Corporate Tax in India – Business Rates and Taxation Explained

Tax is the biggest topic of discussion among people in India after cricket, be it in big offices or in small tea stalls; the people of India treat it as something bothering and inevitable yet a very interesting topic to have a discussion on. Every year, as soon as the Ministry of Finance releases the budget, the one thing everyone has their eyes on is whether the tax amounts have been affected or not, especially the income tax.

The Indian tax system is segregated into 2 types: 

• Direct Tax : Taxes paid directly on the income generated in the form of income tax or tax deducted at source, this tax is dynamic, and increases as the income increases. The direct tax wallet of the government makes up for a comparatively smaller percentage of the total tax collection.
• Indirect Tax : Indirect taxes are paid to the government not in form of the income generated, however the taxes are levied on the consumption of goods and services.

Direct tax:

Direct tax refers to the income tax that is levied upon individuals and corporations as a whole. Therefore, the income tax can be a personal income tax (for individuals) or a corporate income tax (for a corporate organization). The income tax percentage differs upon the income groups that have been created. Any individual below the age of 60 years and earning above INR 2.5 lakhs per annum is liable to pay personal income tax to the Government of India. The segregation of the tax slabs is as follows:

• An individual having an income up to INR 2.5 lakhs per annum is exempted from the income tax. This is to ensure that the individual earning a sum up to 2.5 lakhs annually does not have to worry about tax deduction, this encourages the individuals to boost their savings, and spending rate.
• An individual earning between INR 2.5 lakhs to 5 lakhs per annum has to pay an income tax amounting to 5% of the total salary. Income tax in India is of a step up structure. With increasing income, the tax liability also increases. As the earning window of 2.5 to 5 lakhs annually is marginally higher than the no tax bracket. Hence, the tax liability too is kept at a marginally higher rate of 5% which while enabling the individuals to save and spend more at the same time not burdening with a high tax.
• An individual earning between INR 5 lakhs to 10 lakhs per annum has to pay an income tax amounting to 20% of their total salary. As highlighted earlier, due to the step up structure of income tax in India, for individuals earning between 5 lakhs and 10 lakhs in India, which is considered as an income of the upper middle class, the tax rate is kept accordingly at 20% enabling the government to boost tax collection.
• For individuals earning more than INR 10 lakhs per annum, the income tax is 30% of their total salary. Considering the fact that the personal income in this range is considered as good, the individuals fitting into this category end up paying a slightly higher tax than the aforementioned category, Although the tax rate is at 30% but there are various deductions offered by the government of India, which can help save taxes on expenses.

With the introduction of the new tax regime, the government is targeting a more efficient and lean structure, where the direct income tax load is not exceptionally high, and there are more categories or earning brackets.

• 0% tax for individuals earning up to 3 lakhs per annum, to ensure no tax burden on comparatively low earning individuals
• 5% tax on income between 3% and 7% to ensure minimal tax burden on the middle class, which majorly falls into this category of income
• 10% tax for earning between 7 lakhs and 10 lakhs of annual income
• 15% tax for individuals with annual income between 10 lakhs and 12 lakhs
• 20% tax rate for individuals with income between 12 lakhs and 15 lakhs annually
• 30% tax for individuals with income over 15 lakhs annually

Corporate tax will be discussed in detail later in the article.

Indirect Tax

Indirect taxes are the taxes charged on goods and services provided to the public through various organisations. In earlier times, there used to be just the excise tax that targeted the sale of particular goods and commodities and levied taxes on their sale such as alcohol, cigarettes, tobacco, etc. Then other taxes like the service taxes for various services provided, VAT (Value Added Tax) charged as state tax, etc., were added.  In 2017, GST (Goods and Services Tax) was introduced, which was a measure to avoid hassle with different taxes for different products and services by having a single tax for all of them. The GST again has been segmented into a four-tier system:

• 5% GST – This tax rate is applicable for goods like tea, domestic LPG, life saving drugs, edible oil, and coal. This is put in place to promote accessibilities to basic necessities.
• 12% GST – This rate is applicable for goods like butter, ghee, juice, etc. to promote accessibility while also increasing revenue for the government.
• 18% GST – This rate is applicable for the majority of fast moving consumer goods, to maintain tax revenue while ensuring reasonable consumer price levels.
• and 28 % GST depending on whether the product is a day-to-day life necessity or a luxury. The aim is to either increase revenue by taxing luxury goods which have high ticket value, or to discourage consumption of sin goods like alcohol, tobacco, etc.

Corporate Income Tax in India

Corporate Income tax, as mentioned before, is a category of income tax that has to be paid by domestic and foreign companies for the revenue that they have earned in India. The corporate taxes are calculated from the income of a company or the profit that the corporation has made during its annual cycle, which means that the tax is not levied on the revenue as a whole but on the amount which is left after expenses have been subtracted from the total revenue. Corporate tax rate in India and the general tax paid by the businesses can be brought down significantly with the help of deduction.

To calculate business tax in India, The incomes of a corporation would include:

• Capital gains : Capital gains tax is taxed when the corporation enjoys an income/profit due to an increased value of the goods/assets when sold.
• Profit from business : This is charged as per the income or profit generated from the business activities, the corporations can enjoy certain deductions offered by the government. The profit generated is usually after various deductions like impairment of assets, depreciation, expenses, etc.
• Rent revenue, etc : Such income does not come under the income from business activities, rather these can be accounted under income from investments, other sources, etc. The corporation is liable to pay taxes on income generated through non business activities too.

