Accounting is the system of recording financial transactions with both numbers and text in the form of financial statements. It provides an essential tool for billing customers, keeping track of assets and liabilities (debts), determining profitability, and tracking the flow of cash.
Taxation refers to the imposition of compulsory levies by government authorities on income earned by individuals and entities.
In India, both accounting and taxation are regulated under different statues and regulations. The following article is an attempt at providing an overview of these regulations applicable specifically on companies in India.
Accounting by Companies in India
The primary law regulating the accounting procedure in India is the Companies Act, 2013. Pursuant to the provisions of Companies Act, 2013, the book of accounts of the company includesthe following records:
The books of accounts are required to be maintained on accrual basis and according to the double entry system of accounting. The Act also provides for the format of financial statements.
Where are the books of accounts required to be kept? Can they be maintained electronically?
Every company is required to prepare and keep the books of account and other relevant books and papers and financial statements at its registered office. However, all or any of the books of accounts may be kept at such other place in India as the Board of directors may decide. When the Board so decides the company is required within seven days of such decision to file with the Registrar a notice in writing giving full address of that other place.
The maintenance of books of account and other books and papers in electronic mode is permitted and is optional. Such books of accounts or other relevant books orpapers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent use.
What is the period for which books are required to be preserved?
The books of accounts, together with vouchers relevant to any entry in such books, are required to be preserved in good order by thecompany for a period of not less than eight years immediately preceding the relevant financial year. In case of a company incorporated less than eight years before the financial year, the books of accounts for the entire period preceding the financial year together with the vouchers shall be preserved.
What are Accounting Standards?
Accounting standardsare a common set of principlesand procedures that define the basis of financial accounting policies and practices.
In India, there are two different set of accounting standards found. First is the Indian Accounting Standard (‘AS’) and the other is Indian Accounting Standard as converged with IFRS (‘Ind AS’).
Indian Accounting Standards (‘AS’) are generally rule based and are less flexible whereas Ind-AS are generally substance based. Ind AS is being adopted in India in a phased manner, at present they are applicable on certain specified classes of companies, generally large companies.
Companies may follow Ind AS voluntarily, however once a company follows Indian ASvoluntarily, it can’t revert to any other method of Accounting.
Taxation of Companies in India
Government of India has provided various incentives in the form of tax advantages in order to attract investments and promote economic development for setting up units in certain parts of the country. The corporate tax rates havebeen reduced and steps have been taken to phase out certain deductions. Hence, every business entity needs to strategize and execute the business plans in order to minimize its tax liabilities within the ambit of the existing regulatory framework.
For the purpose of calculation of Corporate Tax, companies have been classified under following two categories:
Corporate Tax in India
Domestic as well as foreign companies are liable to pay corporate tax under the Income-tax Act. While a domestic company is taxed on its universal income, a foreign company is only taxed on the income earned within India i.e. is being accrued or received in India.
What Constitutes Income of a Company?
Income of a Company on which tax is to be paid, can be broadly classified in following categories:
Taxes on Income The following rates are applicable to the domestic companies for AY 2021-22 based on their turnover:
|Section 115BA (Domestic Manufacturing Companies)||25%|
|Section 115BAA (Not claiming certain exemptions and deductions)||22%|
|Section 115BAB(Company registered after 1st day of October, 2019, and has commenced manufacturing or production of an article or thing on or before the 31st day of March, 2023 )||15%|
|Any other case||30%|
Note: All the companies (including foreign companies) are required to pay Minimum Alternate Tax (MAT) at the rate of 15% on book profits if the tax calculated as per above rates are less than 15% of book profits.
The following rates are applicable to foreign companies for AY 2020-21 based on their turnover:
|Nature of Income||Tax Rate|
|Royalty received or fees for technical services from government or any Indian concern under an agreement made before April 1, 1976 and approved by central government||50%|
|Any other income||40%|
Further the taxes may also be increased by Surcharge. It is an added tax on the taxpayers having a higher income inflow during a particular financial year.
What are the Compliances under Compliance under Income Tax Act?
Companies are required to file their Income Tax Return (ITR) on or before 30 October every year. All the companies except companies claiming deduction under section 11 need to file their return using Form ITR 6. All the companies registered under section 8 of Companies Act, 2013 are required to file their return using Form ITR 7. Income tax act requires a class of companies to get their accounts audited and submit a Tax audit report to the IT department along with the Income tax return.
Is there any separate accounting for preparation of financial statements and Income Tax Returns?
In accordance with the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate. Matching of such taxes against revenue for a period poses special problems arising from the fact that in a number of cases, taxable income may be significantly different from the accounting income. It is because each item (of the company financials and Income tax return) has different purposes, user, and accounting treatment.
Accounting Standard 22 aims to prescribe a structure of accounting methods that is focused on taxes rather than the appearance of public financial statements. It provides for the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements.
Tax Deducted at Source (TDS)
The concept of Tax Deduction at Source (TDS) or Withholding Tax was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income, tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor. The deductor is required to file TDS returns which on quarterly basis for the TDS deductions. TDS is also deducted, deposited and necessary Returns are filed for the salary and consultation fees paid to the employees and retainers.A TDS or Withholding Tax is also deducted from remittance of royalty, technical fee, salary, commission, dividend etc. to a foreign entity in compliance with Income Tax Act ready with applicable Double Taxation Avoidance Agreement (“DTAA”).