The corporate tax also known as corporation tax is a direct tax imposed on the total income or profit that corporate firms make from their businesses, normally during one financial year. All companies which are registered in India in public or private sectors under the Companies Act, 1956 are legally responsible to pay corporation tax.
The corporate tax is levied at a specific rate based on the provisions of the Income-tax Act, 1961. The revenue generated from the corporate tax is an important source of income for the Indian government. The domestic companies were taxed at a 30 percent rate for the financial year 2014-2015.
Corporate organizations that are legally responsible to pay corporation tax in India are as follows:
- Incorporated corporations
- Corporations that need revenues from India and do business on these earnings.
- Other International firms that have permanently established in India
- Corporations with the earned title of being an Indian resident only for the tax payment purpose.
Types of Corporate Organizations
Corporations are classified in the following two categories in India
Domestic Corporation
An organization that is registered under India’s Companies Act,2013 and established in India is known as a domestic corporation.
These types of business entities are different from foreign entities in terms of taxes, payment, declaration, and dividend payment. As such, domestic company interest ranges from 15% to 30%. In addition, there are several tax forms an organization is required to fill, which depend on its size and business type.
Foreign Corporations
A company that is located overseas and not in India is termed a foreign corporation. If some part of that foreign corporation is located overseas, then also it is termed a foreign corporation. Foreign corporations are not registered under India’s companies act, 2013.
The residential status of a company determines the taxes it pays in India. Once a foreign company has a residential status, its taxes are calculated based on its income regardless of whether it earns in or outside the country. However, a foreign enterprise without residential status will be taxed only on income derived within India.
Corporate Tax Rate in India
In India, the corporate tax rate depends on the type of company. For example, domestic corporations and foreign corporations pay taxes at different rates.
For the business year 2019-20, the information is given below.
Corporate Tax Rates in India
1. Domestic Companies
With an Annual turnover up to Rs. 250 Crore
- Corporate tax rate: 25%
- Surcharge on net income up to Rs. 1 crore: Nil
- Surcharge on net income greater than Rs. 1 crore but less than 10 crore: 7%
- Surcharge on net income greater than Rs. 10 crore: 12%
With an annual turnover of more than Rs. 250 Crore
- Corporate tax rate: 30%
- Surcharge on net income up to Rs. 1 crore: Nil
- Surcharge on net income greater than Rs. 1 crore but less than 10 crore: 7%
- Surcharge on net income greater than Rs. 10 crore: 12%
2. Foreign Companies
- Corporate tax rate: 40%
- Surcharge on net income up to Rs. 1 crore: Nil
- Surcharge on net income greater than Rs. 1 crore but less than 10 crore: 2%
- Surcharge on net income greater than Rs. 10 crore: 5%
Basics of Corporation Tax Planning
Every taxpayer in India including corporate businesses needs some tax planning and strategy that will help them to increase their net profits by reducing the tax payment. The corporations hire professional tax lawyers that are well aware of all tax laws, rules, and regulations made by the government of India to help them in maximizing their profit by reducing the amount of tax payable legally.
Any business that wants to operate successfully must have an effective corporate tax plan. Having this strategy allows the entity to minimize its tax liabilities. However, reducing tax liabilities requires a broad action on several aspects of a business. These aspects include retirement plans, transportation, staff health insurance, child care, and community services. As such, a business can achieve this by leveraging exemptions and tax deductions as stipulated in the Indian income tax act. Using this path is legal and is not the same as tax evasion. Nonetheless, a company must ensure it avoids any illegality.
For any business, increasing revenue helps it to grow. However, increased profits mean more tax liabilities. Therefore, a business must create a viable tax strategy that reduces liabilities. With an excellent tax preparation system, you can reduce the amount of levy to pay without breaking Indian law. By extension, having a good tax plan will help you with budgeting and expenditure.
A business that wants to have a strong tax plan must consider the following details when preparing taxes.
- Take into account tax laws and court rulings that have created a precedent.
- Accurate information must be provided and circulated within an organization.
- All strategies that will reduce taxes must be in line with the aims and objectives of a business.
Tax Planning Types
In general, 4 tax planning types can be used by a company in India. Each type is highlighted below. These types are:
- Long-term tax strategy;
- Short-term tax strategy;
- Permissive tax strategy;
- Purposive tax strategy.
Each tax planning strategy can be used by a business for different purposes and at different times. Likewise, properly executing the plan provide variating benefits at different times to a company.
