Corporate Tax - What is corporate tax, and How does corporate tax work?

Is a company explicitly defined under the Act?

Yes, section 2(17) of the Act defines a company. Its scope is much broader in the Income-tax Act than in the Companies Act. Under the Act, the expression ‘Company’ means:

• (a) any Indian company incorporated under the Companies Act 2013 and has a registered or principal office here in India; or
• (b) a corporate body that is incorporated under the laws of any foreign company; or
• (c) any institution, body, or association which is to be assessed or was assessed as a company for any assessment year under the previous Income Tax Act or the present Act; or
• (d) any association, institution, or body, whether incorporated or not and whether Indian or non-Indian, which is declared by a general or special order of the Central Board of Direct Tax (CBDT) is to be a company for such assessment years as may be specified in the CBDT’s order.

Companies are classified as:

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Corporate Tax in India

Corporate Taxes are computed based on income grouped under various heads, such as:

• Rental income is grouped under the head Income from House Property,
• Income from Profits and Gains of Business or Profession,
• Capital Gains,
• Income from Other Sources like dividends, interest, etc.

The tax shall be computed based on either of the following incomes:

• Net profits from business computed in accordance with the Income-Tax Act or
• Book profits computed in accordance with the Companies Act (sec 115JB Minimum Alternate Tax (MAT))

The corporate income-tax rate(%) applicable for the financial year 2020-21 is as follows:

The effective rate above includes a surcharge, as applicable, and a health and education cess of 4%

The surcharge rates vary based on the turnover, which is as given below:

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Reduced rate of taxes for certain domestic companies

Reduced tax rates were introduced to encourage the companies to expand their operations, thereby providing the a much-needed boost to the economy. Certain conditions are attached to such beneficial rates. Therefore, the companies have an option to pay tax at the reduced rates or the normal rates. The benefits and conditions are as follows:

A) Existing Companies:

• a) Section 115BAA
  

  i) Tax Rate:
  Effective rate: 25.168%
  Basic: 22%
  Surcharge: 10% (irrespective of the turnover)
  Cess: 4%

  ii) The companies should not claim the deduction of the following benefits otherwise available to them :

  1. deduction under section 10AA available for newly established units in Special Economic Zones.
  2. additional depreciation under section 32
  3. The benefit of investment allowance under section 32AD regarding investments made in new plant and machinery made in notified backward areas of Andhra Pradesh, Telangana, Bihar, and West Bengal
  4. deduction for expenditure on scientific research under section 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA), 35(2AB)
  5. 100% deduction of capital expenditure incurred towards specified business under section 35AD
  6. tea, coffee, and rubber manufacturing companies should not claim a deduction under section 33AB
  7. companies engaged in the production or extraction of petroleum or natural gas or both in India shall not claim any deduction towards deposits made for site restoration fund under section 33ABA
  8. deduction of expenditure incurred on an agriculture extension project under section 35CCC
  9. deduction of expenditure incurred on skill development project under section 35CCD
  10. deductions under chapter VI-A except for 80JJAA for employment of new employees, 80LA for off-shore banking units, etc., and 80M for inter-corporate dividends
  11. Set-off of any carried forward losses or unabsorbed depreciation, including those of the amalgamated company which was transferred to it under amalgamation, if they are attributable to the deductions mentioned above

  iii) Companies must exercise the option to pay tax@22% before the due date of filing the return in Form 10-IC

  iv) on electing to pay tax under this section, MAT and MAT credit shall not apply to such companies

• b) Section 115BA:
  

  i) Tax Rate
  Effective rate: depends on turnover (refer to the third column of the first table)
  Basic: 25%
  Surcharge: based on the turnover
  Cess: 4%

  The company can exercise such an option if it fulfills all the following conditions:

  1. The company is set up and registered on or after 1 March 2016
  2. The company is engaged in the manufacturing or production of any article or thing
  3. Same as point (ii) of section 115BAA above
  4. The company must exercise the option upto the due date of return filing in Form 10-IB
  5. The option, once exercised, shall continue for the lifetime of the company except when it switches to section 115BAA.

B) Newly set-up manufacturing companies

• a) Section 115BAB i) Tax Rate
  Effective rate: 17.16%
  Basic: 15%
  Surcharge: 10% (irrespective of the turnover)
  Cess: 4%

  However, the above tax rates are only for income from manufacturing businesses. Tax rates for other income are summarised below:

  Summary of tax rates applicable for companies opting to pay tax under section 115BAB:

  Income	Tax Rate
  Income from manufacturing	15%
  Income from non-manufacturing activity (If no specific rate is prescribed)	22%
  Short-term capital gain(STCG) on the transfer of depreciable assets	15%
  STCG on the transfer of non-depreciable assets	22%
  Excess profit computed by tax authority u/s 115BA(6)	30%
  Special tax rates for income under Chapter XII	Special rates applicable

  ii) The company can exercise such an option if it fulfills all the following conditions:

  1. The company is set up and registered on or after 1 October 2019, and it commences its operations on or before 31 March 2023
  2. The company is not formed by splitting up or reconstructing an existing business
  3. The plant and machinery should be new. Exceptions:
     a) 20% of total plant and machinery can be second hand.
     b) Imported plants and machinery shall be treated as new in this section.
  4. Should not use any building previously used as a hotel or convention center.
  5. Should not be engaged in any business other than the manufacturing of any article or thing.
  6. Same as point (ii) of section 115BAA above
  7. The company must exercise the option upto the due date of return filing in Form 10-ID.

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Minimum Alternate Tax (MAT)

Where the tax payable under the normal provisions (excluding surcharge and health and education cess) of the Act exceeds 15% of tax on adjusted book profits(except the income from life insurance business), then the companies shall be required to pay MAT on such book profits. Such excess tax paid is termed as MAT credit, which can be carried forward and utilized for the next 15 years.

The MAT rate is 15% plus the surcharge based on the turnover and cess of 4%.

Note: MAT does not apply to:

• A foreign company that does not have a permanent establishment(PE) in India.
• Foreign companies engaged in the shipping business, aircraft business, exploration of mineral oils, and civil construction in turnkey projects and whose income is offered to tax under specific provisions of the Act.
• Capital gains from transfer of securities, royalties, interest, and FTS accruing or arising to a foreign company (which has a PE in India) if the tax payable on such income is less than 15% (exclusive of surcharge and health and education cess).
• Sick companies (i.e., where losses wiped out their net worth and are now being revived)
• Companies exercising the lower tax rate option of 22% u/s 115BAA (discussed above)

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Return Filing for Companies

All the companies must file an income tax return by the due dates. The tax return forms to be filed by a company are ITR 6 or ITR 7 if it is a religious or charitable trust, political party, research association, news agency, or similar organizations specified in the Act. Also, the Income Tax Act mandates a certain class of companies to undergo auditing of their accounts and submit an audit report to the IT department alongside their income tax return. This process is commonly referred to as a Tax Audit.

The due dates for filing such returns and reports are as under:

• For companies engaged in international transactions and mandated to submit a transfer pricing report, the deadline is typically November 30th. However, for the fiscal year 2020-21, this deadline has been extended to December 31st, 2021.
• For other companies not involved in international transactions, the deadline for various filings, including the income tax return, is typically October 31st. Yet, for the fiscal year 2020-21, this deadline has been extended to November 30th, 2021.

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