Corporate Tax in India: Meaning and Tax Rate
Corporate tax is the tax levied by the government on the income or profits of companies and corporations. In India, all domestic and foreign companies are subject to corporate tax on the income they earn within the country. This tax is a major source of revenue for the government and plays a vital role in shaping the country's economy.
India follows a progressive tax regime for corporations, with different tax rates based on the nature of the company, its annual turnover, and the type of income earned. Over the years, the government has introduced various incentives and lower tax rates for specific sectors to encourage investments and economic growth. Notably, recent reforms have simplified the corporate tax structure, making India a more competitive destination for global businesses.
In this article, we will explore the meaning of corporate tax, the applicable tax rates for domestic and foreign companies, and explore the impact of recent policy changes on businesses operating in India. Whether you're running a startup, managing a large enterprise, or looking to invest in the Indian market, understanding the corporate tax structure is essential for effective financial planning and compliance.
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Update in Budget 2024
The finance minister has proposed to reduce the corporate tax rates for foreign companies from 40 to 35%.
Corporate Tax in India
A corporate tax is levied on the net income or profits of a corporation. It is paid on a company’s taxable income comprising its revenue after deductions like the cost of goods sold (COGS), selling and marketing, general and administrative expenses, depreciation, research and development, etc. Companies can save corporate tax with careful management of these expenses.
What is a Corporate?
According to Section 2(17) of the Income Tax Act, a corporation is a company incorporated in India or outside India. The definition includes associations, institutions, and bodies of individuals assessed as a corporation for any assessment year after 1922. Besides these, the Central Board of Direct Taxes (CBDT) can declare an association, institution, or body of individuals as a corporation from a taxation perspective. However, the declaration applies only to the assessment year in which it is made.
Types of Corporations
A corporation is a legal entity independent of its shareholders. It is entitled to rights and duties of its own. Corporations are divided into two categories. These are:
Domestic Corporations
A company registered under the Indian Companies Acts of 1956 or 2013 and whose management and control is situated in India is a domestic corporation. If the Indian subsidiary of a foreign company is entirely controlled and managed within India, it may be deemed as a domestic corporation. It also includes companies registered in foreign countries.
Foreign Corporations
A company based outside India or having a portion of its operations controlled and managed outside the country is a foreign corporation.
Income of a Company
The income of a company comes from various sources, and you must know them to calculate and apply the rate of taxes. These include:
Profits earned from the business
Income from other sources like dividends, interest, etc
Income from renting property
Capital Gains
Calculation of Net Income
Corporate tax is calculated on the net revenue or income. Net income or revenue is the total amount left with the company after deducting various expenses, such as:
Total cost of goods sold
Selling expenditures
Depreciation
Expenses incurred for administrative purposes
Net Revenue = Gross Revenue – (Expenses + Depreciation)
Tax Rates Applicable
We will share a list of corporate tax rates applicable for domestic and foreign companies in the following tables:
Corporate Tax Rates for Domestic Companies
Corporate tax rates applicable for domestic firms are as follows:
Section | Tax Rate | Surcharge & Cess | Effective Tax Rate |
Companies with a turnover of up to Rs 400 Crore in FY 2017-18 (Section 115BA) | 25% | 7% / 12%* + 4% | 27.82% / 29.12% |
Domestic companies not claiming any exemptions/incentives (Section 115BAA) | 22% | 10% + 4% | 25.17% |
New domestic manufacturing companies (Section 115BAB) | 15% | 10% + 4% | 17.16% |
Companies not coming under any of the sections above | 30% | 7% / 12%* + 4% | 33.38% / 34.94% |
* A 7% surcharge applies to companies with total income between Rs 1 crore and Rs 10 crore. Surcharge applies at 12% for companies with a total income above Rs 10 crore.
