What is Corporate Tax?
According to Income Tax Act, Corporations have to pay tax on the income earned by them. A corporation can be defined as an artificial person created under the jurisdiction of law having a distinct legal personality and its own signature referred to as the common seal. From the point of view of charging tax, all companies either domestic or international are liable to pay tax on the income earned. Domestic companies are the ones that are registered under the Companies Act of India. They have to pay tax on their universal income whereas Foreign companies are those companies that are not registered under the Companies Act of India and are controlled and managed from outside of India, they have to pay tax only on the income earned within India.
Corporate Tax includes:
Corporate Tax includes the following taxes:
- Securities Transactions Tax (STT): Any income earned through security transactions is taxable, and Securities Transactions Tax (STT) must be paid on it.
- Dividend Distribution Tax (DDT): DDT is levied on any domestic company who have declared, distributed, or paid any amount as dividends to shareholders. Foreign companies are exempted from this.
- Fringe Benefits Tax: It is levied on companies that provide fringe benefits for maids, drivers, etc.
- Minimum Alternate Tax (MAT): MAT is levied on companies having zero tax liability and whose accounts are prepared according to the Companies Act.
Corporate Tax in India
Corporate Tax is paid by the company directly to the government on the net taxable income. The net taxable income of a company is calculated by adding all the sources of income a company earns from. These are the types of income that are considered while calculating net taxable income:
1. Profit earned by the business: Profit refers to the amount left out after deducting all the expenses and losses from the revenue generated by a company from the normal course of business in a financial year. This profit is the major source of income for any company.
2. Income from Renting a Property: If a business rents out a property, the income generated from it as rent will also be considered while calculating the net taxable income of the company.
3. Capital Gains: Profit earned from the sale of capital assets is known as Capital Gain. Property, Plant and Equipment are all examples of capital assets. Gain on the sale of capital assets is categorised as an income, so they are liable for taxation.
4. Income from other sources: Any other income that does not come under any of the above-mentioned categories are termed as Income from Other Sources. Income generated as interest from saving bank accounts, fixed deposits, lottery winnings, etc., comes under this category.
Indian Corporate Tax Rate
In India, Corporate Tax rates are different for Domestic companies and Foreign Companies. Also, the new domestic company incorporated after 1st October 2019 enjoys paying corporate tax at a lower rate. Let’s see them one by one:
1. For Existing Domestic Companies:
Income Tax Act, 1961 levies a 30% corporate tax rate for all domestic companies in India whether public or private. A surcharge of 7% is also levied if the net taxable income of the company ranges from ₹ 1 Crore to ₹ 10 Crore and the surcharge increases to 12% if the income of the company exceeds ₹ 10 Crore in a financial year.
In 2019, Several amendments were made to the existing Income Tax Act in place, including a corporate tax cut for domestic companies. Taxation (Amendment) Ordinance, 2019 has been introduced by the Government of India under which section 115BAA extends an option for domestic businesses to pay tax at a rate of 25.168%. This can be further expressed as:
For domestic companies, the following rates are applicable:
*Further 4% Health & Education Cess is charged on the income tax calculated, irrespective of the level of the company’s net income.
2. For Foreign Companies:
Corporate tax rates for foreign companies in India are higher than the domestic companies. Any income generated by a foreign company through royalty from the government or any Indian Company in respect of any agreement made after 31st March 1961, but before 1st April 1976 with the Indian company is charged at the rate of 50%. Also, any income generated from receiving fees for rendering technical services in respect of an agreement approved by the Central Government made after 29th February 1964 but before 1st April 1976 is taxed at 50%. Any other income generated from any other activities of the business is charged at 40%.
Tax Slabs for Foreign Companies:
Surcharge Rates in Addition to the Rates Above:
3. For New Firms:
Any new domestic company incorporated after 1st October 2019 that are involved in making fresh investment in manufacturing can enjoy paying corporate tax at the rate of 15% or to be more precise 17.01%(inclusive of surcharge and cess). This benefit is only available to firms that do not avail of any other exemptions/incentives offered by the government and must have started their production before 31st March 2023. For such companies, the Minimum Alternate Tax rate of 18.5% has also been reduced to 15%.
Tax Rebates Applicable on Corporate Tax
There are some provisions of tax rebates available to companies:
1. Any income earned as capital gain which can either be taxed at a flat rate of 15% or 20% can be claimed as an exemption under sections 54D, 54G, 54GA, 54EC, etc.
2. Section 80G provides for a full or partial exemption of an amount donated to charitable organisations (subject to terms and conditions).
3. Dividends received by domestic companies from other domestic companies are also eligible for rebates.
4. Section 80JJAA provides for claiming a deduction in respect of the employment of a new employee.
5. 15% of the total amount of depreciation charged on old assets and an additional 20% on the purchase of new assets of any business involved in the manufacture or production is subject to an exemption under section 32.
6. Certain deductions are also applicable for setting up new infrastructure and power sources.