What is Corporate Tax in India? Rates, Slabs & Planning

A business largely earns its income through various sources of operation, either domestically or internationally. Based on the business size and nature of transactions, the tax is levied. In India, there are several types of tax that a corporation pays, such as corporate tax, income tax, capital gains tax, professional tax and a few more. This blog will be focussing in detail on corporate tax in India, and its rate and will give all the latest updates about. Let’s move to understand its concept first.

What is Corporate Tax?

There are majorly two major types of companies operating in India, domestic or regional companies, and international ones. While national companies are taxed based on all of their income sources, international companies are taxed based on their domestic income in India. Here is a simple breakdown of the question of what is corporate tax in India:

Domestic company taxation

A domestic company pays tax based on its income earned from national as well as foreign income sources. A domestic company that is directly registered with the Companies Act undergoes an audit every financial year and pays corporate tax as per Section 2(22A) of the Income Tax Act.

Foreign company taxation

There are few international companies that have franchises or directly operate in India as well. These companies are not registered with the Companies Act, and hence they pay taxes based on all their income earned within the national territories of India. The taxes collected on these two types of companies are known as corporate tax in India. A corporate income tax (abbreviated as CIT) is however not equal to the tax paid by individual shareholders of a company. A corporate tax in India is shown in the accounts as expenses, as it is a deduction from the earnings of a company. In every financial year, the Department of Income Tax amends a few changes to be brought to the corporate tax to align with the economic condition of the nation. Some of the latest updates are below:

Read also about the types of taxes and their impact on a business.

Corporate Tax Rate in India

The corporate tax rate in India is determined by the Income Tax Department. This rate is subject to change and is revised according to tax department amendments and budgetary decisions. The tax rate is different for domestic companies and foreign companies. Here is a complete breakdown of all the corporate tax slabs in India:

Corporate Tax Rate For Domestic Companies

Domestic companies operating in India have been classified according to their revenue structure. For those domestic companies whose annual income does not exceed ₹400 crore, the tax rate to be levied is:

Part I - For annual income not exceeding ₹400 crore

For companies whose annual income exceeds ₹400 crore, the CIT rate is different. The table below clearly explains the taxation structure for such companies:

Part II - For annual income exceeding ₹400 crore

Corporate Tax Rate For Foreign Companies

The corporate tax rate for foreign companies in India is given below:

Foreign companies also have to pay 50% net tax on royalty received or any technical services provided to the government.

Deductions Allowed under Corporate Tax in India

Deductions refer to the major elements that are business revenue but are allowed to be deducted because they are neither personal expenses nor capital expenses. These deductions are counted directly from the corporate income tax and are permitted by the Income Tax Act, of 1961. Let’s take a close look at all of those items:

Interest Deduction

Interest paid on borrowed capital is deducted from corporate tax in the books of accounts of companies. However, any interest paid to a third party such as a non-resident company, then only 30% of the earnings will be paid as interest rate expense. The purpose of borrowing capital, however, matters here. If the capital is borrowed for purchasing another capital asset, then interest is not deducted and is added to the cost of borrowing.

Unethical and Illegal Expenses

The Finance Act, 2022 does not allow any illegal or unethical expenses to be deducted from the corporate tax. The reason behind this is that any illegal expenses done which are prohibited by the law are not treated as business expenditures. Deductions are therefore not extended to include illegal expenses such as bribery or false auditing expenses.

Depreciation

Expenses related to depreciation are tax deductibles and are counted as annual deductions directly from the capital assets. In India, firms treat depreciation as blocks or cluster groups, where every capital asset is subjected to a fixed proportion of depreciation. For example, plant and machinery are depreciated at a 45% rate and are treated as tax deductible.

Goodwill

Goodwill is not considered a depreciable asset according to the Finance Act, 2021. This decision has been solidified by the Central Board of Direct Taxes, and hence not deducted from corporate tax. In 2021, the amendment of the Income Tax Act made the changes to not regard goodwill as a tax-deductible item.