Corporate Tax Rates for Foreign Companies AY 2022-23
Section | Tax Rate |
Royalties and fees for technical services received from Indian governments or Indian corporates, according to approved agreements made before April 1, 1976 | 50% |
Any other income | 40% |
Surcharge Rates
Income | Domestic Companies | Foreign Companies |
Upto INR 1 Crore | Nil | Nil |
More than INR 1 Crore but up to 10 Crores | 7% | 2% |
More than INR 10 crores | 12% | 5% |
Minimum Alternate Tax (MAT)
Minimum Alternate Tax (MAT) under Section 115JB is applicable to the book profits of the company. It cannot be less than 15% of book profits for domestic and foreign companies. However, a MAT of 9% is applicable for a company running as a unit of an international financial services centre and deriving its income as convertible foreign exchange. MAT is not applicable to companies choosing taxation under Sections 115BAA or 115BAB. It is applicable when the company’s regular income tax liability is low than the book profit certain percentage.
Liability of Minimum Alternate Tax (MAT)
MAT payments come as a MAT credit to the corporates liable to pay the tax. The credit must be adjusted with the actual tax liability in the AY. If the MAT paid is higher than the actual tax liability, the difference amount can be carried forward. The firm can carry it forward for up to 15 years (10 years for before AY 2018-19). The carried forward balance can be adjusted only with the balance tax liability after the deduction of MAT payment for the same AY.
Application and Exemption of MAT
Every corporation registered in India is mandated to pay MAT under Section 115JB. The mandate includes companies running in designated Special Economic Zones (SEZs). However, the provisions will not apply to the following:
Shipping income where tax is based on the tonnage
Income earned through the life insurance business
A foreign entity from a country or territory having an agreement with India under Section 90(1) and not having a permanent establishment in India according to the agreement
A foreign entity from a country or territory not having an agreement with India, but not bound by Indian corporate law to register in India
Dividend Distribution Tax
According to the Finance Act, 2020, dividends from domestic companies are taxable in the hands of recipients. These firms are not liable to pay a distribution tax. However, they must deduct TDS at the rate of 10% for dividends over Rs 5000.
Health & Education Cess
Health and Education Cess is applicable s to the total tax liability after the surcharge at the rate of 4%. The government of India have introduced this cess on the total tax burden. This cess aims to fund specific initiatives in the area of healthcare and education. It is typically calculated as the percentage of overall tax payable by the company.
Reduced Rate of Taxes for Certain Domestic Companies
Reduced tax rates for companies were introduced to encourage them to expand their operations for an overall boost to the economy. However, some conditions are attached to such beneficial rates, so companies seeking reduced rates should fulfill them. Here are the details regarding these conditions:
Existing Companies
A) Section 115BAA
Tax rates applicable under this section are as follows:
Effective rate: 25.168%
Basic: 22%
Cess: 4%
Surcharge: 10% (irrespective of the turnover)
However, companies cannot claim deductions for the following benefits to avail of the reduced rates:
Deduction under section 10AA for newly established units in Special Economic Zones (SEZ)
Additional depreciation under section 32
investment allowance under section 32AD regarding investments in new plant and machinery in notified backward areas of Bihar, West Bengal, Andhra Pradesh, and Telangana
Deduction under section 33AB for tea, coffee, and rubber manufacturing companies
Deduction towards deposits for site restoration fund under section 33ABA for companies engaged in production or extraction of natural gas or petroleum or both
Deduction for scientific research expenditure under section 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA), 35(2AB)
100% deduction of capital expenditure under section 35AD
Deduction of expenditure on an agriculture extension project under section 35CCC
Deduction of expenditure on skill development project under section 35CCD
Deduction for employment of new employees under chapter VI-A except for 80JJAA, for off-shore banking units under 80LA, and for inter-corporate dividends under 80M
Set-off of unabsorbed depreciation or carried forward losses including those of the amalgamated company transferred under amalgamation if attributable to the above-mentioned deductions
Companies must use this option to pay tax @22 % before the return deadline in Form 10-IC. MAT and MAT credit shall not be applicable to these companies.
Section 115BA
Tax rates applicable under this section are as follows:
Effective rate: depends on turnover
Basic: 25%
Cess: 4%
Surcharge: based on the turnover
You can get this exemption option by fulfilling the following:
Set up and registered on or after 1 March 2016
Engaged in the manufacturing or production
Option is available up to the due date of return filing in Form 10-IB
Once you exercise this option continues for the lifetime of your company except when it switches to section 115BAA.
