What is Corporate Tax?
Corporate Tax is a direct tax levied by the Indian government on the net income or profit generated by companies. It’s governed by the Income Tax Act, 1961, and applies to both domestic and foreign companies operating within India.
This tax serves as a crucial source of revenue for the nation and ensures businesses contribute to India’s economic growth and welfare programs. It also encourages compliance and transparency within the corporate sector.
Corporate Tax applies to both domestic and foreign companies, with specific rules and tax rates for each category.
Types of Companies Liable for Corporate Tax
India’s corporate tax system classifies companies into two broad categories:
1-Domestic Companies:
- These are companies registered under the Companies Act of India.
- They are taxed on their global income, meaning they must pay taxes on earnings generated both within and outside India.
2-Foreign Companies:
- These include entities incorporated outside India but conducting business within the country.
- Taxation for foreign companies is limited to the income sourced within Indian borders.
Corporate Tax Rates in India (FY 2024-25)
India follows a structured tax rate system for domestic and foreign companies. The rates vary based on the nature of the business and the incentives availed:
Type of Company | Category | Tax Rate |
Domestic Companies | No exemptions or incentives (Section 115BAA) | 22% |
New manufacturing companies (Section 115BAB) | 15% | |
Turnover up to 400 crore in the previous fiscal year | 25% | |
Other domestic companies | 30% | |
Foreign Companies | Income from royalties or fees for technical services | 50% |
Other income | 35% |
Additional Levies:
- Surcharge:
– For domestic companies: 7% on incomes exceeding ₹1 crore but not ₹10 crore; 12% for incomes above ₹10 crore.
– For foreign companies: 2% and 5%, respectively, for the same thresholds. - Health and Education Cess: 4% on the total tax and surcharge.
How Corporate Tax is Calculated
Corporate tax is calculated on the taxable income of a company, which is derived after adjusting the net profit reported in the company’s financial statements according to the provisions of the Income Tax Act, 1961. Here’s a step-by-step guide:
Step 1: Determine Net Profit
- Obtain the net profit from the company’s Profit and Loss Statement for the financial year.
- This is the starting point for computing taxable income.
Step 2: Adjust for Tax Provisions
Adjust the net profit as per the provisions of the Income Tax Act:
Adjustments to Net Profit | Examples |
Add Back Disallowed Expenses | - Expenses not allowed under tax laws (e.g., personal expenses, penalties, donations to unapproved institutions). |
- Depreciation as per financial books (replaced with depreciation under the Income Tax Act). | |
Deduct Exempt Income | - Income exempt from tax (e.g., agricultural income, specific dividends). |
Add Back Non-Taxable Losses | - Losses that are not eligible for deduction under the Act. |
Deduct Eligible Deductions | - Deductions under Chapter VI-A (e.g., Section 80G, 80JJAA). |
Step 3: Compute Taxable Income
After adjustments, you get the taxable income, which forms the basis for calculating corporate tax.
Step 4: Apply Corporate Tax Rates
Step 5: Add Surcharge (if Applicable)
Tax Filing Deadlines
Form/Tax Type | Deadline |
Income Tax Return (ITR-6 and ITR 7) | 31st October (or as extended by the government). |
Tax Audit Report | 30th September (or as extended by the government). |
Advance Tax | Quarterly deadlines : 15th June, 15th September, 15th December, 15th March. |
TDS Returns | Quarterly deadlines : 31st July, 31st October, 31st January, 31st May. |
Tax Return Forms for Corporates
Corporate taxpayers in India are required to file their tax returns using specific forms based on their type of entity, nature of income, and activities. Here’s a detailed overview of the forms applicable to corporate taxpayers:
Form ITR-6 | |
Criteria | Details |
Applicability | Applicable to all companies other than those claiming exemptions under Section 11 (charitable or religious purposes). |
Purpose | Filing income tax returns for companies, including domestic companies, foreign companies, and startups. |
Details Included | Income from all sources, such as business or profession, capital gains, and other income. |
Mode of Filing | Mandatory e-filing with a digital signature. |
Form ITR-7 | |
Criteria | Details |
Applicability | Applicable to companies and entities claiming exemptions under Section 11, such as : |
- Charitable trusts. | |
-Religious trusts. | |
- Political parties (under Section 13A). | |
Purpose | Reporting income exempt under Section 11 or Section 12 of the Income Tax Act. |
Details Included | Gross income, exemptions, and details of voluntary contributions. |
Mode of Filing | Mandatory e-filing with a digital signature. |
Tax Audit
A tax audit is mandatory for companies (corporates) under specific conditions outlined in the Income Tax Act, 1961. Tax audit provisions are governed by Section 44AB of the Act, and the applicability depends on turnover, receipts, and profits.
