Corporate Taxation in India

Corporate Taxes are annual taxes payable on the income of a body corporate operating in India. The provisions relating to corporate income tax are contained in the Income-tax Act, 1961. There are specific statutes for other taxes levied on companies. It should be noted that a new draft Direct Tax Code to simplify and rationalize the direct tax system of India is currently being reviewed by the government. If passed it will mark a paradigm shift in the tax regime of India, by moderating, consolidating and simplifying the direct tax provisions and enhance compliance levels. The following article discusses the key provisions for corporate tax, rules and regulatory requirements relating to it.

For the purpose of taxation companies in India are broadly classified into domestic companies and foreign companies or in other words resident or non-resident. Depending on their residence they are subjected to different tax treatment. Companies that are registered in India according to the Companies Act of 1956, are deemed to be domestic companies and a company whose chief control and management are wholly located within India is also known as domestic company.  A domestic company may be a public company or a private company.  A company which is not registered in India and if its management control is exercised from a foreign country then it is treated as a foreign company.

Key Provisions

  • A domestic/ resident company is taxed on
    1. Any income which is received or is deemed to be received in India in the relevant Previous Year by or on behalf of such company
    2. Any income which accrues or arises or is deemed to accrue or arise in India during the relevant Previous Year
    3. Any income which accrues or arises outside India during the relevant Previous Year.
  • A Foreign/non-resident company is taxed on
    1. Any income which is received or is deemed to be received in India during the relevant Previous Year by or on behalf of such company
    2. Any income which accrues or arises or is deemed to accrue or arise to it in India during the relevant previous year.
  • A domestic/ resident company would be subjected to an additional tax called dividend tax on the amount of dividend declared, distributed or paid. Dividends tax is charged on the company and not charged on the hands of the shareholders. Such tax must be paid within 14 days of declaration or distribution, whichever is earlier. Any deduction on account of such tax is not allowed to the company.
  • Companies with more than INR 10 million total incomes are subjected to a surcharge on their taxes. Domestic companies pay a surcharge of 5% as against foreign companies that pay a surcharge of only 2%.
  • Withholding tax is applicable on payments made to foreign companies operating in India without permanent establishment.
  • Capital gains are subjected to tax.

Corporate Tax Rates 2011-2012

Company with total income exceeding INR 10 million Company with total income less than INR 10 million
Domestic Company 32.445% (30% basic rate  plus surcharge of 5% plus education cess of 3%) 30.9% (30% direct tax plus education cess of 3%)
Foreign Company 42.024% (40% plus surcharge of 2.5% and education cess of 3%) 41.2% (40% plus and education cess of 3%)

In addition to the basic corporate tax rate the following important taxes are applicable

  1. Minimum Alternate Tax rate of 18.5% (plus applicable surcharge and cess)
  2. Dividend Distribution Tax of 16.22% is charged on domestic companies
  3. Foreign dividends received by an Indian company currently are taxed at a rate of 30% (plus the surcharge and cess). To encourage Indian companies to repatriate funds, it is proposed that where the total income of an Indian company includes any dividend declared, distributed or paid by a foreign subsidiary company, the dividends will be taxed at 15% on a gross basis. No deduction in respect of any expenditure or allowance will be allowed in computing the dividend income.
  4. Wealth tax is charged @ 1% of the amount by which the net wealth exceeds Rs.3 Million
  5. Fringe benefits are taxable at 30% tax rate and additional 3% education cess on the total tax amount. For corporate with turnover of over INR 10 million, there is additional 10% surcharge on the 30% tax.
  6. Short term capital gains are taxed at normal basic income tax rate and Long term capital gains are charged 10% -20%. Short term gains on sale transactions of equity shares / unit of an equity oriented fund attract 15% tax rate while long term tax gained on similar transaction is exempted from tax.
  7. Withholding Tax
    Current rates for withholding tax for payment to non-residents are as follows

    Interest 20% *
    Dividends (Domestic Companies) Nil
    Royalties 20%
    Technical services 10%
    Any other services 40% of the income

     Note: Applicable to Non-resident belonging to countries that are not party to DTAA with India. Rates will be competitive for DTAA partner countries.

