Company Incorporation under the Companies Act, 2013 are levied taxes after allowing certain deductions , Now know more about it
A successful business needs to be built from the scratch in a step-by-step manner. The first step would be to evolve the business into a suitable legal entity. The company incorporation, therefore, is the most important step in establishing a business. The Companies Act, 2013 gives several options to the business owners to choose from when it comes to selecting the entity type for the business like that of a PVT ltd company, public limited company, or limited liability partnership. Business owners often choose the entity type depending upon the number of members in the company, their business priorities, and their tax goals. Are Company Incorporation Costs Tax -Deductible? let’s check.
Company Incorporation Costs Tax:
In India, both domestic and foreign companies are required to pay taxes under the Income Tax Act, 1961. The difference between the two is that a domestic company is taxed on its overall income and a foreign company is taxed only on that income that is acquired in India. While incorporating a company, various expenses are incurred like the preparation of the Memorandum of Association(MoA), project report, etc. which is referred to as the preliminary expenditure. The Income Tax Act, mentions the conditions, and the sum of preliminary expenditure that is required to make a claim on this expenditure.
Entities Qualified to Claim the Deductible:
- Indian Companies
- Persons who are Residents of India.
Expenditures Qualified to Be Claimed as Deduction:
While there are ‘n’ number of expenses when it comes to setting up a business, only the following expenditures incurred, qualify for availing a deduction.
- Preparing and furnishing the feasibility report
- Devising the project report
- Various Market surveys conducted during the course of the business
- Engineering services pertaining to the business activity
- Contracts entered by the assessee with other parties for the purposes of conducting the business
- Preparation and drafting of the Memorandum of Association (MoA) and Articles of Association (AoA)
- Expenses accrued for the incorporation of the company
- The registered company’s public issue of shares and debentures.
It has to be noted that the expenses thus incurred should be before the business owner has commenced the business or after the commencement of business pertaining to the extension of new business, like the setting up of a new branch office or new business unit.
Amount of Money Qualified as Deduction:
The deduction allowed on the expenditure incurred is 5% of the total project cost or 5% of the total capital employed, whichever is higher in value. The deduction amount thus obtained is compared with the preliminary expenditure accrued before the deduction. The lesser of the two is the amount qualified for the deduction. The deduction amount is usually claimed in 5 equal installments. For instance, say the company ‘ABC Private Limited’ has been registered and incorporated. The company has incurred a preliminary expenditure of ₹10 lakhs. The entire project cost the business owner about ₹75 lakh, while the capital invested was ₹50 lakh. The calculation of the deduction amount can be done as follows:
- 5% of the cost of the project = 5% of ₹75 lakhs = ₹3.75 lakhs
- 5% of the capital invested = 5% of ₹50 lakhs = ₹2.5 lakhs.
Though the preliminary expenditure accrued by the company is ₹10 lakh, the actual amount eligible for deduction under the cap of preliminary expenses will be ₹3.75 lakh. 1/5th of ₹3.75 lakh, i.e ₹75,000 is eligible to be claimed as a deduction in this case for every year for the first 5 years from the date of commencement or expansion of the business. Also, the expenditures incurred for the purposes of merger or demerger of the company can also be considered for the purposes of claiming a deduction. The preliminary expenditures can thus be claimed during the incorporation of the company.
Thus, tax incentives are generally offered to boost new business ventures as they could bring about a remarkable change in the economy of the country. The businesses would qualify for deductions with respect to the cost of incorporation and also with respect to the profits earned for the respective period as specified in the Income Tax Act, 1961: https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx. Several new establishments in the fields of manufacturing and research, product-based establishments, and companies operating and maintaining infrastructure facilities have immensely benefited from these incentives.
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