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 5% 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.
Corporate Tax Budget 2015:
Corporate tax budget 2015 was being looked forward too with eagerness and anticipation. The new government at the center was supposed to reduce the existing corporate tax rate which the financial industry experts felt would be an extremely positive move considering the current market structure.
The current government did live up to the expectation and announced a 5% cut in corporate tax from 30% to 25% for the next 4 years. The move is aimed at encouraging foreign investment for infrastructure projects like roads, railways and energy as well as for setting up of shops in India by foreign companies. This corporate rate cut will ease out tax burden resulting in a higher level of investment, growth as well as job creation. The honourable finance minister of India, while announcing the slash in rate, was of the view that corporate tax rate had reached a level wherein government was neither receiving revenue nor investment owing to the high rate of company tax. This deadlock prompted the government to do something about the high tax rate so as to foster better and higher investment in the economy.
News about Corporate Tax
Exemption of Angel Investment Tax for Startups
Angel Investments are usually the earliest equity investments made in startup companies, and such investors are called angel investors. The capital that angel investors provide may be a one-time investment to drive business or a continuous financial support during difficult times of the company.
The Union Budget of 2012 introduced the provision of the Angel Investment Tax, which is a form of Corporate tax. As per the rules, funds raised by an unlisted company through issuance of equities are covered under this tax. However, it is applicable only if the amount raised exceeds the fair market value.
In a move to promote start-ups, the Indian government has dismissed the imposition of Angel Investment Tax on investors who fund startups. However, only investments in startups that fulfil all conditions specified by the DPIP are eligible for exemption from the tax. This is expected to promote investment in India and provide relief to angel investors and eligible startups.
30th August 2016
Government to Reduce Cut of Corporate Tax to 25% to Increase Transparency
The government has proposed to reduce the cut in corporate tax by 5% from the existing 30% and level it off to 25% over a span of 3 years to improve the transparency in collections. India Ratings and research said that this proposal to reduce the cut in corporate tax is to bring a focus on returns based on economics and will help government reduce the incentives they pay forcing low tax paying corporations to increase their taxes by a considerable amount
Some of the largest corporates were found to be paying tax lower than 10%. With the reduction of the cut to 25% over a phased manner, the incentives paid by the government will reduce and the tax outflows will increase
The withdrawal of incentives will affect key sectors such as Oil and Gas, Auto, Telecom, Mining, IT & ITES, pharma and healthcare
5th April 2016
Corporate Tax has increased from FY14 to FY15
The effective rate of Corporate Tax in the country, has increased from FY14 to FY 15 by 1.4%. The effective rate has gone up from 23.22% in 2013-14 to 24.67% in 2014-15. Small companies which have a turnover that is up to Rs. 1 crore but not than Rs. 500 crore, have the highest effective rate. Larger counterparts enjoyed a rate as low as 22.88%, companies with a turnover of Rs. 10 crore enjoy a rate of 33.84%, while those with a turnover up to Rs. 10 crore it comes to 32.44%. With the Budget 2016-17, there was a unveiling of a new plan whereby a new manufacturing entity can enjoy corporate tax rate of 25%. The estimated revenue loss of Rs 68,710 crore was estimated by the government in lieu of of tax exemptions.
14th March 2016
Impact of Budget 2016 and the Impact on Corporate
With the Budget 2016 being announced the impact for new corporate will be pretty advantageous when it comes to tax. Any new manufacturing companies, which will come into existence after 1st March 2016, will be provided a corporate tax reduction of 27.55% if their income exceeds Rs. 1 crore but not Rs. 10 crore. If the income exceeds Rs. 10 crore, then the 28.84%, this will provide the Make in India initiative the much needed boost in this sector. All startups set up before April 1, 2019 will be proposed to be provided with 100% deductions of profits for the first 3 years.
2nd March 2016
Corporate Tax Exemptions will be Phased Out, and No Weighted Deductions from FY 2017-18.
A detailed plan has been laid out that will phase out corporate tax exemptions and bring down the corporate tax rate from 30% (now) to 25%.
Profit linked, investment linked, and area based deductions will be phased out for corporate and non-corporate taxpayers.
27th November 2015
Finance Minister announces Plan to Cut Taxes and Black Money Problems
The Finance Minister, Arun Jaitley, has announced that personal and corporate taxes may be reduced over the next 4 years. In terms of personal taxes that individuals pay, he said that a more rational rate will be decided upon and for taxes paid by corporates, the rate might be brought down to a flat 25%. This new rate is to become effective from the financial year 2016-17. In addition to bringing down corporate taxes he also said that once they come down, certain exemptions might also be removed.
Even the Goods and Services Tax might be reviewed and altered as needed along with provisions for bankruptcy. In reply to the problem of black money, he said that the first step would be have rational taxes. He also said that a PAN card might be made compulsory for transactions that exceed a certain amount and fall under particular categories.
9th October 2015
India will phase out corporation tax exemptions
The Finance Minister said that he will phased out corporation tax exemptions in a phased manner to aim and align the levels of taxation with other countries on a global level. The list of exemptions of which will phased out are expected over the next few days. The current corporation tax stands at 30% effective rate of taxation is 23% due to the exemptions. The amount of revenue lost on account of these exemptions is a whopping Rs. 68, 000 crores.He also mentioned that weaker banks need to consolidate with stronger ones.
24th September 2015
No Renewal for Corporate Tax Exemptions with Sunset Clause
Sunset clause is a statement added to the end of a measure which causes the act to sunset or become ineffective after a certain date. CBDT or the Central Board of Direct Taxation has decided not to renew the corporate tax exemptions after expiry of the sunset clause. The move is specifically aimed to phase put exemptions and to move to a lower corporate tax rate.
Ministry of Finance has already come out with a directive to phase out exemptions in the next few days in order to bring down the corporate tax rate from the current 30% to 25% over the next four years. CBDT might also put a sunset date for open-ended tax exemption schemes in order to give some time to corporates to adjust their taxes.
CBDT is also looking forward to cleaning up and revamping the Income Tax Act which still contains clauses and exemptions that are no longer applicable to corporates.
15th September 2015