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Decoding Corporate Tax: Navigating India's Business Landscape

GST or the Goods and Services Tax was launched in 2017 to bring uniformity in the tax structure in India as it was complicated for the general population, businesses, and the government. The aim was to enhance trust and transparency between customers and sellers.

Each of the GST slabs comprises different categories of items according to particular parameters. The GST Council determines these rate slabs and revises them from time to time. Typically, the GST rates for essential needs are lower than those for luxury supplies. In this comprehensive guide, we will shed light on the GST rates to be implemented in 2024. 

 Corporate Tax in India

A corporate tax is levied on the net income or profits of a corporation. It is paid on a company’s taxable income comprising its revenue after deductions like the cost of goods sold (COGS), selling and marketing, general and administrative expenses, depreciation, research and development, etc. Companies can save corporate tax with careful management of these expenses.

What is a Corporate?

According to Section 2(17) of the Income Tax Act, a corporation is a company incorporated in India or outside India. The definition includes associations, institutions, and bodies of individuals assessed as a corporation for any assessment year after 1922. Besides these, the Central Board of Direct Taxes (CBDT) can declare an association, institution, or body of individuals as a corporation from a taxation perspective. However, the declaration applies only to the assessment year in which it is made.

Types of Corporations

A corporation is a legal entity independent of its shareholders. It is entitled to rights and duties of its own.  Corporations are divided into two categories. These are:

Domestic Corporations

A company registered under the Indian Companies Acts of 1956 or 2013 and whose management and control is situated in India is a domestic corporation. If the Indian subsidiary of a foreign company is entirely controlled and managed within India, it may be deemed as a domestic corporation.

Foreign Corporations

A company based outside India or having a portion of its operations controlled and managed outside the country is a foreign corporation.

Income of a Company

The income of a company comes from various sources, and you must know them to calculate and apply the rate of taxes. These include:

  • Profits earned from the business

  • Income from other sources like dividends, interest, etc

  • Income from renting property

  • Capital Gains

 Calculation of Net Income

Corporate tax is calculated on the net revenue or income. Net income or revenue is the total amount left with the company after deducting various expenses, such as:

  • Total cost of goods sold

  • Selling expenditures

  • Depreciation

  • Expenses incurred for administrative purposes

 Net Revenue = Gross Revenue – (Expenses + Depreciation)  

Tax Rates Applicable

We will share a list of corporate tax rates applicable for domestic and foreign companies in the following tables:

Corporate Tax Rates for Domestic Companies 

Corporate tax rates applicable for domestic firms are as follows:

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

* A 7% surcharge applies to companies with total income between Rs 1 crore and Rs 10 crore. Surcharge applies at 12% for companies with a total income above Rs 10 crore.

Corporate Tax Rates for Foreign Companies AY 2022-23

Section
Tax Rate
Royalties and fees for technical services received from Indian governments or Indian corporates, according to approved agreements made before April 1, 1976
50%
Any other income
40%

Surcharge Rates

Income
Domestic Companies
Foreign Companies
Upto INR 1 Crore
Nil
Nil
More than INR 10 crores
12%
5%
More than INR 1 Crore but up to 10 Crores
7%
2%

Minimum Alternate Tax (MAT)

Minimum Alternate Tax (MAT) under Section 115JB is applicable to the book profits of the company. It cannot be less than 15% of book profits for domestic and foreign companies. However, a MAT of 9% is applicable for a company running as a unit of an international financial services centre and deriving its income as convertible foreign exchange. MAT is not applicable to companies choosing taxation under Sections 115BAA or 115BAB.

Liability of Minimum Alternate Tax (MAT)

MAT payments come as a MAT credit to the corporates liable to pay the tax. The credit must be adjusted with the actual tax liability in the AY. If the MAT paid is higher than the actual tax liability, the difference amount can be carried forward. The firm can carry it forward for up to 15 years (10 years for before AY 2018-19). The carried forward balance can be adjusted only with the balance tax liability after the deduction of MAT payment for the same AY.

