A corporation’s taxable income is found by deducting all allowable expenses, includ-ing depreciation and interest, from revenues. This taxable income is then subjected to a graduated tax structure.
The taxability of a company’s income depends on its domicile.
• Indian companies are taxable in India on their worldwide income.
• Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interest, gains from sale of capital assets located in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees for technical services are all treated as income arising in India.
• The tax, rate the of shares in an Indian company), dividends from Indian companies and fees for technical services are all treated as income arising in India.
A percent of taxable income that must be paid in taxes-that is , applied to each income bracket is referred to as a marginal rate. For example, each additional dollar of taxable income above Rs.50,000 is taxed at the marginal rate of 25 percent until taxable income reaches Rs.75,000. At that point, the new marginal rate becomes 34 percent.
The average tax rate for a firm is measured by dividing taxes actu-ally paid by taxable income. For example, a firm with Rs.100,000 of taxable income pays Rs.22,250 in taxes and, therefore, has an, average tax rate of Rs.22,250/Rs.100,000, or 22.25 percent. For small firms (i.e., firms with less than Rs.335,000 of taxable income), the distinction between the average and marginal tax rates may prove important. However, the average and marginal rates converge at 34 percent for firms with tax-able income between Rs.335,000 and Rs.10 million and, finally, converge again, this time to the 35 percent rate, for firms with taxable income above Rs.18,33,333.
Deductability of Expense
While calculating income from business or profession, expense incurred wholly and exclusively for business purposes are generally deductible. These include depreciation on fixed assets, interest paid on borrowings in the financial year etc. Interest paid on outstanding corporate debt is treated as an expense and is tax deductible.. Therefore, there are tax advantages associated with using debt financing that are simply not present with either preferred or common stock financing.
Certain expenses are specifically disallowed or the amount of deduction is restricted. These expenses include:
• Entertainment expenses
• Interest or other amounts paid to a non-resident without deducting without tax
• Corporate taxes paid
• Indirect general and administrative costs of a foreign head office.