Are you working in a corporate sector as an accounts or finance people and need to calculate company tax at the year end to prepare tax return for the assessment?
Today, in this article I will discuss step by step how to calculate your company tax and then prepare tax return to complete assessment.
The tax calculation of company for tax filing starts after the completion of statutory audit at the year end. The starting figure is disclosed net profit/loss from the profit or loss account of the audited financial statements of the company.
You may know that for tax purpose, the income of a company shall be calculated under section 28 of the Income Tax Ordinance 1984. The items which shall be included for income are mentioned in that section.
So, based on the profit/loss figure, we include and exclude items as specified under section 29 and 30 of the Income Tax Ordinance 1984.
Now we will discuss below step by step.
Separate items consideration
First, we exclude the items are considered separately like dividend income, interest on securities, gain on sale of capital assets etc. Generally, the items which are not generated from the core business are considered separately.
Tax rates for the items which I mentioned above are also different.
So, first you have to identify the separate items to exclude from the net profit of the company to find out the business income for the assessment.
When we will get the business income then we will add the inadmissible expenses which are not permissible under section 30.
The expenses which are inadmissible mentioned under section 30. If any expenses fall under section 30 then such expenses shall be disallowed results increase of tax liability of the company.
There are specified bar and tax compliance to follow during expenses incurred by the company like cash disbursement. If salary of employee exceeds BDT 15,000 then the disbursement shall be made through banking channel. And there are also other cash disbursement limit.
Tax compliance such as where the tax deducted at source is applicable then shall make payment after deducting the tax and shall deposit to the government treasury within a prescribed time limit. If the tax was not deducted at source or the amount was deducted but not deposited to the government treasury then the full amount shall be inadmissible.
So, you have to know the TDS rates 2020-21 with section references to deduct or collect tax at source. I have composed all the TDS rates and published in this blog. You may also download PDF copy by visiting the article.
And there are certain limits for the expenses like foreign travel, sample distribution, entertainment expenses, head office expenses, incentive bonus etc. If the expenses during the income year exceeded the specified ceiling then the exceeded amount is considered as inadmissible which increases the taxable income of the company results increase of tax liability.
In this circumstance, we first include the full amount from the profit or loss account of the company and then exclude the permitted amount under allowable expenses.
You shall have to be careful during the consideration of particular limit because in few cases the limit shall be calculated on disclosed turnover, in few cases on disclosed profit or in few cases on assessed income. So, first check then calculate the permissible amount following section 30 otherwise your tax calculation will be wrong.
Another most common item is depreciation calculation. When you will calculate tax of a company then you have to follow third schedule for depreciation rate. The accounting depreciation as per profit or loss account is added under the inadmissible expenses and deducted as allowable deduction which is separately tax depreciation is maintained.
Allowable deductions/admissible expenses
As we have discussed above that there are specified limit mentioned under section 30 and upto such limit is allowable. As we have added the full amount under inadmissible expenses from profit or loss account of the company, now we will deduct the amount only the allowable limit.
We have added foreign travel, incentive bonus, head office expenses etc. and now these expenses will be deducted as per permissible limit under the section 30.
And the tax depreciation as per Third Schedule will also be deducted now. After deducting all the allowable expenses then we will get the assessed business taxable income. And on this figure, you have to apply the entertainment percentage.
Finally doing all the add-back you will get taxable income from business.
Taxable income and tax liability calculation
So, we have got the taxable income and now we will apply the company tax rate to find out the tax liability of the company.
Non-publicly traded company tax rate has been reduced to 32.5% from 35% by Finance Act 2020. So, for the upcoming assessment year, you have to apply this new rate 32.5% to calculate the company tax liability.
But if the company is loss making after calculating all the above items then what will be the tax liability?
You may know that there is an option to pay minimum tax, even if the company is made profit but the normal tax liability is less than the minimum tax under section 82C then the minimum tax shall be the tax liability of the company.
Minimum tax consideration
But how the minimum tax under section 82C has to be calculated for the company?
I have published an article few years ago in this blog where I have described step by step how to calculate minimum tax by company. You may visit the article to know everything about minimum tax under section 82C.
Minimum tax calculation is complex mainly due to nature of business. It creates the problem mainly because certain items are considered under minimum tax and if any tax at source from such section has been deducted and the regular tax is less then the deducted amount then such deducted amount shall be the tax liability. And the deducted amount shall not be adjustable or refundable.
Another consideration is minimum tax on gross receipts. So, there are three or four figures are coming during the calculation of minimum tax. And ultimately which figure will be the minimum tax creates the complexity.
If the company enjoy reduced tax rate facility or tax exemption facility then the minimum tax calculation also creates complexity.
So, after considering all the issues as discussed above you have to find out the minimum tax and regular tax liability, and the ultimate tax liability will be the higher one from these two figures.
Tax under section 30B treatment of disallowances
The Finance Act 2019 inserted a new section 30B treatment of disallowances. It will increase the tax burden of the company. Tax at 32.5% has to be paid even if the company faces loss during the income year.
Tax under section 30B is applicable when any payment is made by the company under section 30. We include the disallowances according to lax law to find out the taxable income.
But now, if you include it as you did in your previous year’s calculation then the tax will be twice on the same amount. At first, you are adding the disallowances during calculation of taxable business income and again the tax will be calculated separately on the disallowance’s due to new section 30B.
So, what is the simple way to calculate tax considering the section 30B?
Separate the items which are not admissible falls under section 30 and then calculate taxable business income and apply your corporate tax rate.
And separately calculate the tax on the disallowances applying tax rate at 32.5%.
Finally, sum up the two figures to get the ultimate tax liability of your company.
Tax return preparation
Tax form for company is issued by the National Board of Revenue (NBR). The company taxpayer shall use this prescribed tax form to submit tax return which is named as IT-GHA 2016.
When your company tax calculation will be complete then you have to fill-up the tax form IT-GHA 2016. There are total six part in this tax form. And another separate sheet is ‘acknowledgement receipt of return of income’. This receipt will be provided to you after tax return submission to your circle by giving sign and seal of tax official as a proof of tax return submission.
Part-I of tax form include the basic information about the company and other parts relate the company financial information. So, during the fill-up of the tax form, collect all the related documents like company TIN, incorporation certificate, trade license, bank statements, audited financial statements etc. These all documents will also be attached with the signed tax form.
You may preserve the completed tax form and it will help you to complete the next year’s tax return.
So, that’s all!
I have discussed all the points to calculate the company tax and to prepare tax return, hope it will help you in your company.