What is Corporate Tax in India? And Corporate Tax Rate for Companies in India
Table of Content
The Income Tax Act of 1961 imposes a corporate tax on both domestic and foreign corporations. Through this Act, the Government of India requires domestic corporations to pay corporate taxes based on their total income. Foreign companies, on the other hand, are only taxed on income earned or received in India. In this article information on “What is Corporate tax in India?”, and the Corporate tax rate for companies is mentioned.
What is Corporate Tax in India?
A corporate is a legal entity that is distinct and distinct from its shareholders. The Income-tax Act requires both domestic and foreign corporations to pay corporate tax. A domestic company is taxed on its total income, whereas a foreign company is only taxed on income earned within India, that is, income accrued or received in India. The following types of companies can be defined for the purpose of calculating taxes under the Income Tax Act:
- Foreign Company: A foreign company is one that is not registered under the Indian Companies Act and has control and management outside India.
- Domestic Company: A domestic company is one that is registered under the Companies Act of India, as well as one that is registered in another country but has control and management in India. Private Limited Companies and Public Companies are both considered domestic companies.
Insights on Corporate Tax Planning
Corporate tax planning can be defined as strategizing one’s financial business affairs in order to maximise profit while minimising payable tax by utilising the allowed benefits of deductions, rebates, and exemptions. Tax management is a risky and tricky business, and most corporations with large sums of money at stake hire financial experts to handle their taxation process. There are various financial players in India who provide corporate tax consultation and implementation. To ensure healthy tax planning, due diligence and absolute awareness of all tax laws and corresponding rules and regulations are required. Corporate tax planning is not the same as tax evasion or non-payment. Tax planning is the act of organising one’s finances in such a way that the amount of tax owed is minimised while gains are maximized. One of the most important aspects of tax planning is that it strictly adheres to the legal and financial guidelines established by the government of India.
Corporate Tax Rate for Companies in India
- For Domestic Companies: This tax is levied on companies registered under the Companies Act of 1956, both public and private. Domestic corporations are currently taxed at a rate of 30%. Furthermore, the Income Tax Act imposes a 7% surcharge on net income between Rs. 1 crore and Rs. 10 crore. If a company’s net income exceeds Rs. 10 crore, it is subject to a 12% surcharge. Section 115BAA was enacted by the Government of India in 2019 through the Taxation (Amendment) Ordinance. This resulted in several changes to the Income Tax Act, including a corporate tax cut for domestic companies. Section 115BAA allows domestic businesses to pay tax at a rate of 25.168%. This corporate tax rate is broken down as follows:
- 22% of the base rate tax
- 10% surcharge applied + 4% cess applied
- 25.17% for the effective tax rate
For Foreign Companies: Foreign corporations must pay corporate income tax on income received within a specified time frame. The Indian corporate tax rate on royalties or fees received is 50%, while other income or the balance is taxed at 40%. A 2% surcharge is levied on foreign companies with net income ranging from Rs. 1 crore to Rs. 10 crore. If its net income exceeds Rs. 10 crores, a 5% surcharge is levied.
- Additional Charges that apply: A 4% Health and Education Cess has been levied on the sum of income tax plus a surcharge, regardless of a company’s net income. Furthermore, companies that take advantage of Section 115BAA are exempt from paying Minimum Alternate Tax (MAT) under Section 115JB of the Act. MAT is applicable at a 15% rate from the financial year 2020-21.
Rebates on Corporate Tax in India
Aside from the various types of taxes levied on corporate income, there are several tax rebate provisions available to businesses. All of these rebates are detailed below.
- Domestic companies 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 some cases.
- Certain deductions apply to the installation of new infrastructure and power sources.
- Business losses can be carried forward for a maximum of eight years.
- In some cases, interest, capital gains, and dividends can also be deducted.
Corporate tax is a type of direct tax levied on profits earned by businessmen over a specific time period. Corporate taxes are levied at different rates depending on the level of profit earned by a business. Corporate tax is generally levied on a company’s revenues after depreciation, SG&A (selling general and administrative expenses), and COGS (cost of goods sold) have been deducted.
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