Reference list .13
Cooperative society is an association of legal and natural persons formed with the aim of providing services to its members and community. The provision of services is meant to improve the effectiveness of commercial activities of members who formed it. Members who formed it own cooperative societies. Just like any other form of business units, cooperative societies are subjected to taxation, deductions and certain exempts. Most cooperatives are formed under existing laws governing cooperative societies and state laws at the time of formation. The main aim of a cooperative society is to increase the effectiveness of the commercial activities of the members who formed it. The mentioned business is normally financed by its members and the profit gained shared among the members in the ratio of capital contribution. The profit is also subjected to taxation under income tax act.
Most cooperative societies face problems relating to financing, membership and capitalization. Tax compliance is mandatory for cooperatives though most people have a feeling that cooperatives do note pay taxes. Therefore, the purpose of this paper is to assess the taxation system and rates of cooperative societies.
1.0 A cooperative society is normally registered under Cooperative Society Act or the existing law of the state at the time of formation (Cracogna & Henrÿ, 2013). Funds used to register cooperative society are normally contributed by the members who formed it. The finance for registration may also be provided by the bank or even the government. However, in the organizational set up of a cooperative society, a business can be formed within the cooperative (Governance, 2010). Cooperative societies are normally exempted from certain compliances of direct or indirect taxes at the time of formation and registration. For a cooperative society to get a tax relief, it must set up a clear process for tax planning, compliance, and tax management. The setup process must show how the business will obtain PAN, TAN and other requirements for tax compliance. It is, therefore, worth mentioning that registration of cooperative societies is necessary for tax relief. The main reason for the mentioned point is that tax relief encourages more members to join cooperative societies and even form new ones under the existing laws at that particular time of formation.
2. Under Income Tax Act, cooperative societies are fully treated as an association of persons (AOP). It’s, therefore, a taxable entity under the mentioned Act. For taxation purposes, a cooperative is treated as Association of Persons but it is excluded from the members of the cooperative society (Helminen, 2011). The rate of taxation of a cooperative society is different from other business organizations belonging to Association of Persons. The amount of Income Tax of a cooperative is normally computed in accordance with the existing tax rate and the law governing cooperative society. They also charged certain rates of surcharge depending on the level of income. Additionally, cooperatives enjoy the benefit of concessional rate of tax that is normally charged with reference to the existing Finance Act. Under the mentioned Act, cooperatives are treated favorably with the view of encouraging and promoting economic growth of cooperatives (Economics, 2011). They enjoy different types of exemptions of profit with the view of encouraging workers and artisans involved in certain activities of the cooperative society.
3. Most cooperative societies do not both take (Permanent Account Number) PAN No. and filling income tax returns. People have a perception that income from cooperatives is not taxable. The given perception is wrong because some income types are taxable while other income types are exempt. The income of a cooperative society is not exempted. The income of a cooperative is normally taxed at various levels (Kumar, 1988). Income from interests gained from loans is normally taxed.
Additionally income that results from the sale of debentures is also taxed, and that derived from letting warehouses are taxed. Income that is placed at the disposal of corporate members like a bank is not exempted from tax, because the interest earned is treated as revenue and, therefore, eligible for tax. Notably, rental income from advertisement hoardings is fully taxed under head business income (Okauru, 2012). Non-occupancy charges are also taxed because the income tax authority views the collection as from non-residence members of the cooperative society.
However, the society operates under the principle of mutuality. In the mentioned scenario, any form of excess of the income over expenses is exempted. The excess fund usually termed as the reserve is normally invested in fixed deposits with a bank. The deposited fund is meant to deal with future expenditures and exigencies. There exist some conditions that must be met for income to be exempt from the principle of mutuality (Chandra, 1997). Just to mention, there must exist complete identity between the participators and contributors. Also, there must be no scope of profiteering by the contributors (Khanna & Palepu, 2000). Any form of income that meets the above requirements is normally exempted. The forms incomes that are normally exempted include a capital contribution, interest on default payments and premium on flat transfer. Additionally, cooperatives that operate as trade unions are normally exempted. Contributions made by members meant to purchase goods and services for the common use of members are also exempted.
4. Most cooperative societies operate with a standard tax rate globally. Their tax rate is different and separate from the tax rate of limited liability companies, partnerships and other forms of business units (Singla, 2013). Taking the assessment of most recent years, 10% is charged for income ranging from Rs.1 to Rs. 10,000. 20% is charged for income ranging from Rs. 10,001 to Rs. 20,000 and 30% is charged for the amount of Rs. 20,000. Notably, the surcharge is not applicable to cooperative societies. Comparing the income tax rates with that of limited liability Company, we learn that in limited liability Company, the tax rate is 30% with surcharge of 10% of the net income that exceeds Rs. 1. The statistics clearly indicates different tax rate between cooperative societies and other forms business units. The tax rate for cooperatives is a somehow flexible in that low income is taxed less, and the tax increases with the increase in income (Atkinson, 2007). The advantage of cooperative societies over other forms of business units like companies is that in cooperatives, low incomes are taxed less. For companies, there is a flat tax rate system without considering the level of income.
