Course No.

4135:

Taxation

Business Taxation: An Introduction

Key Words / Outline

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Issues to be discussed:
Business Enterprises as a Taxpayer - Sole-proprietorship - Partnership - Company Pass-Through vs. Non-Pass-Through Entities Legal Taxpayer vs. Real Taxpayer

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Business Enterprise as a Taxpayer

Taxpayer is a person, or business entity or any other organization who/which is supposed to pay tax to the Government.
Whether a business enterprise is a taxpayer or not, depends on its form.

Common forms of business enterprises are: Sole-proprietorship: 1 owner and fully managed & controlled by that owner. Partnership: more than one owner (at least 2, but not more than 20) and managed and controlled by the partners (being the owners), but sometimes management may be hired. Company: more than one shareholder (owner) and there is a divorce between management and ownership.

Question regarding whether the entity itself and/or the owners of the entity is(are) taxable is explained on the basis of following two concepts: Pass-Through Entity Non-Pass-Through Entities

Type of Tax-paying Entity: Pass-Through vs. Non-Pass-Through Entities

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Pass-Through Entity: This entity is not taxable itself. Income of the entity will pass through the owners & is taxable after its accumulation with the owners other income. Non- Pass-Through Entity: This entity is taxable itself. The income of the entity may be distributed to the owners and is (or is not) again taxable after its accumulation with the owners other income.

SOLE-PROPRIETORSHIP: The entity is not taxable for its income [i.e., passthrough entity]. The sole owner of the entity is taxable for the income of the entity, distributed/withdrawn or not. PARTNERSHIP: The partnership firm is taxable for its income in first instance [i.e., non-pass-through entity]. But if the entity fails to pay tax on its income, then the partners are individually and jointly liable to pay tax on its income. The share of income (distributed or not) will be included in the total income of individual partners, and if the firm has already paid tax on its income, the share of income will be treated as tax-free income in the individual partners hand and it will be subject to tax rebate at average tax rate (ATR). COMPANY: The company is taxable for its income always [i.e., non-pass-through entity]. The shareholders of the company are taxable for the income of the company, only if distributed to them (as dividend).

Business Entity: Legal vs. Real Taxpayer

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Question regarding whether the entity itself is a legal or statutory taxpayer or it can be able to shift the tax incidence on others or other can be able to shift their tax incidence on the entity is explained on the basis of following two concepts:

Legal Taxpayer: The taxpayer whose name is registered in the tax-authoritys list of taxpayers under some statutory tax provision. Real Taxpayer: The taxpayer whose name may or may not be registered in the tax-authoritys list of taxpayers under any statutory tax provision, but practically tax has been shifted on them and tax is being really paid by them.

Business Entity: Legal vs. Real Taxpayer

In this regard, answers to the following queries are important:

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Whether the tax incidence can be shifted on others? Whether the impact of the tax and the incidence of the tax are on same entity? Whether the impact of the tax on one entity and the incidence of the tax is on other entity?

Answers to the above queries may be as follows:

Whether the tax is direct (there is no scope of shifting) or indirect (there is scope of shifting). In case of income tax (tax on interest income, dividend income, business profit, capital gain, etc.) and property-related tax (gift-tax), both the impact of the tax and the incidence of the tax are on same entity. In case of tax on business transactions/consumption (VAT, supplementary duty, turnover tax), tax on international trade (customs duty, VAT, SD at import stage), in case of tax on production (narcotics duty, VAT and SD), in case of tax on services (excise duty, VAT and SD), the impact of the tax on the entity on which the tax is imposed legally under some statutory provision and the incidence of the tax is on other entity or person who are the buyers of the goods and services from the selling entity.

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End of the Presentation

Thank you.