Corporate tax is an essential aspect of India’s taxation system. Levied under the Income Tax Act, 1961, corporate tax applies to both domestic and foreign companies operating in India to ensure that they comply with lawful operations and contribute to the nation’s economic growth. The revenue collected through corporate tax supports infrastructure development, social welfare schemes, defence, education, and healthcare. It is pertinent to note that there are different tax rates for other companies in India. For example, the corporate tax for the domestic company is 25%, whereas startups can claim a 100% tax exemption for a continuous period of three years.
In this blog, we shall understand what corporate tax is in India, its types, structure, and key requirements for businesses.
What is Corporate Tax?
Corporate tax is a tax imposed on the income or profits of companies and corporations. India is governed by the Income Tax Act, 1961, and the Finance Act, which is amended annually. Corporate tax applies to both domestic and foreign companies operating in India.
There are two primary forms of corporate tax:
- Domestic Corporate Tax: Imposed on companies that are incorporated in India.
- Foreign Corporate Tax: Imposed on foreign companies that generate income within India.
Importance of Corporate Tax in India
Corporate Tax in India has a lot of significance, such as:
- Primary Revenue Source for Government: Corporate tax contributes to the government’s revenue, helping fund public infrastructure, welfare programs, and development projects.
- Promotes Economic Stability: By taxing corporate income, the government maintains economic stability, ensuring sustainable growth and fiscal discipline.
- Incentivizes Business Compliance: A structured corporate tax system encourages businesses to comply with the law, ensuring transparency and reducing tax evasion.
- Fosters Economic Growth: Corporate tax policies, such as exemptions and deductions, stimulate investment in sectors like manufacturing, R&D, and infrastructure, promoting overall economic growth.
- Attracts Foreign Investment: Competitive corporate tax rates, especially for new businesses, attract foreign investment, which boosts India’s global position as a favorable business destination.
- Supports the Make in India Initiative: Reduced corporate tax rates for manufacturing companies encourage domestic production, benefiting the “Make in India” initiative and creating jobs.
- Strengthens Regulatory Framework: A well-designed corporate tax structure enhances the efficiency of India’s regulatory framework, contributing to improved ease of doing business.
- Promotes Fair Competition: A standardized corporate tax structure ensures that all companies, regardless of size, contribute fairly to the economy, preventing monopolistic practices.
- Strengthens Global Trade Relations: A fair and competitive tax system ensures that Indian companies remain competitive in international markets, thus strengthening India’s global trade relations.
Tax Rates for Corporations in India
India has a progressive corporate tax structure, with different rates for various categories of companies. The tax rates are subject to change annually through the Union Budget.
1. Corporate Tax Rates for Domestic Companies
- Base Tax Rate:
- For domestic companies with an annual turnover of up to INR 400 crore, the corporate tax rate is 25%.
- For companies with a turnover exceeding INR 400 crore, the tax rate is 30%.
- Minimum Alternate Tax (MAT):
- If a company’s regular tax liability is lower than the MAT, it must pay MAT at 15% of its book profits. MAT ensures that companies with low taxable profits still contribute to taxes.
- Tax on Startups:
- Startups incorporated after April 1, 2016, can enjoy a 100% tax exemption on profits for three consecutive years within the first seven years of their operations, provided they meet certain conditions.
2. Corporate Tax Rates for Foreign Companies
- Foreign companies operating in India are subject to the following tax rates on their income earned in India:
- Royalty Income: 10% (on gross income)
- Fees for Technical Services: 10% (on gross income)
- Business Income: 40% (for a foreign company)
Dedications and Exemptions for Corporate Taxpayers
There are various tax deductions and exemptions allowed under India’s Tax Regime, such as
1. Depreciation
Companies can claim depreciation on assets such as machinery, buildings, and vehicles. Depreciation rates are prescribed by the Income Tax Act and vary for different types of assets. Depreciation is calculated using the Written Down Value (WDV) method or the Straight Line Method (SLM), depending on the type of asset.
2. Business Expenses
The Income Tax Act, 1961 allows companies to claim business expenses incurred in the normal course of operations, such as:
- Salaries and wages
- Rent and utilities
- Legal and professional fees
- Marketing and advertising expenses
- Interest on business loans
3. Research and Development (R&D) Benefits
A company engaged in R&D activities can claim significant tax deductions. The government offers an additional 100% deduction on the expenditure incurred on in-house R&D activities under Section 35 of the Income Tax Act, 1961.
Tax Compliance for Corporate Taxpayers
Corporations must follow a rigorous compliance framework to meet their corporate tax obligations, such as:
1. Filing Income Tax Returns (ITR)
Every company is required to file an income tax return (ITR) annually. The due date for filing ITR is September 30 of the assessment year. Companies need to file ITR-6, which is specifically meant for businesses and companies.
2. Advance Tax Payments
Companies must pay advance tax in four installments throughout the financial year if their estimated tax liability exceeds INR 10,000. These installments are due on:
- 15th June
- 15th September
- 15th December
- 15th March
3. Tax Audit
A tax audit is mandatory for companies whose annual turnover exceeds INR 1 crore. A qualified Chartered Accountant (CA) must conduct this audit to verify the company’s financial statements and ensure compliance with tax laws.
GST and Corporate Tax
The Goods and Services Tax (GST) regime, which came into effect in 2017, also plays a significant role in corporate taxation. Under GST, companies must:
- Register for GST if their turnover exceeds the threshold limit.
- Pay GST on the supply of goods and services.
- Claim Input Tax Credit (ITC) on GST paid on business-related purchases.
GST simplifies the indirect tax structure, but companies must still ensure compliance by filing regular GST returns.
Conclusion
Corporate tax in India plays a pivotal role in the functioning of businesses and the country’s economy. With progressive tax rates, benefits for startups, and tax deductions for various business expenses, companies have multiple avenues to reduce their tax liabilities. However, it is crucial for companies to stay updated with the latest tax laws and ensure compliance to avoid penalties. As the Indian tax system continues to evolve, corporate tax reforms and digitization are likely to enhance transparency and create a more business-friendly environment.