5. Filing of returns is compulsory for a cooperative society. Just to mention, filling is very vital for any business as it keeps documents for future reference and helps keep documents safely. In most cooperatives, filling is normally done on 30th September of every year. Most of the state cooperate laws allows cooperative societies to hold their meeting at the end of the year normally 31st December. By the time of AGM, the cooperative must have filed all the returns to present to the management and members. Filling must be done within the stipulated time. For instance, without filling a loss within the right time, loss under the head capital gain and business loss of a given cooperative cannot be carried forward. If loss return is not filed at all, then loss involving the head income from house property and depreciation that was not absorbed cannot be carried forward.
Depreciation that was never absorbed will not be carried forward, and, therefore, the liabilities of the business might exceed assets, and the business might not have an idea on how to recover the losses. The management will lack the information regarding the origin of losses, and, therefore, the cooperative might be placed at financial risk and closure. Additionally, it is also important to file profit on returns as it will provide a record of the profitable businesses. Any other record of the business in terms of assets and liabilities must also be filed. Most cooperatives are facing challenges relating to e-filling and use of digital signature. Most of these cooperatives lack exposure in terms of internet use and computerized accounting and it, therefore, difficult to the e-filling system.
6. Just like any other business or company, Tax audit is compulsory for all cooperative societies that operate a business. The mentioned audit involves examination of overdue debts, valuation of assets and liabilities and checking for the arithmetic accuracy in vouching and scrutiny of the balance sheet. Maintenance of the books of account and other documents is vital for a cooperative society. Tax audit will assist Assessing Officer to calculate the total income basing on the provisions of Income Tax Act. The accounts of cooperative societies are subjected to an audit of both Chartered Accountant and Directorate of Cooperative Audit from the administrative department.
The tax audit of a cooperative society enables the state to assess the tax compliance of the society. Due to the diversity of activities by cooperative societies, the tax auditor must be acquainted with the high degree of knowledge and skills so to comment properly on the financial position of the business. Notably, there exist cooperative societies that do not carry out any business. For example, housing cooperative societies, that has no business during the time of construction of building premises. In the mentioned scenario, tax audit is not applicable. The main reason being that during the mentioned period, there is no profit made or gained by the cooperative society.
7. The state may exempt cooperative societies from paying some taxes, fees and levies. The mentioned can only be done through official notice, official Gazette and amendment in the laws governing cooperative societies. Fees that are paid under any law relating to the registration of documents and court fee are normally exempted (Dutta, 1991). The following exemptions are normally available for a cooperative society: taxes on agricultural income. Income earned from the agricultural produce of any given cooperative society is normally exempted. The mentioned income goes directly to the cooperative budget accounts untaxed.
Taxes on the sale and purchase of goods are normally exempted. Any contribution made by members with the aim of purchasing goods is normally un-taxed. Taxes on professions, trade callings and employments are also exempted. A cooperative society offering professional services and employment are exempted from taxes in regard to the existing laws at that time of offer (Hopkins, 2011). They also enjoy exemption from a new industry undertaking a free trade zone for 100 years. Additionally, they enjoy exemptions of the profits and gains for ten years from a fully export oriented undertaking.
8. Deductions are normally made in the income of cooperative societies when the cooperative engage in specified activities. Cooperative that is carrying out the business of credit facilities or banking to its members undergoes profit deduction. A Certain percentage of profit made by the cooperative is normally deducted (Sondak, 1996). Primary cooperatives that engage in a business like supply of products grown by its members to the government or local authorities also undergo profit and gain deductions.
Any income from interests is also deducted. A cooperative society that provides loans to its members and other members in return for interest undergoes full deduction from the concerned authority. In the mentioned case, a certain percentage of money goes to the tax authority. Dividends derived from any investment done cooperative society, and other cooperative societies undergo deduction (Mitra & Wolf, 1986). Additionally, any income derived from a cooperative society from letting or renting storage facilities like go downs are normally deducted.
It is important to note when the cooperative carries on unspecified activity, the deduction is normally made. Subsidies received from the government are also deducted. Subsidies from government are normally treated as revenue to the cooperative society, and that’s why they undergo deduction (Seligman, 1914). When a cooperative society involves in any activity relating to marketing, purchasing and processing of agricultural produce, deduction are made.
9. Cooperative societies are required to pay Alternate Minimum Tax. AMT is payable if normal provisions of the Income Tax are less than 18.5% of the adjusted total income. In the mentioned scenario, the tax payable is 18.5% of the adjusted income. Most companies are normally exposed to tax basing on the book profit, but the case is different for a cooperative society (Congress, 2010). For cooperatives, they pay their minimum tax basing on the adjusted total income rather than profits. However, there are some cooperatives that subjected to deductions. Such cooperatives do not pay Alternate Minimum Tax. The mentioned tax is not applied to medical expenses and treatment recovery. AMT payment is flexible to cooperative societies so as make them attractive that many people can join.
