Depreciation Under the Companies Act, 2013 vs Depreciation Under the Income Tax Act,1961

Depreciation is a crucial accounting concept that reflects the reduction in value of a fixed asset over time due to usage, wear and tear, or obsolescence. Both the Companies Act, 2013 and the Income Tax Act, 1961 address depreciation, but they differ significantly in terms of methods, rates, and applicability. This blog will compare depreciation as per the Companies Act, 2013 and the Income Tax Act, 1961, providing an in-depth understanding of their differences and implications.

1.Depreciation Under the Companies Act, 2013 :

The Companies Act, 2013 mandates the accounting treatment for depreciation for companies in India. Depreciation is accounted for as per the provisions laid down in Schedule II of the Companies Act, which outlines the rates, methods, and other criteria for depreciation on various fixed assets.

Key Features of Depreciation as per the Companies Act, 2013:

a) Method of Depreciation:

  • The Companies Act allows two methods of depreciation: the Straight-Line Method (SLM) and the Written Down Value (WDV) Method.
  • SLM is used where the asset’s benefit is expected to be uniform over its useful life.
  • WDV is used when the asset’s usage or benefit decreases over time at a higher rate in the earlier years.

b) Useful Life of Assets:

  • Schedule II provides specific useful lives for different classes of assets, which companies must adhere to while calculating depreciation.
  • The useful life may be reviewed periodically, and adjustments can be made if required.

c) Residual Value:

  • A residual value is considered in calculating depreciation, and the minimum residual value is generally taken as 5% of the original cost of the asset.
  • The residual value should not exceed the asset’s cost, unless specifically indicated.

d) Depreciation on Revalued Assets:

  • If an asset is revalued, depreciation must be calculated based on the revalued amount, with the accumulated depreciation adjusted accordingly.
  • Revaluation surplus may be credited to a revaluation reserve

e) Transition to New Provisions :

  • For assets existing as of April 1, 2014, companies were required to adopt the provisions of Schedule II for depreciation calculation, considering the remaining useful life of assets.

Rates of Depreciation :

  1. The rates for depreciation are provided for various categories of assets under Part C of Schedule II of the Companies Act, 2013. For example:
  • Buildings: 5% (SLM) or 10% (WDV)
  • Furniture & Fixtures: 10% (SLM) or 20% (WDV)
  • Machinery: 15% (SLM) or 25% (WDV)

2. Depreciation Under the Income Tax Act, 1961 :

Depreciation under the Income Tax Act, 1961 is governed by Section 32 of the Act. The Income Tax Act provides specific rates of depreciation on assets used for business or professional purposes, primarily to calculate taxable income.

Key Features of Depreciation as per the Income Tax Act, 1961:

1. Method of Depreciation:

  • The Income Tax Act mandates the Written Down Value (WDV) method for calculating depreciation.
  • SLM is not allowed for tax purposes. Depreciation is deducted from the WDV of the asset each year.

2. Rates of Depreciation:

  • The Income Tax Act specifies different rates for various categories of assets, which are subject to change through Finance Acts.
  • These rates are typically higher compared to the Companies Act to encourage investment.

Example of depreciation rates under the Income Tax Act:

  • Buildings: 10% (if used for business or office)
  • Furniture and Fittings: 10%
  • Machinery and Plant: 15% (general category), 40% (computers and related equipment)

3. Accelerated Depreciation:

  • The Income Tax Act offers higher depreciation rates on certain assets (e.g., computers, windmills, and solar power systems) to incentivize businesses to invest in specific assets.
  • This is designed to promote capital investment and growth in sectors like technology and renewable energy.

4. Depreciation on Revalued Assets:

Revaluation of assets does not affect depreciation for tax purposes. Depreciation is calculated on the original cost of the asset, irrespective of any revaluation.

5. Additional Depreciation:

  • A business can claim additional depreciation of 20% on new machinery and plant (excluding office buildings) in the first year of purchase, subject to certain conditions.

6. Block of Assets:

  • Depreciation is calculated on a block of assets, where assets of similar nature are grouped together. The block is depreciated at a prescribed rate on the aggregate cost of the block rather than individual asset cost.

