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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:

  1. Profits earned from the business
  2. Capital gains
  3. Income from renting property
  4. 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.

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. 

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 centre.

Corporate Tax Rate for FY 2020-21

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)

 

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%

* Compliant with prescribed conditions under section 115BAA;** Compliant with prescribed conditions inder section 115BA

*** Compliant with prescribed conditions under section 115BAB

Note: Health and education cess of 4 percent has been considered for determining the tax rates mentioned above.

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.

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.

So far, companies are required to pay DDT at 15 percent, and after considering the surcharge and cess, the effective rate is 20.56 percent. From April 1, 2020, the dividend income will be added to the taxable income, and then taxed on the applicable slab rate.

 

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