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
Corporate Tax Rates AY 2019-20
Corporate Tax Rates for Domestic Companies AY 2019-20
|Range of income||Rate of tax|
|Up to Rs.250 crore gross turnover||25%|
|Gross turnover that exceeds Rs.250 crore||30%|
Surcharge rates in addition to the rates above
|Particulars||Domestic Companies Tax rate|
|If total income range is between Rs.1 crore and Rs.10 crore||7% as per rate of tax above|
|If total income range exceeds Rs.10 crore||12% as per rate of tax above|
Corporate Tax Rates for Foreign Companies AY 2019-20
|Nature of income||Rate of tax|
Royalty or fees received for any technical services from the government or
an Indian concern under agreements made before April 1, 1976, which is approved by the central government
|Any other kind of income||40%|
Surcharge rates in addition to the rates above
|Particulars||Foreign Companies Tax rate|
|If total income range is between Rs.1 crore and Rs.10 crore||2% as per rate of tax above|
|If total income range exceeds Rs.10 crore||5% as per rate of tax above|
Health and education cess
To the amount that is the total tax liability, 4% of the income tax that is calculated and the surcharge that is applicable will be added before the health and education cess.
Minimum Alternate Tax (MAT)
The minimum alternate tax rate is 18.5% for both domestic and foreign companies. This is based on the book profits if the tax that is calculated at the rates given above are less than 18.5% of the book profits.
Dividend Distribution Tax
Tax that has to be paid by companies on the dividend that is distributed to the shareholders every year. In the shareholders’ hands, this dividend is exempted up to Rs.10 lakh. However, tax paid by companies is 20.56%.
Liability of Minimum Alternate Tax (MAT):
If the total applicable payable tax of a company on the total income is less than 18.5% of the profit which is recorded in their books (in addition to surcharge and SHEC), the company will be liable to pay a token tax money in the form of MAT or Minimum Alternate Tax.
However, MAT can also be carried forward and adjustments can be made against regular tax. The MAT can be carried forward for 10 subsequent years.
Application and Exemption of Minimum Alternate Tax (MAT):
The Minimum Alternate Tax or MAT is applicable on all the companies. Foreign companies which have income sources in India are also liable to pay MAT.
However, there are certain exemptions as per the regulations of the MAT. Companies that have a setup for life insurance business will be exempted from the purview of MAT under Section 115B. Companies having income generated through shipping will be exempted from the purview of MAT under Section 115V-O.
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.
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.