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Corporate Tax

Corporation Tax in India

Last Updated 31st Oct 2020

  • Corporate tax is applicable on those entities which have a separate legal entity from its founders and have been formed under the Companies Act, 2013 or any previous Companies Act.
  • Currently the companies with turnover upto ₹ 250 crores have to pay corporate tax @ 25%. Whereas, the companies with a turnover above ₹ 250 crores have to pay corporate tax @ 30%.
  • The corporate tax rate for foreign companies depends upon the tax agreement between India and the origin country of the concerned company.
  • Companies hire professionals for effective Corporate Tax Planning. These professionals strategize company financials to reduce the tax and increase profit well within the tax and financial laws.
INCOME TAX CALCULATOR

What is Corporate Tax?

The tax is levied in India based on two approaches, direct tax and indirect tax. The direct tax is levied on all types of assesses, that’s why it is divided into two parts: Income tax and Corporate tax.

The Corporate tax is the tax paid by the registered companies under the Companies Act, 2013 on the profit earned by them in a financial year. The profit of these businesses is taxed at a specified rate which is subject to change as per the discretion of the government.

Corporate Tax in India

In India, corporate tax is levied on both domestic and foreign companies. As like individuals are required to pay income tax based on income, they earn in a financial year, similarly companies are also required to pay tax on their income, which is covered under the corporate tax. Some other popular names of corporate tax are; corporation tax, company tax, etc.

Definition of Corporate

A corporate is an entity which has a separate legal identity from its founders or shareholders. The Companies Act 2013 defines the company as an entity which is incorporated under this Act or any previous company law. The income earned from the business by the company is assessed and computed differently than the computation of income for individuals.

Types of corporate

The companies or corporate in India are classified into two categories:

  • Domestic Corporate: A company that is formed under any of the Indian Company Law is termed as a domestic company. In addition, a foreign company whose control and management are wholly situated in India is also termed as a domestic company.
  • Foreign Corporate: A company who does not have its origin in India and have some or whole part of control and management situated outside India is called a foreign company.

Corporation Tax AY 2020 - 21

Company Type New Corporate Tax Rate Additional Benefit
Companies which do not want to claim any exemption or incentives 22% + applicable cess and surcharge. Effective rate is 25.17%. No Minimum Alternative Tax to be paid by these companies.
Companies which intends to claim exemption or incentives 30% Minimum Alternative Tax reduced to 15% from earlier rate of 18.50%.
New Manufacturing Companies 15%, reduced from earlier level of 25% These new manufacturing companies must have been incorporated on or before Oct 2019 and must start production before March 2023.

Corporation Tax Rates in India for Domestic Companies

The domestic company or corporate is the entity whose management is situated wholly in India. The corporate tax applicable to the domestic companies for the A.Y. 2019-20 is charged based on turnover in a financial year. The rates are:

Gross Turnover Tax Rate
Upto ₹ 250 Crore 25%
More than ₹ 250 crore 30%
  • In a financial year, if the annual revenue of a company exceeds ₹ 1 crore, then a surcharge of 7% is levied on such corporations. If the revenue exceeds ₹ 10 crores the surcharge is 12%.
  • In addition, a Health and Education Cess of 4% is applicable along with a corporate tax on domestic companies.
  • In case a domestic company has an overseas branch, then the same rate would be charged on the total earnings of the company, including domestic and overseas. Thus, it is to be noted that corporate tax laws in India take the abroad earnings of domestic companies into consideration as well.

Corporate Tax for Foreign Companies

A company who's not of the Indian origin and its management is situated wholly outside India. Such corporations are not registered under the Companies Act, 2013. Therefore, the taxation system for such companies is different from domestic companies. The taxation system in case of foreign corporates depends upon the tax agreement between India and the origin country of such foreign company.

Income Tax Rate
Any royalty or fee for technical services received by a foreign company from an Indian concern or Indian government as per any agreement made before April 1, 1976 which is approved by the central government. 50%
Any other income 40%

A surcharge of 2% is levied if the income is between ₹ 1 crore to ₹ 10 crores. In case it exceeds ₹ 10 crores then the applicable surcharge is 5%.

Corporate Tax Rebates

There are various provisions in the income tax law which provides rebates and deductions to the companies in the process of calculating their income for corporate tax. Some of the key rebates and deductions are:

  • Some interest income received by domestic companies is deductible from the profit calculated for corporate tax.
  • In case the company has set up new infrastructure or sources of power, then those are subject to deduction.
  • The company can carry forward the losses incurred for a maximum of 8 years.
  • In case a domestic company receives a dividend from another domestic company.
  • The capital gain earned by corporate entities is not taxed.
  • In case of export and new undertakings, deductions are allowed in some cases.

Corporation Tax Planning

Corporate Tax Planning means strategizing the financials of the corporation to minimize tax outgo and maximize profits. This objective is achieved by better utilizing the available exemptions, rebates and deductions. Effective tax planning is tricky and sometimes risky as well; that is why corporates hire professionals for this task. These professionals are well-tuned with various provisions of the tax, and they keep themselves updated with the latest developments with regards to rules and regulation of the corporate tax.

An important aspect to understand here is, tax planning is not tax evasion. Tax evasion is against the law while tax planning is about strategizing the financials of the company in such a way that the resultant tax payable is less and profit is more within the frame of tax laws. Thus, the corporation must be in line with the tax laws and well versed with financial laws and rules set up by the Indian Government.

Dividend Distribution Tax

A dividend is the distribution of profits by the company to its shareholders. Dividend Distribution Tax (DDT) is charged on the distributions of such profits. The profits are distributed by the corporate after deducting the corporate tax, which is levied on the net profit of the company. Currently, the dividend distribution tax is payable in the hands of the company at an effective rate of 17.65%.

The Dividend Distribution tax is to be removed from F.Y. 2021. Thus the current assessment year is the last year for the applicability of Dividend Distribution Tax.

FAQs

What is corporation tax in India?

The corporation tax in India is the tax levied on the net profits of the company after deducting applicable expenses and deductions.

What is a corporation tax rate?

The corporation tax rate for domestic companies with turnover upto ₹ 250 crores is 25%, and for companies with a turnover above ₹ 250 crore is 30%.

What is the difference between income tax and corporate tax?

Income tax is levied on the income of individuals. In contrast, corporate tax is levied on the income of companies which are formed under the Companies Act, 2013 or any previous company law.

How do I calculate my corporation tax?

The net profit of the corporation after paying interest on debts is multiplied with the tax rate to arrive at the payable corporation tax amount.

How much tax do I pay as a limited company?

The amount of tax you have to pay as a limited company depends solely on the amount of net profit for the concerned financial year.

Is corporation tax calculated on gross profit?

No, corporation tax is calculated on net profit after paying interest on debts.

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