Under the Income Tax Act, 1961, corporate tax is levied on the income earned by companies. Any company registered under the Companies Act, or any foreign company that has its place of effective management in India will be considered as a domestic company. All income earned by a domestic company is taxed under corporate income tax.
For foreign companies, only the income received or accrued in India is taxed under corporate taxation.
The types of income that a company earns are:
- Profits earned from the business
- Capital gains
- Income from renting property
- Income from other sources like dividend, interest etc.
Lowered corporate tax rate for eligible companies
India cut the corporate tax rate for domestic (locally incorporated) companies in 2019, whereby companies could opt for a 22 percent rate and new domestic manufacturing companies, 15 percent. Choosing the concessional regime would require meeting certain specified conditions.
Domestic companies
The Taxation Laws (Amendment) Act, 2019 inserted section 115BAA into the Income-tax Act, 1961, which provides the concessional tax regime (22 percent) for domestic enterprises if they do not avail of specific tax incentives or deductions. The effective tax rate for these domestic companies is around 25.17 percent inclusive of surcharge and cess.
Those companies opting for the concessional corporate tax rate also do not have to pay minimum alternate tax (under section 115JB). As a result, India’s current effective tax rate brings it at par, on average, with leading Asian investment destinations and manufacturing hubs like China, Vietnam, Malaysia, Singapore, and South Korea.
[tips title="Important Tip"]A company that does not opt for the concessional corporate tax regime and avails the usual tax exemptions/incentives shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period.[/tips]
There is no restriction on company turnover to be eligible for choosing the concessional regime and the company need not be a new company; any existing company can migrate to this regime (section 115BAA, Income Tax Act, 1961) at any point. Once the domestic company chooses the new tax rate in a particular financial year (section 115BAA) – they cannot subsequently opt out.
New domestic manufacturing companies
If a new domestic company is engaged in the business of manufacture or production of any article or thing, or research in relation to such article or thing, or engaged in the distribution of such article or thing manufactured or produced by them – they can claim the benefit of section 115BAB (available from the financial year 2019-20 (AY 2020-21)).
The eligible manufacturing company can exercise the option to be taxed under section 115BAB on or before the due date of filing income tax returns, which is usually September 30 of the assessment year, unless extended. Once the company opts for section 115BAB in a particular financial year, it cannot be withdrawn subsequently.
Eligibility
1) The company was set up and registered on or after October 1, 2019 and commenced manufacturing on or before March 31, 2023.
2) The company must not be formed by the splitting up and reconstruction of an already existing business – except in the case of a business that is re-established under section 33B, Income Tax Act.
3) The company does not use any previously used (second hand) plant or machinery for any purpose. However, the company can use plant and machinery that was used outside India and is now being used in India for the first time. Also, the company can use old plant and machinery, if their value does not exceed 20 percent of the total value of the plant and machinery used by the company.
4) The company does not use a building that was previously used as a hotel (two-star, three-star, or four-star category as classified by the Central Government) or a convention center.
