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What Is Corporate Tax

23 Feb 2023

What Is Corporate Tax?

A corporation tax is a charge that the government levies against a company's revenue. A nation's source of income is the money it receives through corporate taxes. A company's operating profits are calculated by deducting expenses from its income depreciation and the cost of goods sold (COGS).

To determine the legal obligation the business has to the government, tax rates are first applied. Worldwide, there are many different corporation tax regulations; however, before they can be put into effect, a nation's government must be voted and approved by the citizens.

What Is Corporate Tax In India?

As a source of revenue, the corporate tax in India is levied by the government on companies. The basis for evaluating and calculating the corporate tax is a corporation's net income. 

These are the many forms of revenue that a corporation receives:

  • Profits Earned By The Company: Profits are the monetary gains that a business experiences when its total income exceeds its whole costs.
  • Income From Renting A Property: When a firm rents out a piece of property, the rental revenue is considered business income.
  • Capital Gains: The rise in a company's capital assets' worth is referred to as a capital gain. In this case, a capital gain can be long-term as well as short-term and is deducted from income taxes.
  • Revenue From Unrelated Sources: Earnings from other sources refers to any additional income received by a business that is not expressly taxed under some other heading. It includes interest income, and dividend, among other things. Foreign and local businesses are both required to pay an annual corporation tax. So, it is dependent on the aforementioned revenue received within a certain fiscal year.

A corporation's taxable profit and otherwise net income decides how much corporate tax in India is due. The total amount that remains with a corporation after all essential deductions for different expenditures have been made is known as net profits, also often known as operational profits. To sell its products, a company must cover a number of expenses.

Understanding Corporate Tax Rate In India

An outline of the corporate tax rate in India is provided below:

1. Corporate Tax Rate For Domestic Companies

Both public and private businesses that are registered underneath the Companies Act of 1956 must pay this tax. Now, domestic businesses pay a 30% tax rate.

Moreover, if net income is between ₹1 crore and ₹10 crore, the Income Tax Act imposes a 7% surcharge. A 12% surcharge is applied on net income that exceeds ₹10 crore for a firm.

2019 saw the introduction of Section 115 BAA by the Indian government via the Taxes (Amendment) Ordinance. This resulted in many changes to the Income Tax Act, including a reduction in the corporation tax rate for domestic businesses.

Domestic corporations now have the option to pay tax at quite a rate of 25.168% according to Section 115 BAA. The following table breaks out this corporation tax rate:

Income Range

Surcharges Rate
₹400 crore 7% 25%
More than ₹400 crore 12% 30%

2. Corporate Tax Rate For Foreign Companies

On the money they earn within a certain time period, foreign corporations are obligated to pay corporate income tax. Royalty payments and other fees are subject to a 50% corporation tax rate in India, while the remaining revenue is subject to a 40% tax rate.

Foreign companies having net earnings of between ₹1 crore and ₹10 crore are subject to a 2% surcharge. A 5% surcharge would've been levied if its net income exceeded ₹10 crore.

Basis for Comparison

Domestic Company  Foreign Company
Operating Areas Inside India's national limits, business is conducted. With several countries across the world, trade is conducted.
Registration Registered under the Indian Companies Act. Not a company registered under the Indian Companies Act.

Benefits Of Corporate Tax

Paying corporation taxes may be preferable for business owners than paying additional individual income taxes. Corporate tax returns allow deductions for family health insurance as well as other benefits like retirement plans and tax-deferred trusts.

Businesses may also be able to write off losses more quickly. A company can write off all of its losses, but a lone owner must show that they have the intention to make a profit before they can do so. Lastly, a corporation's earnings may be retained inside the business, providing for tax planning and possible future tax benefits.

 

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