Understanding Corporate Tax in India

Corporate tax is a levy imposed by the Indian government on the profits earned by businesses. It's a significant source of income for the government, used to fund public services and infrastructure development. In India, both domestic companies (registered under the Companies Act) and foreign companies with a presence in India pay corporate tax.

What is Taxed as Corporate Income?

• Business Profits: This is the core element, representing the net income after subtracting expenses from total revenue.
• Rental Income: If a company rents out a property, the rental income is classified as business income and subject to corporate tax.
• Capital Gains: When a company sells an asset for a profit compared to its purchase price, the capital gain is taxed.
• Income from Other Sources: Any other income not explicitly taxed under other heads, such as dividends or interest earned, is included in this category.

Corporate Tax Rates in India

Domestic Companies:

• Standard Rate: Currently, domestic companies pay a base corporate tax rate of 30%.
• Concessional Rate: Introduced in 2019, Section 115BAA offers an option for domestic companies to pay a lower tax rate of 25.168%. This includes a base rate of 22%, a surcharge of 10%, and a health and education cess of 4%.
• Surcharge: An additional tax levied on top of the base rate. The surcharge applicable depends on the company's net taxable income. Companies with a net income between Rs. 1 crore and Rs. 10 crores pay a 7% surcharge, while those exceeding Rs. 10 crores pay a 12% surcharge.

Foreign Companies:

• Royalties and Fees: Foreign companies are taxed at a rate of 50% on royalties or fees received for technical services provided before April 1, 1976, under government-approved agreements.
• Other Income: For all other income earned in India, foreign companies pay a corporate tax rate of 40%.
• Surcharge: Similar to domestic companies, foreign companies are also subject to a surcharge on their net taxable income. Companies with a net income between Rs. 1 crore and Rs. 10 crores pay a 2% surcharge, while those exceeding Rs. 10 crores pay a 5% surcharge.

Additional Charges

• Health and Education Cess: A 4% cess is levied on the sum of income tax and surcharge, applicable to all companies regardless of their income level.
• Minimum Alternate Tax (MAT): This is an alternative minimum tax levied to ensure companies with low profits or availing significant deductions still pay a minimum level of corporate tax. However, companies opting for the concessional tax rate under Section 115BAA are exempt from MAT.

Tax Planning for Businesses

• Understanding Exemptions and Deductions: The Indian tax code offers various exemptions and deductions that can reduce taxable income. Businesses should stay updated on these provisions and utilize them effectively.
• Proper Expense Management: Categorizing expenses accurately under the appropriate heads in financial accounts can optimize tax benefits.
• Capitalization and Depreciation: Capitalizing assets and claiming depreciation deductions on their value over time can lower taxable income.
• Optimizing Investments: Selecting tax-advantageous investments can offer additional benefits.

Tax Rebates and Incentives

• Dividend Deduction: Under certain conditions, domestic companies can deduct dividends received from other domestic companies.
• Special Provisions for Venture Capital: The tax code offers special benefits for venture capital funds and enterprises.
• Export and Startup Incentives: Deductions are available in specific situations for companies engaged in exports or newly established businesses.
• Infrastructure and Renewable Energy Incentives: Tax benefits are offered for investments in new infrastructure and renewable energy sources.
• Carry Forward of Business Losses: Companies can carry forward business losses for up to eight years and offset them against future profits.