How is Corporate Tax in India Imposed?

How is Corporate Tax in India Imposed?

6 mins readComment
Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Jan 16, 2024 17:58 IST

Corporate tax is a tax imposed on the net profit earned by the corporation. It is taxed at the entity level in a specific jurisdiction. The net profit for corporate tax is the profit of the financial statement with modification. Some expenses such as donations and depreciation will be reduced. It is defined within the tax system of every country. Tax systems of many countries impose an income tax entity level on certain entity types.  

corporate tax in India

Table of Contents

What is Corporate Tax?

Also known as corporation tax or company tax, corporate tax is a type of tax levied on income earned by corporations. Depending on the nature of the tax, it may be referred to as capital tax or corporate tax. The government levies taxes on the profits earned by corporations through corporate revenue to generate revenue. 

Who Has to Pay Corporation Tax?

Corporation or corporate tax is the income tax that corporations are required to pay. Hence it is also known as corporate income tax (CIT). This tax may also vary for domestic and foreign corporations. Corporate tax is levied on corporations that are:

  • Doing business within the country on income from a particular company
  • Incorporated within the country
  • Have a permanent establishment in the country but are foreign corporations
  • Deemed to be a resident for tax purposes in the country

Calculation of Corporate Tax

Calculation of corporate tax varies according to different countries and its regulations. 

  1. Determine Net Profit: Start with the company's gross revenue (total income) and subtract all allowable expenses like cost of goods sold, administrative costs, marketing expenses, etc. This gives you the net profit before tax.
  1. Apply Tax Rates: Most countries have a flat tax rate applied to the net profit before tax. For example, in the United States, the current corporate tax rate is 21%. However, some countries might have graduated tax rates, where the rate increases with increasing profits.
  1. Consider Surcharges and Cesses (if applicable): Some countries may levy additional charges on top of the base tax depending on specific factors like company size, profit level, or industry. These can be:
    • Surcharges: Percentage-based additional tax on the base tax calculated.
    • Cesses: Flat or percentage-based fees added to the total tax amount.
  1. Deduct Tax Credits and Incentives (if applicable): Certain countries offer tax credits or incentives for specific activities like research and development, investments in certain sectors, or hiring from underprivileged communities. These can be deducted from the total tax liability.
  1. Final Tax Liability: Once you add up the base tax, surcharges, cess, and subtract any allowable credits or incentives, you arrive at the final corporate tax liability for the company.

How is Corporate Tax Levied?

Corporation tax is a type of tax on the profits of the corporation. Corporate tax in India is paid on the taxable income of the company. It includes:

  • Rental income that is grouped under the head Income from house property
  • Income from profits and gains of business or profession
  • Capital Gains
  • Income from Sources like dividends and interest

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It excludes the following:

  • Cost of goods sold (COGS)
  • Selling and marketing cost 
  • General and administrative (G&A) expenses
  • Depreciation 
  • Operating cost
  • Research and Development cost

How is Corporate Tax Levied in India?

Corporate tax in India is a direct tax regime for businesses. Every corporation conducting business within India has to pay taxes as per corporate tax laws whether they are domestic or foreign organizations. 

Corporate Tax (%) for U.S. Businesses

Base Rate (%)

Surcharge Applied (%)

Cess Applied (%)

Effective Tax Rate (%)

22

10

4

25.168

Corporate Tax (%) for International Companies

  • Foreign corporations have to pay corporate tax on the revenue generated within a certain time period.
  • Royalties and other fees are levied with a 50% business tax rate in India and the remaining revenue is subject to a 40% tax rate. 
  • 2% surcharge is applied to international companies with income between ₹1 crore and ₹10 crore.
  • 5% surcharge is added when the total revenue is more than ₹10 crore.

Corporate Tax (%) for Domestic Companies

Sections

Tax rate

Surcharge

Section 115BA

25%

7%, for companies with net income below 10 crores

12%, for companies with net income above 10 crore

Section 115BAA

22%

10%

Section 115BAB

15%

10%

Any other case

30%

7%, for companies with net income below 10 crores

12%, for companies with net income above 10 crore

Why does the Government Levy Corporate Tax in India?

The Indian government, like many governments imposes corporate tax for several reasons:

  1. Revenue Generation: Corporate tax is an important source of revenue for the government. This revenue is essential for funding public services such as healthcare, education, infrastructure development, and defense.
  2. Economic Regulation: Through corporate tax, the government can influence the economy. For example, lower corporate taxes can encourage investment and economic growth, while higher taxes can help cool down an overheated economy.
  3. Income Redistribution: Corporate tax serves as a tool for income redistribution. Profits earned by corporations can be substantial, and taxing these profits helps redistribute wealth in the economy, aiming for a more equitable society.
  4. Controlling Externalities: Corporations may produce negative externalities, such as environmental pollution. Taxes can be used to internalize these externalities, making corporations bear the costs of their actions.
  5. Incentivizing Behavior: The government can use corporate tax policies to incentivize certain behaviors. Tax breaks and incentives are often used to encourage businesses to invest in research and development, adopt eco-friendly practices, or operate in economically disadvantaged areas.
  6. International Competitiveness: Corporate tax rates can influence foreign investment. By adjusting these rates, the government can make the country more or less attractive to foreign investors, which impacts the overall competitiveness of the economy.
  7. Fiscal Stability: Stable and predictable corporate tax revenues are important for the government’s long-term fiscal planning. They help the government manage its budget and plan for future expenditures.

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FAQs

When is corporate tax paid?

Due date to pay corporate tax is decided based on the following factors:

  • Tax year: Most countries follow a calendar year tax system, but some have different fiscal years. This determines the period for which profits are calculated and reported.
  • Company size and type: Some countries might have different deadlines for small businesses or specific industry sectors.
  • Tax payment schedules: In some cases, the total tax liability might be payable in installments throughout the year, with additional deadlines for final settlements.
  • Extensions: Most countries allow companies to request extensions for filing or payment under specific circumstances.

What are deductible expenses?

Deductible epenses are incurred to generate income, like cost of goods sold, office rent, and salaries, can be deducted from taxable income.

What are the ethical considerations of corporate tax planning?

While minimizing tax burdens is legal, aggressive tax avoidance schemes can raise ethical concerns. Balance ethical principles with maximizing business benefits through responsible tax planning.

How are foreign subsidiaries taxed? 

Companies operating in multiple countries face complex tax considerations. Transfer pricing rules ensure fair pricing for transactions between related entities within the company to avoid tax avoidance.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio