India is a country where it is compulsory for every individual as well as business enterprise to pay taxes of some or the other form to the governing body so as to help them run the country properly. The different types are income tax, wealth tax; capital gains tax etc. and their purpose vary. Some of these taxes are paid by individuals whereas others are paid by business enterprises. One such form of tax that a business corporation is required to pay to the Indian Government is corporation tax or capital tax. Corporation tax is a form of tax on the income or revenue of a business enterprise for a certain period of time. Corporations earn different amount of revenue at different levels so accordingly the corporation taxes also vary. Corporation tax is calculated on the net profit left with the corporation after deducting certain expenses. The corporations that are liable to pay this tax are as follows:
- Incorporated corporations in India.
- Corporations that acquire revenues from India and does business on those earned incomes.
- Other foreign enterprises that have permanently established themselves in India.
- Corporations that have earned the title of being an Indian resident only for the purpose of tax payment.
What is a Corporate?
Now the question which arises is- what is meant by a Corporate on which a corporation tax is levied? Well a corporate is an artificial person that is recognised by law as having certain rights and duties and holds a completely independent legal identity from its shareholders. In such enterprises, the revenue of the company is not calculated along with the dividends that are offered to its shareholders. There are basically two types of corporate. They are as follows:
- Domestic corporate- A company that is established in India and is registered under the Companies Act 1956 is termed as a Domestic Corporate. Also a foreign company whose management and control takes place wholly in India is also a domestic corporate.
- Foreign corporate- On the contrary, as the name suggests, a company that is situated overseas and not in India is called a foreign corporate. Again, if some part of a foreign company’s management and control takes place outside India, then it is also called a foreign company.
What is Net Income?
We all now know that a corporate tax is computed on the net revenue or net income of a company. So one should have a clear understanding of this term. A net income of a company is the total amount left with the company after making necessary deductions on various expenses. There are a host of expenses that a company incurs for selling the goods. These expenses are as follows:
- Total cost of goods sold.
- Selling expenditures.
- Expenses incurred for administrative purposes.
Dividends are the amount that is payable to the shareholders of the company and corporate tax is the tax calculated on the net profit of a company after deducting expenses incurred by them. So, dividend distribution tax is a type of tax that is payable on the dividends offered to its shareholders by the corporate. It can also be termed as the percentage on the dividends paid to the shareholders by that particular corporate. Presently, the dividend distribution tax that is payable on the dividends offered to a company’s shareholders is 15%.
The rate of corporate tax varies from company to company. It is not the same for a domestic corporate and for foreign corporate. Depending on the kind of corporate and the different revenue earned by each one of them, the corporate tax rate also differs. Presently for the computing year 2015-2016, the corporate tax rate has seen a downfall of a certain percentage. Given below is the corporate tax rate for different corporates:
Corporate tax rate for a Domestic Corporate in India
A Domestic Corporate is a company that is of an Indian origin and whose management takes place in India. The applied rates on such corporate are mentioned below:
- On the income of a domestic corporate, a flat rate of 25% corporate tax is levied.
- For a particular financial year, if the total revenue earned by a company exceeds Rs. 1 crore, then a surcharge corporate tax of 5% is levied on such a corporate.
- An educational cess of 3% is charged from a domestic company.
- If a particular company has its branches overseas, then some amount of corporate tax is also charged on the total global earnings of such a company. Corporate tax considers the revenue that is earned by a domestic company abroad.
Corporate tax for foreign corporate
A Foreign Corporate is such a company that is not of an Indian origin. Its management and control takes place anywhere abroad except India. These types of corporate are not recognised under the Companies Act 1956. The rules pertaining to the taxation process for a foreign company is completely different from that of a domestic corporate. It all depends on the taxation agreement made between India and other foreign countries. Like for example, the corporate tax rate for United States of America will depend on the taxation agreement that India has with America.
Corporate tax Rebates
As several types of corporate taxes are levied on a company, similarly there are certain provisions of deductions or rebates as well. These deductions are mentioned below:
- Interests can be deducted in certain cases.
- Capital gains of a corporate can be neglected.
- Dividends in some cases can also be deducted.
- The corporate have an authority to carry the losses incurred in the business for a maximum of 8 years.
- If a corporate sets up new sources of power or new infrastructure, then they can be subjected to certain deductions.
- In case of exports and new undertakings of a corporate, certain amount of deductions are allowed to the corporate.
- Various amounts of provisions for deductions are allowed if the corporate wishes to venture capital enterprises or fund.
- If a domestic corporate receives some amount of dividends from other domestic corporate, they have the provision to deduct such dividends as rebates.
Every business corporate requires some sort of tax planning that will enable them to maximise their profit and minimise the amount of payable tax after making necessary deductions. Having a strategy for the same is an ardent task and so the corporate hire professionals who are well tuned with all the rules and regulations regarding the laws pertaining to tax payments. A healthy tax planning is required at all levels because each corporate involves huge finances at risk. However, one must understand that tax planning and tax evasion are two completely different terms. Tax evasion is non-payment of tax and tax planning is strategising the amount of payable tax in such a way that the corporate has more net profit and less tax to pay. For a successful tax planning, the corporate must be well aware of all the tax laws as well as the financial rules set up by the Government of India.