In India, the revenue of companies is taxed as per the provisions of the Income Tax Act, 1961. Corporate taxation is an important component of the country’s fiscal structure, with substantial contributions to government revenue. A company, whether domestic or foreign, is considered a separate legal entity and is liable for paying taxes on any income earned during a fiscal year.
Domestic companies are taxed on their total income, but foreign companies are taxed only on income actually received or constructively received in India and on income accrued or arisen in India. The tax rate that applies depends on several factors, such as the nature of the firm (domestic or foreign), its turnover, and whether the firm is availing itself of one of the special tax regimes put in place by the government to ensure investment and ease of doing business.
Corporate tax involves not just the usual rate of tax but also surcharges and cess charges. The firms are also subject to some rules related to advance tax, filing of income tax returns, and the minimum alternate tax (MAT). The levy on corporate earnings promotes responsibility, transparency, and national growth by assisting the government in funding public services and infrastructure.
What is Corporate Tax?
Corporate tax is a direct tax charged by the state on business profits and revenues earned by corporations and companies. It is governed in India through the Income Tax Act of 1961 and managed by the Central Board of Direct Taxes (CBDT). It applies to all corporations that carry out business activities within India, including both local and foreign companies, subject to varying rates depending on the company type, turnover, and applicable tax laws.
A domestic company is taxed on its entire income, whereas a foreign company is taxed only on income earned or arising in India. The tax rate on domestic companies is usually in the range of 15% to 30%, based on factors like turnover and whether the company qualifies for concessional tax regimes under sections such as 115BAA or 115BAB. Apart from the regular tax, businesses also have to pay a surcharge based on income slabs and a health and education cess of 4% on the total tax.
Corporate tax is a crucial component of the government’s income and is critical in financing public welfare schemes, infrastructure construction, and economic activities. It makes sure that companies pay their share towards the growth of the country fairly while upholding the principles of transparency and accountability in their financial reports.
Types of Corporate Taxes
India’s corporate tax policy strives to be both equitable and flexible, with standard rates for conventional businesses and incentives through concessional regimes to encourage manufacturing and investment. Though the conventional system provides simple tax rates along with allowances and Minimum Alternate Tax (MAT), the new concessional tax regimes offer lower rates with no allowances so that companies can choose the one that best suits their financial approaches. Understanding these categories helps organisations comply and make tax planning decisions based on sound information.
Corporate tax is a tax on the profit or income of corporations. It is regulated in India by the Income Tax Act of 1961 and is levied on both domestic and foreign corporations. The corporate tax structure is not the same for all companies; it depends on a number of factors, such as the residency status of the company, turnover on an annual basis, nature of operations, and the chosen tax regime.
1. Alternative Tax for Companies Under Concessional Regimes
Firms choosing Sections 115BAA or 115BAB are not liable to pay MAT, but they lose the right to claim deductions or exemptions. This changes their tax base to gross taxable income instead of adjusted book profits (such as in MAT), thus removing incentives.
2. Dividend Distribution Tax (DDT) [Repealed w.e.f. FY 2020-21]
Earlier, corporations had to pay taxes on dividends distributed to shareholders. DDT has now been withdrawn from the Assessment Year 2021-22, and dividends are taxed in the hands of the shareholders.
3. Domestic Company Taxation
A domestic company is a body that is registered under the Companies Act of India and whose control and management are located within India. The income of domestic companies is taxed as follows:
Regular tax regime:
- Businesses making an income of ₹400 crore or less in the last financial year are charged a rate of 25%.
- Those making more than ₹400 crore are charged a rate of 30%.
- Surcharge: 7% on income between ₹1 crore and ₹10 crore.
- 12% of the income of more than ₹10 crore.
- A 4% Health and Education Cess is charged on the total tax amount along with the surcharge.
Concessionary tax regimes:
To promote investments and ease the financial strain on corporations, the government has made available voluntary concessional tax rates.
- Section 115BAA applies a 22% tax rate, making the effective rate around 25.17% after surcharge and cess.
- No deductions or exemptions are allowed (e.g., Sections 10AA, 35AD, 80IA).
- Minimum Alternate Tax (MAT) is not applicable.
- Section 115BAB is for new manufacturing companies, subjecting them to a 15% tax rate (effective rate of around 17.16%).
- This is for new domestic manufacturing companies formed on or after October 1st, 2019, and which begin operations before March 31st, 2024.
- MAT is not applicable.
4. Taxation of Foreign Companies
A foreign company is an organization that is not incorporated in India but controlled and run from outside the country. Income will be taxed only if it is received or earned within India.
Tax Rates:
- A flat tax rate of 40% is levied on taxable income.
- Surcharge: 2% on income over ₹1 crore but not more than ₹10 crore.
- 5% for income over ₹10 crore.
- The Health and Education Cess forms a 4% tax and fee.
Foreign companies may also be required to remit withholding tax on dividends, interest, technical charges, and royalties earned from Indian sources, as provided for by the provisions of the Income Tax Act or the relevant Double Taxation Avoidance Agreement (DTAA).
