If you read through the Income Tax Act of India, 1961, you will find several types of taxes mentioned in there. The ones we are familiar with include GST, income tax, service tax, and capital gains tax –which we also pay regularly.
But did you know that even corporation tax is a significant contributor to India’s tax revenue? In fact, the corporate sector in India is so huge that the country’s Fortune-500 companies had close to INR 4.8 trillion in profits in 2018, and this was after paying taxes.
However, despite the corporate sector’s massive contribution to India’s tax revenue, many people are unfamiliar with how corporation tax works. We get that it sounds really boring and complicated, but it’s rather simple.
So, if you wish to know what is corporate tax and how it works in India, you’re at the right place. We are going to discuss the topic at length, leaving you with all the essential information on corporation tax. Let’s get started!
- Corporation tax is a form of direct tax that is imposed on the net revenue of domestic and foreign companies.
- In India, corporation tax does include deductibles like income depreciation, administrative expenses, cost of goods sold (COGS), and selling goods expenses.
- The corporation tax that a company has to pay depends on its annual earnings as well as the slab rates released by the Indian government.
- Corporate tax does not include the dividends that a corporate entity offers its shareholders.
- A foreign corporation only has to pay tax for the income or profits earned via operations in India.
What is Corporate Tax?
Corporate tax is a type of direct tax levied by the Indian government. As per this tax, all companies, domestic and foreign, are legally required to pay taxes on their revenue and profits. The government then utilizes corporate taxes for the country’s growth and development by undertaking several initiatives, such as public welfare schemes, expansion of public infrastructure, and more.
However, corporation tax is imposed after deducting the company’s COGS (cost of goods sold), SG&A (selling general and administrative expenses), income depreciation, and related expenditure.
Additionally, the slab rate for corporation tax primarily depends on the entity’s profit range. This means that the higher a company’s net income, the higher the corporation tax. And you can say that corporation tax is the same as income tax, but for companies instead of citizens.
Here are the recent slab rates for corporation tax in India:
|Type of Corporation||Income Range||Corporation Tax Rate||Surcharge on Net Income Between Rs. 1 Crore and Rs. 10 Crore||Surcharge on Net Income Exceeding Rs. 10 Crore|
|Domestic Corporation||Gross Turnover of Up to Rs. 400 Crore ||25%||7%||12%|
|Domestic Corporation||Gross Turnover Above Rs. 400 Crore ||30%||7%||12%|
|Foreign Corporations||Royalty/Fees Received from the Indian Government||50%||2%||5%|
|Foreign Corporations ||All Other Kinds of Income from Indian Operations||40%||2%||5%|
Note: While these are the corporation tax slab rates for Assessment Year 2021-22, you should check out the Income Tax Department’s official website for more information.
Are you wondering why foreign companies are required to pay corporation tax and how it works? Well, that’s what we’re going to discuss next, so make sure you keep reading!
Who Needs to Pay Corporation Tax?
In India, a corporation (or corporate entity) is an artificial person with certain duties and rights so that it has a legal identity independent from that of its shareholders. This also means that a company’s income is assessed without considering the dividends offered to its shareholders. Instead, the corporate dividend tax is calculated individually, but more on that later.
This means that all corporate entities (minus the dividends provided to stakeholders) in India are required to pay corporation tax. However, they are classified into the following two types:
Any corporation (public or private) that has been established in India and is also registered under the Indian Companies Act, 2013 is referred to as a domestic corporation. Similarly, if a foreign company’s management and control are completely situated in India, it will also be considered a domestic corporation.
As the name implies, foreign corporations are companies that are based outside of India. Similarly, if the entity’s control and management (or part of it) are situated overseas, it is referred to as a foreign corporation.
But how do corporation tax payments differ for domestic and foreign companies? Domestic entities are required to pay the tax on their universal income. However, foreign entities have to pay corporate tax only for the income generated through their operations in India.
What Do You Pay Corporate Tax On?
As we discussed in the beginning, corporation tax is imposed on a company’s net income or revenue. In this case, net income refers to the amount left with the entity after deducting essential expenses, particularly those incurred for selling goods – which are as follows:
- Total COGS (cost of goods sold)
- Income depreciation
- SG&A (selling goods and administrative expenses)
The net revenue includes the corporation’s earned net profit, rental income, interest income, dividend income, or capital gains. In simple terms:
Net Income = Gross Income – (Depreciation + Incurred Expenses)
Additionally, if a domestic corporation has its branches in foreign countries, then corporation tax is also charged on its global revenue.
What is Corporate Dividend Tax?
