Corporation Tax popularly known as Corporate Tax is a direct tax levied on the net income or profit that corporate enterprises make from their businesses. The tax is imposed at a specific rate as per the provisions of the Income Tax Act, 1961.
Updated Corporation Tax Rates for FY 2019-20 (AY 2020-21)
The Finance Ministry has announced new corporate tax rates applicable from 1st April 2019 onwards for certain types of corporations*. The following are the new rates that are applicable:
|Type of Company||New Corporation Tax Rate||Additional Benefit/Requirements|
|Corporations not seeking any incentives/exemptions||22% (earlier 30%) + applicable cess and surcharge. Effective corporate tax rate of 25.17%||No MAT (minimum alternative tax) payable by these companies|
|Corporations seeking incentives/exemptions||Unchanged at 30%||MAT rate reduced to 15% from earlier level of 18.5%|
|New Manufacturing Companies||15% (earlier 25%)||New manufacturing co. must be incorporated on or before October 2019. Must start production before March 2023|
*For all other types of corporations including foreign companies, the corporation tax rates have remained unchanged.
Corporate entities that are liable to pay corporate tax in India are as follows:
- Incorporated corporations in India.
- Corporations that acquire revenues from India and do business on those earned incomes.
- Other foreign enterprises that have permanently established themselves in India.
- Corporations that have earned the title of being an Indian resident only for the purpose of tax payment.
Corporate Entities: Definitions and Types
A corporate entity or corporation is an artificial person that is legally considered to have certain rights and duties such that by law it has an independent legal identity separate from that of its shareholders. India, corporations are classified into two different categories as follows:
- Domestic Corporations- A company that is established in India and is registered under India’s Companies Act, 2013 is termed as a Domestic Corporate. Even a foreign company can be considered as a domestic corporate if the Indian arm’s management and control is wholly based in India.
- Foreign Corporations- In case of Foreign Corporation, as the name suggests, a company that is situated overseas and not in India is called a foreign corporate. Again, if some part of a foreign company’s management and control is situated outside of India, then also it is called a foreign company.
This distinction is important as domestic companies in India are charged corporate tax on their universal income while foreign corporations get charged tax only on the income they generate through their Indian operations only.
Calculation of Net Income for Corporates
Corporate tax is computed on the net revenue or net income of a company. A net income/net revenue of a company is the total amount left with the company after making necessary deduction of various expenses. There are a host of expenses that a company incurs for selling goods. These expenses are as follows:
- Total cost of goods sold.
- Selling expenditures.
- Expenses incurred for administrative purposes.
The income of a company includes net profit earned from the business, rent income, capital gains or income from other sources such as interest income or dividend income.
Thus Net Revenue = Gross Revenue – (Expenses + Depreciation)
Corporate Tax Rate in India
The rate of corporate tax in India varies from one type of company to another i.e. domestic corporations and foreign corporations pay tax at different rates. Additionally, depending on the type of corporate entity and the different revenues earned by each of them, the corporation tax rate differs based on a slab rate system. Presently for the assessment year 2019-2020, the corporation tax rates in India are as follows:
|Type of Company||Corporate Tax Rate||Surcharge on Net Income Less than Rs. 1 crore||Surcharge on Net Income greater than Rs. 1 Crore and less than Rs. 10 Crore||Surcharge on Net Income greater than Rs. 10 Crore|
|Domestic with annual turnover upto Rs 250 Crore||25%||Nil||7%||12%|
|Domestic Company with turnover more than Rs 250 Crore||30%||Nil||7%||12%|
Corporation Tax Rates in India for a Domestic Corporation
A Domestic Corporate/Corporation is a company that is of Indian origin and whose management is located entirely in India. The applicable rate of corporate tax for AY 2019-20 in case of domestic companies as mentioned below:
|Gross Turnover||Tax Rate|
|Upto Rs. 250 Crore||25%|
|More than Rs. 250 Crore||30%|
- A domestic corporate entity with a turnover upto Rs. 250 Crore, pays a flat rate of 25% corporate tax.
- For a particular financial year, if the total revenue earned by a company exceeds Rs. 1 crore, then a surcharge corporate tax of 5% is levied on such a corporation.
- A Health and Educational Cess at 4% is also charged for a domestic company.
- If a particular domestic company 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 in AY 2019-20
A foreign corporate is defined as a company that is not of Indian origin. Its management and control takes place outside of India. These corporations are not registered under the Companies Act 2013. The rules pertaining to the taxation process for a foreign company is completely different from that of a domestic corporate. It all depends on the taxation agreement made between India and other foreign countries. Like for example, the corporate tax rate for foreign corporation based out of the US will depend on the taxation agreement that India has with the United States.
|Nature of Income||Tax Rate|
|Royalty received or fees for technical services received by a foreign corporation from the government or any indian concern under an agreement made before April 1, 1976 and approved by the central government||50%|
|Any other Income from Indian Operations||40%|
Corporate Tax Rebates
As several types of corporate taxes are levied on a company, similarly there are certain provisions for corporation tax rebates or deductions as well. The key ones to consider are as follows:
- Interest Income can be deducted in certain cases.
- Capital gains of a corporate entity are not taxed.
- Dividends may also be subject to tax rebate with applicable terms and conditions.
- The corporate entity has an authority to carry the losses incurred in the business for a maximum of 8 years.
- If a corporate sets up new sources of power or new infrastructure, then they can be subjected to certain deductions.
- In case of exports and new undertakings of a corporate, certain amount of deductions are allowed to the corporate.
- Various amounts of provisions for deductions are allowed if the corporate wishes to venture capital enterprises or fund.
- If a domestic corporate receives some amount of dividends from other domestic corporate, they have the provision to deduct such dividends as rebates.
Basics of Corporation Tax Planning
Every taxpayer including business corporations require some tax planning that will enable them to maximise their profits by reducing the tax payment burden. Corporate tax planning involves development of a strategy in order to achieve this goal, so the corporations hire professionals who are well tuned with all the rules and regulations regarding the laws pertaining to tax payments. Proper corporate tax planning is required as every business involves significant financial risk.
It is important to keep in mind that corporate tax planning and tax evasion are two completely different concepts. Tax evasion is non-payment of tax and a punishable offence by law. Whereas, tax planning is a strategy to determine the amount of tax payable in such a way that the corporate has more net profit and less tax to pay legally. For successful corporate tax planning in India, the corporation must be well aware of all the tax laws as well as the financial rules set up by the Government of India.
Dividend Distribution Tax
Dividend refers to distribution of profits to shareholders of a company and Dividend Distribution Tax (DDT) is charged on the profits distributed by this process. On the other hand, Corporation Tax is the tax calculated on the net profit of a company after deducting expenses incurred by them. So, dividend distribution tax is a type of tax that is payable on the dividends offered to its shareholders by the corporate thus higher dividends mean a greater tax burden for the corporate entity. It can also be termed as the percentage on the dividends paid to the shareholders by that particular corporate.
Dividend distribution tax is governed as per the provisions of Section 115-O of the Income Tax Act, 1961. Presently, the dividend distribution tax that is payable on the dividends offered to a company’s shareholders is 15% of the gross amount distributed as dividend which means it is levied effectively at a rate of 17.65%.