The term “corporate tax,” sometimes known as “corporation tax” or “business tax,” refers to a type of direct tax levied against the profits or assets of corporations or other similar legal entities. These taxes are common in many nations, and they might also be levied at the state or local levels. The levies can alternatively be referred to as capital taxes or income taxes. Read here to learn more.
A corporate is a business that has received state authorization to operate independently of its shareholders and as a single legal entity.
The Income Tax Act divides corporations into two categories: domestic companies and international companies to determine the corporate tax rate in India.
A corporate tax is a tax on a corporation’s profits. Taxes are paid on a company’s taxable income, which is revenue less general and administrative (G&A), selling and marketing, R&D, depreciation, and other operating expenditures.
A corporate entity’s net income or profit from its operations, whether domestic or international, is subject to the direct tax which is the corporation tax or corporate tax.
The Corporate Tax Rate is the amount of tax levied by the terms of the Income Tax Act of 1961.
Depending on the kind of business entity and the various revenues generated by each corporate entity, the corporate tax rate is based on a slab rate structure.
Corporate tax rates vary greatly amongst nations, with some having meager rates and being labeled as tax havens.
- The effective corporate tax rate, or the rate a corporation pays, is typically lower than the statutory rate, which is the declared amount before any deductions because corporate taxes can be reduced by a variety of deductions, government subsidies, and tax loopholes.
Corporate tax in India
As a source of revenue, the Indian government levies corporation taxes on businesses. The basis for calculating this tax is a company’s net income. These are the various sources of income a business receives.
- Profits earned by the business
- Income from renting a property
- Capital gains
- Income from other sources
Companies, both domestic and foreign, are liable to pay an annual corporate tax. It is, therefore, based on the above income earned in a given financial year.
- Both public and private businesses that are registered under the Companies Act of 1956 must pay this tax.
- Currently, domestic businesses pay a 30% tax rate. Additionally, if net income is between Rs. 1 crore and Rs. 10 crores, the Income Tax Act imposes a 7% surcharge.
- A 12% surcharge is applied to a company’s net income exceeding Rs. 10 crores.
- 2019 saw the introduction of Section 115BAA by the Indian government through the Taxation (Amendment) Ordinance.
- This resulted in many changes to the Income Tax Act, including a reduction in the corporation tax rate for domestic businesses.
- Domestic firms now can pay tax at a rate of 25.168% thanks to Section 115BAA.
- On the money they earn within a certain period, foreign corporations are required to pay corporate income tax.
- Royalties and other fees are subject to a 50% corporation tax rate in India, while the remaining revenue is subject to a 40% tax rate.
- A 2% surcharge is applied to foreign companies with net incomes between Rs. 1 crore and Rs. 10 crore.
- If its net income surpasses Rs. 10 crores, a 5% surcharge will be added.
- No matter the level of a company’s net income, a 4% Health and Education Cess is imposed on the total income tax and the surcharge.
- Additionally, under Section 115JB of the Act, businesses receiving advantages under Section 115BAA are excluded from paying Minimum Alternate Tax (MAT).
- MAT is applied to start with AY 2020–2021 at a rate of 15%.
The Taxation Laws (Amendment) Bill, 2019
- Currently, domestic companies with an annual turnover of up to Rs 400 crore pay income tax at the rate of 25%. For other domestic companies, the corporate tax rate is 30%. The Bill provides domestic companies with an option to pay tax at the rate of 22%, provided they do not claim certain deductions under the Income Tax Act.
- The Bill provides new domestic manufacturing companies with an option to pay income tax at the rate of 15%, provided they do not claim certain deductions. These new domestic manufacturing companies must be set up and registered after September 30, 2019, and start manufacturing before April 1, 2023.
- A company can choose to opt for the new tax rates in the financial year 2019-20 (i.e. assessment year 2020-21) or any other financial year in the future. Once a company exercises this option, the chosen provider will apply for all subsequent years.
- Provisions regarding payment of Minimum Alternate Tax (MAT) will not apply to companies opting for the new tax rates. MAT is the minimum amount of tax required to be paid by a company, in case its normal tax liability after claiming deductions falls below a certain limit. The Bill adds that the provisions regarding MAT credit will also not apply to companies opting for the new rates.
- The Ordinance reduces the MAT rate (applicable for companies not opting for the new tax rates) from 18.5% to 15% with effect from the financial year 2019-20. The Bill amends this provision by making it effective from the financial year 2020-21.
The government has gradually cut the business tax rates to make India more competitive on a global scale.
The reduced corporate tax rate of 25% was extended to all businesses with an annual turnover of up to Rs 400 crore by the Union Budget 2019–20. It was anticipated that this would apply to 99.3% of businesses.
For newly created domestic manufacturing units, a favorable tax regime of 22% for existing businesses and 15% for corporations was also introduced, providing they do not take advantage of any specific deductions or incentives. The last day to use this is March 31, 2024.
Also, India’s corporate tax collections exceeded 3% of the country’s gross domestic product (GDP) for the first time in two years.
-Article written by Swathi Satish