If a Company's net income in year 1 is Rs. -2 Crores (-20 million), year 2 is Rs. -1 crores(-10 million), year 3 is Rs. 1 crore (10 million). What is the tax payable in year 1, 2 and 3 at a 30% tax rate?

Year 1 = Rs.0' Year 2 = Rs.0; Year 3 = Rs.0 - Correct

Year 1 = Rs.0' Year 2 = Rs.0; Year 3 = Rs30 Lakhs (3 million)

Year 1 = Rs.60 lakhs (6 million)' Year 2 = Rs.30 lakhs (3 million); Year 3 = Rs.0 - Incorrect

Year 1 = Rs.60 lakhs (6 million)' Year 2 = Rs.30 lakhs (3 million); Year 3 = Rs.30 Lakhs (3 million)

Sir, could you please explain on how the interest rate is 0 for all the three years ?

Year 1 = Rs.0' Year 2 = Rs.0; Year 3 = Rs.0 - Correct

Year 1 = Rs.0' Year 2 = Rs.0; Year 3 = Rs30 Lakhs (3 million)

Year 1 = Rs.60 lakhs (6 million)' Year 2 = Rs.30 lakhs (3 million); Year 3 = Rs.0 - Incorrect

Year 1 = Rs.60 lakhs (6 million)' Year 2 = Rs.30 lakhs (3 million); Year 3 = Rs.30 Lakhs (3 million)

Sir, could you please explain on how the interest rate is 0 for all the three years ?

Nov 19 2012 12:15 AM

Veena - A company pays taxes only if it makes a profit. In this case the companys profit/net income is negative in year 1 and year 2 hence no tax is paid.

Now there is another tax rule through which a company can carry-forward its losses. So year 1 + year 2 the company has total losses of Rs. 3 crores (2+1). Even thought the company made a profit of Rs. 1 crore in year 3, it can adjust that 1 crore to the 3 crores of cumulative loses and not pay tax. So at the end of year 3, the loss carryforward will be 2 crores (3-1) that the company can offset in year 4.

Is that clear ? If not let me know if you need a call to clarify this.

Nov 20 2012 10:19 AM
Now there is another tax rule through which a company can carry-forward its losses. So year 1 + year 2 the company has total losses of Rs. 3 crores (2+1). Even thought the company made a profit of Rs. 1 crore in year 3, it can adjust that 1 crore to the 3 crores of cumulative loses and not pay tax. So at the end of year 3, the loss carryforward will be 2 crores (3-1) that the company can offset in year 4.

Is that clear ? If not let me know if you need a call to clarify this.