Application and Exemption of MAT

Every corporation registered in India is mandated to pay MAT under Section 115JB. The mandate includes companies running in designated Special Economic Zones (SEZs). However, the provisions will not apply to the following:

  • Shipping income where tax is based on the tonnage

  • Income earned through the life insurance business

  • A foreign entity from a country or territory having an agreement with India under Section 90(1) and not having a permanent establishment in India according to the agreement

  • A foreign entity from a country or territory not having an agreement with India, but not bound by Indian corporate law to register in India

Dividend Distribution Tax

According to the Finance Act, 2020, dividends from domestic companies are taxable in the hands of recipients. These firms are not liable to pay a distribution tax. However, they must deduct TDS at the rate of 10% for dividends over Rs 5000.

Health & Education Cess

Health and Education Cess is applicable s to the total tax liability after the surcharge at the rate of 4%. 

Reduced Rate of Taxes for Certain Domestic Companies

Reduced tax rates for companies were introduced to encourage them to expand their operations for an overall boost to the economy. However, some conditions are attached to such beneficial rates, so companies seeking reduced rates should fulfill them. Here are the details regarding these conditions:

Existing Companies

Section 115BAA

Tax rates applicable under this section are as follows:

  • Effective rate: 25.168%

  • Basic: 22%

  • Cess: 4%

  • Surcharge: 10% (irrespective of the turnover)

However, companies cannot claim deductions for the following benefits to avail of the reduced rates:

  • Deduction under section 10AA for newly established units in Special Economic Zones (SEZ)

  • Additional depreciation under section 32

  • investment allowance under section 32AD regarding investments in new plant and machinery in notified backward areas of Bihar, West Bengal, Andhra Pradesh, and Telangana

  • Deduction under section 33AB for tea, coffee, and rubber manufacturing companies

  • Deduction towards deposits for site restoration fund under section 33ABA for companies engaged in production or extraction of natural gas or petroleum or both

  • Deduction for scientific research expenditure under section 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA), 35(2AB)

  • 100% deduction of capital expenditure under section 35AD

  • Deduction of expenditure on an agriculture extension project under section 35CCC

  • Deduction of expenditure on skill development project under section 35CCD

  • Deduction for employment of new employees under chapter VI-A except for 80JJAA, for off-shore banking units under 80LA, and for inter-corporate dividends under 80M

  •  Set-off of unabsorbed depreciation or carried forward losses including those of the amalgamated company transferred under amalgamation if attributable to the above-mentioned deductions

Companies must use this option to pay tax @22 % before the return deadline in Form 10-IC. MAT and MAT credit shall not be applicable to these companies.

Section 115BA

Tax rates applicable under this section are as follows:

  • Effective rate: depends on turnover

  • Basic: 25%

  • Cess: 4%

  • Surcharge: based on the turnover

You can get this exemption option by fulfilling the following:

  • Set up and registered on or after 1 March 2016

  • Engaged in the manufacturing or production 

  • Option is available up to the due date of return filing in Form 10-IB

Once you exercise this option continues for the lifetime of your company except when it switches to section 115BAA.

 Newly Set-Up Manufacturing Companies

Tax rates applicable under Section 115BAB are as follows:

  • Effective rate: 17.16%

  • Basic: 15%

  • Cess: 4%

  • Surcharge: 10% (irrespective of the turnover)

The above rate applies only to income from manufacturing businesses. For other income, tax rates are summarised below:

Income
Tax Rate
Excess profit computed by tax authority u/s 115BA(6)
30%
Special tax rates for income under chapter XII
Special rates applicable
Short-term capital gain(STCG) on the transfer of non-depreciable assets
22%
Short-term capital gain(STCG) on the transfer of depreciable assets
15%
Income from non-manufacturing activity
22%
Income from manufacturing
15%

The company must fulfil the following conditions to exercise such an option:

  • Set up and registered on or after 1 October 2019, and commencing operations on or before 31 March 2023

  • Not be engaged in any business other than manufacturing

  • Not formed by reconstruction or splitting up of an existing business

  • Plant and machinery should be new (except when 20% of total plant and machinery can be second hand and imported plant and machinery treated as new)

