Businesses in India are primarily subject to two types of taxes categorized based on who bears the ultimate tax liability – direct taxes and indirect taxes. Indirect taxes are a type of tax that occurs when the ultimate tax liability falls on the final consumer. Businesses act as intermediaries to help pay their taxes, like the GST. However, the tax burden and payment falls on the business directly in the case of direct taxes like Income tax. Body corporates, in particular, are subject to a special type of Income-tax, called the Corporate Income Tax (CIT) in India.
CIT is very different from the income tax individuals pay in India, though it is also covered under the same legislation – The Income Tax Act, 1961. The tax structure, and rates, for instance, are different for individuals, partnership firms, and body corporates. While Individuals pay taxes according to the slab rates, body corporates and partnerships pay taxes at a flat rate, as prescribed by the annual finance act. These rates can be found in the First schedule of the annual finance act introduced on the union budget session each year. But before we go in-depth about the tax rate, it is important to see what the Income Tax Act, 1961 classifies your organization as.
According to the Income Tax Act, 1961, only companies (Incorporated in India, or otherwise) and LLCs, along with those organizations subject to corporate taxes under a specific order from CBDT (Central Board of Direct Taxes). These corporates are further divided into categories based on the rates of corporate taxes they are bound to pay.
These categories are:
- Companies u/s 115BA
The domestic companies with a turnover of up to INR 400 crore in the FY 17-18 fall under this category. For the current year, these companies are required to pay corporate taxes at 25%, surcharge (discussed later), and Health, Secondary, and Higher Education Cess as the case may be.
- Companies u/s 115BAA
All domestic companies have the option to pay corporate taxes at a rate of 22% on their total income, provided they don’t avail any exemptions or provided under different sections of the Income Tax Act, 1961. A detailed list of these conditions can be found here. Companies opting for this option will be mandated to pay a surcharge of 10%, apart from the Health, Secondary and Higher Secondary Education Cess (HS&HSEC) at the rate of 4%, making the effective rate 25.168%
- Companies u/s 115BAB
A Manufacturing company in operation after 1st October 2019, and has or will commence operations before 1st October 2023, subject to different conditions, can opt to pay corporate taxes at a rate of 15%, a mandatory surcharge of 10%, and HS&HSEC of 4%. This means the qualified companies can choose to pay corporate taxes at an effective rate of 17.16%
- Other Domestic Cases
In all other cases, domestic companies are subject to payment of corporate taxes at a rate of 30%, under normal surcharge conditions (discussed later).
- Foreign Corporates
Any foreign company carrying out business in India is bound to pay corporate taxes at the rate of 40%, along with the specified surcharge. However, if the income received by the foreign company falls under the category of Royalty, or fee for technical services on an agreement made before 1st April 1976, these taxes would be subject to a tax rate of 50%.
Note that these rates are subject to changes annually, and these figures are true for the financial year 2021-22.
A surcharge is an additional levy on companies exceeding a specified income limit. These rates are computed on the taxes and not on the total income.
When companies earn more than INR 1 crore but not more than INR 10 crore, they are subject to a surcharge of 7% in domestic companies and 2% in the case of foreign companies. For income exceeding INR 10 crore, the rates of surcharge would be 12% in domestic companies and 5% in the case of foreign companies. This is not applicable in companies u/s 115BAA/BAB, as they are mandated to pay a surcharge of 10% regardless of the income earned.
All companies are liable to pay a Health, Secondary, and Higher Secondary Education Cess (HS&SHEC) at a rate of 4% on the corporate taxes and surcharge payable.
In order to avoid excessive dividend distribution, while paying little corporate taxes by taking advantage of the different provisions, all companies have to pay a minimum tax of 15% on their book profits. The excess of Minimum Alternate Tax (MAT) over the computed tax will be credited to the account of the company, to be used only in subsequent years, when the computed tax exceeds MAT. This does not apply to companies opting for sections 115BAA, or 115BAB
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