Corporation Tax in India

Taxes are the primary source of revenue for the government, with which it provides all kinds of services to its citizens. Taxes and the taxation rules are often the most confusing and complex topics of any financial system. The complexity arises due to different types of taxes with different tax rates, not to mention endless amendments in taxation rules. Corporate tax being one among these taxes, let’s help ourselves by taking a look at how exactly it works.

Corporation Tax

Corporation tax, also called corporate tax, is a tax levied on the net income of a company. Under the Companies Act 1956, both public and private companies that are registered in India are liable to pay corporate tax. 

Who Should Pay Corporate Tax in India?

The following entities are liable to pay corporate or corporation tax:

• Corporations incorporated in India.

• Corporations that do business on income from India.

• Foreign enterprises that are permanently established in India.

• Corporations deemed to be residents in the country for tax purposes.

Types of Corporate Entities

Corporations in India are generally classified into two different types, as given below:

• Domestic Corporation: Any company established in India and registered under India’s Companies Act, 2013, is called a Domestic Corporation. A foreign company can also be considered as a domestic corporation if control over the Indian wing of the company is wholly based in India.

• Foreign Corporation: A company established overseas is called a foreign corporation. Also, if part of a company’s control and management is situated outside India, it is called a foreign company.

This distinction is quite important, as a domestic company in India is charged corporate tax on its universal income, while a foreign corporation is charged tax only on income generated through operations in India.

Taxable Income for Corporate Tax

Taxation of corporate entities is similar to that of individual taxpayers. Though the rules may differ for some jurisdictions, the tax is usually imposed on net profits. Certain corporates file for reorganizations, which exempts them from being taxed. Charities and trusts may also be exempted from tax.

Calculation of a Corporate's Net Income 

Corporate tax is computed based on the net revenue or net income generated by a company. Net income/net revenue is the total amount left with the company after the necessary deductions for various expenses have been made. There are a lot of expenses that a company incurs for selling goods. Some of these expenses are listed below:

• The total cost of goods sold

• Selling expenditures

• Depreciation

• Expenses incurred for administrative purposes

The income of a corporation includes net profit earned from the business, capital gains, rental income, or income from other sources, such as interest or dividend income. 

Net Revenue = Gross Revenue – (Depreciation + Expenses)  

Corporate Tax Rates in India

The rate of corporate tax in India varies depending on the type of company, i.e., domestic and foreign corporations pay tax at different rates. It also depends on the nature of the corporate entity and the revenue earned by them. For the assessment year 2019-2020, the corporate tax rates in India are as follows:

Type of Corporate Entity	Turnover	Tax Rate
Domestic	< 250 crores	25%
Domestic	> 250 crores	30%
Foreign	any	40%

Corporation Tax for Domestic Entities

A domestic company is established in India and registered under India’s Companies Act, 2013. A foreign company is also considered to be a domestic corporation if the Indian wing’s control is based wholly in India.

• The tax rate for a domestic corporation is :

  • 25% for a company that has a turnover less than 250 crores

  • 30% for a company that has a turnover of more than 250 crores

• In addition, cess and surcharge are levied as follows:

  • Cess: 4% of corporate tax

  • Surcharge: Surcharge depends on the amount of taxable income

Turnover	Surcharge
Taxable income > 1 crore	7%
Taxable income > 10 crore	12%

Corporate Tax for Foreign Entities

A foreign company is one that is established overseas. Also, if part of a foreign company’s control and management is situated outside India, then it is deemed to be a foreign company. These companies are not registered under the Companies Act 2013. Hence, the rules governing the taxation process of a foreign company are entirely different from that of a domestic company. It depends on the taxation agreement that has been made between India and the concerned foreign country. For example, the corporate tax rate for a foreign corporation that is based in the USA will depend on the taxation agreement that has been made between the USA and India. The tax rate also varies based on the nature of the company’s income.

Nature of Income	Tax rate
Royalty received as fees for any technical service rendered for an Indian concern approved by the central government, under an agreement made before April 1, 1976	50%
Other income from Indian operations	40%

Corporate Tax Rebate

There are certain provisions in place for corporation tax rebates or deductions. Let’s look at a few important ones:

• Capital gains of a corporate entity are not taxed.

• Income from interest can be deducted in certain cases.

• Dividends may be subject to tax rebate (as per terms and conditions).

• A corporate entity can carry losses incurred in the business for a maximum period of 8 years.

• New sources of power or new infrastructural facilities are subject to certain deductions.

• A certain amount of deductions are allowed in the case of exports and new undertakings by a corporate.

• If the corporate wishes to entertain venture capital enterprises or funds, various provisions for deductions are allowed.

• Dividends from other domestic corporations can be deducted as rebates.

Corporation Tax Planning

Every business corporation requires tax planning, such that they can maximize profits by reducing their tax payment burden. Corporate tax planning involves the development of a strategy to achieve this goal. Hence, corporations hire professionals who are well-tuned with the rules and regulations regarding corporate tax. Proper corporate tax planning is a must for every business that holds financial stakes.