    *In order to augment long-term, low cost funds from abroad for the infrastructure sector interest received by a non-resident from an infrastructure debt fund set up in accordance with guidelines to be prescribed and notified by the central government will be taxed at a rate of 5% (plus the applicable surcharge and education cess) on the gross amount

  8. In addition several other taxes will be charged as indirect charges CENVAT, VAT, Service Tax, Custom’s duty etc

Computation of Tax

All incomes
Less: Losses, expenses, & Allowable Exemptions
______________________________
Gross Total Income
Less: Allowable Deductions
_____________________________

Tax: Total Income * Tax rate
Less: Relief & Rebates
_____________________________

= Tax Payable

Gross Total Income

For the purpose of tax computation total gross income is the aggregate of the income from various sources, after excluding qualifying exemptions, grouped under the following heads:

  • Income from house/property
  • Capital gains
  • Profits and gains of business or profession
  • Income from other sources such as foreign dividends, interests etc. Income from other sources including interest on securities, winnings from lotteries, and also, income of other persons may be included in the income of the company.

The income is adjusted for ‘current and brought forward losses’ and qualifying exemptions to arrive at the Gross Total Income. which should be adjusted allowable deductions to arrive at the net income

Allowable Deductions

In computing taxable total income, Gross Total Income should be adjusted for allowable deductions to arrive at the net income, several deductions are allowed which include the following.

  • Capital Allowances – expenses on R&D, mergers & acquisitions qualify for deduction
  • Depreciation – available at specific percentage depending on the nature of the asset and depreciation not set off against current year’s income can be carried forward for set off against any future income for an unlimited period.
  • Stock/Inventory – valuation at market value or cost whichever is lower
  • Interest – Interest paid on the borrowings
  • Losses – can be set off against any other income in the same Assessment Year and against business profits in subsequent assessment years subject to certain conditions.

The net income thus arrived is the chargeable income which is subjected to tax  to determine the tax accrued from which the tax rebates and credits are deducted to arrive at the actual tax payable.

Tax Rebates Available for Corporate Tax:

  • Domestic companies are allowed to deduct dividend received from other Domestic Companies in certain cases
  • Special Provisions apply to Venture Fund and Venture Capital companies
  • Subject to certain conditions Deductions are allowed to Exports and new undertakings
  • Special Deductions for developing, maintaining, and operating new infrastructure and power facilities
  • Business Losses can be carried over for eight years
  • Interest, Dividends and Long-Term Capital Gain income earned by an Infrastructure Fund from investments in shares or long-term finance in enterprises carrying on the business of developing, monitoring and operating specified infrastructure facilities or in units of Mutual Funds involved with the infrastructure of power sector are to be tax exempt.

Payment of Tax

After calculating the income tax, tax can be paid through Online deposit or through Nationalized banks.

Advance Tax Payment

Liability for payment of advance tax arises where the amount of tax payable by the assessee for the year is Rs. 10,000 or more. It can be paid in installments in the previous year. Deferred payment of tax will attract penal interest.

Filing of Income Tax Returns

Income Tax Act requires that every company to furnish return of income. The due date for filing of return is 30 September of the Assessment year. Assessment Year is the year in which the salary earned in the Previous Year is taxable. Any financial year begins from 1st of April of every year and ends on 31st of March of the subsequent year.

Forms for Filing Corporate Tax

ITR 5 For Firms, Association Of Persons and Body of Individuals
ITR 6 For Companies other than companies claiming exemption under section 11
ITR 7 For persons including companies required to furnish return under section 139(4A) or section 139(4B) or section 139(4C) or section 139(4D)
ITR 8 Return for Fringe Benefits

Except form ITR-7, which is in respect of charitable/religious trusts, political parties and other non-profit organizations, all the forms can be electronically filed.

The consequences of late submission range from penal interest, penalty, deprival of privilege for certain deduction, and in case of losses reported few losses cannot be carried forward.

In the return the details of high value transactions need to be compulsorily stated, which are ordinarily reported through the annual information return (AIR) and these details are cross checked and matched with the data in the AIR.

The form must be verified and endorsed by the following persons, as applicable.

  • Resident company: Managing Director or, where there is no Managing Director or he is not able to sign and verify the return due to any unavoidable reason, by any director thereof.
  • Non-Resident company: The return may be signed and verified by a person holding a valid Power of Attorney from the Company, which should be attached to the return

A company has two ways of filing tax return

  • furnishing the return electronically under digital signature;
  • transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V.

The collection of acknowledgement completes the filing process. An assessee will have to produce documents, if required by the Assessing Officer to complete the assessment.

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