Every rupee of a company's entire income must be taxed at a flat rate, with no upper exemption limit. Therefore, understanding what a company is and the different types of companies are crucial to evaluate companies.
Widely-held Company is the common name for a company in which the public is substantially interested.
The following situations indicate "a company in which the public is substantially interested" under Section 2(18) of the Income Tax, 2016:
- A company owned by the RBI or the government.
- A company with government participation is a company in which the government, the RBI, or a company owned by the RBI owns at least 40% of the shares.
- Companies listed in accordance with Section 25 of the Companies Act, 1956: As per Section 25 of the Companies Act, some registered companies that are promoted with a specific objective, such as to promote commerce, science, art, charity, religion, or any other useful object, and these companies do not have a profit motive. However, if these companies declare dividends, they will no longer qualify as a company in which the general public has a substantial interest.
- A company declared by CBDT: A company without share capital that the Board has declared to be a company in which the public is substantially interested due to its nature, object, and composition of its membership consideration.
- A mutual benefit financing company designated by the Central Government as a Nidhi or a Mutual Benefit Society whose primary business accepts deposits from its members.
- A company with cooperative society participation is one in which one or more cooperative societies own at least 50% or more of the equity shares.
- A public limited company: A company is considered to be a public limited company if it meets either of the following two criteria and is not a private company as defined under the Companies Act 1956:
- As of the last day of the relevant prior year, equity shares of the company were listed on a recognized stock exchange.; or
- Government, a statutory corporation, a business in which the general public has a significant stake, or a fully owned subsidiary of one of these entities, beneficially owned equity shares of the business during the relevant prior year with a minimum 50% of the voting power (in the case of an industrial company, the limit is 40%).
Section 2(18) of the IT Act, 1961, defines a company in which the public is substantially interested. The crux of the definition is that the company is owned by the Indian Government or RBI or any government company or corporation. Further, it includes companies listed on an RSE in India and a company falling under the category of 'company having no share capital, as per its nature and composition of membership and other factors considered by BOD.