  • Not use a building earlier used as a hotel or convention centre

  • The option is available up to the due date of return filing in Form 10-ID

Filing Income Tax Returns as a Company

Tax Return Forms to Be Filed

As a corporate entity filing income tax returns, you must fill out the following forms:

  • ITR 6 : To be filed by the companies except companies claiming deduction under section 11 

  • ITR 7 : To be filed by the companies registered under section 8 of Companies Act, 2013

Due Date for Filing

All companies including foreign companies must file their income tax return on or before the due date which is 30 October every year. The deadline applies to companies coming into existence during the same financial year. For FY 2019-2020 (AY 2020-21), the due date was extended to 30 November 2020 because of the COVID-19 pandemic.

Tax Audit

According to the Income Tax Act, companies must get their accounts audited every year because they have to submit an audit report to the IT department with the IT return. Submitting this tax audit report is mandatory for eligible companies by 30 September. The due date for the tax audit report for FY 2019-20 (AY 2020-21) was 31 October.

Corporate Tax Planning

Like individuals, companies can also save their tax liability with proper tax planning every year. It entails minimising the tax outflow in the coming year by understanding the scope of expenditure, investments, and treasury operations. Companies can also use it to defer tax outflow on incomes not necessary in the financial year. These include interest incomes and capital games. Additionally, they can use available deductions to minimise tax liability legally.

Tax Deductions Applicable on Corporate Tax

Companies can use deductions, exemptions, and rebates to minimise the payable taxes. They can do it with the appropriate reporting and management of the organisation’s expenses. Here are a few valid deductions they can claim:

  • Capital Gains, taxed at a flat rate of 15% or 20% or exempt from taxes under Sections 54D, 54G, 54GA, or 54EC

  • Dividends eligible for rebates in certain cases

  • Donations to charitable organizations, exempt 50 -100% under Section 80G subject to terms and conditions

  • Deductions for depreciation under Section 32 allowing a 15% deduction for old assets and 20% on the purchase of new assets for manufacturing and power businesses

  • Deduction for employment of new employee u/s 80JJAA

Conclusion

In conclusion, companies are subject to corporate tax under the Income Tax Act. As a registered corporate, you must know everything about the income tax rate for your company and the deductions you can claim to minimise your liability. This comprehensive guide offers all the information you need and educates you about the ways to plan your taxes for savings in the long run. With the right approach, you can fulfill your obligations to prevent penalties and save your company from hefty taxes in the long run.

Frequently asked questions

Q

What is the income tax rate of a company?

A

Corporate tax is the tax to be paid on the income earned by a company, whether domestic or foreign. The Income Tax Act, of 1961 sets guidelines for charging corporate tax in India, and it may vary from company to company depending on certain conditions.

Q

What is the due date for companies filing an income tax return (ITR)?

A

All companies must file their ITR before 31st October of the applicable assessment year if they need an audit. This limit also applies to the companies coming into existence within the same assessment year when they need to be audited. Companies not requiring auditing of books must submit their returns on or before 31st July

Q

What are the IT returns forms to be filed by a company?

A

Companies filing their ITR in India need to submit ITR 6 (applicable for those claiming relief under section 11) and ITR 7(applicable for those claiming registered under section 8 of the Companies Act, 2013).

Q

When do companies need tax audits?

A

The threshold limit for companies to provide a tax audit report is Rs 10 crore (from AY 2022-23). It should meet the following conditions for the requirement:

  • Cash receipts for sales turnover should not exceed 5% of total turnover

  • Cash expenses should not exceed 5% of the total expenses of the firm

Q

How can companies save corporate tax?

A

Companies can take some steps to save corporate tax. These include:

  • Effective management of expenses by maintaining detailed records of wages and overhead costs to claim valid deductions on labour and production expenses

  • Equity valuation on Net Realizable Value or NRV to prevent stocks from being overvalued and reduce the taxable income from capital gains

  • Maximising the use of deductions and rebates available under the Income Tax law

Companies must strike a balance between the different available methods to save corporate tax without attracting undue attention. It is vital to understand the situations when these measures are suitable to maximise the gains for your company in the long run.

Prachi Jain

Chartered Accountant

Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.