10. TDS is the tax required to be deducted at source on specific payments made to residents. Just like any other form of business, cooperative society should Comply Tax Deducted at Source (TDS) provisions excepting few. The payment is normally made in the form of commission, salary, brokerage, professional service, and salary (Van Gerven, 2010). If a cooperative society is involved in the transfer of immovable property apart from agricultural land, tax is usually deducted at the source by person or body involved in the transfer.
According to principles guiding cooperative societies, interests that are paid on debentures should not be taxed. TDS provisions are applicable to interests in securities that are paid by the society to its members. In case of dividends, TDS provisions are not applicable (Brody & Davidson, 1998). The provisions in TDS that are applicable to cooperative societies include electronic filing TDS returns, the time limit for deposits of TDS and issuing of NSDL. The penalties, interests and prosecution of violence are normally applied to all cooperatives regardless of size or locality. However, it is worth mentioning that TDS causes hardship to depositors. It also increases the administrative burden on tax authorities when granting for refunds.
11. Certain forms of Interest earned from a cooperative society are taxable. Interest on income earned on investments is fully taxable. Notably, interests from investments are considered as a major source of revenue to the cooperative, and it is therefore taxed. Additionally, interest derived from credit and loans given to members from a cooperative bank is also taxable (Thuronyi, 1998). Contrarily, outstanding dues of members of a cooperative society are normally classified as contribution from members. Interests earned on the mentioned contributions meet the requirements of the principles of mutuality.
Contributors and participators are the same persons. Therefore, the mentioned interests are exempted from tax. In a case whereby a cooperative society engages in business operations with a bank, interests on deposits are not exempt and, therefore, taxable (Cockfield, 2010). The cooperative society would have engaged in a commercial activity with the bank and, therefore, the society has to comply with the laws and regulations governing the Bank.
Cooperative societies face the risk of low governance. The tax rate system used for cooperative societies is different from the tax rate system for other forms of business units. The tax rate favors cooperative societies in that low income is less taxed while high income is highly taxed. The favorable system is just meant to attract many people to join and form new cooperative societies. The status of a cooperative society under Income Tax Act is that they are recognized as Association of Persons (AOP). That is to say that they eligible to taxation under Income Tax Act just like any other form of business unit. Cooperative societies are favored in terms of taxation as compared to other form of business units, as shown in the above discussion.
Atkinson, A. B. (2007). Measuring top incomes: methodological issues. Atkinson, AB and T. Piketty: Top Incomes over the Twentieth Century: A Contrast between Continental European and English-Speaking Countries, 18-42.
Brody, C. M., & Davidson, N. (Eds.). (1998). Professional development for cooperative learning: Issues and approaches. USA: SUNY Press.Chandra, P. (1997). Financial management. Tata McGraw- India: Hill Education.
Cockfield Arthur, J. (2010). Globalization and Its Tax Discontents: Tax Policy and International Investments. University of Toronto Press.-August, 21, 320.Governance, C. (2010). e-Voting Revolution—In Pusuit of better. Technical Data, 937.
Congress, O. H. T. (2010). This Act has been amended by the: DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT [PUBLIC LAW 111–203—JULY 21, 2010] This PDF will be replaced in a future Update to reflect changes. Public Law, 111, 203.
Cracogna, D., Fici, A., & Henrÿ, H. (2013). International handbook of cooperative law. UK: Springer.
Dutta, S. K. (1991). Co-operative societies & rural development: A politico-economic study. Mittal Publications.
Economics, A. A. M. (2011). New Delhi: Financial Analysis.
Helminen, M. (2011). EU tax law: direct taxation. Netherlands: IBFD.
Hopkins, B. R. (2011). The law of tax-exempt organizations (Vol. 5). Canada: John Wiley & Sons.
Khanna, T., & Palepu, K. (2000). Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. The Journal of Finance, 55(2), 867-891.
Kumar, V. (1988). Committees and Commissions in India: 1947-1973 (Vol. 11). Concept Publishing Company.
Mitra, P., Lal, D., & Wolf, M. (1986). A description of adjustment to external shocks: Country groups. Stagflation, Savings, and the State, INDIA: 103.
Okauru, I. O. (2012). Federal inland revenue service and taxation reforms in democratic Nigeria.
Seligman, E. R. A. (1914). The income tax: a study of the history, theory, and practice of income taxation at home and abroad. New Jersey: The Lawbook Exchange, Ltd.
Singla, R. K. (2013). Business Studies. VK PUBLICATIONS.
Sondak, H. (1996). Social dilemmas: Perspectives on individuals and groups-Schroeder, DA.
Thuronyi, M. V. (1998). Tax Law Design and Drafting, Volume 2 (EPub). International Monetary Fund.
Van Gerven, D. (Ed.). (2010). Cross-border mergers in Europe (Vol. 1). Cambridge University Press.