Corporate Tax in India

Introduction to Company Income:

Before learning about tax rates and how they are determined, we need to know about the types of income a company makes. It is as follows:

1. Profits generated by the business firms
2. Capital Gains
3. Revenue from property rental
4. Other sources of income include dividends, interest, and so on.

A corporation is a legal entity distinct from its stockholders. Under the Income-tax Act, both domestic and international corporations are required to pay corporate tax. The domestic corporation is taxed on its total income, a foreign corporation is taxed only on income gained within India, that is, income accruing or receiving in India.

Corporations established under the Companies Act, 1956, and foreign companies producing income in India are subject to the corporate tax rate imposed on their “net income,” which is defined as the amount of money they make after deducting their expenses.

A company earns profit from various sources, including sales, capital gains, commissions, and rent. The government relies heavily on the taxation of these earnings.

Income tax is distinct from corporate tax where corporate tax is levied on an individual’s earnings. As with income tax, corporations are entitled to minimize the taxable amount through several deductions and exemptions.

Additionally, the company tax rate is frequently revised globally. Similarly, India’s statutory corporate tax rate was reduced to 22% from 30% in 2019. However, the 22% tax rate is available solely to domestic corporations that do not seek tax exemptions.

The rates have been updated and lowered to assist companies in development. The corporate can concentrate on business expansion and capital enhancement when they have a significant share of the profits in their possession.

How to Calculate Corporate Tax

India has one of the world’s highest corporate tax rates, but the actual tax rate varies by industry and sector. Whether domestic or international, a corporation is required to pay CIT according to the country’s 1961 Income Tax Act. Unlike resident companies, non-resident (foreign) companies are only taxed on income received, earned, or deemed to be sourced in India.

The term ‘Corporate Tax’ meaning is the taxes paid by businesses on their income. The income tax divides companies into two categories –

• Domestic Business
• A foreign business

Domestic corporations are taxed on their entire income, whereas international companies are taxed on only India’s income received/accrued. The term “domestic company” and “foreign corporation” are defined in the following section of the Income Tax Law.

A domestic firm is an Indian corporation or any other corporation subject to tax under the Income Tax Act that has made necessary arrangements for the declaration and payment of dividends (including dividends paid on preference shares) within India, payable from the said income.

A foreign firm is simply one that is not a domestic one.

Corporate tax in India is the tax levied on the profit earned by registered firms under the Companies Act, 2013, throughout a financial year. The profit of these companies shall be taxed at a fixed rate subject to modification according to the government’s discretion. The revenue earned by the corporation is evaluated and calculated differently from the income calculation for individuals.

Net income is another name for the profit earned from the business over a financial year. You can obtain net income from the entire revenue by deducting the overall expenses. The total expenditure includes the cost of goods sold and other costs such as rent, wages, interest, etc. Total revenue includes revenue plus commissions and capital gains.

The equation and calculation for corporate tax are provided here. The value of company tax is calculated by multiplying the entire profit/net income of a corporate unit by the applicable tax rate.

Corporate tax payable = Net profit obtained under the country’s tax standards × applicable tax rate

Corporate Tax Rates on Different Companies

Type of company	New tax rate for companies	Additional advantage
Companies claiming no exemptions or incentives pay 22% plus relevant cess and surcharge.	The effective rate is 25.17%.	These businesses are not required to pay a Minimum Alternative Tax.
Companies claiming exemptions or incentives	30 percent	Minimum Alternative Tax decreased to 15% from 18.50 percent.
New manufacturing companies	Decreased by 15% from the previous level by 25%	These new manufacturing enterprises must be formed by October 2019 and begin operations by March 2023.

Corporate Tax Rates for Domestic Corporations in India

Corporate tax is levied on domestic enterprises for the financial year 2019-20 based on their annual revenue. The rates are the following:

Gross Turnover	The rate of taxation
Up to Rs. 250 Crore	25% of the total
Over Rs. 250 crore	30%

• If the company’s yearly revenue reaches Rs. 1 crore in a financial year, a surcharge of 7% shall be applied to such firms. If the income surpasses 10%, the tax shall be 12%.
• A 4% cessation of health and education and a business tax on domestic firms are applied.
• If a domestic corporation has an overseas branch, the same rate is applied to the corporation’s total earnings, domestic and foreign. Therefore it is essential to remember that corporate tax planning in India also considers the foreign earnings of domestic enterprises.

Corporate Taxation of Foreign Corporations

A firm not of Indian origin and management is located entirely outside India. These companies are not registered under the Companies Act, 2013. For these enterprises, therefore, the tax structure differs from domestic companies. For foreign companies, the taxation system focuses on the Indian and foreign corporations’ tax agreements.

Income	Taxation
Any royalty or charge for technical services obtained by a foreign business from an Indian concern or government prior to April 1, 1976.	50%
Any other sources of income	40%

When the income lies in between Rs. 1 crore and Rs. 10 crores, a surcharge of 2 per cent is payable on the total income. If it surpasses ten crores, a 5% surcharge is applicable.

Corporate Income Tax Rebates

The income tax legislation has numerous provisions that allow rebates and discounts to businesses when determining their corporate tax liability. Several significant rebates and deductions include the following:

• Domestic corporations may deduct a portion of their interest revenue from their profit for corporate tax purposes.
• If the corporation has invested in new infrastructure or sources of energy, those costs are deducted.
• The corporation may carry forward losses for up to eight years.
• If a domestic business gets a dividend from some other domestic company.
• The capital gains earned by enterprises are not taxed.
• Deductions are permitted in certain circumstances for exports and new ventures.

FAQs on Corporate Tax

Q1. What is the distinction between individual income tax and corporate income tax?
Ans. Individuals are taxed on their income. But, the corporate tax is charged on the profits of businesses that are constituted under the Companies Act, 2013, or any preceding company law.

Q2. What about the MAT (Minimum Alternate Tax)?
Ans. MAT is mandated under Section 115JB of the Act and has been in place for decades. The goal of MAT is to tax businesses at either the MAT rate on book profit or the taxation on taxable income, whichever is greater. MAT was originally 18.5 per cent of book profits but has been cut to 15 per cent.

Corporate taxpayers opting to exercise 115BAA or 115BAB are exempt from the application of MAT under these rate modifications.

Q3. Which businesses prefer to gain the most from the corporate tax rate changes?
Ans. Existing domestic enterprises with less than INR 4,000 million in revenue profit are relatively less because their income tax rate is reduced from 26-29 per cent to 25.17 per cent. Still, they also lose the benefits of some special exemptions or deductions.

New manufacturing businesses formed after 1 October 2019 profit from these reforms, as they qualify for a considerable tax rate reduction.

Large domestic corporations also benefit from the adjustments in corporate tax rates, as they can now choose a rate of 25.17 per cent rather than the prior range of 31-35 per cent.

Q4. Is corporate tax based on gross revenue?
Ans. No, after payment of interest on debts, corporate tax shall be computed on net earnings.