Corporate Tax: Meaning, Tax Rates & Rebates

Written by : Knowledge Centre Team

2024-08-02

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A corporate tax is a tax on the profits or net income of a corporation. Corporate tax is paid on a company’s taxable income which includes company’s revenue after deductions such as cost of goods sold (COGS), general and administrative (G&A) expenses, selling and marketing, depreciation, research & development etc. Careful management of these expenses can be a useful aid to save corporate tax and minimize the loss of income through taxation.

Company tax or corporate tax is an Income Tax for income earned by corporations. Different countries have their own different rules with respect to corporate tax.

What is a Corporate?

Section 2(17) of the Income Tax Act, 1961, defines a corporate as a company incorporated in India or outside India (under the laws of that foreign country). The definition also includes institutions, associations and bodies of individuals which have been assessed as a corporation for any assessment years after 1922.

Apart from these Central Board of Direct Taxes (CBDT) can declare an institution, association or body of individuals to be taxed as a corporate. However, this declaration is applicable only for the assessment year in which it is made.

Types of Corporations (Companies)

A corporation can be defined as a legal entity independent from its shareholders that is entitled to certain rights and functions/duties of its own. In India, corporations can be divided into two categories:

1. Domestic Corporations

Any company whose management and control is entirely situated in India and is registered under the Indian Companies Acts of 1956 or 2013 is referred to as a domestic corporation. If the Indian arm of a foreign company is wholly controlled and managed within the country, it may also be deemed as a domestic corporation.

2. Foreign Corporations

A company that is based outside India or has a portion of its operations controlled and managed outside the nation’s borders is referred to as a foreign corporation.

What is an Income of a Company?

A company or corporate can have multiple sources of income. The tax rates the company will use for estimating the tax liability will depend on these incomes. A company can have the following sources of income in a financial year:

a) Profits and gains from business activities
b) Interest and dividend income from treasury operations
c) Capital gains from the sale of assets
d) Rental income from property

Corporate Tax in India

Corporate tax, company tax or, corporation tax in India is a direct tax regime for businesses. All legal entities involved in business activities within Indian borders are expected to pay their taxes as per the corporate tax laws. Thus, the corporate tax rules will apply to both domestic as well as multinational organisations operating in India.

Corporate Tax Rates for Domestic Companies AY 2022-23

Corporate tax rates applicable for domestic firms are as follows:

Section	Tax Rate	Surcharge & Cess	Effective Tax Rate
Section 115BA: Companies with a turnover of up to Rs 400 Crore in FY 2017-18	25%	7% / 12%* + 4%	27.82% / 29.12%
Section 115BAA: Domestic companies not claiming any exemptions/incentives	22%	10% + 4%	25.17%
Section 115BAB: New domestic manufacturing companies	15%	10% + 4%	17.16%
Companies not falling under any of the sections above	30%	7% / 12%* + 4%	33.38% / 34.94%

* Surcharge at 7% will apply to companies with total income between Rs 1 core & Rs 10 crore. For companies with a total income above Rs 10 crore surcharge applies at 12%

Corporate Tax Rates for Foreign Companies AY 2022-23

Income tax rates for foreign companies and institutions applicable for AY 2022-23 are as follows:

Section	Tax Rate
Royalties & Fees for technical services received from Indian Govts. or Indian Corporates, based on approved agreements made before April 1, 1976	50%
Any other income	40%

Surcharge Rates in Addition to the Rates Above

Surcharge rates on the income of foreign companies apply as given below:

Total Income	Surcharge Rate
More than Rs 1 crore but below Rs 10 crore	2%
More than Rs 10 crore	5%

1. Health & Education Cess

Health and Education Cess applies to the total tax liability after surcharge (if applicable) at the rate of 4%. For example, if the tax as per the applicable tax rate is Rs 25 crore and the surcharge is 10%, Health and Education Cess of 4% will apply to Rs 27.5 crores (25x1.1).

2. Minimum Alternate Tax (MAT)

Section 115JB defines that Minimum Alternate Tax (MAT) is applicable to the book profits of the firm. MAT cannot be lower than 15% of book profits for both domestic and foreign companies.

However, for a company which is a unit of an international financial services centre and derives all of its income as convertible foreign exchange MAT will be 9%.

MAT does not apply to companies opting for taxation under Sections 115BAA or 115BAB.

3. Liability of Minimum Alternate Tax (MAT)

MAT payments are available as a MAT credit to the companies liable to pay the tax. The credit has to be adjusted with the actual tax liability of the company in the AY.

