Corporate Tax: What is it & How It Works?

From Reliance and TCS, corporations have to pay taxes to the Indian government. Just as individuals have to pay personal income tax, corporations must also pay corporate tax every financial year on their income. Governments worldwide impose this direct taxation on companies under their respective corporate tax regime, though they vary greatly by country. 

Nonetheless, it doesn’t matter whether it is a big or small company, domestic or foreign entity, public or private- all corporations have to pay corporate tax, albeit at different tax slab rates in India. It is an essential source of revenue for the state, evidenced by TCS’s mind-boggling tax payment of INR 11,536 crores in FY 2021-2022! 

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What is Corporate Tax?

Corporate tax is the direct tax registered corporations pay to the Government of India on their net earnings or income. Consider it a company income tax or income tax for business activities. The law divides companies into two categories for taxation. They are:

Domestic Company

They are public or private companies established and registered under the Companies Act, 2013 of India. Companies owned by foreign firms but with management or place of effective management entirely based out of India also fall within this category. Domestic companies pay corporate tax on their Universal Income to the government. 

Foreign Company

Companies not incorporated under the Companies Act 2013 and have control and management outside India fall under the category of foreign companies. The company must have a place of business by itself or through an agent (including electronic mode) and should conduct business activity in the country. They only pay taxes on the income earned or accrued in India. 

What constitutes Net Income?

Corporate tax is the company income tax. A company will have multiple streams of income or revenue and expenditures. Income tax for business accounts for income and expenditure to determine the tax rate and amount payable to the government every financial year. So, corporate tax is levied on a company’s net income, where net income is the gross income minus applicable tax deductions. 

Let’s look at what comprises the income and expenditure for corporates.

Income of a corporation

• Profit from business
• Capital gain
• Income from renting property
• Income from other sources like dividends, interest, etcetera

Expenditure of a corporation

• Depreciation
• Cost of sold goods
• Administrative expenses
• Selling and transportation costs

Therefore, 

Net Income = Total Income of a Corporation – Total Expenditure of a Corporation.

Corporate Tax Rate in India

The corporate tax rate in India varies for companies along several criteria. Most significantly, whether a company is domestic or foreign will determine how much tax it will pay to the Government of India under the Income-tax Act of 1963.

Let’s look at the corporate tax rates for domestic and foreign companies based on the provisions of the Government of India.

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Corporate tax rate for a domestic company

• A domestic corporate with an annual turnover of up to INR 400 crore is liable to pay 25% company income tax. 
• A domestic corporate with an annual turnover over INR 400 crore is liable to pay 30% corporate income tax.
• A surcharge rate of 7% is imposed on domestic companies with a total income exceeding INR 1 crore but less than INR 10 crore.
• A surcharge rate of 10% is imposed on domestic companies with a total income exceeding INR 10 crore.
• Health and Education Cess at 4% of income-tax and surcharge is also payable to the government.
• Special tax rates applicable to a domestic company under Section 115BAA and Section 115BAB are 22% and 15%, respectively.
• Domestic companies that have opted for taxation under Section 115BAA and Section 115BAB will pay a flat surcharge rate of 10%, irrespective of total income.
• Domestic companies that have opted for taxation under Section 115BAA (not claiming any exemptions or any incentives) and Section 115BAB (new domestic manufacturing companies) are exempt from the provisions of Minimum Alternate Tax (MAT).
• Domestic companies under Section 115BA have to pay Minimum Alternate Tax at a 15% rate of book profits, additional surcharge and cess. It is the minimum tax a domestic company must pay on their book profit and can be carried forward over 15 years.
• MAT will be applicable at 9% (plus surcharge and cess) when a domestic company is a unit of an International Financial Services Centre and derives its income only in the form of convertible foreign exchange.

Corporate tax rate for a foreign company

• A foreign company has to pay a tax rate of 50% for royalty received or fees for rendering technical services from the Government or an Indian concern in pursuance of an agreement made with the Indian concern before April 1, 1976. The agreement must have the seal of approval from the central government. 
• A foreign company has to pay a company income tax rate of 40% from any other source of income.
• A surcharge rate of 2% will be applicable if the total income of a foreign company exceeds INR 1 crore but is less than INR 10 crore. 
• A surcharge rate of 5% will be applicable if the total income of a foreign company exceeds INR 10 crore. 
• A Health and Education Cess will be applicable at a rate of 4% of income-tax and surcharge. 
• A foreign company that does not have a permanent establishment (PE) in India does not have to pay the Minimum Alternate Tax. Additionally, foreign companies engaged in shipping, aircraft, mineral oils exploration, and turnkey construction projects are exempt from the MAT provision. 

Applicable Deductions on Corporate Tax

The Government of India has made several provisions that allow companies to avail deductions, rebates, and exemptions. 

Here are a few ways in which corporates can avail of tax deductions:

1. Capital gains may be exempted from taxation under Sections 54D, 54G, 54GA, 54EC, etcetera.
2. Dividends, under certain terms and conditions, are subject to tax rebates.
3. Businesses that incur losses can carry it over for an 8-year period.
4. Businesses are eligible for a tax rebate if they have invested in developing new infrastructure or power sources. 
5. Donations to charitable organisations may be fully or partially exempted under Section 80G if they fulfil the terms and conditions. 
6. Deductions are allowed for the depreciation of old assets under Section 32. 
7. Interest expense is deductible from income tax for business. 
8. Contractual penalty may be considered for purposes of tax deduction. 

Corporate Tax Planning

Corporate tax planning is the plan or strategy of reducing the tax liability of corporations by using the legal provisions available under government regulations. Tax deductions, rebates, and exemptions can reduce the burden of corporate tax on companies legally. Efficient corporate tax planning can reduce exposure to financial risk and capital outflow. 

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Why do we need Corporate Tax Planning?

Corporate Tax Planning is essential for running an efficient and profitable business while keeping in line with the country’s legal framework. It is essential because:

• It reduces tax liability
• It minimises the threat of tax-related litigation
• It helps to channel finances in the direction of productive investments
• It contributes to the economic stability of a company
• It promotes the growth of the national economy by increasing the circulation of white money

What are the types of Corporate Tax Planning?

Corporate Tax Planning is of the following types:

• Short-range and Long-range Tax Planning- Short-range tax planning is done at the end of the fiscal year for specific objectives. Long-range tax planning is done at the beginning of the financial year and aims at saving taxes in the long run.
• Permissive Tax Planning- Tax planning which complies with the existing provisions of the Income-tax Act to reduce tax liability is called permissive tax planning.
• Purposive Tax Planning- Tax planning seeks to maximise tax benefits by opting for tax-saving schemes that allow the corporate to diversify its assets or achieve specific investment goals. 

Conclusion

Corporate tax is a major revenue stream for the government. Companies are duty-bound to pay taxes to the government just like any other law-abiding citizen. Through proper corporate tax planning, corporates can reduce their tax liability within the purview of the law while contributing to the nation’s growth. The exchequer benefits considerably from a robust, efficient, and legally binding corporate tax regime. The health of the corporate tax regime is an indicator and a contributor to a well-functioning and healthy national economy. 

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