Key Differences Between Depreciation under the Companies Act, 2013 and the Income Tax Act, 1961 :

AspectCompanies Act, 2013Income Tax Act, 1961
Method of DepreciationStraight Line Method (SLM) and Written Down Value (WDV)Only Written Down Value (WDV)
Rate of DepreciationAs per Schedule II of the Companies Act (specific rates)Prescribed under Income Tax Act (usually higher rates)
Asset ClassificationSpecific life for each class of asset (Schedule II)Assets grouped into blocks (e.g., machinery, building)
RevaluationDepreciation is recalculated based on revalued amountDepreciation is based on original cost, even if assets are revalued
Additional DepreciationNot availableAvailable for new machinery (20% in the first year)
Treatment of Residual ValueMinimum residual value of 5% is consideredNo specific residual value; depreciation is calculated on WDV

Conclusion :

Both the Companies Act, 2013 and the Income Tax Act, 1961 provide mechanisms for calculating depreciation, but with different objectives. The Companies Act governs the accounting of depreciation for financial reporting, while the Income Tax Act focuses on providing tax benefits to businesses. For businesses, it is essential to understand both frameworks to ensure compliance with financial reporting standards and optimize tax planning. In most cases, the depreciation calculated under the Income Tax Act will differ from the depreciation under the Companies Act due to differences in rates, methods, and criteria

For more information you can contact us at Groomtax

Exemptions and Benefits for Small Companies Under the Companies Act, 2013

The Companies Act, 2013, provides several exemptions and benefits to small companies in India, recognizing their unique needs and limited resources. Below is a detailed analysis:

1. Definition of a Small Company :

As per Section 2(85) of the Companies Act, 2013, a small company is defined as a company, other than a public company:

  • Paid-up Share Capital: Not exceeding ₹50 lakh (or a higher amount prescribed, up to ₹5 crore).
  • Turnover: As per the last profit and loss account, not exceeding ₹2 crore (or a higher amount prescribed, up to ₹20 crore).

Exceptions: The following are not considered small companies:

2. Exemptions Available to Small Companies :

The Act grants the following exemptions to small companies:

  • Board Meetings (Section 173): Small companies are required to hold only two board meetings annually, with a minimum gap of 90 days between them, instead of four.
  • Cash Flow Statement (Section 2(40)): Preparation of a cash flow statement as part of financial statements is not mandatory.
  • Annual Return (Section 92): Small companies can have their annual return signed by the company’s director instead of a company secretary, simplifying compliance.
  • Auditor Rotation (Section 139(2)): Small companies are exempt from the mandatory rotation of auditors.

3. Benefits in Compliance Framework :

  • Less Stringent Penalties: Smaller penalties and leniency in certain cases of non-compliance.
  • Filing Fees: Reduced fees for filings with the Registrar of Companies (RoC).
  • Declaration of Solvency: Simplified procedures for schemes like mergers or amalgamations (Section 233).

4. Simplified Accounting and Auditing :

  • No mandatory inclusion of certain notes or disclosures in the financial statements, which reduces complexity.
  • Exemption from specific procedural requirements under the Act.

5. Corporate Governance Relaxations :

  • Fewer requirements for holding general meetings and related documentation.
  • Simplified quorum requirements and voting procedures.

    6. Merger and Amalgamation Benefits :

    Section 233 allows small companies to merge without going through the cumbersome process of seeking approval from the National Company Law Tribunal (NCLT), subject to certain conditions and notifications to the Registrar and Official Liquidator.

    Conclusion :

    Small companies play a critical role in the Indian economy, and these exemptions and benefits are designed to reduce their compliance burden, enabling them to focus on growth and innovation. However, it is essential to stay updated with amendments and notifications to leverage these advantages fully.

    For more information you can contact us at Groomtax

    Everything You Need to Know About Company Setup in India | Groom Tax

    India is one of the fastest-growing economies in the world, making it a prime destination for entrepreneurs and businesses. Whether you are looking to start a new venture or expand your existing business, understanding the process of company setup in India is crucial. This guide provides everything you need to know about setting up a company, including setting up a branch office in India, with expert insights from Groom Tax.

    1. Choosing the Right Business Structure

    The first step in the company setup in India is selecting the right business structure. Common options include:

    • Private Limited Company: Ideal for startups looking to attract investment and establish a limited liability structure.
    • Limited Liability Partnership (LLP): A flexible structure suitable for small businesses and professionals.
    • Branch Office: For foreign companies wishing to extend their business operations in India without incorporating a new entity.

    Groom Tax can help you choose the best structure based on your business needs and objectives.

    2. Registering Your Business

    Once you have selected a business structure, the next step is registration. This involves applying for a Digital Signature Certificate (DSC) and obtaining a Director Identification Number (DIN) for the company’s directors. You will also need to draft the Memorandum of Association (MOA) and Articles of Association (AOA) to outline the company’s objectives and governance.

    For foreign companies, setting up a branch office in India requires additional documentation and approval from the Reserve Bank of India (RBI), but Groom Tax’s experts can assist in simplifying this process.

