Nidhi companies, unique to India, significantly impact the financial landscape by fostering savings and thrift among their members. Nidhi companies, which are recognized as Non-Banking Financial Companies (NBFCs) under Section 406 of the Companies Act, 2013, differ from other NBFCs in that they exclusively engage with their members and accept deposits from them. This distinction shapes their operations and regulatory requirements. In this blog, we will delve into the tax implications of Nidhi company registration in India, considering the latest updates and trends.
Understanding Nidhi Companies
What is Nidhi Company?
Nidhi companies operate as mutual-benefit societies, like NBFCs, but without the stringent regulations that govern other non-banking financial companies under the RBI’s jurisdiction. Nidhi companies’ primary goal is to instill the habit of saving among their members and lend to them at reasonable rates. A Nidhi company can take in deposits and lend them to its members, keeping the funds within the group.
Key Features of Nidhi Companies:
- No external borrowing or lending
- Members only model
- Regulated under the Companies Act, 2013
- Exempt from certain RBI regulations
Taxation of Nidhi Companies
- Corporate Taxation
In India, Nidhi companies are subject to the same taxes as other companies. Currently, the rate for domestic companies is 25% with specific exemptions and incentives or 22% without these exemptions and incentives, depending on criteria for turnover. - Minimum Alternate Tax (MAT)
Nidhi companies are also liable to pay Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act, 1961. Companies with substantial book profits but low or nil taxable income under regular provisions must pay the present rate of MAT, which is 15% of the book profit. - Dividend Distribution Tax (DDT)
On April 1, 2020, they abolished the dividend distribution tax. Consequently, a dividend tax now applies to shareholders. The shareholders of the Nidhi companies now must pay tax on dividends received at applicable rates under their income tax slabs.
GST Implications
- Applicability of GST
In general, Nidhi companies do not supply goods or services but rather deal with finances. As a result, they are not subject to GST for their primary activities of accepting deposits and providing loans. - Input Tax Credit
Nidhi companies may have to bear GST on their administrative expenses. Although Nidhi companies can claim ITC on such expenses, they must ensure compliance under GST, including RCM, where applicable.
Administrative expenses for Nidhi companies, when booked, would give rise to GST implications. You can claim input tax credit on such costs, but all GST provisions, including reverse charge mechanisms (RCM), would apply.
Recent Trends and Updates
- Regulatory Changes
The MCA has brought in some amendments governing better transparency and governance in the activities of Nidhi companies, such as strict norms for acceptance of deposits and lending with some mandatory declarations and periodic filings, among other things. - Digital Transformation
The Nidhi companies are also adopting technology with the increasing use of digital banking and fintech. The increasing implementation of online platforms for member registration, deposit acceptance, and loan disbursement necessitates stricter adherence to digital and data protection laws.
Tax Compliance Tips for Nidhi Companies
- Accurate Record Keeping
For tax purposes and audits, it is very important to keep accurate and up-to-date records of all activities, member details, and financial statements. - Timely Filings
To avoid penalties and interest, ensure that you file income tax returns, GST returns, and other regulatory filings on time. - Professional Consultation
Engaging these tax professionals and chartered accountants is essential to navigate the complex tax landscape and address the latest compliance concerns and updates.
Summary
Nidhi companies play a crucial role in encouraging individuals to save money and use credit cards. They must understand tax effects and watch for regulatory changes to operate legally. Following tax rules and using digital tools can help Nidhi businesses continue to grow and improve the financial health of their members.
FAQ's
A Nidhi company is a type of non-banking financial company (NBFC) recognized under Section 406 of the Companies Act, 2013. Its primary goal is to instill a saving habit among its members and lend money to them at reasonable rates. It operates on a mutual-benefit model, engaging only with its members and not external entities.
Nidhi companies, unlike other NBFCs, can only accept deposits and lend to their members. They are not subject to the strict regulations of the Reserve Bank of India (RBI) that govern other NBFCs, and they cannot borrow or lend externally.
Nidhi companies are subject to the same corporate tax rates as other domestic companies in India. The current corporate tax rate is 25% with specific exemptions and incentives, or 22% without these exemptions and incentives, based on turnover criteria.
Yes, Nidhi companies are required to pay Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act, 1961. The current MAT rate is 15% of the book profit.
The Dividend Distribution Tax (DDT) ceased to exist on April 1, 2020. Shareholders of Nidhi companies now have to pay tax on dividends received according to their applicable income tax slab rates.
Generally, Nidhi companies are not subject to GST for their primary activities of accepting deposits and providing loans. However, they may have to pay GST on administrative expenses and can claim Input Tax Credit (ITC) on such expenses in accordance with GST provisions, including the reverse charge mechanism (RCM), where applicable.
Recent regulatory changes include stricter norms for deposit acceptance and lending, mandatory declarations, and periodic filings to enhance transparency and governance. The aim of these changes is to improve the supervision of Nidhi companies’ operations.
Nidhi companies should keep accurate and up-to-date records, file income tax and GST returns on time, and seek professional advice from tax professionals and chartered accountants. Keeping abreast of regulatory changes and leveraging digital tools can also aid in compliance and operational efficiency.