Criteria | Details |
Applicability | Tax audit is mandatory for all companies if the total sales, turnover, or gross receipts in a financial year exceed 1 crore. |
Reduced Threshold for Tax Audit | Companies engaged in business or profession may be subject to a reduced threshold limit of 10 crore if they meet specific criteria related to cash transactions. |
Threshold for Reduced Limit (10 Crore) | Applicable if cash transactions (receipts or payments) do not exceed 5% of the total receipts or payments. |
Audit Report Form | The tax audit report for corporates must be filed using Form 3CA and Form 3CD. |
Filing Due Date | The tax audit report must be filed by 30th September (or any extended due date) of the assessment year. |
Who Conducts the Audit?
The audit must be carried out by a qualified Chartered Accountant (CA). The CA will issue a Tax Audit Report detailing any discrepancies or issues found during the audit.
Deadline for Filing the Tax Audit Report:
The report must be filed with the Income Tax Department by September 30 of the assessment year. Failure to submit the report on time can result in penalties, making it imperative to complete the audit process promptly.
What types of income are subject to corporate tax?
Type of Income | Examples |
Business Income | Revenue from sales, commissions, royalties, rental income from business assets. |
Capital Gains | Profits from the sale of land, buildings, shares, or other investments. |
House Property Income | Rent or lease income from commercial properties. |
Other Income | Interest, dividends, royalties, and miscellaneous receipts. |
International Income | Export earnings, royalties, and technical service fees from foreign clients. |
Deemed Income | Unexplained cash credits, investments, or deemed dividends. |
Tax Deductions Applicable on Corporate Tax
Corporate taxpayers can reduce their taxable income by availing various deductions allowed under the Income Tax Act, 1961. These deductions encourage companies to invest, grow, and engage in socially beneficial activities while ensuring compliance with tax regulations.
1. Deductions Under Chapter VI-A
These deductions are available from Gross Total Income:
Section | Nature of Deducti... | Details |
80G | Donations to charitable institutions | Deduction for donations to approved funds, charitable organizations, or government schemes. |
80GGB | Donations to political parties | 100% deduction for contributions to political parties or electoral trusts by Indian companies. |
80JJAA | Employment of new employees | Deduction of 30% of additional employee cost for 3 years, applicable to companies hiring new employees. |
80IA/80IB | Profits from infrastructure, telecom, and power sectors | Deduction for profits from eligible infrastructure, industrial parks, and power generation projects. |
80P | Income of cooperative societies | Available to certain cooperative societies. |
2. Depreciation and Amortization
Deduction Type | Details |
Depreciation (Section 32) | Depreciation on tangible and intangible assets as per the Income Tax Rules. |
- Includes normal and additional depreciation for manufacturing companies. | |
Amortization (Section 35D) | Deduction for preliminary expenses incurred during the formation of the company, claimed over 5 years. |
3. Deductions for Specific Business Expenditures
Section | Nature of Deduction | Nature of Deduction |
35 | Expenditure on scientific research | 100%-150% deduction for expenditure incurred on in-house R&D (for specified industries). |
35AD | Capital expenditure on specified businesses | 100% deduction for capital expenditure on specified businesses (e.g., cold storage, affordable housing). |
37(1) | General business expenses | Deduction for expenses wholly and exclusively incurred for business purposes, except those prohibited by law. |
4. Deductions for Startups and SEZs
Section | Nature of Deduction | Details |
10AA | Deduction for Special Economic Zones (SEZs) | 100% tax exemption for first 5 years and 50% for the next 5 years for profits from SEZ units. |
80- IAC | Deduction for eligible startups | 100% deduction of profits for 3 consecutive years out of the first 10 years of incorporation. |