    3. Obtain PAN and TAN

    Every registered company in India needs to apply for a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the Income Tax Department. These numbers are essential for tax filings and compliance.

    4. Licensing and Permits

    Depending on the nature of your business, you may need specific licenses or permits. For instance, a manufacturing business might require an environmental clearance, or a retail business might need a shop and establishment license. Groom Tax can guide you on the required licenses for your specific industry.

    5. Opening a Corporate Bank Account

    After successful company registration, the next step is opening a corporate bank account. You will need your company’s registration documents, PAN, and other KYC details for this process. Having a separate account for business transactions is important for financial transparency.

    6. Compliance and Governance

    Once your company is set up, ongoing compliance is essential. Regular filings with the Ministry of Corporate Affairs (MCA), tax returns, and maintaining statutory records are mandatory. If you set up a branch office in India, it must also comply with specific regulations and filing requirements under Indian law.

    7. Taxation and GST Registration

    Understanding India’s tax structure is vital for any business setup. Most companies are required to register for Goods and Services Tax (GST), which applies to the supply of goods and services. Additionally, businesses must comply with Income Tax, VAT, and other state-specific taxes.

    Groom Tax offers expert consultation to ensure that your company is tax-compliant and optimally structured.

    8. Foreign Investment and FDI Regulations

    If you’re a foreign investor looking to set up a company or branch office in India, it’s important to be aware of Foreign Direct Investment (FDI) regulations. India has specific policies and guidelines for foreign investment in various sectors, which vary based on the business type and structure.

    9. Hiring Employees

    Once your company is set up, hiring employees is the next crucial step. Understanding labor laws and ensuring proper contracts, benefits, and compliance with the Employees’ Provident Fund (EPF) and Employees’ State Insurance (ESI) schemes is important.

    10. Expert Guidance from Groom Tax

    Setting up a company in India, especially a branch office in India for foreign businesses, can be complex. At Groom Tax, we offer comprehensive services to guide you through every step of the company setup process. From business registration to tax compliance, our experts ensure that your business is legally compliant and positioned for success in the Indian market.

    Conclusion

    Company setup in India offers exciting opportunities, but it requires careful planning and adherence to regulations. Whether you’re a foreign investor looking to establish a branch office in India or a local entrepreneur starting a new venture, Groom Tax is here to provide you with expert advice and professional assistance. Visit Groom Tax to learn more about setting up your company in India today.

    10 Tips for Successful Company Registration in India | Groom Tax

    Starting a business in India can be a rewarding venture, but it requires careful planning and adherence to legal procedures. One of the first steps is company registration, which can be a complex process if not done correctly. Here are 10 essential tips for successful company registration in India, brought to you by Groom Tax.

    1. Understand the Types of Company Structures

    Before starting the company registration process in India, it’s crucial to understand the various business structures available. The most common types are Private Limited Company, Limited Liability Partnership (LLP), and Sole Proprietorship. Each type has different legal implications and requirements. Consult with experts like Groom Tax to choose the right structure for your business.

    2. Choose a Unique Company Name

    Your company’s name should be unique and not infringe on existing trademarks or business names. A distinctive name is not only legally required for company registration in India but also plays an important role in brand identity. Check name availability on the Ministry of Corporate Affairs (MCA) portal before finalizing.

    3. Have a Clear Business Plan

    A well-defined business plan is vital for the success of your business and company registration. This plan will serve as a roadmap, detailing the company’s goals, operations, financial projections, and market strategies. A clear plan will also help in raising funds and managing your business effectively.

    4. Ensure Legal Compliance

    For smooth company registration in India, ensure that your business complies with all legal requirements, including obtaining necessary licenses and permits. Be aware of the Goods and Services Tax (GST) registration, tax compliance, and any other specific regulations related to your business type.

    5. Register for Digital Signature Certificate (DSC)

    A Digital Signature Certificate is required for company registration in India, especially for signing documents electronically. Ensure that the company’s directors have valid DSCs, which are issued by certified agencies in India.

    6. Get Director Identification Number (DIN)

    Each company director must obtain a Director Identification Number (DIN). This is a mandatory requirement for company registration in India and helps in tracking the director’s information with the Ministry of Corporate Affairs.

    7. Draft the Company’s Memorandum and Articles of Association

    The Memorandum of Association (MOA) and Articles of Association (AOA) outline the company’s objectives and governance rules. These documents must be filed during the company registration process. Professional help from Groom Tax can simplify this procedure, ensuring compliance with the law.

