Corporation Tax
Corporation tax falls under the category of Direct Tax which is levied on the net income or profit. It is also known as Corporate Tax. It is levied on the corporate enterprises that make money from their businesses. Tax is being imposed at a specific rate according to the provisions of the Income Tax Act, 1961.
Update Corporation Tax for Financial Year 2020-21 and Assessment Year 2021-22
| Type of a Company |
New Corporation Tax Rate |
Additional Benefit Requirements |
| Corporations not seeking any incentives or Exemptions |
22% (earlier 30%) + applicable Cess. Effective Corporate tax rate of 25.17%. |
No MAT (Minimum alternative tax) payable by these companies. |
| Corporations seeking incentives or exemptions |
Unchanged at 30% |
MAT rate reduced to 15% earlier it was 18.5% |
| New Manufacturing Companies |
15% (earlier 25%) |
New Manufacturing companies must be incorporated on or before October 2019. Must start production before March 2023. |
Note: For all other types of corporations including foreign companies, the corporation tax rates have remained unchanged.
Who all are liable to pay Corporation tax?
- Corporations that generate revenues from India and are doing business on that earned incomes.
- Foreign enterprises have established themselves in India permanently.
- Corporations that have earned the title of Indian Citizens only for themselves.
- Incorporated corporations in India.
Definition and types of corporate Entity
A corporate entity or corporation is an artificial person who has been given certain rights and duties according to the law of having an independent legal identity which is separate from its shareholders.
There are two categories of corporations:
- Domestic Corporations: Company which is established in India and is also registered under India’s Company Act, 2013. It is also termed as Domestic Corporate. Even a Foreign Company is also considered as a domestic corporate, if an India’s arm management and control is wholly based in India.
- Foreign Corporations- In case of Foreign Corporation as the name suggest, company which is located overseas and are not of India is called a Foreign Corporate. Again, if any part of Foreign Company’s management and control is situated outside of India also then also it is known as Foreign company.
This distinction is important as domestic companies in India are levying corporate tax on their universal income while foreign corporations are liable to pay tax only on the income, they are generating through their Indian operations only.
How to calculate Net Income for Corporates?
Corporate tax is computed from the Net Revenue or net income of a company. Net Income or revenue of a company is the total amount left with the company after making all necessary deductions of various expenses. There are many expenses incurred of a company for selling goods. The detail of expenses are as follows:
- Depreciation
- Total cost of goods sold
- Selling expenditures.
- Expenses incurred for administrative purposes.
Net profit earned from business, rental income, income from other sources either in the form of interest income or dividend incomes are also the part of income of the company
Net Revenue = Gross Revenue – (Expenses + Depreciation)
Corporate Tax rate in India
The corporate tax rate in India varies from one type of company to another. Rate is different for both Domestic Corporations and Foreign corporations. Depending on the corporate entity type and revenue generated by each of them, corporate tax differs based on the slab rate system.
| Type of a company |
Corporate Tax rate |
Surcharge on Net Income less than 1 Crore |
Surcharge on Net Income greater than Rs 1 Crore and less than 10 Crore |
Surcharge on Net Income greater than Rs 10 Crore |
| Domestic annual turnover up to Rs 250 Crore |
25% |
NIL |
7% |
12% |
| Domestic Company turnover more than Rs 250 Crore |
30% |
NIL |
7% |
12% |
| Foreign Companies |
40% |
NIL |
2% |
5% |
Corporate Tax rates in India for a Domestic Corporation
A Domestic Corporation falls under that environment where the origin of the company in India and management also located in India.
Corporate tax rate for annual year 2020-2021 in case of domestic companies are as follows:
| Gross Turnover |
Tax Rate |
| Up to 250 Crore |
25% |
| More than 250 Crore |
30% |
Note:
- Domestic Corporate Entity with a turnover up to Rs 250 Cr is liable to pay 25% of corporate Tax.
- For a Financial year, if the total revenue generated by a company is above 1 crore, then a surcharge corporate tax is 5% on such a corporation.
- Domestic Corporation is also liable to pay Health and Educational Cess at 4%.
- In case, Domestic Corporation has its branches overseas, then same amount of corporate tax is also charged on the total global earnings of such a company.
- Corporate tax in case of domestic companies in India also considers the revenue that is earned by a domestic company abroad.
Corporate Tax for Foreign Corporation
Foreign Corporation is defined as a company that has not Indian origin. The management and control of the company are taking place outside India. Foreign Corporations are not registered under the Companies Act 2013. Rules and regulations of taxation for Foreign Corporations are different from Domestic Corporations. Taxation agreement of Foreign Corporation made between India and another foreign country where the management and control of company lies.
Tax rate for Assessment year 2020-2021 are as follows:
| Nature of Income |
Tax rate |
| The royalty received or fee charge for technical services received by a Foreign Corporation from the Indian concern or any Government under an agreement made before April 1, 1976, and approved by Central Government. |
50% |
| Any other income from Indian Operations |
40% |
Corporate Tax rebates
There are different types of corporate taxes levied on a company, there are certain provisions of Corporation tax rebates or deductions as well.
- Interest Income deduction can happen in certain cases.
- Capital gains of a corporate entity are not taxable.
- Dividends also come under tax rebate subjected to certain terms and conditions.
- Corporate Entity has given an authority to carry all the losses incurred in the business for 8 years.
- If a corporate tax sets up new sources of power or new infrastructure, then it also becomes liable to get Corporate tax rebates.
- In the case of new undertakings and exports of a corporate taken place, a certain amount corporate tax rebates or deductions are allowed.
- Deductions are also allowed in corporate tax if a corporation wishes to venture capital enterprises or fund.
- If domestic corporate services receive the number of dividends from other domestic corporate, then also there is a provision to deduct such dividends as rebates.
Basics of Corporate Tax planning
Every Taxpayer including business corporations which requires some tax planning as it will enable them to maximize profits by reducing the burden of the tax. Corporate Tax includes the development of a strategy to achieve a goal, so the corporations hire professionals who are well versed with the laws about tax payments. Proper corporate tax planning is required as every business involves significant financial risk.
It is important to understand that corporate planning and tax evasion are two different concepts. Tax evasion is a non-payment of tax and is considered as punishable offense as per law. Tax planning is a strategy to determine the tax to be paid in such a way that corporate has more net profit and less tax to pay on legal basis.
For successful corporate tax planning in India, the corporation must be well versed with all the tax laws and financial rules set up by the Government of India.
Dividend Distribution Tax
Dividend refers to the distribution of profits to shareholders of a company in which dividend distribution tax is being charged. On the other hand, if we talk about the corporation tax, it is calculated on the net profit of a company after deducting expenses incurred by them (Corporation).
Dividend Distribution tax is a type of tax that is payable on the dividends offered to its shareholders by a corporate thus higher dividends mean the larger burden of the tax. In other words, it is also described as a percentage of the dividends paid to the shareholders by a corporate.
As per the provision of Section 115-0 of the Income Tax Act, 1961, the Dividend distribution tax is payable on the dividend offered to the shareholders of the company. It is 15% of the gross amount distributed as a dividend which means it is levied effectively at a rate of 17.6%.