Newly Set-Up Manufacturing Companies
Tax rates applicable under Section 115BAB are as follows:
Effective rate: 17.16%
Basic: 15%
Cess: 4%
Surcharge: 10% (irrespective of the turnover)
The above rate applies only to income from manufacturing businesses. For other income, tax rates are summarised below:
Income | Tax Rate |
Income from manufacturing | 15% |
Income from non-manufacturing activity | 22% |
Short-term capital gain(STCG) on the transfer of depreciable assets | 15% |
Short-term capital gain(STCG) on the transfer of non-depreciable assets | 22% |
Special tax rates for income under chapter XII | Special rates applicable |
Excess profit computed by tax authority u/s 115BA(6) | 30% |
The company must fulfil the following conditions to exercise such an option:
Set up and registered on or after 1 October 2019, and commencing operations on or before 31 March 2023
Not be engaged in any business other than manufacturing
Not formed by reconstruction or splitting up of an existing business
Plant and machinery should be new (except when 20% of total plant and machinery can be second hand and imported plant and machinery treated as new)
Not use a building earlier used as a hotel or convention centre
The option is available up to the due date of return filing in Form 10-ID
Filing Income Tax Returns as a Company
Tax Return Forms to Be Filed
As a corporate entity filing income tax returns, you must fill out the following forms:
ITR 6 : To be filed by the companies except companies claiming deduction under section 11
ITR 7 : To be filed by the companies registered under section 8 of Companies Act, 2013
Due Date for Filing
All companies including foreign companies must file their income tax return on or before the due date which is 30 October every year. The deadline applies to companies coming into existence during the same financial year. For FY 2019-2020 (AY 2020-21), the due date was extended to 30 November 2020 because of the COVID-19 pandemic.
Tax Audit
According to the Income Tax Act, companies must get their accounts audited every year because they have to submit an audit report to the IT department with the IT return. Submitting this tax audit report is mandatory for eligible companies by 30 September. The due date for the tax audit report for FY 2019-20 (AY 2020-21) was 31 October.
Corporate Tax Planning
Like individuals, companies can also save their tax liability with proper tax planning every year. It entails minimising the tax outflow in the coming year by understanding the scope of expenditure, investments, and treasury operations. Companies can also use it to defer tax outflow on incomes not necessary in the financial year. These include interest incomes and capital games. Additionally, they can use available deductions to minimise tax liability legally.
Basics of Corporate Tax Planning
In addition to having a good grasp of corporation tax, effective tax planning is essential for optimizing your tax management and improving your financial efficiency. Here are some key points to keep in mind when engaging in corporation tax planning:
Understand Relevant Tax Laws: Take the time to familiarize yourself with the tax laws that apply to your business, including the Income Tax Act of 1961 and the Companies Act of 2013. Knowing these regulations can help you make informed decisions.
Maintain Accurate Records: Good bookkeeping is the foundation of successful tax planning. While it’s common for many small businesses in India to struggle with organization, keeping track of your income, expenses, receipts, and invoices in an orderly fashion is crucial. This will help you claim eligible deductions and report your income accurately.
Maximize Deductions and Exemptions: Identify the deductions and exemptions available to you and make the most of them. By reducing your taxable income through these provisions, you can lower your overall corporate tax burden. Stay informed about tax incentives and schemes offered by the central government, as these can create significant savings and enhance financial opportunities for your business.
Tax Deductions Applicable on Corporate Tax
Companies can use deductions, exemptions, and rebates to minimise the payable taxes. They can do it with the appropriate reporting and management of the organisation’s expenses. Here are a few valid deductions they can claim:
Capital Gains, taxed at a flat rate of 15% or 20% or exempt from taxes under Sections 54D, 54G, 54GA, or 54EC
Dividends eligible for rebates in certain cases
Donations to charitable organizations, exempt 50 -100% under Section 80G subject to terms and conditions
Deductions for depreciation under Section 32 allow a 15% deduction for old assets and 20% on the purchase of new assets for manufacturing and power businesses
Deduction for employment of new employee u/s 80JJAA
Calculation of Net Income for Corporates
Here's how you can calculate the taxable amount in a more straightforward and friendly way:
Net Income = Total Revenue – Total Expenses
Let’s break it down:
Total Revenue: This is the total income your business earns from all activities, such as sales, services, royalties, or other sources. It’s the full amount of money you’ve made before subtracting any costs.
