The process of taxation dates back to an ancient time. Various kinds of taxes are levied by governments of various countries. In India, taxes on income, wealth, Capital Gains are some of the most significant taxes paid by customers. Corporate houses too, be it domestic or foreign, are required to pay taxes in order to run their business. One of the may taxes that corporates are required to pay to the Indian government is corporate tax or company tax.
What is Corporate Tax?
Corporate tax is a form of tax levied on profits earned by businessmen in a particular period of time. Various rates of corporate taxes are levied for different levels of profits earned by business houses. Corporate tax is generally levied on the revenues of a company after deductions such as depreciation, COGS (Cost of goods sold) and SG&A (Selling general and administrative expenses) have been taken into account.
Corporate tax or company tax can be assumed as an Income Tax for income earned by businesses. Many countries levy corporate tax in order to smooth out the tax process for enterprises. Different countries have different rules that apply to taxing of income.
Corporate Tax in India:
Corporate tax in India is levied on both domestic as well as foreign companies. Like all individuals earning income are supposed to pay a tax on their income, business houses too are supposed to pay as tax a certain portion of their income earned. This tax is known as corporate tax, corporation tax or company tax.
Definition of a Corporate:
Any juristic person having a separate and independent legal entity from its shareholders is termed as a corporate. The income earned by a company is computed and assessed separately from the dividends that it offers to its shareholders. These dividends do not figure out in the tax calculation of the company but are assessed as part of the income of shareholder.
For the purpose of tax calculation, companies in India have been broadly divided into the following two categories.
- Domestic Corporate:
Any company that is Indian is called as domestic company or if the company is foreign but the control and management is wholly situated in India then also it is termed as a domestic company. An Indian company means a company registered under the Companies Act 1956
- Foreign Corporate:
Any foreign company is one that is not of Indian origin and has some part of control and management of affairs located outside India
Dividend Distribution Tax:
Corporate tax is tax paid by companies on revenues earned minus certain expenses. Similarly, dividend distribution tax is tax paid by corporates on the dividend that they pay to their shareholders. Corporate dividend tax is a percentage of the dividend paid. Currently, the dividend distribution tax in India is 15%.
Corporate Tax Rate:
Depending upon the type of company, domestic or foreign and depending upon the income earned in one financial year, corporate or company tax rates vary for different companies. Currently for the financial year 2015-16, corporate tax in India has been reduced by a certain percentage. In the subsequent sections, corporate tax rates for the current fiscal have been detailed out more clearly.
What is meant by Income of a Company?
In order to compute corporate tax on the income of a company it is necessary to first learn what all factors make up the total income of any company.
- Profits from business
- Income from property
- Capital gains
- Income from other sources such as foreign dividends, interests etc.
Corporate Tax Rate for Domestic Companies in India:
A domestic company in India refers to any enterprise that has its base location in India and is of Indian origin. Given below is the tax rate applicable to domestic businesses in the country.
- A flat rate of 25% corporate tax is levied on the income earned by a domestic corporate.
- A surcharge of 12% is levied in case the turnover of a company is more than Rs.1 Crore for a specific financial year.
- 3% educational cess is levied.
- Corporate tax is also levied on the global earnings of the domestic company. This takes into account income earned by the company abroad.
Corporate Tax Rate for Foreign Companies in India:
A foreign company means an enterprise that has operations and origin in any other country except India. The taxation rules are not as simple for foreign enterprises as for domestic businesses. Corporate tax on foreign companies depends a lot on the taxation agreements made between India and other foreign countries. For example, corporate tax on an Australian company in India will depend upon the taxation agreement between the governments of India and Australia.
Tax Rebates Applicable on Corporate Tax:
Apart from various types of taxes levied on company income, there are several provisions of tax rebates available to companies. A list of all these rebates is detailed below.
- In certain cases, domestic companies can deduct dividend received from other domestic companies
- Special provisions are applicable to venture fund and venture capital enterprises
- Deductions, in some cases are allowed for exports and new undertakings
- New infrastructure and power sources set-up is subject to certain deductions
- Business losses have the provision of being carried over for a maximum of 8 years
- Interest, capital gains and dividends can also be deducted in some cases
Corporate Tax Planning:
Corporate tax planning can be understood as strategizing one’s financial business affairs in such a way so as to maximize profit and minimize payable tax by taking into account the allowed benefits of deductions, rebates and exemptions. Tax management is a risky as well as tricky business and most corporates that have a huge money at stake involve financial experts to take care of their taxation process. In India also there are various financial players that provide consultation and implementation of corporate tax. Due diligence and absolute awareness about all tax laws and corresponding rules and regulations, is a must to ensure healthy tax planning.
Corporate tax planning is different from tax evasion or non-payment. Tax planning refers to the act of planning one’s finances in such a way that the payable tax amount is reduced while the gains are maximized. One of the most essential features of tax planning in that it is absolutely in-line with the legal and financial rules set by the government of India.
Highlights of Union Budget 2018 for Corporate Tax
The government had declared to decrease corporate tax rate to 25% in the Union Budget of 2017. This was applicable only to organisations who had turnovers less than Rs.50 crore during FY 2015-16. Under the Union Budget 2018, Finance Minister Mr. Arun Jaitley announced that this particular decreased rate of 25% will be applicable even to companies that have had turnovers of up to Rs.250 crore during FY 2016-17. The government made this change to help all companies that fall under the micro, small, and medium enterprises. This is particularly because approximately 99% of these organisations’ employees file tax returns.
According to the Budget 2018, 7,000 organisations out of 7 lakh organisations that file returns will be retained in the 30% tax rate slab. These 7,000 companies will be companies who have turnovers higher than Rs.250 crore.
It is anticipated that the revenue that has been sacrificed due to this particular move of extending the 25% decrease rate is Rs.7,000 crore for the financial year 2018-19. This significant move by the Finance Minister is a great economic reform that will enhance the overall tax system of the country. This will also help in enhancing the competitive edge of the nation.
This reduced corporate income tax rate for the majority of companies will enable them to offer more and more employment opportunities.