Corporate tax in India is a crucial aspect of the country’s taxation system. It is levied on both domestic and foreign companies operating within its borders. In this article, we will explore the key aspects of corporate tax in India, including the types of income that are subject to taxation and the applicable rates for different types of companies, and the provisions for reduced tax rates for certain entities. So, let’s dive into the world of corporate taxation in India.
Types of Income Subject to Corporate Tax
Under the Income Tax Act of 1961, companies in India are required to pay corporate taxes based on their universal income. The types of income that are subject to taxation include:
1. Profits Earned by the Business
Profits refer to the financial benefits realized by a company when its total revenue exceeds its total expenses. This includes income from various business activities, such as sales of goods or services.
2. Income from Renting a Property
When a business lets out its property on rent, the rental income falls under the purview of the business. income and is subject to corporate tax.
3. Capital Gains
Capital gains are the increase in the value of a company’s capital assets. Whether it’s a short-term or long-term capital gain, it is subject to taxation as per the provisions of the Income Tax Act.
4. Income from Other Sources
Any income that does not fall under the specific heads mentioned above is taxed as earnings from other sources. This includes income from dividends, interests, and other miscellaneous sources.
Corporate Tax Rates in India
The corporate tax rates in India vary depending on the type of company and the income earned. Let’s take a closer look at the different tax rates for domestic and foreign companies.
Corporate Tax Rate for Domestic Companies
Domestic companies registered under the Companies Act 1956, including both public and private enterprises are charged corporate tax. Currently, the tax rate for domestic companies is 30%. However, there are additional surcharges levied based on the company’s net income.
If the net income ranges from Rs. 1 crore to Rs. 10 crore, a surcharge of 7% is applied. For net income exceeding Rs. 10 crores, a surcharge of 12% is levied. These surcharges are in addition to the base tax rate.
In 2019, the Indian Government introduced Section 115BAA through the Taxation (Amendment). Ordinance, which brought about several changes to the Income Tax Act. This section offers a reduced tax. rate of 25.168% for domestic companies. The effective tax rate is achieved through a combination of the base rate of tax, surcharge, and cess.
Base Rate of Tax: 22%
Surcharge Applied: 10%
Cess Applied: 4%
Effective Tax Rate: 25.168%
It’s important to note that companies availing themselves of benefits under Section 115BAA are exempt from paying the Minimum Alternate Tax (MAT) under Section 115JB of the Act.
Corporate Tax Rate for Foreign Companies
Foreign companies are subject to corporate income tax on the income they receive in India or that accrues or arises in India. The tax rates for foreign companies differ based on the type of income. Royalties or fees received by foreign companies are taxed at a rate of 50%. Other income or the balance is taxed at a rate of 40%. Similar to domestic companies, foreign companies also face surcharges based on their net income.
For net income ranging from Rs. 1 crore to Rs. 10 crore, a surcharge of 2% is levied. If the net income exceeds Rs. 10 crores, a surcharge of 5% is applicable. Additionally, a Health and Education Cess of 4% is levied on the sum of income tax plus surcharges, irrespective of the company’s net income.
Reduced Tax Rates for Domestic Companies
To promote investment and economic growth, the Indian Government has introduced reduced Tax rates for certain categories of domestic companies Let’s take a closer look at these reduced rates and the conditions for availing of them.
1. Reduced Rate for Certain Existing Domestic Companies
A beneficial corporate tax rate of 22% (plus applicable surcharge and health and education cess) can be availed by certain existing domestic companies. This reduced rate is optional and subject to the satisfaction of certain conditions, which are as follows:
- The company should not have claimed tax holidays available to units in Special Economic Zones (SEZ) or benefits such as accelerated depreciation, additional depreciation, investment allowances, expenditure on scientific research, and certain other deductions.
- The company should not have claimed a set-off of losses and unabsorbed depreciation carried forward from previous years, except for losses attributable to the deductions mentioned above.
- The option to avail of the reduced tax rate must be exercised before the due date for filing the income tax return.
