The Indian tax system is separated into two categories: Direct Taxes and Indirect Taxes. Direct taxes are charged on the revenue that various sorts of business organisations produce within a fiscal year. There are many sorts of taxpayers enrolled with the Department of Income Tax who pay taxes at varying rates. For example, a taxpayer who is both an individual and a corporation (Corporate Tax in India) is not taxed at the same rate.
Consequently, Direct Taxes are further classified into:
- Personal Income Tax: The tax paid by individual taxpayers is referred to as the personal income tax. Individuals are taxed at varying rates based on tax brackets.
- Corporate Tax: The tax paid by domestic and international corporations on their revenue in India is the corporate income tax (CIT). The CIT is taxed at a specified rate as defined by the income tax laws, subject to annual adjustments in the federal budget.
Corporate Entities: Definitions and Types
A corporate entity or corporation is an artificial person that is legally recognised as having rights and responsibilities, giving it a separate legal identity from that of its stockholders. In India, corporations are divided into the following two categories:
- Domestic Companies: A domestic company is a firm incorporated in India and registered under Companies Act, 2013. Even a foreign firm can be regarded a local company if the management and control of its Indian subsidiary are entirely headquartered in India.
- Foreign Companies: In the case of Foreign Company, a firm that is located outside of India and not in India is referred to as a foreign company. Again, if a portion of the management and control of a foreign firm is located outside of India, it is also considered a foreign company.
This distinction is significant because domestic firms in India are taxed on their global income whereas foreign businesses are taxed exclusively on the money generated by their Indian activities.
Corporate Tax in India
A corporation is a legal body that is distinct and independent from its stockholders. Under the Income-tax Act, both domestic and international corporations are required to pay corporate income tax. While a domestic corporation is taxed on its global income, a foreign firm is taxed solely on the income produced within India, i.e., the money that is accruing or being received in India.
What is meant as Income of a company?
Before understanding the tax rate and how the tax will be computed on a company’s income, we first get familiar with the various sorts of income earned by businesses. Here it is:
- Profits from the firm
- Capital gains
- Rental income
- Income from other sources of income such as dividends, interest, etc.
Calculation of Net Income for Corporates
On the basis of a company’s net revenue or net income, corporate tax is determined. A company’s net income/net revenue is the sum remaining after deducting all required costs. A corporation incurs a variety of costs for the sale of its products. These expenditures include:
- Total selling price of products.
- Selling expenses.
- Costs incurred for administrative functions.
A company’s income consists of business net profit, rent income, capital gains, and revenue from other sources, such as interest income and dividend income.
Thus, Net Revenue = Gross Revenue – (Expenses + Depreciation)
Corporate Tax Rebates
As a firm is subject to several forms of corporate taxes, there are corresponding rules for corporation tax refunds and deductions. The most important considerations are as follows:
In certain situations, interest income is deductible.
- Capital gains of a corporation are not subject to taxation.
- Dividends may also be eligible for tax rebates under certain situations.
- The corporation is permitted to carry losses incurred in the company for up to eight years.
- If a business instals new energy sources or infrastructure, it may be liable to various deductions.
- In the event of exports and new business ventures, a corporation is eligible for specific tax deductions.
- Diverse provisions for deductions are permitted if a corporation intends to invest in venture capital firms or funds.
- If a domestic corporation gets dividends from another domestic corporation, it is permitted to deduct such dividends as rebates.
Basics of Corporation Tax Planning
Every taxpayer, even companies, must engage in tax planning in order to maximise their earnings by minimising their tax obligations. Corporate tax planning requires the establishment of a strategy in order to attain this objective; thus, firms employ specialists who are well-versed in the rules and regulations governing tax payment legislation. As every corporation entails substantial financial risk, proper corporate tax preparation is essential.
It is essential to remember that corporate tax planning and tax evasion are two distinct ideas. Tax evasion is the non-payment of taxes and is a criminal offence. Tax planning, on the other hand, is a technique for determining the amount of tax owed in such a manner that the corporation has a greater net profit and pays less tax. For efficient corporate tax planning in India, the business must be informed of all tax laws and financial regulations established by the Indian government.
Corporate Tax Rates for Domestic Companies Financial Year 2022-23
|Range of income||Rate of tax|
|Up to Rs.400 crore gross turnover||25%|
|Gross turnover that exceeds Rs.400 crore||30%|
|Particulars||Domestic Companies Tax rate|
|If total income range is between Rs.1 crore and Rs.10 crore||7% as per rate of tax above|
|If total income range exceeds Rs.10 crore||12% as per rate of tax above|
Corporate Tax Rates for Foreign Companies for Assessment Year 2022-23
|Nature of income||Rate of tax|
|Royalty or fees received for any technical services from the government or an Indian concern under agreements made before April 1, 1976, which is approved by the central government||50%|
|Any other kind of income||40%|
|Particulars||Foreign Companies Tax rate|
|If total income range is between Rs.1 crore and Rs.10 crore||2% as per rate of tax above|
|If total income range exceeds Rs.10 crore||5% as per rate of tax above|
Health and education cess
Before the health and education cess is applied to the overall tax liability, 4 percent of the computed income tax plus the relevant surcharge are added.
Minimum Alternate Tax (MAT)
The alternative minimum tax rate cannot be less than 15% for both local and international corporations. As per section 115JB, this is based on the book profits. MAT is levied at a rate of 9 percent plus surcharge and cess as applicable for a business that derives its income predominantly in convertible foreign currencies and is a subsidiary of an international financial services centre.
Dividend Distribution Tax
Dividend refers to the distribution of a company’s earnings to its shareholders, and Dividend Distribution Tax (DDT) is imposed on these gains. Corporation Tax, on the other hand, is the tax computed on a company’s net profit after costs have been deducted. Therefore, dividend distribution tax is a form of tax that a corporation must pay on the dividends it pays to its shareholders; bigger dividends result in a heavier tax burden for the corporation. It may also be referred to as the proportion of dividends given to shareholders by a corporation.
The tax on dividend distributions is controlled by Section 115-O of the Income Tax Act of 1961. Currently, the dividend distribution tax due on dividends issued to shareholders of a corporation is 15% of the gross amount distributed as dividend, which results in an effective tax rate of 17.65%.
Corporate tax planning may be defined as the process of structuring one’s financial company affairs so as to maximise profit and reduce due tax by taking use of permissible deductions, refunds, and exemptions. Tax administration is a dangerous and difficult endeavour, and most corporations with a substantial amount of money at stake use financial professionals to handle the taxing procedure. In India, too, there are a variety of financial institutions that provide corporate tax advice and administration. Tax planning requires due care and absolute understanding of all tax laws and their accompanying rules and regulations.
Tax planning for corporations is distinct from tax avoidance and non-payment. Tax planning is the process of arranging one’s finances such that the tax burden is minimised, and the profits are maximised. One of the most important aspects of tax planning is that it strictly adheres to the legal and financial regulations established by the Indian government.