Difference Between Accounting Profit and Taxable Profit

The meaning of profit is different to different persons, i.e. businessmen, accountant, workers, tax
collectors, economist etc. For an accountant, profit means the excess of revenues over expenses,
which is known as Accounting profit. At the time of computing accounting profit, only explicit costs,
i.e. book costs are considered.

The concept of accounting profit differs from taxable profit, in the sense that the latter is the amount
which is taxable as per the provisions of the income tax act. It is calculated by taking into account
accounting profit and then adding the non-allowable expenses less allowable expenses and the
incomes credited in Profit and Loss account.

Comparison Chart
BASIS FOR
ACCOUNTING PROFIT TAXABLE PROFIT
COMPARISON

Meaning The term accounting profit refers the The term taxable profit refers
company's income obtained after the profit of the business whi
reducing total expenses from total is taxable as per income tax
revenues. rules.

Basis Accounting Standard Income Tax Act 1961

Year Financial Year Income of Previous Year is

Taxable in Assessment Year.

Objective To know the profitability and To know the taxability of the

performance of the entity. entity.
To know the taxability of the entity.

Audit Financial Audit Tax Audit

Definition of Accounting Profit

Accounting Profit is the result of operating and non-operating activities of

the company. It is the actual financial gain obtained after reducing total
expenses from total revenue of the business. It reflects the company’s
profitability and performance in the future. It also determines that how
accurately the resources of the entity are allocated.

For knowing the company’s liquidity and solvency, accounting profit is

very helpful to the users of the financial statement.

The financial year starts from 1st day of April and ends on the 31st day of
March.

Definition of Taxable Profit

The amount of profit which is taxable as per the Income Tax Act, 1961
under the head Profit and Gains from Business or Profession, is known as
taxable profit. It is derived by taking accounting profit as a base. Every
year the return is furnished to the income tax department for the previous
year in the assessment year. On the basis of this return the taxable profit
and the tax thereof is calculated which is to be paid by the company. In
this profit, disallowed expenses are added back.

For Example – If the Assessment Year is 2015-2016, then the Previous

Year will be 2014-2015.

What is Corporate Tax?

A corporate tax is a levy which the government imposes on the income of a company. The
money collected from corporate taxes is used as the source of revenue for a country.
Operating earnings of a company are determined by deducting costs from the cost of the
product sold (COGS) and income depreciation.

First, tax rates are applied to establish a legal duty the corporation owes to the government.
Regulations relating to corporate taxes vary widely across the world, but they must be voted
on and approved by the government of a country for enactment.

Some regions, like Jersey, are considered tax havens, and are highly coveted by companies as
such.

Understanding Corporate Tax in India

A corporation is an individual with a distinct and autonomous legal body compared with its
shareholders. According to the Income Tax Act, domestic and international corporations are
liable to pay income tax.
While a domestic corporation is taxed on its universal income, a foreign corporation is
imposed only on the income earned within India, i.e. accrued or obtained within India.

For tax calculation under the Income Tax Act, the types of companies may be described as:

1. Domestic Company: Domestic Company is one that is listed under India's Companies Act
and also involves the foreign-owned firm that has control and management wholly based in
India. A domestic business includes both private and public companies.

2. Foreign Company: Foreign Company is one that is not listed under the Indian Company
Act and has control and management outside of India.

Corporate tax is based on a company's taxable profit or net income. A company's operating
profit/net profits is the overall sum left with the company after the requisite deduction of
different expenditures has been made. A company incurs a host of expenses for selling
products.

What are the sources of income for a company?

Given below are some of the sources of income for a company.

Profits of a business

The excess of a company’s revenues over its expenses is called profit. It is the fundamental source of
income for any business.

Capital gains

Capital gain is the increase in the value of a capital asset of the business. Capital gains are realised at
the time of selling the asset and act as a source of income for the business.

Capital asset?

A capital asset is an asset of a business or an individual that has a useful life of more than one
accounting period – usually one year. So, any asset that delivers value to you for more than one
accounting period is a capital asset. Examples include rare art or collectables, homes, cars, land, and
even stocks.

Capital gains explained with an example

For example, if a piece of land was bought for business purposes for Rs. 10,00,000 (purchase price of
the asset) and sold a few years later at the market price of Rs. 15,00,000 (selling price of the asset),
then the difference between the selling price and the purchase price (15,00,000-10,00,000) = Rs.
5,00,000 is referred to as capital gain.

Determination of tax liability: The residential status of a company identifies its tax liability on income
earned. A company is a resident in India if it’s an Indian company or its control & management is
situated in India. All the income earned by a resident company is liable to tax under corporate tax law.

As a result of this, the issue of double taxation may occur. It refers to the taxing of the same income
twice by the company, because of the different tax laws of different countries. Section 90 & 91 of the
I.T. Act provides relief against double taxation.

Components of Income of a company: The total income of the business that is put to tax under
corporate taxation is inclusive of:

Profits and Gains from the Business & Profession;

Capital Gains;

Earnings from House Property;

Earnings from other sources like interests, lotteries, etc.

The income calculated is adjusted as per section 79 set off and carried forward of losses in companies
and total gross income is ascertained. The deductions under Chapter VI-A are made from the total
gross income to arrive at the net income. The computed value of net income is exposed to tax.

Note: Salary Income is excluded from company’s income.

Dividend Distribution Tax (DDT): It is the tax charged on distributed income of the domestic company.
Section 115-O of the Income Tax Act governs the tax law related to it. DDT is levied in addition to the
tax on income. The current rate of DDT is 15%. Surcharge @ 12% and EC & SHEC @ 3% is also
applicable on DDT.

Note: As per the Budget Update 2016, if any shareholder whether individual or HUF, receives dividend
more than Rs. 10 Lakhs; then DDT will be charged at 10%.
Minimum Alternate Tax (MAT): MAT was made applicable because companies find a lot many ways to
escape tax payments. Through minimum alternate tax companies pay a token of tax. Section 115JA of
Income Tax Act imposes MAT on the companies. All the companies having tax payable on total income
less than 18.5% of their book profits (plus surcharge and SHEC) are liable to pay MAT. Subject to some
conditions, MAT can be carried forward and adjusted against regular tax. It can be carried forward for
subsequent ten years period. MAT is levied on all the companies, including foreign companies having
income sources in India. A few companies are exempt from its purview, viz. companies having life
insurance business (Sec 115B) and companies having shipping income (Sec 115V-O).

The applicable corporate tax rate in India is as under