The world of corporate tax can be really daunting for entrepreneurs in lack of proper knowledge and a professional support.
In simple words, corporation tax is nothing else but a direct tax imposed on the net income earned by enterprises. Both public and privately registered companies in India under the Companies Act 1956 must pay corporation tax. The tax is levied at a particular rate as per the provisions of the Income Tax Act, 1961.
For better understanding and required consultancy, companies need to rely on tax advisory services in India.
September 2019 was a big year when the Finance Minister Nirmala Sitharaman announced huge cuts in the corporation tax through various announcements. In a major move, it was decided to cut down domestic corporate tax to around 25.17%, and it includes all surcharges and cess. The decision was made with an intention to promote growth and investments during the period when an economic slowdown was noticed. However, this sharp cut would cost exchequer Rs 1.45 trillion.
The corporate tax cut from 35 to 26 per cent for all the domestic companies. However, it is applicable when they do not avail of a specified list of exemptions. It includes exemptions such as special economic zones, extra depreciation available on fresh investments, deductions for some scientific research expenditure, and others.
There’s a major change through the minimum alternate tax (MAT) which has been introduced for taxation of zero-tax companies. Companies taking advantage of the reduced rate of taxation will not be taxed under MAT.
Companies, if they continue to claim exemptions, will pay taxes at pre-amended rates, i.e. 25-30 per cent. If they want, they might consider paying taxes at lower rates in future. That being said, once they select to pay taxes at the reduced rate will remain applicable and could not be changed. When companies continue to avail of exemptions, they will have to pay MAT. As a good sign for them, MAT rate has also been slashed from 18.5 per cent to 15 per cent.
New domestic manufacturing companies founded on or beyond October 1, 2019 can pay corporation tax at the rate of 15% (effective rate 17.01%). No MAT will be imposed on them.
Companies can benefit from indirect and direct tax consultancy services in India to understand the tax matter in a better way.
Entrepreneurs should also know that additional surcharge will not apply on the gains made through sale of securities, such as derivatives, to Foreign Portfolio Investors (FPIs).
The series of announcements made by the finance minister also includes an expansion to promote corporate-social responsibilities (CSR) activities. Companies are given the opportunity to spend 2% of their earnings on state or Union govt incubators, IITs, state universities, public-funded entities, etc.
Important Tax Updates for Corporations
As discussed earlier, corporate taxes are levied on enterprises on the net income they make. It is an important source of income for the Indian Government. A company can have different types of income:
Rental income
The financial benefits earned by a company by renting out its property falls under rental income. This income is also a part of business income.
Profit in the business
Profits, as expected, are the financial gains made by a company in case its total revenue is greater than total expenses.
Capital gains
It is realised from the increase in the value of a company’s capital assets. The gain can be long-term or short-term.
Other sources of income
Income of a company that doesn’t fall under above groups can be taxed as income from other sources. It can include interests, dividends, etc.
Not just domestic, but foreign companies are also liable to pay corporate tax, based on the income earned in a particular financial year.
Corporate tax rate in India
Rate for domestic businesses
Top tax consultants in India can explain the tax matter in a better way. Hiring one such professional works in the favour of a company. However, companies must remain aware of the current tax slabs and exemptions.
Any company registered under the Companies Act 1956, whether public or private, have to pay this tax. At present, domestic companies are taxed at the rate of 30%. However, a surcharge of 7% may be levied if the income falls between Rs. 1 Crore to Rs. 10 Crore. In case the income exceeds this range, a surcharge of 12% is levied.
For a domestic company, it is crucial to go ahead with taxation services to realise maximum gains while paying taxes as per the applicable standards. These services are also important to understand recent amendments and tax alterations brought into effect quite recently.
The Government of India has introduced Section 115BAA through the Taxation (Amendment) Ordinance, which came into effect in 2019. Consequently, several alterations to the income tax Act has been made, such as reduction in corporate tax.
Now domestic businesses have the option to pay a tax at a rate of 25.168%. The breakup is given here:
| Base rate (%) | Surcharge (%) | Cess (%) | Net tax rate (%) |
| 22 | 10 | 4 | 25.168 |
Tax rate for foreign companies
Foreign companies have to pay corporate tax on the income earned in a pre-defined time frame. On royalties or fees received, a tax rate of 50% applies. For other income or the balance, a tax rate of 40% applies.
Refer to the table below for surcharge and other fees.
Additional fees
No matter what the level or the net income of a company is, they are subject to pay a health and education cess of 4%.
Indian Corporate Tax Rate – Summary
Tax rates apply depending upon the type of the company and the profits earned by them. Here’s a summary of this system:
| Classification | Domestic company (net annual turnover up to Rs. 250 crores) | Domestic company (turnover exceeding Rs. 250 crores) | A Foreign Company |
| Corporate tax rate | 25% | 30% | 40% |
| Surcharge levied on net income below Rs. 1 crore | Nil | Nil | Nil |
| Surcharge levied on net income ranging between Rs. 1 crore and Rs. 10 crores | 7% | 7% | 2% |
| Surcharge levied on net income exceeding Rs. 10 crores | 12% | 12% | 5% |
Ending note Tax is a complex matter for businesses and they must adhere to the guidelines to keep the tax matter clear. Considering the complexities of the tax matter for companies, they need to have Corporate Taxation Services that can make it simpler for them. Taxation services in India help domestic as well as foreign companies to operate smoothly by avoiding tax related difficulties.