As per the 1961 Income Tax Act, foreign and domestic companies are liable to pay corporate taxes. The act makes it mandatory for the foreign business to pay tax on revenue earned or received within India. Contrarily, domestic companies must pay their tax based on their universal income.
This blog will provide you with a comprehensive glance at corporate tax in India and the impact it has on Indian businesses.
What is the Corporate Tax in India?
So, what is corporate tax in India? A company has its legal personality. It is a legal entity distinct from its investors. According to the Income Tax Act, both foreign and domestic businesses must pay corporation tax. Foreign corporations are solely taxed on money generated in India, regardless of where it is earned or received. Domestic enterprises, on the other hand, are taxed on their whole international income.
There are two main types of corporations for calculating taxes under the Income Tax Act. They are:
- Foreign Company: A foreign company is a legal entity based outside of India with management and control that is not registered under the Indian Companies Act.
- Domestic Company: A domestic company is the one registered under the Indian Companies Act. It also covers foreign-registered enterprises with management and control offices in India. This category includes both private and state companies.
Types of Income to Take into Consideration
The government of India imposes a corporate tax on businesses to generate revenue. The assessment of the tax depends on a company’s net income. So, now that you know what is corporate tax, here are the categories of income earned by a company –
- Profits Earned by the Business
Profits are the monetary gains a company achieves when its overall revenue surpasses its total expenses.
- Capital Gains
Capital gains pertain to the appreciation in the worth of a company’s capital assets. These gains can be either long-term or short-term. One must report it for tax purposes.
- Income From Renting a Property
When the business leases its property, the rental income generated becomes a part of its business revenue.
- Income from Other Sources
Any income generated by a business entity that does not fall under other specified tax categories is the earning from miscellaneous sources. This category encompasses income from interest, dividends, and similar sources.
Both foreign and domestic companies must pay the yearly corporate tax. The calculation involves the income earned during a specific financial year, including the aforementioned miscellaneous income.
Calculation of Net Income for Corporates
Corporate tax is calculated based on a company’s net revenue or net income. Net income/net revenue represents the total amount remaining with the company after deducting various necessary expenses. These expenses encompass:
- Depreciation.
- The total cost of goods sold.
- Selling expenses.
- Administrative expenses.
A company’s income encompasses net profit derived from its core business operations, rental income, capital gains, or income from other sources like interest or dividend income. Therefore, the formula for Net Revenue is as follows:
Net Revenue = Gross Revenue – (Depreciation + Expenses)
Indian Corporate Tax Rate
Here is a concise summary of the Indian corporate tax rate:
Corporate Tax Rate for Domestic Companies
Companies, whether public or private, registered under the 1956 Companies Act must pay this tax. Currently, domestic companies face a 30% tax rate.
In addition, the Income Tax Act levies a 7% surcharge if net income is between rupee one crore and rupees ten crore. When a company’s net income exceeds rupees ten crores, it will apply a surcharge of 12%.
The Indian Government introduced Section 115BAA in 2019 through the Taxation Ordinance. It brought about various changes to the Income Tax Act, including a reduction in corporate tax rates for domestic companies.
Under Section 115BAA, domestic businesses have the option to pay tax at a rate of 25.168%. The breakdown of this corporate tax rate is as follows:
|
Base Rate of Tax (%) |
Surcharge Applied (%) | Cess Applied
(%) |
Effective Tax Rate (%) |
|
22 |
10 | 4 |
25.168 |
Corporate Tax Rate for Foreign Companies
Corporate tax in India on the earnings of foreign companies must be paid within a certain time frame. In India, foreign firms that earn royalties or fees are subject to a corporation tax rate of 50%, with the rest of their revenue being taxed at a rate of 40%.
A 2% surcharge is applied if a foreign company’s net income is between Rs. 1 crore and Rs. 10 crores. A 5% surcharge is applied if the net income is more than Rs. 10 crores.
Tax Rebates
Businesses have access to a variety of tax return alternatives in addition to the different taxes levied on corporate earnings, which are described below:
- Under some circumstances, domestic firms may be able to deduct dividends received from other domestic enterprises.
- Both venture capital funds and venture capital businesses are subject to special rules.
- Under certain conditions, exports and new businesses are eligible for deductions.
- Installation of new infrastructure and electrical sources is subject to some deductions.
- Businesses incurring losses may carry it forward for a total of eight years.
- In extreme circumstances, one can make deductions for dividends, interest, and capital gains.
Other Corporate Tax Rates in India
Health and Education Cess
You can determine total tax liability by adding 4% of the calculated income tax along with the applicable surcharge before factoring in the health and education cess.
Minimum Alternate Tax (MAT)
The minimum alternate tax rate must be a minimum of 15% for both domestic and foreign companies. It is dependent on book profits in accordance with Section 115JB. That is to say, a company may operate as part of an international financial services center and generate its income exclusively in convertible foreign exchange. So, MAT will be applicable at a rate of 9% in addition to any applicable surcharge and cess.
Dividend Distribution Tax
The tax imposed on the dividends distributed to shareholders by companies each year is the Dividend Distribution Tax. In the hands of the shareholders, dividends up to Rs. 10 lakh are devoid of taxation. However, companies are subject to a tax rate of 20.56% on the distributed dividends.
Liability of Minimum Alternate Tax (MAT)
Suppose a company’s total income tax liability, including surcharges and SHEC, amounts to less than 15% of the profit reported in its financial records. Then, the company must pay a nominal tax known as the Minimum Alternate Tax (MAT). Nevertheless, MAT can be offset against regular taxes and one may carry it forward for up to ten consecutive years.
Corporate Tax Planning
Corporate tax online planning involves strategically managing a company’s financial affairs to optimize profits and minimize tax liabilities by leveraging allowable deductions, rebates, and exemptions. Tax management is a complex and risk-laden endeavour, prompting many corporations with substantial financial stakes to enlist the expertise of financial professionals to oversee their taxation processes.
In India, various financial entities offer consultation and assistance with corporate tax matters. Due diligence and an in-depth understanding of all tax laws, rules, and regulations are essential to guarantee efficient tax planning.
It’s critical to identify tax evasion or non-payment from business tax planning. Tax planning is the responsible act of setting up finances in a way that minimises tax liabilities and maximises earnings, all while adhering to the financial and legal guidelines established by the Indian government.
Conclusion
As per corporate tax meaning, achieving an optimal corporate tax strategy involves finding a harmonious equilibrium among different approaches, including deductions, tax rebates, and prudent expense management. A thorough grasp of the circumstances in which these strategies are most advantageous is crucial for maximizing your corporation’s benefits.
Corporate Tax FAQs
Is corporate tax a direct tax?
A corporate tax, referred to as either a corporation tax or a business tax, is a form of direct taxation. It is applicable on the earnings or assets of corporations and comparable legal entities.
What is the difference between personal and corporate income taxes?
Corporate tax represents a governmental cost incurred by a company, constituting a primary revenue source for a nation. In contrast, personal income tax is a tax applicable to an individual’s earnings, such as wages and salaries.
Who is responsible for paying corporation taxes?
A resident corporation is subject to taxation on its global income. In contrast, a non-resident corporation is liable to pay tax on income earned within India and income that they earn or come from India.