5. Minimum Alternate Tax (MAT)
This tax was imposed so that companies with high profits and zero or very small taxable income (for purposes of deductions and exemptions) pay at least the minimum in taxes. It is to be applied to entities that do not opt for Sections 115BAA or 115BAB. Book profits are subject to taxation of 15% (besides fees and cess) under Section 115JB. The MAT credit can be brought forward for 15 years to set against future taxation.
Rates of Corporate Tax
India’s company tax rates are regulated under the Income Tax Act of 1961 and are affected by factors like business type (domestic or foreign), turnover, and whether the company uses any concessional tax regimes. The government updates the rates from time to time to ease the conduct of business, attract investment, and keep up with international trends in taxation.
1. Domestic Companies (Regular Tax Regime):
- Companies with revenues up to ₹400 crore have a tax rate of 25%.
- Companies with revenues more than ₹400 crore have a tax rate of 30%.
- The surcharge, health, and education cess marginally increase the effective rate.
2. Domestic Companies (Concessional Tax Regimes – Optional):
- Under Section 115BAA, domestic businesses can choose to pay tax at 22% if they waive all exemptions or deductions. The effective rate of tax, including the surcharge and cess, comes out to be around 25.17%.
- New manufacturing companies incorporated on or after October 1, 2019, and which started production on or before March 31, 2024, may avail a tax rate of 15% under Section 115BAB. The effective tax rate in view of surcharge and cess is around 17.16%.
3. Foreign companies are levied the same rate of 40% on income earned or attributed to have been earned in India. With the addition of surcharge and cess, the effective rate is brought up to around 43.68%, depending on the slabs of income.
Calculation of Corporate Tax
Corporate taxation in India is computed by analysing a firm’s overall taxable income and imposing the relevant tax rates, which can incorporate applicable surcharges and cesses. The corporate taxation calculation demands in-depth knowledge of tax rates, deductible expenses, and compliance with taxation laws. Firms have the option to minimise their tax burden by opting for the standard or concessional taxation regime, based on the fiscal structure and long-term goals.
1. Compute the Gross Total Income
The initial step is to ascertain the business’s Gross Total Income from all available sources, which can include:
- Principal source of income: profession or business.
- Capital gain.
- Income from properties (where applicable).
- Other sources of income, e.g., interest and dividends.
2. Take deductions and exemptions
Deduct all qualifying business expenses, allowances, and deductions allowed by the Income Tax Act. This can include:
- Depreciation of assets
- Rent, wages, and administrative costs• Firms under the regular tax regime can avail deductions under certain sections (e.g., 80JJAA, 80-IA) but not under Sections 115BAA or 115BAB.
Firms that enjoy concessional tax rates under Sections 115BAA or 115BAB are usually not allowed to avail most of the deductions and exemptions.
3. Calculate Taxable Income
After subtracting all applicable adjustments and deductions, you will find the taxable income of the firm.
4. Apply the applicable tax rate
Use the appropriate corporate tax rate based on whether the company is domestic or international and if it has availed itself of a tax concession.
- For example:
- Domestic companies’ standard rates are 25% or 30%.
- Concessional rates are 22% (Section 115BAA) and 15% (Section 115BAB).
- Foreign companies use a rate of 40%.
5. Add the surcharge (if any)
If the taxable income falls under the following:
- A 7% surcharge is on income above ₹1 crore but not over ₹10 crore.
- A 12% surcharge is on income above ₹10 crore.
- A surcharge of 2% or 5%, as applicable, is applicable to foreign companies.
6. Add Health and Education Cess
A 4% cess on overall income tax and surcharge.
7. Check MAT liability (if any)
If a company’s tax liability is less than 15% of the book profit and not under a concessional scheme, it might be subject to Minimum Alternate Tax (MAT) at 15% (along with surcharge and cess). • Pay the higher of normal tax or MAT.
8. Final corporate tax liability
The entire tax liability of the company is calculated by adding the tax rate, surcharge, and cess (or MAT, if any).
Illustration (for a Domestic Company under Normal Regime):
- Taxable income: ₹8 crore
- Base tax @ 30%: ₹2.4 crore
- Surcharge @ 7%: ₹16.8 lakh
- Tax + surcharge: ₹2.568 crore
- Health and education cess @ 4%: ₹10.27 lakh
- Total tax payable: ₹2.6707 crore
Conclusion
India’s corporate tax structure is well-designed and flexible, covering conventional tax regimes, Section 115BAA and Section 115BAB, minimum alternate tax, and taxes levied on foreign companies. These segments are framed to provide equitable revenue collection, induce investment, and uphold tax equality across business sectors. Firms can choose the most appropriate regime based on their financial strategy and regulatory requirements. Understanding these tax categorisations is critical in designing an effective tax planning, legal compliance, and contributing significantly to the economic growth of India and its fiscal strength.
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