Profits tax

Profits Tax

Profits tax is a tax imposed on the net profits earned by businesses or enterprises. Depending on the jurisdiction, it may be applied separately from or in addition to regular income tax. This tax specifically targets business or corporate profits, rather than personal income from non-business sources.

Key Features

1. Scope

1. Levied on profits generated from business operations, trading, or professional activities.
2. Income from non-business sources may be excluded unless the tax law specifies otherwise.

2. Separate or Additional Tax

1. In some countries, profits tax is charged in addition to corporate or personal income tax.
2. In other systems, it serves as the primary tax on business profits.

3. Calculation

Profits tax is computed based on net profits, which equal gross revenue minus allowable expenses, depreciation, and other eligible deductions.

Formula (Simplified):

Profits Tax = Net Profits × Applicable Tax Rate

4. Purpose

1. Ensures businesses contribute their fair share to government revenue.
2. Separates the taxation of commercial profits from personal or investment income.

Example

A business earns:

1. Revenue: ₹50,00,000
2. Deductible expenses: ₹30,00,000

Net profits = ₹50,00,000 − ₹30,00,000 = ₹20,00,000

If the profits tax rate is 25%:

Profits Tax = ₹20,00,000 × 25% = ₹5,00,000