Corporate Tax

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 direct 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.

  1. 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

  2. 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 2021-22

Corporate Tax Rates for Domestic Companies AY 2021-22

Range of income Rate of tax
Up to Rs.400 crore gross turnover 25%
Gross turnover that exceeds Rs.400 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 2021-22

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

50%
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 cannot be less than 15% for both domestic and foreign companies. This is based on the book profits as per section 115JB. MAT is levied at the rate of 9 percent plus surcharge and cess as applicable in case of a company, being a unit of an international financial services center, which derives its income solely in convertible foreign exchange.

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 15% 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.

News about Corporate Tax

  • Extension in the deadline for availing 15% corporate tax to be considered

    On Monday, 15 June, the Finance Minister, Nirmala Sitharaman stated that the government will be considering an extension in the deadline for availing the lower 15% corporate tax rate on new investments. This was majorly done in the light of the COVID-19 pandemic.

    In September 2019, the government had cut down the corporate tax rate by up to 10% to attract private investments and help the economy grow. The base corporate tax for existing companies was reduced from 30% to 22% and for the new manufacturing firms incorporated after 1 October 2019, and started operations before 31 March 2023, the rate was cut down to 15% from 25%.

    The Finance Minister also assured the industry that government support will be given with the intent of Indian businesses and helping the economy recover. The COVID-19 Emergency Credit Facility will be covering all companies and not just MSMEs.

    16 June 2020

  • Budget 2020: FM announces abolition of dividend distribution tax (DDT)

    Union Finance Minister Nirmala Sitharaman in her budget speech announced the abolition of dividend distribution tax (DDT). The revenue foregone due to the removal has been estimated at Rs.25,000 crore.

    The minister added that dividends will now be taxed at the hands of the recipients. The move to abolish DDT is expected to increase attractiveness for investment.

    Currently, the government taxes at the rate of 20.35% on dividends distributed by companies.

    01 February 2020

  • Bill for replacement of ordinance on corporate tax reduction gets approval from Cabinet

    A bill for replacing the ordinance on promulgating reduction of corporate tax has been approved by the Union Cabinet to uplift the economy. The corporate tax has been slashed to 22% for domestic firms following the decision if no concession or incentive is availed. The bill may be introduced during the ongoing Winter session in the parliament. The reduction in the corporate tax will cost the government Rs.1.45 lakh crore annually. After the decision, firms which have opted for 22% income tax slab will not be required to pay the minimum alternative tax (MAT). Also, new domestic manufacturing firms that have been incorporated after 1 October 2019 will enjoy a reduced tax rate of 15%. In the recent budget, the government had announced that capital gains from the sale of equities in a firm liable for securities transaction tax (STT) will not be levied enhanced surcharge. Apart from this, listed firms that have announced share buybacks before 5 July 2019 need not pay super-rich tax, as announced by the government.

    22 November 2019

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