5. Deductions for CSR and Other Activities
Nature of Deduction | Nature of Deduction |
Corporate Social Responsibility (CSR) | CSR expenses are not deductible unless specifically mandated by law or falling under eligible exemptions (e.g., contributions to PM CARES). |
Section 80G | Deduction for contributions to national relief funds and certain charitable institutions. |
6. Minimum Alternate Tax (MAT) Credit
Section | Details |
115JAA | Companies paying MAT can carry forward the MAT credit for 15 years and set it off against future tax liabilities. |
7. Deductions for Foreign Income
Section | Details |
Foreign Tax Credit (FTC) | Credit for taxes paid in a foreign country on income taxed in India, subject to Double Tax Avoidance Agreements (DTAAs). |
Non-compliance with corporate tax regulations can lead to significant legal, financial, and reputational consequences for a company. Below are the potential repercussions:
Deduction | Details |
Bad Debts (Section 36(1)(vii)) | Deduction for irrecoverable debts written off in the books of accounts. |
Employee Benefits | Contributions to EPF, gratuity funds, and leave encashment provisions are deductible under specific rules. |
Interest on Borrowed Capital | Deduction for interest paid on loans used for business purposes. |
Consequences of Non-Compliance with Corporate Tax Regulations
Consequences of Non-Compliance with Corporate Tax Regulations
1. Financial Penalties and Interest | |
Consequence | Description |
Penalty for Non-Filing/Delayed Filing | Companies failing to file their tax returns by the due date face penalties under Section 234F. The penalty can range from 1,000 to 10,000 depending on the delay and turnover. |
Interest on Late Payment | Interest under Section 234A, 234B, and 234C is charged for late payment of taxes, delayed filing, or failure to pay advance tax. Rates are typically 1% per month or part thereof. |
Penalty for Underreporting/Concealment | Under Section 270A, a penalty of 50% to 200% of the tax amount evaded can be imposed for underreporting or concealing income. |
2. Legal Consequences | |
Consequence | Description |
Prosecution | Severe cases of non-compliance, such as willful tax evasion, can result in imprisonment under Section 276C, ranging from 3 months to 7 years, along with fines. |
Attachment of Assets | The Income Tax Department can attach the company's bank accounts and assets to recover unpaid taxes. |
Revocation of Licenses | Persistent non-compliance may lead to cancellation of licenses or registrations, such as GST or business licenses. |
3. Disqualification of Directors | |
Consequence | Description |
Director Disqualification | Under the Companies Act, 2013, if a company fails to file financial statements or returns for 3 consecutive years, its directors may be disqualified for up to 5 years. |
4. Reputational Damage | |
Consequence | Description |
Loss of Credibility | Non-compliance can harm the company's reputation with stakeholders, investors, and creditors. |
Impact on Public Image | Legal proceedings or financial penalties may lead to negative publicity, reducing trust in the brand. |
5. Business Disruption | |
Consequence | Description |
Operational Challenges | Seizure of assets or bank accounts can disrupt daily operations and cash flow management. |
Loss of Contracts | Non-compliance may lead to loss of contracts, especially with government or multinational corporations requiring strict compliance. |
6. Additional Tax Liability | |
Consequence | Description |
Re-assessment and Recovery | The tax authorities can re-assess income and recover unpaid taxes, including penalties and interest. |
Denial of Deductions/Exemptions | Certain deductions, exemptions, or carry-forward of losses may be denied due to non-compliance. |
7. Impact on Mergers, Acquisitio | |
Consequence | Description |
Delays in Transactions | Non-compliance can delay mergers, acquisitions, or funding due to unresolved tax liabilities or disputes. |
Lower Valuation | Companies with poor compliance records may face reduced valuations during investment or sale negotiations. |