- Companies availing themselves of this option are exempt from the provisions of the Minimum Alternate Tax (MAT) and MAT credit.
It’s important to note that non-compliance with the conditions for availing of the reduced tax rate will result in the loss of the benefit for the year of non-compliance and subsequent years.
2. Reduced Rate for Newly Set-Up Domestic Manufacturing Companies and Companies Engaged in Generation of Electricity
Newly set-up domestic manufacturing companies and companies engaged in the generation of electricity can avail themselves of a beneficial corporate tax rate of 15% (plus applicable surcharge and health and education cess). The conditions for availing of this reduced rate are as follows:
- The company should be incorporated on or after October 1, 2019, and commence manufacturing or production of any article or thing on or before March 31, 2023.
- The business should not be formed by splitting up or reconstructing an existing business, except in cases of re-establishment, reconstruction, or revival of business.
- The company should not use plants and machinery previously used for any purpose in India, and no Depreciation should have been claimed on the same.
- The company should not use any building previously used as a hotel or convention center for which Deductions under the provisions of the Income Tax Act have been claimed or allowed.
- The company should be engaged only in the business of manufacturing or producing any article or thing, and research or distribution of such an article or thing. Certain specific businesses, such as software Development, marble conversion, gas bottling, printing, and others are excluded from the definition of manufacturing or production.
- The company should not have claimed benefits such as establishment in a Special Economic Zone, accelerated depreciation, additional depreciation, investment allowances, expenditure on scientific research, and certain other deductions.
- The company should not have claimed a set-off of losses and unabsorbed depreciation carried forward. from previous years, except for losses attributable to the deductions mentioned above.
- The option to avail of the reduced tax rate must be exercised before the due date for filing the income tax return.
- Domestic transfer pricing provisions will apply to these companies.
- Companies availing themselves of this option are also exempt from the provisions of the Minimum Alternate Tax (MAT) and MAT credit.
Similar to the reduced rate for certain existing domestic companies, non-compliance with the conditions will result in the loss of the benefit for the year of non-compliance and subsequent years.
Minimum Alternate Tax (MAT)
Minimum Alternate Tax (MAT) is a provision in the Indian tax system that ensures companies pay a minimum amount of tax, regardless of their tax liability under the normal provisions of the Income Tax Act. However, companies availing themselves of the reduced tax rates discussed earlier are exempt from the applicability of MAT and MAT credit.
Companies that continue to pay taxes under the existing tax regime (without availing of the reduced tax rates) are liable to pay MAT on their adjusted book profits. The MAT rate is 15% of book profits in Indian companies and foreign companies (other than those exempted) with income exceeding INR 10 million. It is important to note that the surcharge and health and education cess are applicable in addition to the MAT rate.
MAT credit is the amount paid over and above the normal tax liability, which can be carried forward for 15 years. However, the credit for foreign taxes allowed against MAT cannot be carried forward against tax. liability under the other provisions of the Income Tax Act.
It’s worth mentioning that foreign companies without a Permanent Establishment (PE) in India are not subject to MAT provisions. However, certain specific businesses, such as shipping, mineral oil exploration, aircraft business, and civil construction in turnkey projects are also exempt from MAT provisions.
Local Income Taxes
Unlike some countries, India does not impose any local, state, or provincial taxes on income at present. The corporate tax rates discussed earlier are applicable throughout the country, regardless of the specific location of the company’s operations.
Conclusion
Corporate tax in India is a significant component of the country’s tax system, impacting both domestic and foreign companies. Understanding the basics of corporate taxation, including the types of income subject to tax and the applicable rates, is crucial for businesses operating in India. The reduced tax rates Certain entities provide opportunities for tax optimization and incentivize investment and growth. However, it’s important for companies to carefully assess the eligibility criteria and comply with the conditions to avail of the reduced rates. By staying informed and ensuring compliance, businesses can navigate the complexities of corporate tax in India and contribute to their own success and the growth of the Indian economy.