Introduction, Meaning and Definition of Company, Types of Companies under Income Tax Act

The Concept of a company in the context of the Indian Income Tax Act encompasses a wide range of entities engaged in commercial, financial, or industrial activities. The taxation regime for companies is designed to accommodate the diverse structures and operations of these entities, ensuring a fair and efficient method of tax collection. Companies, owing to their significant contribution to the economy, are subject to a distinct set of tax rules and rates, reflective of their operational complexities and revenue generation capacities.

Meaning and Essence

Company is not merely a business entity; it is a juristic person established under the Companies Act, 2013, or previous legislation, recognized for its capacity to earn income, incur liabilities, and be held accountable for tax obligations. The essence of a company, from a tax perspective, lies in its distinct legal identity, separate from its members or shareholders. This separation underpins the taxation principles applicable to companies, ensuring that the entity’s income is taxed independently of the personal income of its constituents.

Definition under the Income Tax Act

Income Tax Act, 1961, provides a broad and inclusive definition of a company to capture the varied forms and structures of entities operating in the economic landscape. Section 2(17) of the Act defines a company as follows:

• Indian Company:

An Indian company is defined as a company formed and registered under the Companies Act, 2013, or under any previous company law, which has its registered office in India.

• Foreign Company:

A foreign company refers to a company that is not an Indian company and has control and management situated wholly outside India.

• Domestic Company:

A domestic company includes any Indian company and any foreign company that is liable to tax under the Income Tax Act on income received within India.

This definition is instrumental in determining the tax obligations and entitlements of companies operating within the Indian jurisdiction. It encompasses both domestic and foreign entities, ensuring that all companies engaged in generating income within India are subject to taxation in accordance with the Act.

Taxation of Companies

The taxation of companies under the Income Tax Act is characterized by specific provisions that address the computation of taxable income, allowable deductions, and the imposition of tax at prescribed rates. Key aspects of company taxation:

• Tax Rates:

Companies are taxed at rates that are periodically revised and specified in the Finance Acts. These rates may differ based on the nature and income of the company, with distinctions often made between domestic and foreign companies, as well as between small companies and other entities.

• Minimum Alternate Tax (MAT):

MAT is a provision aimed at bringing companies with large profits but low taxable income, due to exemptions and deductions, into the tax net. It ensures that such companies pay a minimum amount of tax.

• Dividend Distribution Tax (DDT):

Although the concept of DDT has been abolished since the financial year 2020-21, it was a significant feature in the taxation of companies, where companies distributing dividends were required to pay a tax on such distributions.

• Compliance and Reporting:

Companies are required to adhere to strict compliance and reporting standards, including the filing of annual returns, tax audits, and transfer pricing documentation, where applicable.

Implications for Tax Planning

The definition and taxation of companies under the Income Tax Act have profound implications for tax planning. Entities must navigate the complex provisions of the Act to optimize their tax liabilities, leveraging allowable deductions, incentives, and benefits. Effective tax planning strategies enable companies to achieve tax efficiency, ensuring compliance while minimizing tax outflows.

Types of Companies under Income Tax Act:

The Income Tax Act, 1961, in India categorizes companies into various types for the purpose of taxation, each subject to specific tax provisions and rates. This classification is crucial for determining the applicable tax obligations and benefits.

1. Indian Company

An Indian company is defined under section 2(26) of the Income Tax Act as a company that is registered under the Companies Act of India, 2013, or any previous Companies Act. The key characteristic of an Indian company is that it must have been formed and registered in India, making it a resident company for tax purposes. Indian companies are subject to tax on their global income, i.e., income earned both from within India and abroad.

2. Foreign Company

A foreign company, as per section 2(23A) of the Income Tax Act, refers to a company that is not registered under any Indian law and has its management and control primarily situated outside of India. These companies are taxed only on the income that is received, accrued, or is deemed to be received or accrued in India.

3. Domestic Company

This category includes Indian companies as well as foreign companies that have made arrangements for the declaration and payment of dividends within India. The term is significant for taxation purposes, as domestic companies are taxed at rates specified for them in the Act. The Act also provides various tax benefits, deductions, and incentives specifically tailored for domestic companies.

4. Public Company

A public company is defined under the Companies Act, not directly in the Income Tax Act, but its structure affects its tax obligations. It is a company that is not a private company and has a minimum paid-up capital as prescribed by the Companies Act. Public companies can have any number of members, and they can freely transfer their shares. The tax treatment of public companies is aligned with the general provisions applicable to companies under the Income Tax Act.

5. Private Company

A private company is defined under the Companies Act, with specific characteristics such as restrictions on the transfer of shares, a limit on the number of members (excluding present and past employees), and prohibition on inviting the public to subscribe to any shares or debentures. While the Income Tax Act does not directly define private companies, their structure and earnings influence their tax treatment.

6. Subsidiary and Holding Companies

These are categorized based on their relationship with other companies. A subsidiary is a company controlled by another company (the holding company). The tax implications for subsidiaries and holding companies are based on their earnings, transactions between them, and their respective structures.

7. Listed and Unlisted Companies

Companies can also be categorized based on whether their securities are listed on a recognized stock exchange (listed companies) or not (unlisted companies). This classification impacts their tax treatment in terms of deductions, exemptions, and tax rates applicable to their capital gains.

8. Special Purpose Vehicles (SPVs) and Start–ups

Special categories such as SPVs (created for a specific purpose) and start-ups (newly established companies) may enjoy certain tax benefits or exemptions under the Income Tax Act or through specific government schemes to encourage innovation, investment, and economic growth.