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Corporate Tax Rate for FY 2022 |
||||||
|
Types of companies |
Income up to INR 10 million (US$131,687) |
Above INR 10 million (US$131,687) up to INR 100 million (US$1.3 million) |
Above INR 100 million (US$1.3 million) |
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|
|
Surcharge rate |
Effective tax rate |
Surcharge rate |
Effective tax rate |
Surcharge rate |
Effective tax rate |
|
Domestic - turnover not exceeding INR 4,000 million in FY 2018-19 (claiming exemption / incentives) |
Nil |
26.00% |
7% |
27.82% |
12% |
29.12% |
|
All domestic companies not claiming tax exemption / incentives* |
10% |
25.17% |
10% |
25.17% |
10% |
25.17% |
|
New domestic manufacturing (set up and registered on or after March 1, 2016)** |
Nil |
26% |
7% |
27.82% |
12% |
29.12% |
|
New domestic manufacturing (set up and registered on or after October 1, 2019)*** |
10% |
17.16% |
10% |
17.16% |
10% |
17.16% |
|
Other domestic |
Nil |
31.20% |
7% |
33.38% |
12% |
34.94% |
|
Foreign |
Nil |
41.60% |
2% |
42.43% |
5% |
43.68% |
Minimum Alternate Tax (MAT)
A company shall be liable to pay minimum alternate tax (MAT) at 15 percent of book profit (plus surcharge and health and education cess as applicable) where the normal tax liability of the company is less than 15 percent of book profit. However, a foreign company shall not be liable to pay MAT on following incomes if income-tax payable thereon under the normal provisions is at a rate less than 15 percent:
- Capital gains that arise from the transfer of securities
- Interest
- Royalty
- Fees for technical services
Further, MAT provisions shall not be applicable with effect from April 1, 2001 to a foreign company, if:
- The assessee is a resident of a country or a specified territory with which India has a Double Taxation Avoidance Agreement (DTAA) or the central government has adopted any agreement under sub-section (1) of section 90A of the Income Tax Act and the assessee does not have a permanent establishment in India.
Dividend Distribution Tax
In the 2020 union budget, the finance ministry proposed the abolition of the dividend distribution tax (DDT), which will help companies and foreign investors pay reduced taxes.
[video file='https://cdn.jwplayer.com/videos/241HctFL-sZcHHUE7.mp4' image='https://resource.dezshira.com/resize/900x506/Misc/banners/web_2.jpg' title='An Overview of the External Commercial Borrowings Framework in India']
Instead of being subjected to DDT on the dividend payouts, the dividend income will be added to the taxable income, and then taxed on the applicable rate. Earlier, multinationals could claim tax credit in their respective countries only for the corporate tax paid in India. However, now investors will be able to claim credit in their countries for all the taxes paid in India.
A domestic company that declares or distributes dividend is required to pay dividend distribution tax (DDT) at the rate of 15 percent on the gross amount of dividend as mandated under section 115O of the Income Tax Act. Hence, the effective rate of DDT is 17.65 percent (or 20.56 percent after adding surcharge and cess) on the amount of dividend.
With effect from Assessment Year 2021-22, the domestic company is not required to pay DDT on any amount declared, distributed, or paid by such company by way of dividend. Dividend received from the domestic company is taxable in the hands of shareholders.
Special provisions relating to tax on distributed income are in the following sections of India’s Income Tax Act, 1961:
Section - 115O : Tax on distributed profits of domestic companies
Section - 115P : Interest payable for non-payment of tax by domestic companies
Section - 115Q : When company is deemed to be in default
[faq title="FAQ:Common Compliances for Companies in the Indian Regulatory Landscape" ui="accordion"]
What are the challenges companies face while ensuring that necessary regulatory compliances are completed?
Managing compliances in today’s highly complex economic and regulatory environment is no easy task. Companies face many challenges, including:
- Rapid globalization
- Ongoing developments in tax and other allied laws
- Changes in accounting standards
- Increased demand from regulatory authorities for greater transparency and cooperation
- Acute shortage of qualified professionals
- Obtaining accurate data in an efficient manner
- Global trends towards centralization of compliances
- An ever-evolving technology ecosystem
Can you list a few common laws and legislations that are applicable to companies in India?
The following laws are applicable to companies in India.
- The Companies Act 2013 and Rules thereof.
- Labor and Employment Laws
- Environmental Laws
- Tax and Stamp Duty
Can you explain the scope of compliances under Companies Act, 2013?
The scope of compliances under the Companies Act covers but is not limited to the following:
The Companies Act, amongst other provisions, lays down detailed guidelines regarding qualification and appointment/ removal of directors, retirement of directors, their remuneration, passing board resolutions, arranging board and shareholders meetings, oversight on related party transactions, timely maintenance of books of accounts and the preparation and presentation of annual accounts (matters that must be included in the annual reports of the companies), filing of forms with the Registrar of Companies periodically, etc.
