Corporate Tax

Corporate tax in India is levied by the Income Tax Department on both foreign and domestic companies. With the enactment of the Income Tax Act 1961, the Indian Government makes it compulsory for domestic companies to make corporate tax payments depending on their overall income. Meanwhile, the same Act only charges taxes on foreign companies’ received or accrued income. 

What is Corporate Tax?

Corporate tax is a type of direct tax that businesses are obliged to pay on the revenue incurred in a specific period of time. The types of corporate tax rates vary depending on the levels of revenue incurred by different business enterprises. 

Typically, the Government levies corporate tax on the company’s profits after considering deductions like SG&A (Selling General and Administrative Expenses), COGS (Cost of Goods Sold), and depreciation. 

So, what is corporate tax? One can consider corporate or company tax as a corporate income tax for the revenue incurred by their business house. India mandates paying corporate income tax to simplify and streamline taxation for business enterprises. 
 

Understanding Corporate Tax in India

Corporate taxes in India are levied on business houses by the Central Government to generate an income source. Corporate tax meaning is usually based on the company’s net income. Here are the following types of revenue that a company incurs: 

Profits Earned by the Business

Profits earned by a business refer to the financial value realized in the event that the total revenue generated is more than their total expenditures. 

Income From Renting a Property

Nowadays, several business enterprises let out their property (commercial property) on rent. This helps them incur rental income. The Indian Government considers this rental income as a business income. Thus, it becomes taxable under the corporate tax slab. 

Capital Gains

Capital gains mean the surge in the valuation of a company’s capital assets. Thus, capital gain can be either long-term or short-term and can be claimed on income taxes. 

Income from Other Sources

Profits from different sources refers to any additional income from a business that isn’t explicitly taxed under another category. It consists of interest and dividend income, among other things. 

Corporate taxes must be paid annually by all businesses—domestic and foreign. As a result, it is dependent on the aforesaid income received during a specific fiscal year.
 

Indian Corporate Tax Rate

Now that you know the ‘corporate tax meaning,’ let’s look at a concise overview of the Indian corporate tax rate: 

Corporate Tax Rate for Domestic Companies

Private and public companies that have been granted registration under the 1956 Companies Act of 1956 must pay this tax. Currently, domestic businesses pay a 30% tax rate.

Additionally, if the net profit is between Rs. 1 crore and Rs. 10 crore, the Indian Income Tax Act imposes a 7% surcharge. Also, it applies a 12% surcharge on the net profit that surpasses Rs. 10 crores for a business. 

With the Taxation (Amendment) Ordinance, the Indian Government implemented Section 115BAA in 2019. This resulted in many changes to the Income Tax Act, including a reduction in the corporation tax rate for domestic businesses. 

Domestic companies now have the choice of paying taxes at a rate of 25.168%, thanks to Section 115BAA. The following table breaks out this corporation tax rate:
 

Corporate Tax Rate for Foreign Companies

Foreign business enterprises must pay corporate income tax on their earnings within a specific period. Royalties or fees earned are subject to a 50% corporation tax rate in India, whereas additional revenue or the remaining portion is subject to a 40% company tax rate. 

There is a 2% surcharge imposed on international businesses with net incomes between Rs. 1 crore and Rs. 10 crore. In the event that the company’s total revenue surpasses Rs. 10 crores, a 5% surcharge will be imposed.

Additional Charges

No matter how much the net revenue of a business is, there is a 4% Health and Education Cess assessed on the total income tax and surcharge. Furthermore, per Section 115JB of the Act, corporations that use Section 115BAA privileges are not required to pay the Minimum Alternate Tax (MAT).
 

Corporate Tax Deductions

Companies are allowed to deduct some usual and essential business expenses from taxable income. Every present expenditure incurred in running the company is entirely deductible from taxes. 

Deductions are also available for investments and properties acquired with the goal of making money for the company. A slab rate system differentiates the company tax assessed on each entity according to the kind of organization and the income generated by it. 

The system is summarized in the table below:
 

Corporate Tax for Domestic Companies

Corporate Tax for Foreign Companies

What are the Types of Corporates?

A corporation0 is a business that has been given permission by the Government to continue operating independently of its stockholders. The Income Tax Act divides corporations into two categories: domestic businesses and foreign enterprises, intending to calculate the corporate tax rate in India.

Corporate Tax Planning

Their desire to grow their commercial operations compels them to search for tax planning strategies.
Tax planning is the evaluation and best possible optimization of one’s economic circumstances. 

This enables businesses to maximize the utilization of exemptions from taxes, deductions, and perks, lowering their overall tax burden for a specific fiscal year. 

Here are the following objectives of tax planning: 

●    Economic stability
●    Low tax liability
●    Making prudent investments
●    Boosting savings
●    Improving business growth
●    Reducing litigation

Also, there are some areas that foolproof tax planning takes into account. This includes: 

●    Deductions claim under numerous income heads
●    Asset capitalization
●    Evaluating unabsorbed depreciation for own benefit
●    Making claims for the ideal exemptions
●    Assessing expenditures in the right head of accounts
●    Deduction claims on depreciation
●    Claiming tax benefits on bad debts

A taxable corporation uses a variety of techniques to carry out tax planning, including:
 

Short-term Tax Planning

Short-term tax planning is strategies and actions taken to lower taxable earnings towards the completion of a fiscal year. 

Long-term Tax Planning

Companies create a long-term tax strategy from the onset of a fiscal year and adhere to it all year.

Permissive Tax Planning

It entails developing strategies in relation to the legal provisions authorized, such as aiming to make revenue under Section 10(1), etc.

Purposive Tax Planning

It involves employing tax regulations in a way that provides fiscal benefits depending on the prudent investment choice, the substitution of assets, the diversification of company operations and revenue, etc. 

Applying existing rules to the income a business obtains during a certain tax period is the main goal of tax planning. However, tax planning shouldn’t be done with the intention of stealing money from the Government. For this reason, it must be accurate in form as well as content. 
 

Tax Rebates

Similar to how an entity is subject to various business taxes, there also exist specific procedures for company tax rebates or exemptions. Here are the crucial ones to take into account:

●    In some situations, interest income may be written off.
●    Corporations are exempt from paying taxes on their capital gains.
●    In accordance with the T&Cs (terms and conditions), dividends can also be eligible for a tax rebate.
●    The corporate body has up to 8 years to carry the company’s losses.
●    A corporation may be liable for specific deductions if it installs additional facilities or electricity supplies.
●    A specific amount of exemptions are permitted for corporate exports and new business ventures.
●    If the company wants to invest in venture capital companies or funds, it can make various kinds of provisions for exclusions.
●    A domestic business has the option of deducting certain amounts of dividends received from other domestic corporations as rebates.
 

Advantages of a Corporate Tax

Entrepreneurs may benefit more from paying company taxes than from paying higher personal income taxes. Along with extra perks like retirement plans and tax-deferred trusts, business tax returns also deduct family health insurance. A firm can write off losses more easily as well.

A company may write off the total amount of losses. However, individual proprietors must show that they intend to make a profit before they can write off their losses. Lastly, a company’s profit can be retained within the business, enabling tax planning and potential subsequent tax benefits in the future.