Corporate Tax in India: Meaning and Tax Rate

From startups to multinational corporations, navigating the intricacies of taxation can significantly impact financial planning and operational decisions. In this comprehensive guide, we will help you understand the concept of corporate tax in India, key concepts, recent developments, and essential strategies for compliance and optimization.  

India’s tax system comprises two main categories: Direct taxes and Indirect taxes. 

What are direct taxes?

Direct taxes are levied directly on individuals and entities based on their income, profits, or assets. Tax rate increases with higher income or profits for this kind of tax. The primary types of direct taxes in India include: 

• Income Tax:
  • Imposed on the income earned by individuals, companies, and other entities.
  • It is calculated based on various income sources, like salaries, business profits, capital gains, and interest income. 
• Corporate Tax:
  • Applicable to the profits earned by companies registered in India.
  • The tax rates vary for domestic and foreign companies, with recent reforms aimed at reducing rates to promote investment and economic growth. 
• Wealth Tax (Abolished):
  • Formerly imposed on the net wealth of individuals and Hindu Undivided Families (HUFs) exceeding a specified threshold.
  • However, it was abolished in 2015 and replaced with an additional surcharge on high-income individuals. 

What are indirect taxes?

Indirect taxes are levied on the sale or consumption of goods and services, rather than directly on individuals or entities. These taxes are typically included in the price of goods and services, ultimately borne by the end consumer. In India, the main indirect taxes are: 

• Goods and Services Tax:
  • Introduced in 2017, Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services across the country.
  • It replaced multiple state and central taxes, streamlining the taxation system and promoting ease of doing business. 
• Customs Duty:
  • Imposed on the import and export of goods, customs duty aims to regulate trade, protect domestic industries, and generate revenue for the government.  

What is Corporate Tax in India?

Corporate tax in India is a levy imposed on the profits earned by companies operating in India. The tax is calculated on the net income generated during a financial year after deducting allowable expenses, depreciation, and other deductions permitted by the Income Tax Act, 1961. The rates of corporate tax in India varies depending on the type of entity, business activities, and annual turnover. 

What is the Income of a company?

The income of a company refers to the total revenue earned by the company from all its sources during a specific period, typically a financial year. This includes revenue generated from the sale of goods or services, interest income, dividend income, capital gains from the sale of assets, rental income, and any other income accruing to the company in the ordinary course of business.  

For taxation purposes, a company’s income is computed as per the Income Tax Act, 1961. It involves adjusting the total revenue by deducting allowable expenses, depreciation, provisions for bad debts, and any other deductions permitted under the tax laws. The resulting figure represents the taxable income of the company on which corporate tax in India is levied at applicable rate.  

What are the types of corporate entities?

In India, companies are primarily classified into two categories for taxation purposes:  

• Domestic companies and  
• Foreign companies 

Domestic companies are those incorporated under the Indian Companies Act, while foreign companies refer to entities incorporated outside India but engaged in business operations within the country. Each category is subject to different tax provisions and rates. 

Recent changes on corporate tax in India

In recent years, the government introduced significant reforms to corporate tax in India to stimulate economic growth and attract investments. One of the recent changes was the reduction in corporate tax rates announced in 2019.

The move aimed to enhance India’s competitiveness, encourage domestic manufacturing, and boost investor confidence. Additionally, measures such as the phased reduction of Minimum Alternate Tax (MAT) and changes in the surcharge structure were implemented to provide relief to businesses. 

Tax Rates, incentives and exemptions

To promote specific industries, regions, and activities, the Indian government offers various tax incentives and exemptions. These include deductions for Research and Development (R&D) expenses, Export-Oriented Units (EOUs), Special Economic Zones (SEZs), and investments in certain sectors like infrastructure and renewable energy. 

Type of Company	Tax Rate
Domestic Companies opting for lower tax regime (No exemptions/incentives)	22% (plus surcharge and cess)
Domestic Companies opting for exemptions/incentives	25.17% (including surcharge and cess)
New Domestic Manufacturing Companies	15% (plus surcharge and cess)
MAT for companies availing exemptions/incentives	15% (plus surcharge and cess)
Foreign Companies (Corporate Tax)	40% (plus surcharge and cess)

Note: The tax rates mentioned are as per the prevailing tax laws in India. However, tax rates and regulations may be subject to change. 

Income tax for corporate companies

Income tax for corporate companies is levied on the profits earned by the company during a financial year. Here’s how it works: 

• Calculation of Income:
  • The income of a corporate company is determined by subtracting allowable deductions and expenses from its total revenue.
  • This net income forms the basis for calculating the income tax liability. 
• Applicable Tax Rates:
  • The income tax rates for corporate companies depend on various factors such as the type of company (domestic or foreign), the level of income, and any tax incentives or exemptions availed. 
• Tax Compliance:
  • Corporate companies are required to maintain accurate financial records, file annual tax returns, and pay the applicable income tax within the stipulated deadlines. 
• Tax Planning:
  • Corporate companies often engage in tax planning strategies to minimize their tax liability while ensuring compliance with legal requirements.
  • This may involve optimizing deductions, structuring business operations efficiently, and utilizing tax incentives provided by the government. 

Conclusion

In conclusion, tax system comprises direct taxes, such as income tax and corporate tax in India , which are levied directly on individuals and entities, and indirect taxes, including GST and customs duty, which are imposed on the sale or consumption of goods and services.  

The corporate tax in India requires careful attention and strategic planning. With the right approach, businesses can not only fulfill their fiscal obligations but also drive sustainable growth and profitability in the dynamic Indian market.

24efiling, an expert tax consultant helps companies to file their corporate tax returns directly with the Income Tax Department of India. This saves time and reduces the risk of errors.

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