Corporate Tax in India

Corporate taxation is a tax regime that plays a crucial role in the world of business. Here, businesses are charged tax on their net income or net profit. It helps the government redistribute wealth from the rich to the poor, displaying itself in the category of a progressive tax. 

In this article, you will find more about this tax including the tax rate slabs for corporations. 

Let’s begin!

Indian taxes are scattered across two groups of taxes among which one is the direct tax and the other is an indirect tax. When it comes to direct taxes, you must know that it is applicable on the income that is earned by different sorts of business entities in a financial year. 

There are several types of taxpayers that are registered with the ITD (Income Tax Department). More importantly, they all have the imposition of different rate slabs. For example – the taxation rates for a person and a company taxpayer cannot be the same. 

This is what brings the subdivision of direct taxes into the essence. So, direct taxes are split as –

•  Personal Income Tax: Personal income tax is a type of direct tax that has to be paid by individual taxpayers. Under this kind of taxation, an Individual gets taxed based on the tax slabs at varying rates.
• Corporate Income Tax: The tax is referred to as corporate tax when the income tax has to be paid by the domestic companies or organisations as well as foreign companies on the income they draw. The CIT or Corporate Income Tax is paid at a tax rate specified as per the Income Tax Act. Also, the rates are subject to change during the union budget that takes place once a year. 

Now let us dig more into the definition of corporate tax and move on to understanding the very basics of it. 

What is Corporate Tax?

A corporate tax is an imposition that is mobilised by the government on the earnings of a company/ organisation. The money that is collected from corporate taxes is helpful as the source of revenue generation for a country. The active income of a company is assessed by the deduction of costs from the cost of the product sold or COGS as well as income depreciation. Tax rates are levied in order to set up a legal duty that a corporation owes to the government. Regulations that are related to corporate taxes range widely across the world. However, they all have to have the approval of the government of the country before they head on to enactment.

Corporate Tax in India – Types of Corporations

A corporation refers to an individual featuring a different as well as autonomous legal body as compared with the shareholders. As per the Income Tax Act, both domestic and international corporations carry the liability to pay income tax. A domestic corporation is imposed with the tax on its universal income while a foreign corporation is charged only on the income which they have earned within India or obtained within India. 

This is how the different types of companies are distinguished when it comes to the tax calculation as per the Income Tax Act-

• Domestic Company: Domestic company is a term for the company that is enrolled in the Companies Act of India. It also refers to the foreign-owned company that has its management entirely based in India. Both private and public companies come under this category. 
• Foreign Company: Foreign Company is a company that does not have registration under the Companies Act of India and is wholly controlled and managed from outside of the Indian territory. 

What is a Company’s Income?

Before you can put a figure on the corporate tax on the income earned by a company, you need to keep all the constituents in mind that make up the overall income of any company.

• Profits from business
• Capital gains
• Income from property
• Income earned through other sources such as interests,  foreign dividends etc. 

Corporate Tax Eligibility – Who Pays Corporate Tax?

Here are the corporate entities that have to pay corporate tax in the country – 

• Incorporated corporations in India.
• Corporations that generate revenues from India and practice business on the incomes earned from it.
• Other foreign firms that are established in India permanently.
• Corporations that have got themselves titled as Indian residents just with the purpose of tax payment.

How is the Net Income of Corporates Calculated?

Corporate tax is calculated based on the net revenue or say – net income of a company. A net income or net revenue of a company refers to the total amount that remains with the company after all the important deductions for different expenses have been made. 

There is a cluster of expenses that an enterprise incurs on the sale of goods and services. Let’s take a look at it –

• The total cost of goods that have been sold.
• Depreciation
• Expenses incurred on administrative processes.
• Selling expenditures

Note – The corporate tax is based on the taxable profit or net income earned by a company. A company’s operating profits or net profits is the total sum that stays with the company after all the required deductions of various expenditures have been made. 

Is Corporate Tax Useful?

This is a question that pops up in the head when it comes to corporate taxation. Know that corporate taxes come with a scope of being utilised efficiently. It acts as a source for the government to generate more revenues provided that corporations make for the biggest players when it comes to making money. It allows the government to create a well-paced flow of cash. 

Apart from that, corporate taxes prove to be helpful for companies making profits in redistributing the benefits by the provision of public services. It powers businesses to function in a more enhanced way and the possibility of them making profits does not go extinct.

Corporate Tax Rebates

With different types of corporate taxes that are imposed on a firm, there are also certain provisions that apply to the corporation tax rebates/ deductions. Here is what they look like –

• Deductions are allowed for new undertakings and exports in some cases.
• Special provisions are applicable in the case of venture funds and venture capital enterprises.
• Dividends are also subject to taxation in a number of cases and domestic companies can make deductions of dividend that is received from the other domestic companies.
• The new set-up of power source as well infrastructure is also subject to deductions.
• There is a provision for corporations to carry out the business losses for a maximum period of 8 years. 

Corporate Tax Rates FY 2021-22

Know that the corporate income tax rates work differently across varying nature of income as well as the income limit. These rates draw a contrast between the domestic company tax and foreign company tax. 

Let’s start with the part where you understand the corporate tax rates in figures.

Corporate tax slab for domestic companies

In addition to these rates, here are the surcharge rates that apply in the case of domestic corporate tax rates –

Corporate tax slab for foreign companies

In addition to these rates, here are the surcharge rates that are applicable to the foreign corporate tax rates –

4% of the income tax is computed to the total amount of tax liability. Also, the applicable surcharge is added before the computation of health and education cess.

Corporate Tax Planning – What Makes It Important?

Tax planning is essential for all corporations as it provides the scope to minimise the tax burden and boost profits. An ideal corporate tax planning refers to the proper planning of capital budget and expenses along with the marketing costs. 

Here are some of the important benefits of corporate tax planning –

• It channels the taxable income into different investment plans.
• It promotes adherence to compliance. 
• It reduces the liability.
• It stabilises businesses.
• It helps the country grow together. 

Now you may find its resemblance to tax evasion but note – it is totally different than that. 

Tax evasion means sneaking out of the tax regime and it is a punishable offence. On the other hand, tax planning is strategizing to define the amount of payable tax in a way that the corporations become able to save up the profit by paying less tax. 

In order to make the best out of corporate tax planning, there is a non-negotiable need for a well-thought strategy and thus, it is necessary to hire professionals who are well-armed with all the guidelines and compliances in this subject.

Frequently Asked Questions (FAQ)