CSR Expenses

Expenses for meeting the eligibility of Corporate Social Responsibility (CSR) are also not regarded as a tax-deductible item. There is an exception to this although, such as all expenses made to NGOs and charitable trusts for meeting CSR standards are tax deductible.

Penalties

A business, if it pays any penalty, cannot claim it as a tax-deductible expense. In the case of a contractual penalty, a business can claim a tax deduction.

Foreign Affiliate Expenses

For all foreign affluent expenses such as payment for royalties and payment of interest for technical or management services, a firm can claim tax deduction.

Corporate Tax Planning Strategies

Corporate tax planning involves meticulous auditing of accounts and structuring of all the financial accounts for a clear and transparent tax declaration. Check some of these key planning strategies that your firm may follow:

Income Shifting and Transfer Pricing

Transfer pricing techniques can be adapted to allocate your business income to lower tax-deductible subsidiaries. This method is sufficient to save income tax and also create better financing opportunities for the business in the long term. This technique may require a professional tax agency as the business has to restructure most of its operations to a different nation and showcase a high price of selling to equalize tax returns.

Maximization of Tax Incentives

Tax incentives are a strong strategic measure by which companies may reduce the burden of tax incidence on them. The Government of India allows tax incentives in several cases, such as a tax credit for an oil refining business or operating a hospital in a rural region.

• If your business operates in the real estate industry, it can still claim higher tax incentives if it develops affordable housing projects. Before claiming for 100% tax deduction on payment of corporate tax in India, you may need to understand if your business meets the eligibility criteria. Below are all those businesses that can claim a tax deduction:
• The company is a domestic company and was incorporated on or after October 1, 2019, and had treated to manufacture before 31st March 2024
• The company uses a new plant and machinery and not anything from the previous business.
• The company has been formed all new and is not a reconstruction of any business from earlier times.
• The company is in a manufacturing or production business and is not engaged in any form of manufacturing such as computer software development, marble block manufacturing, or bottling of gas into cylinders.

Debt Structuring Process

This is an indirect process of reducing business tax, where a business can negotiate with creditors to lower the debt amount to compensate for the high corporate tax. A company can restructure debt to lower the tax incidence amount, which may work by several methods, such as credit modification or even debt settlement.

Tax-exempted Investments

A great way to lower corporate tax is to invest in tax-exempted investments such as creating an employee life insurance fund. Investing in tax-free investments such as employee provident fund or life insurance, can reduce the overall tax burden on the company.

Get to know more about employee wellness benefits and their coverage details.

Income Deferral

Postponing income to the next year is another strategy to lower the tax imposition. Companies can write off their recurring income and lower it in the current period to enjoy low taxation. In case a direct complete income deferral is not possible, a company can also arrange for receiving sales revenue in instalments.

How to File Corporate Tax in India?

A large portion of corporate tax planning involves finding for tax and complying with the central tax laws. Your company can easily file for corporate tax by checking out these steps to ensure a smooth taxation process.

Checking The Due Date

Checking the last date of business tax filing is vital for all companies. Companies can get to the official portal of the Income Tax Department and check out the due dates to avoid tax default. This portal keeps updating according to the latest government notifications and tax return claims.

Filling in Tax Returns Forms

Every company in India registered under the Companies Act, 2013, is required to file corporate tax returns by duly filing Form ITR 7. One can visit the official website of the Income Tax department and digitally sign the form, followed by verification and submission. The business also needs to submit correct information about their registration details, ongoing project name and approval of this party.

Filing Tax Audit Report

A registered auditor can file the tax audit report on behalf of the company, as an audit report requires the approval and signature of the auditor. Usually companies have to submit their audit reports by October 31, and can be done through the Income Tax department online.

Conclusion

This blog gets into a detailed briefing about corporate tax in India, major strategies to file it and deductions allowed in it. Corporate tax is a statutory payment of tax payable by every Indian company irrespective of their business or size of business. A company can easily claim tax deductions if its business is described as eligible for tax deductions, which the blog discusses above.

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