The expenditures of a corporation include:

• Cost of goods sold : Under this header, the costs related to raw material, labour to put together the finished product, etc is accounted for. Revenues minus the cost of goods sold gives us gross profit from the business.
• Depreciation : Depreciation is charged on an asset purchased by the business (Usually a machinery) to produce goods or services for the business. Since these tools are imperative for a business to function, their cost can be written down over the course of its useful life to account as business expense.
• Selling, transportation expenditures : These expenses may seem like small amounts for businesses in local operations, or service sector businesses, however these can be a major expense for product heavy businesses with nationwide or inter-state distribution. Since this expense is to generate revenue, these are deducted from the revenue to calculate profits on which taxes are charged.
• Administrative costs, etc : These are usually minimal in comparison to the larger scheme of things, however since these costs are incurred for the business to operate, administrative costs tend to be an integral part of the cost to the company.

All the domestic companies registered under the Company Act of India, as well as the foreign companies who are liable to pay the corporate tax have to file for their respective income tax returns by 30^th September generally, but it can get an extension, subject to Government guidelines for that particular year. For a company having an annual turnover of more than INR 1 Crore per annum, a tax audit filed by a licensed Chartered Accounted is mandatory.

Tax distribution under normal provision:

Note: A surcharge is an additional tax introduced by the government, which can be defined as a tax on the Corporate tax itself. To understand what a surcharge is, suppose a corporate has a profit of INR 100, and it has to pay an income tax of 20%, which is INR 20. An additional surcharge of 10% is levied on the corporation; then it has to pay an additional 10% of INR 20, INR 2. Thus, the corporation’s total corporate tax has to pay the Government is INR 22 for a profit of INR 100.

In 2019, new taxation rates under Section 115BAA and 115BAB have been introduced by the Government of India, under which several amendments have been made to the Income-tax Act of 1961 for domestic companies by creating further divisions as per annual turnover to help the corporates with low turnovers.

Under the Section 115BAA, it is stated that the domestic companies, with no regards to annual turnover, have an option to pay income tax at the rate of 22% + applicable surcharge of 10% and cess of 4%, provided that the company opting for this, agree not to make use of exemptions and incentives under the provisions of the income tax. The companies had to apply to be taxed under this section by 15^th February 2021 (extension received as per Government guidelines due to Covid-19 pandemic).

MAT (Minimum Alternate Tax) is not applicable if they pay their taxes under this section’s protocols.

What is MAT?

MAT (Minimum Alternate Tax) amounts to 15% on book profits+ additional surcharge and cess. In layman’s terms, it is the minimum amount that a corporate tax is liable to pay as income tax. It was seen that many corporates were making huge profits by misusing the exemptions and incentives under the normal provisions of the Income Tax Act, so as to ensure that there was a minimum amount of tax that they paid every year.

What is cess?

Cess is applied on the calculated Income tax along with surcharge as a tax meant to promote health and educational infrastructure in India. 4% of cess is applicable to corporate taxation.

Under the Section 115BAB, a company that has been set up and registered on or after 1st October 2019 and has commenced manufacturing on or before 31st March 2023 can avail benefits under this section, which is that it has to pay a corporate tax of around 17% per annum (15% base tax rate, 10% surcharge and 4% cess). This amount is quite lower than the normal provisional amount of corporate tax, and MAT doesn’t apply here either. This is meant to promote new manufacturing companies to set up their roots in the Indian market and have a steady flow of income. The company has to opt for paying taxes under this section before filing the income tax returns, which is usually on 30^th September, every year.

Advantages of Paying Corporate Tax in India for Business Owners

Paying corporate tax in India offers multifaceted advantages for business owners domestic companies in India. Firstly, India’s corporate tax rates, recently reduced to promote economic growth, provide a competitive edge, fostering profitability and investment. The country’s diverse deductions and exemptions, including those for research and development initiatives, encourage innovation while reducing tax burdens. Leveraging India’s tax treaty network, businesses can mitigate double taxation risks, optimizing global operations. Moreover, compliance with corporate tax regulations ensures legal adherence, enhancing credibility and access to funding and partnerships. Additionally, the tax incentives for specific industries, such as infrastructure or renewable energy, incentivize sustainable business practices. By embracing India’s corporate tax structure, business owners not only contribute to the nation’s growth but also benefit from a conducive fiscal environment, fostering long-term stability and growth prospects. Last but not the least, it is highly recommended to hire a professional to do corporate tax planning to ensure maximum savings for the company’s perspective.

Tax Planning

As one can guess easily, corporate taxes amount to a large part of the profits of an organization, so these big corporates hire professionals who are experts related to taxes and law to plan the taxes effectively and efficiently so that they can come up with proper tax management systems and can retain maximum profits even after paying the taxes, without disrupting the legal norms.

Read More – Tax Benefits on Business Loan in India

Note: Tax planning doesn’t mean tax evasion. Tax evasion is punishable by law as it means the revenues aren’t recorded, and hence, taxes aren’t paid for that particular revenue, which in turn is called ‘black money.

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Corporate Tax FAQs: