Corporate Tax in India: Meaning, Tax Rates & Rebates

Last Updated: 11 Oct 2024

As you may be aware, taxes are a vital component of any economy and have a big impact on a nation’s progress and development. This also applies to corporate tax, which is why it is so important for both individuals and business owners to understand how it operates in India. So, let’s discuss this corporate tax meaning in detail.

What is Corporate Tax in India?

Corporation tax is which type of tax imposed on businessmen’s profits within a specific time frame. Different corporation tax rates are applied to varying levels of earnings made by business enterprises.

Generally speaking, corporate tax is applied to a company’s revenues following the deduction of items like depreciation, cost of goods sold, and selling, general, and administrative expenditures (SG&A).

Additionally, for money earned by firms, corporate tax, often known as corporation tax, can be considered an income tax. Several nations impose corporate taxation to facilitate business taxation. The laws governing income taxation vary throughout nations.

What is Corporate?

A corporate is defined as a company established in India or outside of India (under the laws of that foreign nation) in Section 2(17) of the Income Tax Act, 1961. Institutions, associations, and groups of people that have been evaluated as corporations for any assessment year following 1922 are likewise included in the definition.

In addition, the Central Board of Direct Taxes has the authority to determine that a group of people, institutions, or associations would be subject to corporate taxes. This declaration, however, is only valid for the assessment year that it is made.

Types of Corporations

Indian firms can be broadly classified into two types for the purpose of tax calculation.

1. Domestic Corporation: An Indian corporation is referred to as a domestic business. A foreign firm may also be considered a domestic company if all of its management and control are located in India. A corporation that is registered under the 1956 Companies Act is considered Indian.
2. Foreign Corporation: Any firm that is not of Indian descent and has some degree of management and control over affairs situated outside of India is considered to be foreign.

Corporate Tax Rates for Domestic Companies

Section	Tax Rate	Surcharge & Cess	Effective Tax Rate
Section 115BA: Companies with a turnover of up to Rs 400 Crore in FY 2017-18	25%	7% / 12%* + 4%	27.82% / 29.12%
Section 115BAA: Domestic companies not claiming any exemptions/incentives	22%	10% + 4%	25.17%
Section 115BAB: New domestic manufacturing companies	15%	10% + 4%	17.16%
Companies not falling under any of the sections above	30%	7% / 12%* + 4%	33.38% / 34.94%

Corporate Tax Rates for Foreign Companies

Section	Tax Rate
Royalties & Fees for technical services received from Indian Govt. or Indian corporations, based on approved agreements made before April 1, 1976	50%
Any other income	40%

Other Corporate Tax Rates in India

Other Corporate Tax Rates in India

1. Education and health decline The appropriate surcharge and four per cent of the computed income tax will be added to the overall tax liability before the health and education cess.
2. Alternate Minimum Tax (MAT) Both domestic and foreign enterprises must pay at least 15% in alternate taxes. According to section 115JB, this is based on the book earnings. The rate of MAT is nine per cent, plus any relevant surcharge and cess if the business is a class of international financial services and its only source of revenue is convertible foreign exchange.
3. Tax on Dividend Distribution A tax that businesses must pay on the annual dividends they give to their shareholders. This dividend is exempt from tax in the hands of the shareholders of up to Rs. 10 lakh. On the other hand, businesses pay 20.56% in taxes.
4. Minimum Alternate Tax (MAT) Liability A corporation will be required to pay token taxes in the form of Minimum Alternate Tax if the total applicable, payable tax on the total income, after surcharge and SHEC, is less than 15% of the profit that is documented in the company’s records.

Corporate Tax Planning

The practice of organizing a business’s financial affairs to reduce tax liabilities while abiding by tax rules and regulations is known as corporate tax planning. A variety of tactics, including deciding on the most advantageous tax jurisdiction, delaying income, maximizing deductions, and taking advantage of tax credits, may be used to achieve this. Legally lowering a company’s tax liability while increasing profits is the aim of corporate tax planning.

Tax Deductions Applicable on Corporate Tax

It is possible to reduce the amount of taxes that must be paid by keeping track of deductions, exemptions, and refunds in addition to managing and reporting the organization’s spending appropriately. These deductions could consist of:

• Capital Gains are subject to several taxation regimes, including tax exemptions under Sections 54D, 54G, 54GA, and 54EC, or a flat 15% or 20% tax rate.
• Contributions to nonprofit or charitable organizations are exempted from taxes by 50–100% under Section 80G, subject to certain restrictions.
• Dividends, in some circumstances, may be qualified for refunds.
• Depreciation deductions under Section 32, which permits a 15% deduction for depreciating the cost of older assets, such as machinery, and an extra 20% deduction for buying new assets in a business that manufactures or produces any good or service used in the creation, transmission, or distribution of electricity.
• Deduction under Section 80JJAA for the hire of a new employee.

What is Meant as Income of a Company?

The income of a company refers to the total revenue it generates from its operations within a specific period, typically a quarter or a year. This includes income from sales of goods or services, as well as any other sources such as investments or royalties. Essentially, it’s the money coming in before deducting expenses like salaries, utilities, and taxes.

Understanding a company’s income is crucial for assessing its financial health and performance. It’s like knowing how much money you make from your lemonade stand before considering how much you spend on lemons, sugar, and cups. By analyzing a company’s income, investors, analysts, and managers can gain insights into its profitability and potential for growth. So, in simple terms, a company’s income is its total earnings before taking out costs.

Everything About Filing Income Tax Return

The due date for filing a tax return

If an audit is necessary, all businesses, domestic and international, must file their ITRs by October 31st of the relevant assessment year. This cap applies to newly established businesses that require an audit within the same year of their founding.

Businesses that are exempt from book auditing requirements have until July 31st to file their ITRs.

Tax return forms to be filed by the Business

ITR 6: All businesses must use Form ITR 6 to file their returns, with the exception of those businesses who are claiming a deduction under Section 11. ITR 7: All businesses incorporated under the Companies Act of 2013’s Section 8 must submit their return using Form ITR 7.

How to Save Corporate Tax?

Here are some steps that can be performed in addition to the previous deductions to reduce corporate tax. These are totally dependent upon how the management of the organization formulates its tax-saving plan. Additionally, a business can reduce its taxes in the following three ways:

• Efficient Expense Management: Unorganized labor is used by many companies in the nation, which could make record-keeping difficult. Therefore, in order to deduct labor and production costs, it is essential to keep thorough records of overhead expenses and wages paid.
• Evaluation of Equity: Although stock prices are often evaluated at cost, in certain situations with shorter shelf life, they may also be valued at their Net Realizable Value, or NRV. This could keep the stock from being overpriced and reduce the amount of capital gains income that is subject to taxation. This might only apply in specific circumstances where the value is relatively constant, as significant volatility could provide an opportunity for fraud.
• Applying Deductions: If a company wants to reduce its corporation tax, it may be necessary to properly manage its deductions, which may be the most effective way to control taxable revenue.

Frequently Asked Questions

Are there any exemptions or rebates available for companies in India?

Yes, the Government of India has provided various rebates and exemptions for corporations to encourage economic growth. These include start-up tax exemption, export-oriented units (EOUs), and special economic zones (SEZs).

How does corporate tax impact businesses in India?

Corporate tax affects businesses in India by reducing their profits, increasing the cost of doing business, and potentially deterring foreign investment. However, it also funds public services and infrastructure for the betterment of the country.

Are there any tax rebates available for start-ups in India?

Yes, newly incorporated companies in India may be eligible for a tax holiday for the first three years of operation under certain conditions.

Do all companies in India pay corporate tax?

Yes, all companies operating in India are required to pay corporate tax on their profits. However, certain exemptions and rebates may apply based on the company’s size, industry, or location.