14.—Assessment of firms
Charge of tax in case of a firm.
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In the case of a firm which is assessable as a firm, tax shall be charged on its total income at the rate as specified in the Finance Act of the relevant year.
Explanation
Section Summary:
Section 14 of the new income tax law deals with the taxation of firms. It specifies that a firm, which is assessable as a firm (i.e., treated as a separate taxable entity), will be taxed on its total income at the rate prescribed in the Finance Act for the relevant financial year. This section ensures that firms are taxed as distinct entities, separate from their partners.
Key Changes:
- Clarification on Tax Rates: The section explicitly states that the tax rate applicable to firms will be as per the rates specified in the Finance Act of the relevant year. This is not a new concept but reinforces the existing framework.
- Firm as a Separate Taxable Entity: The section reiterates that firms are treated as separate taxable entities, distinct from their partners, which aligns with the previous tax regime.
Practical Implications:
- Tax Liability for Firms: Firms will continue to be taxed on their total income at the rates specified in the annual Finance Act. This ensures clarity and consistency in tax treatment.
- No Change in Tax Treatment: Since this section largely reiterates existing principles, there is no significant change in how firms are taxed compared to the prior income tax law.
- Impact on Partners: While the firm is taxed separately, partners are also taxed on their share of profits from the firm, ensuring no double taxation due to the pass-through nature of partnership income.
Critical Concepts:
- Assessable as a Firm: This means the firm is treated as a separate taxable entity, and its income is taxed at the firm level before distribution to partners.
- Total Income: Refers to the firm’s gross income after deducting allowable expenses and exemptions.
- Finance Act: The annual legislation that specifies tax rates and other financial provisions for the relevant financial year.
Compliance Steps:
- Compute Total Income: Calculate the firm’s total income by deducting allowable expenses and exemptions from gross income.
- Apply Tax Rate: Use the tax rate specified in the Finance Act for the relevant year to determine the firm’s tax liability.
- File Returns: Ensure timely filing of income tax returns, disclosing the firm’s total income and tax liability.
Examples:
- Scenario 1: A firm earns a total income of ₹50 lakhs in FY 2023-24. The Finance Act for that year specifies a tax rate of 30% for firms. The firm’s tax liability would be ₹15 lakhs (30% of ₹50 lakhs).
- Scenario 2: If the firm incurs allowable expenses of ₹10 lakhs, its total income reduces to ₹40 lakhs. At a 30% tax rate, the tax liability would be ₹12 lakhs.
This section ensures that firms are taxed consistently and transparently, maintaining the existing framework with no major changes.