In the case, where MAT paid by the firm is higher than its actual tax liability the difference amount is available for carrying forward. The firm can carry forward unadjusted MAT credit for up to 15 years (10 years for MAT credits before AY 2018-19).

The carried forward balance of MAT credit from prior AYs can be adjusted only with the balance tax liability after deducting MAT payment for the same AY.

4. Application & Exemption of MAT

Every company registered in India is liable to pay MAT under Section 115JB. This includes companies operating in designated Special Economic Zones (SEZs). These provisions will not apply in the following cases:

a) Income earned through the life insurance business
b) Shipping income where tax is applicable based on the tonnage
c) A foreign entity belonging to a territory or country which has an agreement with India under Section 90(1) and does not have a permanent establishment in India as per the agreement under the section
d) The foreign entity belongs to a territory or country which does not have an agreement with India, but the entity is not bound by any Indian corporate law to register in India

5. Dividend Distribution Tax

With the Finance Act, 2020 dividends from domestic firms are taxable in the hands of recipients, while the firm is no longer liable to pay a distribution tax. However, the distributing firm is required to deduct TDS at the rate of 10% for dividend payments in excess of Rs 5000.

Before AY 2021-22, the firms were required to pay a dividend distribution tax at an effective rate of 20.56% (including surcharge and cess).

Corporate Tax Planning

Corporate tax planning gives you a fair idea of the available scope of expenditure, investments and treasury operations for minimising the tax outflow in the coming financial year. Tax planning also gives the corporations the opportunity to postpone tax outflow on incomes which are not necessary in the financial year. For example, capital gains, interest incomes, etc. Advance planning will give the corporation opportunity to use available deductions and minimise tax liability legally.

Tax Deductions Applicable on Corporate Tax

Minimizing payable taxes can be done by taking note of deductions, exemptions and rebates as well as the appropriate management and reporting of the organization’s expenses. These deductions may include:

a) Capital Gains, which can either be taxed at a flat rate of 15% or 20% or may be tax exempt under Sections 54D, 54G, 54GA 54EC etc.
b) Donations to charitable organizations, which may be 50 -100% tax exempt under Section 80G subject to terms and conditions.
c) Dividends, which may be eligible for rebates in certain cases.
d) Deductions for depreciation under Section 32, which allows for a 15% deduction for the depreciation of the cost of old assets such as machinery and an additional 20% on the purchase of new assets in the business of manufacture or production of any article or thing in the business of generation, transmission or distribution of power.
e) Deduction in respect of employment of new employee u/s 80JJAA.

Income Tax Return Filing for Companies

1. What is the due date for filing an income tax return (ITR)?

All companies including both domestic and foreign must file their ITRs before 31st Oct of the applicable assessment year if they require an audit. This limit is applicable for the companies coming into existence within the same year when they need to be audited.

Companies which do not require auditing of books must submit their ITRs on or before 31st July.

2. What are the tax returns forms to be filed by a company?

The companies filing their ITR in India need to submit the following forms:

a) ITR 6

Applicable to all companies except the ones claiming relief under section 11

b) ITR 7

All companies registered under section 8 of the Companies Act, 2013

3. Tax audit for companies

The threshold limit for companies for providing a tax audit report is Rs 10 crore (w.e.f. AY 2022-23) if the company meets the following conditions:

a) Cash receipts for sales, turnover, etc. do not exceed 5% of total turnover
b) Expenses made in cash do not exceed 5% of the total expenses by the firm

How to Save Corporate Tax?

In addition to the above deductions, here are some measures that can be taken in order to save corporate tax. These depend entirely on how the company's management devises their tax saving strategy. A corporate can save tax in the following three ways as well:

1. Effective Management of Expenses

Many businesses within the country operate with unorganized labour which may hinder proper record keeping. Hence it is vital to maintain detailed reports of overhead costs and wages paid out in order to claim deductions on labour and production expenses.

2. Equity Valuation

While stock prices are generally valued at cost there are cases involving shorter shelf lives where it can also be valued at its Net Realizable Value or NRV which could prevent it from being overvalued and limit the taxable income from capital gains. This may only be applicable in certain cases where this value remains fairly steady as large fluctuations may be grounds for fraud.

3. Making Use of Deductions

Deductions may be the most effective method of regulating taxable income and their proper management could prove to be vital for companies looking to save corporate tax.

It is important to strike a balance between the various available methods in order to save corporate tax such as deductions and tax rebates as well as the effective management of expenses. Fully understanding the situations that these measures are best suited to also goes a long way in maximizing the gains of your corporation.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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