Subsequent to the completion of all legal formalities required for incorporation, and the issuance of the certificate of incorporation, the company is recognized as a separate legal entity in the eyes of the law, distinct from its members who have incorporated the entity.
Whether it is a private or a public company, various things are supposed to be dealt with post incorporation. There are matters that must be undertaken in the first board meeting immediately post incorporation, and then there are tasks that are required to be carried out on a periodical basis.
A company conducts its business through its Directors who are accountable in the event of failure to comply with the above compliances.
Soon after a company is incorporated, but no later than 30 days, an appointed director is under obligation to call the First Board Meeting by issue of notice (together with the agenda) of the meeting at least seven days prior to the meeting. Several important matters need to be resolved in this first board meeting.
A company must also place its sign board outside the registered office address, with its name, registered office address, company identification number, e-mail ID, and phone number (mandatory fields as per the current mandate), Website address and fax number, if any, stated on it. These details must also be printed on all business letters, billheads, and all other official publications.
As mentioned under section 173(1) of the companies act of 2013, a company must convene at least four board meetings, in addition to the first board meeting, with a gap of no more than 120 days between two consecutive board meetings in a calendar year. Detailed minutes of the meetings should be prepared, recording the important actions taken by the Board of Directors and the same must be maintained as a permanent document by the company. Within 30 days from the meeting, the minutes must be prepared, duly signed, and maintained in a minute’s binder.
Similarly, on allotment of shares, the company must issue share certificates to those who have been allotted the shares and must maintain both a members register and a shares allotment register. A company is also required to file various financial statements along with the auditor’s report and annual return before the due date every financial year with the Registrar of Companies.
Additionally, there are several instances wherein a company has to intimate the concerned Registrar of Companies, on a timely basis, about the appointments/ removal of directors and certain other changes in a prescribed manner.
The above-mentioned compliance requirements under the Companies Act is not an exhaustive list. Some companies may also be required to ensure several other additional compliances such as registration under the GST, Professional Tax, and Shops and Establishment Act. It is important to understand that the responsibility of complying with the central and state by-laws is indeed, a continuous process.
What is the scope of compliances under Labor and Employment Legislation?
The scope of compliances under Labor and Employment Legislation covers, but is not limited to, the following:
Businesses with production lines, factories, must consider and comply with a host of statutes such as:
- The Employees' State Insurance Act, 1948
- The Maternity Benefits Act, 1961
- The Industrial Disputes Act, 1948
- The Contract Labor (Regulation and Abolition) Act, 1970
- The Trade Union Act, 1926
- The Equal Remuneration Act, 1976
- The Payment of Gratuity Act, 1972
- The Workmen’s Compensation Act, 1923
- The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, etc.
The above statutes govern pressing issues such as duration of work, conditions of employed workers, minimum wages and remuneration, rights and obligations of the trade unions, insurance cover for employees, maternity benefits, employment retrenchment, payment of gratuity/provident fund, payment of bonus, and regulations of the contract labor, amongst other issues concerning employees.
However, many provisions of the existing labor laws trace their origins to the time of the British Colonial era, and with changing times, many of them have either became ineffective or do not have any contemporary relevance. Rather than protecting the interests of workers, these provisions ensured unwarranted difficulties for them.
The web of legislations back in the British colonial era were such that workers had to fill four different forms to claim a single benefit. Therefore, the present Government has repealed the outdated Labor Laws and has codified 29 of such labor Laws into four new Labor Codes.
For ensuring workers’ right to minimum wages, the Central Government has amalgamated 4 laws in the Wage Code, 9 laws in the Social Security Code, 13 laws in the Occupational Safety, Health and Working Conditions Code, 2020 and 3 laws in the Industrial Relations Code. By getting these Bills passed in the parliament, the Central Government has made significant headway in changing the standard of living of workers.
