A successful business must be built from the ground up, step by step. The first step would be to transform the company into a legal entity. The incorporation of a company is thus the most important step in establishing a business. The Companies Act of 2013 gives business owners several options when it comes to selecting the entity type for their company, such as a private limited company, a public limited company, or a limited liability partnership. Business owners frequently select the entity type based on the number of members in the company, their business priorities, and their tax objectives.
Companies Must Pay Corporate Tax:
Under the Income Tax Act of 1961, both domestic and foreign companies are required to pay tax refund. The distinction between the two is that a domestic company is taxed on its total income, whereas a foreign company is taxed only on income earned in India. Various expenses are incurred during the incorporation of a company, such as the preparation of the Memorandum of Association (MoA), project report, and so on, which is referred to as the preliminary expenditure. The Income Tax Act specifies the conditions as well as the amount of preliminary expenditure required to make a claim on this expenditure.
Entities Eligible to Claim the Deductible: Indian Companies and Indian Residents.
Expenses That May Be Claimable as a Deduction:
While there are 'n' number of expenses associated with starting a business, only the following expenses qualify for a tax deduction.
Creating and delivering the feasibility report
Making a project report
Various market surveys conducted throughout the business Engineering services related to the business activity
Contracts entered by the assessee with other parties for the purposes of conducting the business
Creating and revising the Memorandum of Association (MoA) and Articles of Association (AoA)
Expenses incurred for the company's incorporation
The public offering of shares and debentures by a registered company.
It should be noted that the expenses incurred should be before the business owner started the business or after the business started pertaining to the expansion of new business, such as the establishment of a new branch office or new business unit.
Amount of Money Allowable as a Deduction:
The deduction allowed for incurred expenses is 5% of the total project cost or 5% of total capital employed, whichever is greater in value. The resulting deduction amount is compared to the preliminary expenditure incurred prior to the deduction. The amount eligible for the deduction is the lesser of the two. The deduction is typically claimed in five equal instalments. Assume the company 'ABC Private Limited' was registered and incorporated. A preliminary expenditure of ten lakhs has been incurred by the company. The entire project cost the business owner approximately 75 lakh, with a capital investment of 50 lakh. The amount of the deduction can be calculated as follows:
5 percent of the project cost = 5 percent of 75 lakhs = 3.75 lakhs
5 percent of invested capital = 5 percent of 50 lakhs = 2.5 lakhs
Though the company's preliminary expenditure is 10 lakh, the actual amount eligible for deduction under the preliminary expense cap is 3.75 lakh. In this case, 1/5th of 3.75 lakh, i.e. 75,000, is eligible to be claimed as a deduction for each year for the first 5 years from the date of business start-up or expansion. Additionally, expenditures incurred for the purposes of the company's merger or demerger can be considered for the purpose of claiming a deduction. Thus, the preliminary expenses can be claimed during the company's incorporation.
Thus, tax breaks are commonly offered to encourage new business ventures because they have the potential to significantly impact the country's economy. The businesses would be eligible for deductions for the cost of incorporation as well as profits earned during the applicable period, as specified in the Income Tax Act of 1961. Several new manufacturing and research establishments, product-based establishments, and companies operating and maintaining infrastructure facilities have benefited greatly from these incentives.
Comments