Tax Planning Tips For Private/Public Limited Companies

Organising your business in the form of Private Limited Company has got its own advantages such as Limited Liability of the owners, Perpetual existence, Better Image and credibility among stakeholders, separate legal entity and improved Borrowing Capacity and so on. A company enjoys better avenues for borrowing of funds. It can issue debentures, secured as well as unsecured and can also accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to a company rather than partnership firms or proprietary concerns.

As you setup your company, sell your products and services, get appreciation from customers and having a great go at business. There is one motivational factor – a good profit. And no matter what we think bottom line is this, the profit is a lifeline for your business and catalyst for growth of your success ladder.

But, down the line with profit, tax comes side by side. No doubt we cannot avoid these taxes (and we should not, after all its for nation building), but yes certain tax planning steps can fill your pocket little high. Even though, the government has slashed the corporate income tax rate as follows:

1. All domestic companies to be allowed to pay corporation tax at the rate of 22% (effective rate 25.17% including cess and surcharge). This would be subject to the condition that these companies do not avail of any tax incentives or exemptions. Moreover, no Minimum Alternative Tax (MAT) would be imposed on these companies.

2. Any new domestic manufacturing company, incorporated on or after October 1, 2019, will be allowed to pay corporation tax at the rate of 15% (effective rate 17.01%). No MAT will be imposed on these companies either. This will be subject to the condition that the company does not avail of any tax incentives or exemptions and commences production by 31 March, 2023.

3. For companies who continue to avail exemptions/incentives, the rate of minimum alternate tax (MAT) has been reduced from 18.5 percent to 15 percent.

(These changes in income tax rates are brought through an Ordinance which require legislative amendments as of now. They require Parliamentary ratification. When the Parliament is not in session, the government can bring these changes through an Ordinance and later bring a Bill when Parliament convenes.

Under normal circumstances, income tax rate changes take place in the Union Budget during the passage of the Finance Bill. The government’s decision to bring about an ordinance mirrors the urgency attached to the economic situation. The next Parliament session—the Winter Session—is starting next month. The government did not want wait until Parliament convened for the Winter Session for bringing in these changes, given the economy’s wobbly state and the need to soothe frayed nerves of the corporate community. Though there is no stopping to get ratification from parliament to these changes.)

It is always advisable to start tax planning in the beginning of financial year. But its better late than never. Owners of the Company can plan taxes at this time of the year as well and reach to their desired economic objective. Here are 10 effective tax planning tips which can be adopted by every and any private limited company:

1. Startup expenses (Preliminary expenses):

These are incurred for incorporation of a company. For e.g. professional charges paid for incorporation, drafting of MOA and AOA, Printing cost of documents, fees paid to ROC, stamp duty etc. There are several expenses that people incur before and after private limited company incorporation, basically which is borne by the founder of private limited company for its incorporation.

Usually most people forget to take the advantage of these expenses by book-keeping it in books of accounts. These expenses are allowed to be claimed, thereby reducing the profit by its amount.

2. Salary to Director:

Salary to directors is an easiest way of saving tax in private limited company. As you are founder of the company, end of the day you will surely be taking out the profit from company in the pre decided ratio, so instead of taking that profit as dividend take that part as salary which is an allowable expense for private limited.

A short example over same:

For example, Let us say XYZ private limited company is making a profit of 5 lacks which is to be shared among the founder/director in equal ratio. So Instead of showing 2.5 lakhs as profit-sharing; one can show salary of Rs. 2.5 lakhs to each director. The result of the same will be that taxation on XYZ Pvt Ltd will be nil as there is no profit left and also no taxation on salary also as there is no tax up to income of Rs. 2.5 lac for an individual.

3. Sitting fees to Director:

The rules notified under section 197 of companies act 2013 says, “a company may pay sitting fee to a director for attending meetings of board or committee thereof. Such sums as may be decided by the BOD thereof which shall not be exceed 1 lakh per meeting of the board or committee thereof.” As per the clause (1)(ba) in section 194j of income tax act,1961, TDS on any remuneration or fees or commission by whatever name called shall be liable to be deducted @ 10%.

In a very simple words, you can also pick up your profit from company in form of this sitting fees, again the impact of same will be dual as same will save tax in company and simultaneously exempt in hand of individual under prescribed limit.

4. Rent Expenses:

As you must have shown your registered address of company at some place. If the place is actually on rent then it’s no deal, but if the same is in name of director or in name of any relative of director then you can easily book the expense of rent in this case.

Just make a rent agreement in name of owner, start transferring rent and book rent expense in company’s book which eventually has the same impact as discussed in previous points. Here also you can book dual save of tax.

5. Capitalizing capital asset and depreciation:

An item is capitalized when it is recorded as an asset, rather than expense. This means that expenditure will appear in the balance sheet, rather than the income statement. If an expenditure is expected to help the company generate revenues for a long period of time, then you should recorded as a Fixed asset and then depreciate it over its useful life, which agrees with the matching principle.

So, of you buy an equipment for the office like laptop, printer, furniture which usually has the life of more than year, you should book them as fixed asset in book which ultimately gives you tax benefits in over the years.

6. Family member’s salary:

Whenever you start a business, you usually look for assistance and guidance from your family members and friends. In fact some family member usually help you in your business throughout your struggle and they are not doing it for any monetary benefits. But you should be good tax planner by book keeping their salary as expense in books of company which is ultimately bringing your profit portion at your home again with dual tax benefits.

7. Entertainment expenses:

Here comes a most beautiful expense of your business, after approx. each quarter , you must always celebrate your success either by throwing an in house party or hang out with your partner. So again don’t just let that expenses be free or unaccounted. Get at flat discount of applicable tax rate on your party bill by book keeping the same in books and get your tax saved.

8. Director’s vehicle expenses:

Company usually does not own its own vehicle and normally one of director’s vehicle is used in the business for travelling and meetings. Not just fuel but also repair maintenance of vehicle. Since the same expenditure is exclusive for business, so same should be booked in books of the company.

Above expenses are easy ways for saving 30% tax of companies. But just booking the expenses won’t work that way, the above expenses required proper documentation and planning to take a maximum and true benefit of it but that is really worthy doing.

9. Meeting expenses:

These expenses include taking a client to dinner, to a theatre show, or to a sporting event. These expenses are usually tax- deductible. Also, as for your business purpose, you tend to socialize and have lot of meetings and visits several places. Do not forget to book them in proper manner.

10. Filing your Tax Returns on time

Last but not the least, the I-T Department recommends people to file tax returns on time if they want to avail benefits. One of the prominent benefits is to carry forward of losses on your income earned from business. You can carry forward business income losses for a consecutive period of 8 years, and so it can be set off against the income earned in the coming years if it cannot be adjusted in the current year. This benefit is available only when you file your tax returns on or before the tax filing due date.

It is very important to keep a tab on any changes made by the government with regards to tax write-offs to save money, both in short-term as well as long-term. One should file their taxes effectively and save the maximum amount of money as tax deductions and exemptions, which can be used back to enable the growth of your business.

(The author is a Practicing Company Secretary and can be reached at csankitasingla@gmail.com)

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out.