These labor reforms will enhance ease of doing business in the country. Employment creation and output of workers will also improve. The benefits of these four Labor Codes will be available to workers in both the organized and unorganized sector. Now, the Employees’ Provident Fund (EPF), Employees’ Pension Scheme (EPS) and coverage of all types of medical benefits under Employees’ Insurance will be available to all workers.
Companies must put consistent effort to ensure that proper compliance of these various statutes vis-à-vis the working condition for its employees are in order, and that the HR policies are formulated in accordance with the guidelines mentioned in the central and state by laws.
What is the scope of compliances under Environmental Laws?
The scope of compliances under Environmental Laws covers, but isn’t limited, to the following:
Environmental and pollution control matters fall under the ambit of various statutes such as:
- The Environment (Protection) Act, 1986
- The Water (Prevention and Control of Pollution) Act, 1974.
- The Air (Prevention and Control of Pollution) Act, 1981
- Hazardous Wastes (Management, Handling and Trans boundary Movement) Rules, 2008
- The Manufacture, Storage, and Import of Hazardous Chemicals Rules, 1989
- The Indian Forest Act, 1927
- The Forest (Conservation) Act, 1980
- The National Environment Tribunal Act, 1995
- The Public Liability Insurance Act, 1991, etc.
Companies are required to comply with the provisions of these environmental laws to the extent specifically applicable to their business operations. The consequences of non-compliance with the provisions of any such statutes and rules are provided in the respective statutes.
What is the scope of compliances under Tax and Stamp Duty related laws?
The scope of compliances under the Tax and Stamp Duty related laws covers, but is not limited, to the following:
There is a federal tax structure in India and taxes are levied by both the Central and State Governments, along with other local regulatory authorities. These taxes are broadly classified as:
- Direct Tax (which includes income tax, dividend distribution tax, minimum alternate tax (MAT), share buy-back tax),
- Indirect Tax (which includes GST, Excise Duty, Customs Duty, Entry Tax, R&D Cess), and
- Charges on transactions (including stamp duty, securities transaction tax, and commodity transaction tax).
All Indian companies are subjected to payment of tax and stamp duty for their business transactions undertaken during any financial year and on the income generated from such operations. Delayed/ non-payment and inadequate payment of tax and stamp duty may attract moderate to heavy penalties, cause enforceability issue of the documents and, in some cases, impounding of the documents by the authority.
Apart from the ones mentioned above, are there any other enactments that are applicable for companies in India?
Whilst the above explained laws and enactments lays down the general laws governing a company in India, local state laws also play a very important role. Therefore, the need for companies to be mindful of adhering to local state laws in which they are registered and conducting their business must not be overlooked.
What are the consequences of non-compliance of the provisions of Acts and Enactments as mentioned above?
The policy and procedures regulating, and governing Indian corporations have been progressively liberalized and simplified over the last few years. However, there are several compliance mandates that must be adhered to, failure to do so could trigger various compliance risks such as disqualification of directors, attracting of penal provisions and in some cases even imprisonment of the directors and key management personnel.
What is compliance risk and how can companies manage it?
Compliance risk refers to an exposure to legal penalties, financial forfeiture, and the material loss an organization faces when it fails to act in accordance with industry laws and regulations, internal policies, or prescribed best practices. Compliance risk can also be referred to as integrity risk. Several compliance regulations are enacted to ensure that companies operate ethically and in a fair manner.
Compliance risk management constitutes the widely known collective governance, risk management, and compliance (GRC) discipline. The three fields have been known to overlap frequently in the areas of internal auditing, incident management, operational risk assessment, and compliance with regulations such as the Sarbanes-Oxley Act of United States. Penalties for compliance violations include payments for damages, fines, and voided contracts, which can lead to a loss of reputation and business opportunities for organisations, as well as devaluation of its franchises.
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