    8. Open a Company Bank Account

    After successful company registration, open a dedicated bank account in the company’s name. This is important for managing business finances and ensures transparency in financial transactions. Banks typically require a copy of your company’s registration documents and identification proof.

    9. File for PAN and TAN

    Your newly registered company in India must apply for a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the Income Tax Department. These are necessary for tax-related activities and compliance.

    10. Hire Professionals for Smooth Business Registration

    Company registration in India can be a lengthy process with various legal and procedural steps. It’s always beneficial to work with professionals who understand the intricacies of business registration in India. At Groom Tax, we provide expert consultancy services to guide you through the entire process smoothly and efficiently.

    Conclusion

    Company registration in India is a pivotal step for any entrepreneur looking to establish a business. Following these 10 tips will help you navigate the process seamlessly. For expert guidance and professional services, visit Groom Tax, your trusted partner in business registration in India.

    Provision for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS)

    Tabular Summary based on the Key Provisions:

    AspectTDS (Tax Deducted at Source)TCS (Tax Collected at Source)
    Relevant SectionsChapter XVII-B, e.g., Sections 192, 194, 206AAChapter XVII-BB, e.g., Sections 206C, 206CC, 206CCA
    Applicable OnPayments like salaries, interest, rent, fees for professionals, etc.Sale of specified goods (e.g., alcohol, tendu leaves, scrap, minerals)
    Deductor/CollectorPerson making specified payments to a residentSeller receiving payment for specified goods
    RatesPrescribed by Income Tax Act, subject to changes in Finance ActsSpecified in the Act, often percentage-based (e.g., 1% for scrap)
    Non-Filer ImpactHigher TDS for non-filers under Section 206ABHigher TCS for non-filers under Section 206CCA
    PAN RequirementMandatory; otherwise higher rates under Section 206AAMandatory; otherwise higher rates under Section 206CC
    Time of DeductionAt the time of credit/payment, whichever is earlierAt the time of debiting amount or receipt of payment, whichever is earlier
    Filing ReturnsForm 26Q, 27Q for reportingQuarterly statements in prescribed forms
    Consequences of DefaultDeemed assessee-in-default; penalties and interest applyDeemed assessee-in-default; penalties and interest apply

    Section-Wise Tabular Summary of the TDS and TCS Provisions:

    TDS Provision :

    SectionParticularsApplicable OnRateThreshold LimitKey Notes
    192TDS on SalarySalaries paid to employeesAs per slab ratesBasic exemption limitDeduction considering employee’s declaration (Form 12BB).
    194TDS on DividendsDividends by companies10%₹5,000Applicable to resident shareholders only.
    194ATDS on Interest (except securities)Interest by banks, financial institutions10%₹40,000 (₹50,000 for senior citizens)Not applicable to certain exempted entities.
    194CTDS on ContractsPayments to contractors/sub-contractors1% (individual/HUF), 2% (others)₹30,000 per contract/₹1,00,000 annuallyApplicable to contracts including supply of labour.
    194HTDS on Commission/BrokerageCommission or brokerage2%₹15,000Excludes insurance commission covered under Section 194D.
    194ITDS on RentRent for land, building, plant, or machinery2% (plant/machinery), 10% (land/building)₹2,40,000 annuallyIncludes sub-letting cases.
    194JTDS on Professional FeesFees for professional/technical services10% (general), 2% (technical)₹30,000 annuallyApplicable to consultancy services as well.
    194QTDS on Purchase of GoodsPayment to resident for goods exceeding limit0.1%₹50,00,000 annuallyDeductor must ensure supplier’s compliance.
    206ABHigher TDS for Non-filersTDS for non-filers of ITR in specified casesTwice the rate or 5%, whichever is higherNANon-filers as defined in the Act.

    TCS Provision:

    SectionParticularsApplicable OnRateThreshold LimitKey Notes
    206C(1)TCS on Specified GoodsAlcohol, tendu leaves, scrap, minerals1%-5%No limitRate depends on the type of goods sold.
    206C(1F)TCS on Sale of Motor VehiclesSale of motor vehicles exceeding limit1%₹10,00,000Applicable to all sellers.
    206C(1G)TCS on Overseas RemittanceRemittances under LRS, overseas tours5%-20%₹7,00,000 (for education/medical cases)Higher rates for others.
    206C(1H)TCS on Sale of GoodsSale of goods (exceeding limits)0.1%₹50,00,000Seller turnover must exceed ₹10 crore.
    206CCAHigher TCS for Non-filersTCS for non-filers of ITRTwice the rate or 5%, whichever is higherNASimilar applicability to Section 206AB.

    For more information you can contact us at Groomtax