Understanding business taxation

6 min read
Saumya Dwivedi

Running a business requires you to wear many hats and learn different aspects of the business such as marketing, product development, sales and finance. Understanding business taxation can be a bit tricky for the new business owners and for this purpose they often consult accountants and tax professionals.

It is mandatory for every individual or corporation to pay the tax that applies to them and keep a record for tax audits.

Whether you’re using an external consultant or doing business taxation on your own, there are certain critical aspects that you should know as the founder or promoter of the company. Here, in this article, we will help you understand business taxation and discuss the major taxes that all companies must comply with. We will also touch on the recent developments in tax policy for startups so that tax planning for new business is no more a challenge.

8 business taxes you should know about

The following is a list of business taxes that all business owners should be familiar with.

  1. Corporate income tax.
  2. Personal income tax.
  3. Payroll tax.
  4. Fringe benefits tax.
  5. Goods and Service Tax.
  6. Dividend distribution tax.
  7. Capital gains tax.
  8. Angel tax.

You might need to consult with an accountant to determine which of these taxes apply to your business.

Related: Where to find SME business loans

Understanding business taxation: an overview

There are primarily two types of taxes — direct tax and indirect tax.

Direct tax

Understanding Business Taxation Men on Rickshaw

A direct tax is a tax that is directly paid to the government by the taxpayer, for example corporate tax, income tax and wealth tax.

Indirect Tax

Indirect tax is a tax collected by the intermediary from the person who bears the ultimate burden of the tax, for example GST (Goods and Service Tax India).

Below is the overview of major taxes that apply to various types of businesses.

1. Corporate income tax

Corporate income tax is the tax paid by the company on the net profit that it makes from the business. Net profit is the revenue of a company after deductions such as depreciation, interest expense, COGS (cost of goods sold) and SG&A (selling general and administrative expenses).

The corporate tax rate for domestic companies having a turnover of less than Rs. 250 crore is currently 25%. For all others it’s 30%.

Startups incorporated after April 1, 2016 with an annual turnover of less than Rs 25 crore in any financial year could be eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years. Refer to the eligibility criteria here for details.

2. Personal income tax

If you own a sole proprietorship then you are mandated to pay personal income tax on your earnings. Since the business and the owner are not separate entities, the owner of the firm is not obligated to pay a separate corporate tax on their earnings.

3. Payroll tax

Once you start hiring employees then the company must deduct the applicable tax from the salaries of the employees.

Payroll is a tax that an employer withholds from an employee’s salary and pays on behalf of his employees.

The company is also required to share the details of the deducted tax (Form 16) with the employee after the closure of the financial year.

4. Fringe benefits tax

For attracting and retaining quality talent, some companies offer various fringe benefits to the employees. These can include:

  • Car allowances
  • Low-interest loans
  • Payment of private expenses

Fringe Benefit Tax is a tax payable by employers for the benefits paid to an employee in place of salary. This is calculated on the taxable value of the benefits provided.

5. Goods and Service Tax (GST)

Understanding business taxation is not complete without GST.

GST is an indirect tax levied by the government of India on goods and services, one the business must charge its customers. The recent changes to GST make tax planning for new businesses and startups much easier.

Companies with an annual turnover of under Rs 40 lacs are currently exempt from GST taxation.

Phew! We have covered a lot. I hope you are still with me and are beginning to understand business taxation. Few more types of taxes and you will be all set for tax planning for that new business of yours.

6. Dividend Distribution Tax

A dividend is a return given to the shareholders of a company from its profits. The company distributes dividends when it has surplus cash with no immediate investment opportunities.

Dividends received by shareholders form part of their income but are not subject to taxation. Income tax department provides for this exemption by levying a tax called the Dividend Distribution Tax on the company that is paying the dividend.

7. Capital gains tax

Capital gains tax is the tax charged on the profit or gain that arises from the sale of capital assets. Some example of the capital assets include:

  • Land
  • Building
  • Patents
  • Trademarks
  • Machinery

The capital gains tax rate is different for short-term gains (for a period of less than one year) and long-term gains.

8. Angel tax

Understanding Business Taxation Food in Dishes

Angel tax is the tax paid by the privately held company when they receive angel funding at a valuation higher than its fair market value.

For startups, this tax has been the biggest hurdle in raising angel funds since their fair market value is comparatively low due to the absence of brand goodwill and other intangibles.

Recently, the government of India has addressed the issue by increasing the exemption threshold.

Now companies whose share premium does not exceed Rs 25 crore are immune from taxation.

Understanding business taxation and complying with the statutory tax norms of the land is a must for all businesses. Taxes contribute to the growth and progress of the country.

Business taxation explained

Business taxation is complicated due to two reasons:

  • There are many different taxes that a business must comply with.
  • There are many clauses within each tax that determine the extent of the applicable tax rate.

While it is your responsibility to understand the significant aspects of business taxation, there is an army of chartered professionals to guide you through this entire process. Best luck!

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