If you own a corporation, you can distribute some profits to your shareholders in the form of dividends. However, according to Section 115-O of the Indian Income Tax Act of 1961. dividends are taxable. So, corporate dividend tax, which is also known as Dividend Distribution Tax, is the amount (or percentage) you will pay to the government for the distribution of dividends to shareholders.
This also means that the dividends provided to the shareholders will be exempt from taxes so as to avoid double taxation. At present, the corporate dividend tax rate that companies are liable to pay rounds off to 15%. But since this is only applicable to the gross amount distributed as dividends, the effective rate comes close to 17.5%.
Thus, the corporate dividend tax is calculated individually and is not part of a company’s corporation tax. Plus, it is imposed on both domestic and foreign entities.
What is Corporate Tax Planning?
Let’s say you’re a salaried professional who has to pay an income tax of 20% each year. But when it comes to filing your ITR, you do everything to minimize the total cost you pay towards income tax. You invest in tax-saving instruments, buy insurance policies, and open a savings account, all of which help you save a few extra bucks.
But what about corporations? Is there anything they can do to minimize how much they spend on taxes? Well, this is where corporate tax planning comes in. It is nothing but a strategy designed to maximize a company’s profits and avoid monetary risks.
Although the specifics of corporate tax planning differ from one corporation to another, a common step is to hire professionals who can aid with tax payments and savings. Additionally, corporate tax planning also involves being familiar with Indian tax laws and the relevant rules and regulations.
However, you should know that corporate tax planning is all about taking the legal route. Although some people might confuse it with tax evasion, corporate tax planning is, in fact, quite beneficial for profit maximization.
Did You Know?
As per a survey conducted by the Fight Inequality Alliance in 2021, 65% of respondents believed that corporations (and wealthy individuals) should not receive tax rebates. This came after corporation taxes were brought down from 30% to 22% in 2019 – which also resulted in severe tax revenue losses.
Key Benefits of Corporate Tax
Now that we’re done discussing the basics of corporation tax, let’s look at some of its key benefits:
Source of Revenue for the Government
One of the most important benefits of corporation tax is that it can be utilized as a revenue source by the Indian government. This means that the taxes collected from corporations is used for the economy’s growth, which includes several development initiatives and programs. And since the corporate sector in India is quite vast, the taxes become a steady income source for the government.
Reduced Liability for Corporate Dividend Tax
As we mentioned earlier, the corporate dividend tax is not part of the general corporation tax that companies pay. Instead, it is calculated separately at a rate of 15%, which is comparatively lower. This helps corporate entities reduce their liabilities as they pay a tax for distributing dividends to shareholders. Additionally, it helps companies avoid double taxation.
Exemptions on Minimum Alternate Tax (MAT)
In India, all companies are liable to pay MAT or Maximum Alternate Tax. However, there are certain regulations that allow for exemptions on MAT, particularly for foreign companies. For instance, corporations that are in businesses like shipping, life insurance, oil exploration, air transport, and construction can benefit from Maximum Alternate Tax exemptions.
Corporate Tax Deductions
Although both domestic and foreign corporations in India are legally liable to pay corporation tax, they can claim certain deductions or rebates. Here are some important ones:
- A corporation’s dividends can be deducted in some cases.
- An entity’s capital gains are not necessarily taxable.
- Interest income can be exempted from corporation tax.
- In some cases, a domestic corporation can deduct dividends received from another domestic company.
- A company’s business losses can be carried forward for up to 8 years.
- Some special provisions are applicable to venture capital as well as venture fund enterprises.
- Setting up of new infrastructure or expenses incurred during new undertakings are subject to certain exemptions.
Word to Remember
A dividend is a proportion of profits that a corporation pays its shareholders. The payment can be in the form of cash, stocks, or a reward, and dividends are typically drawn from a company’s accumulated earnings. Although dividends are taxable in India, they can be subject to certain exemptions in some cases.
So, like we said, corporation tax is not as complicated or boring as it may sound. It is simply an extensive tax policy that is levied by the Indian government. But when it comes to corporation tax, it’s best to consult professionals, especially if you wish to maximize profits.
Also, we have now given you all the essential information on the corporation tax in India, so feel free to boast!
Yes, foreign companies with operations in India are required to pay corporation taxes.
The 3 main things that are not included in corporation tax are total COGS (cost of goods sold), income depreciation, and SG&A (selling goods and administrative expenses).
The difference between corporation tax for domestic companies and foreign companies is the income. Domestic entities are required to pay corporate tax on their universal income. However, foreign entities only have to pay corporate tax on their income generated via operations in India.
The corporate tax rate is decided and released by the Indian government every year. Additionally, the rates are different for domestic companies and foreign companies.
Yes, dividends are taxable as per Indian law. However, they can be claimed as an exemption in some cases.