Total Expenses: These include everything it costs to run your business. This can be the cost of goods sold, salaries, rent, utilities, taxes, depreciation, and any other business-related expenses. Once you subtract these costs from your total revenue, you're left with your profit.
Net Income: This is the money your business has left after subtracting all its expenses from total revenue. It includes not only the net profit from your main operations but also additional income like rent, capital gains, interest, or dividends.
When calculating taxable income, there are a few additional factors to consider depending on the nature of your business. You’ll start with gross receipts (total revenue) and then subtract allowable deductions, which might include various business expenses.
Some exemptions, like income from exports or specific industries, can further reduce the taxable income. If your company has significant profits, Minimum Alternate Tax (MAT) may apply to ensure a minimum tax payment. Additional taxes, such as surcharges or cess, may also be required based on your company’s income level. All these factors combined will help determine the final amount your company needs to pay in taxes.
Conclusion
In conclusion, companies are subject to corporate tax under the Income Tax Act. As a registered corporation , you must know everything about the income tax rate for your company and the deductions you can claim to minimise your liability. This comprehensive guide offers all the information you need and educates you about the ways to plan your taxes for savings in the long run. With the right approach, you can fulfil your obligations to prevent penalties and save your company from hefty taxes in the long run.
FAQ
Q1. What is the income tax rate of a company?
Corporate tax is the tax to be paid on the income earned by a company, whether domestic or foreign. The Income Tax Act, of 1961 sets guidelines for charging corporate tax in India, and it may vary from company to company depending on certain conditions.
Q2. What is the due date for companies filing an income tax return (ITR)?
All companies must file their ITR before 31st October of the applicable assessment year if they need an audit. This limit also applies to the companies coming into existence within the same assessment year when they need to be audited. Companies not requiring auditing of books must submit their returns on or before 31st July.
Q3. What are the IT returns forms to be filed by a company?
Companies filing their ITR in India need to submit ITR 6 (applicable for those claiming relief under section 11) and ITR 7(applicable for those claiming registered under section 8 of the Companies Act, 2013).
Q4. When do companies need tax audits?
The threshold limit for companies to provide a tax audit report is Rs 10 crore (from AY 2022-23). It should meet the following conditions for the requirement:
Cash receipts for sales turnover should not exceed 5% of total turnover
Cash expenses should not exceed 5% of the total expenses of the firm
Q5. How can companies save corporate tax?
Companies can take some steps to save corporate tax. These include:
Effective management of expenses by maintaining detailed records of wages and overhead costs to claim valid deductions on labour and production expenses
Equity valuation on Net Realizable Value or NRV to prevent stocks from being overvalued and reduce the taxable income from capital gains
Maximising the use of deductions and rebates available under the Income Tax law
Companies must strike a balance between the different available methods to save corporate tax without attracting undue attention. It is vital to understand the situations when these measures are suitable to maximise the gains for your company in the long run.
Q6. What are the current corporate tax rates in india?
According to the latest update, domestic companies are subjected to the 25% of tax base rate. In addition, the new manufacturing companies are eligible to low rate of 15%.
Q7. How is taxable income calculated for corporations?
The taxable income is calculated by subtracting allowable deductions and exemptions from the total revenue generated by the company. It includes expenses related to the operations, salaries and costs.
Q8. What are the exemptions available for the corporate tax?
Certain exemptions may be available depending on specific criteria. For instance, income from exports, earnings generated in special economic zones (SEZs), and investments in certain specified industries can all qualify for exemptions. Taking advantage of these exemptions can significantly help in reducing your taxable income.
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