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.
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 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
- 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
- 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 crores, a 2% surcharge is levied on them. A surcharge of 5% is applicable if its net income exceeds Rs. 10 crores.
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. From AY 2020-2021, MAT is applicable at a rate of 15%.
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 –
|Basis of classification||Domestic company with an annual turnover up to Rs. 250 crores||Domestic company with turnover over Rs. 250 crores||Foreign Company|
|Corporate tax rate||25%||30%||40%|
|Surcharge on net income less than Rs. 1 crore||Nil||Nil||Nil|
|Surcharge on net income between Rs. 1 crore and Rs. 10 crores||7%||7%||2%|
|Surcharge on net income exceeding Rs. 10 crores||12%||12%||5%|
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.
Corporate taxes stand out as a massive source of revenue for governments, especially in developing countries like India. In fact, the corporate tax collection for the income year 2019-20 was valued at Rs. 5.56 lakh crores which were still lower than in preceding years. This tax essentially binds together the whole tax system of the country. Corporate tax is, therefore, irreplaceable and an essential tool for the economic growth of India.