Introduction 

One of the many taxes that corporates are required to pay to the Indian government is a corporate tax or company tax. Corporation Tax, also known as Corporate Tax is a direct tax levied on the net income or profit that corporate enterprises make from their businesses. The tax is imposed at a specific rate as per the provisions of the Income Tax Act, 1961. In India, taxes on income, wealth, Capital Gains are some of the most significant taxes paid by customers. Corporate houses too, be it domestic or foreign, are required to pay taxes to run their business. 

What is Corporate Tax?

Corporate tax is a tax levied on profits earned by businesses in a particular period. Different percentages of corporate taxes are levied for different levels of profits earned by business houses. Corporate tax is generally levied on the revenues of a company after deductions such as depreciation, COGS (Cost of goods sold) and SG&A (Selling general and administrative expenses) have been taken into account.

Many countries levy a corporate tax to smooth out the tax process for enterprises. Different countries have different rules that apply to a tax on income.

In India, corporate tax is levied on both domestic as well as foreign companies. Like all individuals earning income are supposed to pay a tax on their income, business houses are also supposed to pay as tax a certain portion of their income earned. This tax is known as corporate tax, corporation tax or company tax.

What is Corporate Income? 

How is the tax calculated on the income of companies? To understand this, we need to know the various income categories of corporates. Here are the types of income which a company earns. 

  • Profits earned from the business

  • Capital Gains

  • Income from renting a property

  • Income from other sources like dividend, interest etc.

Corporate Tax Rates – 2019-20

The corporate tax rates applicable from 1st April 2019 onwards for certain types of corporations. The following are the new applicable rates:

Type of Company New Corporation Tax Rate Additional Benefit/Requirements
Corporations not seeking any incentives/exemptions 22% (earlier 30%) + applicable cess and surcharge. Effective corporate tax rate of 25.17% No MAT (minimum alternative tax) payable by these companies
Corporations seeking incentives/exemptions Unchanged at 30% MAT rate reduced to 15% from an earlier level of 18.5%
New Manufacturing Companies 15% (earlier 25%) New manufacturing co. must be incorporated on or before October 2019. Must start production before March 2023

 

 

Type of Company Corporate Tax Rate Surcharge on Net Income Less than Rs. 1 crore Surcharge on Net Income greater than Rs. 1 Crore and less than Rs. 10 Crore Surcharge on Net Income greater than Rs. 10 Crore
Domestic with annual turnover up to Rs 250 Crore 25% Nil 7% 12%
Domestic Company with turnover more than Rs 250 Crore 30% Nil 7% 12%
Foreign Companies 40% Nil 2% 5%

 

Following corporate entities are liable to pay corporate tax in India:

  • Corporations incorporated in India.

  • Corporations that acquire revenues from India and do business on earned incomes.

  • Other foreign enterprises that have permanently established themselves in India.

  • Corporations that have earned the title of being an Indian resident only for tax payment.

Corporate Tax – Domestic vs Foreign Corporation

A Domestic Corporate/Corporation is a company that is of Indian origin and whose management is located entirely in India. The applicable rate of corporate tax for AY 2019-20 in case of domestic companies as mentioned below:

Gross Turnover Tax Rate
Upto Rs. 250 Crore 25%
More than Rs. 250 Crore 30%

  • Domestic corporate entities with a turnover up to Rs. 250 Crore has to pay a flat rate of 25% corporate tax.

  • In case, the total revenue earned by a company in a financial year exceeds Rs. 1 crore, then a surcharge corporate tax of 5% is levied on such a corporation.

  • A Health and Educational Cess at 4% is also charged for a domestic company.

  • Domestic companies having branches overseas must pay the same amount of corporate tax on its total global earnings. Corporate tax in case of domestic companies in India also considers the revenue that is earned by a domestic company abroad.

A company that is not of Indian origin is termed as a foreign corporation. Its management and control must be outside of India. These corporations are not registered under the Companies Act 2013. The rules about the taxation process for a foreign company is completely different from that of a domestic corporation. It depends on the taxation agreement made between India and other foreign countries. For instance, the corporate tax rate for a foreign corporation based out of the US will depend on the taxation agreement that India has with the United States.

Nature of Income Tax Rate
Royalty received or fees for technical services received by a foreign corporation from the government or any Indian concern under an agreement made before April 1, 1976, and approved by the central government 50%
Any other Income from Indian Operations 40%

 

Corporate Tax Planning:

Corporate tax planning involves strategizing the financial business affairs in a manner to maximize profit and minimize tax liability by taking into account the allowed benefits of deductions, rebates and exemptions. Tax management can be a tricky affair and most corporates that have huge money at stake involve financial experts to take care of their taxation process. Multiple financial players in India provide consultation and implementation of corporate tax. Due diligence and absolute awareness about all tax laws and corresponding rules and regulations, is a must to ensure healthy tax planning.

Corporate tax planning does not mean tax evasion or non-payment. Tax planning refers to the act of planning one’s finances in such a way that the payable tax amount is reduced while the gains are maximized. One of the most essential features of tax planning in that it is in-line with the legal and financial rules set by the government of India.

End Note

Corporation tax is a tax imposed on the net income of the company. Companies, both private and public which are registered in India under the Companies Act 1956, are liable to pay corporate tax. As is common across the world, net income or net revenue is calculated after accounting for certain costs like depreciation, selling cost and administrative costs. The amount of tax a company will be paying depends on its revenues. This means that corporation taxes are based on a slab rate system.