Corporate Tax

The Income Tax Act, 1961 levies a corporate tax on domestic as well as foreign companies. The Government of India, through this Act, mandates domestic companies to pay corporate taxes based on their universal income. On the other hand, foreign companies are only taxed on their income accrued or received in India.

Corporate Tax in India 

The Indian government levies corporate taxes on enterprises as a source of income. The calculation of this tax is premised upon the net income of a company. These are the types of income that a company earns - 

  • Profits Earned by the Business

Profits refers to the financial benefits realised by a company when its total revenue exceeds total expenses. 

  • Income From Renting a Property

When a business lets out its property on rent, its rental income comes under the purview of business income.

  • Capital Gains

Capital gains refer to the increase in the value of a company’s capital assets. A capital gain, in this case, can be short-term or long-term and is claimed on income taxes.

  • Income from Other Sources

Any other income of an enterprise that is not specifically taxed under other heads is taxed as earnings from other sources. It includes income from dividends, interests, etc. 

Companies, both domestic and foreign, are liable to pay an annual corporate tax. It is, therefore, based on the above income earned in a given financial year.

Indian Corporate Tax Rate

Below-mentioned is a brief overview of Indian Corporate Tax Rate-

  • Corporate Tax Rate for Domestic Companies

Companies registered under the Companies Act 1956, both public and private enterprises, are charged with this tax. Presently, domestic companies are taxed at a rate of 30%.

In addition to this, the Income Tax Act levies a surcharge of 7% if the net income ranges from Rs. 1 crore to Rs. 10 crore. If a company’s net income exceeds Rs. 10 crore, a 12% surcharge is levied on it. 

In 2019, the Government of India introduced Section 115BAA through the Taxation (Amendment) Ordinance. This brought about several alterations to the Income Tax Act in place, including a corporate tax cut for domestic companies. 

Section 115BAA extends an option for domestic businesses to pay tax at a rate of 25.168%. The breakup of this corporate tax rate is as below:

Base Rate of Tax 

(%)

Surcharge Applied (%)

Cess Applied

(%)

Effective Tax Rate 

(%)

22

10

4

25.168

  • Corporate Tax Rate for Foreign Companies

Foreign companies are subject to pay corporate income tax on the income received by them in a pre-defined time frame. The Indian corporate tax rate levied on royalties or fees received stands at 50%, whereas other income or the balance is taxed at a rate of 40%. 

If the net income of a foreign company ranges from Rs. 1 crore to Rs. 10 crore, a 2% surcharge is levied on them. A surcharge of 5% is applicable if its net income exceeds Rs. 10 crore.

Additional Charges

A Health and Education Cess of 4% is levied on the sum of income tax plus surcharge, irrespective of the level of a company’s net income. Additionally, companies availing benefits of Section 115BAA are exempted from paying Minimum Alternate Tax (MAT) under Section 115JB of the Act.

Corporate Tax Rate in India – An Overview

Based on the type of entity and revenue earned by it, a slab rate system distinguishes the corporate tax levied on it. The table below offers a summary of this system -

  • Corporate Tax for Domestic Companies

Income Range

Rate

Surcharges

Rs. 400 crore

25%

7%

More than Rs. 400 crore

30%

12%

  • Corporate Tax for Foreign Companies

Income

Rate

Surcharge

Royalties or payments collected from the government or an Indian firm for any technical services provided prior to April 1, 1976, under agreements approved by the central government.

50%

2%

Other Income

40%

5%

What are the Types of Corporates?

A corporate is an organisation which is authorised by the state to exist and act as a single entity, separate from its shareholders.

For the purposes of calculations of the Indian corporate tax rate, the Income Tax Act segregates corporates into two types – domestic companies and foreign companies.

Context for Comparison

Domestic Company

Foreign Company

Area of operations

Economic transactions take place within the geographical boundaries of India.

Economic transactions take place with several countries across the globe.

Registration

Registered under the Companies Act of India.


Also includes companies with a foreign registration but has control and management wholly in India.

Not registered under the Companies Act of India. 

Currency dealt  

Single currency

Multiple currencies

Corporate Tax Planning

The aspiration to expand business operations urges them to look out for methods of tax planning.

Tax planning is the analysis of one’s financial position and its optimisation to the highest degree. This allows enterprises to make the best use of tax exemptions, deductions and benefits, which minimises tax liability over a given financial year. 

The objectives of tax planning are as follows -

  • Increasing savings
  • Economic stability
  • Enhancing growth
  • Reduction in tax liability
  • Minimising litigation
  • Making productive investments

An effective tax planning takes the following areas into consideration -

  • Claiming appropriate exemptions
  • Claiming deductions under various heads of income
  • Evaluating expenses in the appropriate head of accounts
  • Capitalisation of assets
  • Claiming deductions on depreciation, additional depreciation
  • Analysing unabsorbed depreciation and using it to one’s advantage
  • Availing tax benefits on bad debts 

A taxable entity implements tax planning through various methods, which are -

  • Short term Tax Planning

It refers to planning and execution to reduce taxable income at the end of a financial year. 

  • Long term Tax Planning

Businesses chalk out a long term tax plan at the beginning of an income year, which is followed throughout the year.

  • Permissive Tax Planning

It involves making plans pertaining to the provisions permissible under the law, like planning of earning income under Section 10(1), etc.

  • Purposive Tax Planning

It includes applying tax provisions in a manner that it offers tax benefits based on a replacement of assets, correct selection of investments, diversifying business activities and income, etc. 

The primary focus of tax planning is to apply current laws to the revenue that a company receives in a given tax period. However, the intent behind tax planning should not be to defraud the revenue. It should, therefore, be correct in both form and substance. 

Tax Rebates

Aside from the numerous forms of taxes charged on corporate profits, there are other tax refund possibilities available to businesses. All of these rebates are mentioned below.

  • Domestic corporations can deduct dividends received from other domestic companies in certain circumstances.
  • Special provisions apply to venture capital funds and venture capital enterprises.
  • Deductions for exports and new ventures are permitted in specific situations.
  • Certain deductions apply to the installation of new infrastructure and electricity sources.
  • Business losses can be carried forward for a maximum of eight years.
  • In rare situations, interest, capital gains, and dividends can also be deducted.
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