AN INSIGHT INTO INDIA’S CORPORATE TAX REGIME

INTRODUCTION

Tax is one of the major sources from which the government receives revenue. There are  primarily two types of taxes levied by the government which are- direct tax and indirect tax.

Direct tax is directly paid to the government by the person/ entity upon whom it is imposed. Such  tax is imposed on the income and wealth of the entity. For e.g. Income tax, corporate tax, wealth  tax.

Indirect tax is paid through an intermediary and does not flow directly from consumer to  government. Such tax is imposed on goods and services. For e.g. GST, VAT, sales tax.

CORPORATION- MEANING

A corporation is an independent legal body established for the purpose of conducting business,  distinct from its owners. It can enter into contracts, sue and be sued, own assets, and incur  liabilities because it is legally recognized as having rights and obligations that are comparable to  those of an individual. The Companies Act, 2013 governs the formation, operation and  regulation of corporations in India. We can thus say that a corporation has the following  attributes-

• It has a legal personality of its own which is separate from its shareholders • Shareholders have limited liability
• It does not end with the death of its owner or shareholder i.e. it has a perpetual existence • Regulated by The Companies Act, 2013
• Shares which symbolise the ownership in corporation are transferrable Corporations can be divided into two categories: domestic and foreign

Domestic corporations are those which have been incorporated in India in accordance with The  Companies Act, 1956. They have their area of operation within India.

Foreign corporations are those which although haven’t been incorporated in India but carry out  their operations within the Indian jurisdiction.

CORPORATE TAX STRUCTURE

The taxation system of corporation in India is governed by the Income Tax Act, 1961.

The tax structure for domestic and foreign corporations is different. It is essential to know that  the tax rate prescribed under the statute is higher than the rate at which it is actually paid by the  corporation. This difference is due to the various exemptions and deductions availed which  reduce the tax rate for the corporations.

For domestic corporations tax is levied on their net income whereas for foreign corporations tax  is levied only on that part of income which has accrued in India. The various sources of income  generated by corporations are-

• Profits earned
• Rental income
• Capital gains
• Income from other sources

Domestic corporation

Domestic companies which have an annual turnover up to Rs. 400 crores have to pay tax at the  rate of 25%. For those domestic companies who have an annual turnover of more than Rs. 400  crores, they have to pay tax at the rate of 30% An additional surcharge of 7% is levied if the net income of the company is between Rs. 1 crore 10 crore. For net income surpassing Rs 10 crore, a surcharge of 12% is levied.

Irrespective of the net income, a 4% Health and Education Cess is imposed on the total income  tax and the surcharge.

Foreign corporation

The tax is levied on income earned within India, including income from business operations,  royalties, fees for technical services, and other specified sources. For royalties or other fees, tax at the rate of 50% is imposed and for all other income, rate of 40% is fixed.

Also, if the net income of a foreign company ranges between Rs. 1 crore- 10 crores, a surcharge  of 2% is levied and for those having net income above Rs. 10 crores, a surcharge of 5% is levied.

Apart from this, a 4% Health and Education Cess is imposed on the total income tax and the  surcharge.

MINIMUM ALTERNATE TAX(MAT)

The Indian Income Tax Act has a provision known as Minimum Alternate Tax (MAT), which is  meant to make sure that businesses who have high profits and significant tax exemptions pay a  minimum amount of tax. MAT is computed as a set proportion of the book profit and is

applicable to all businesses, including international ones. Currently. The MAT rate is 15% of  book profit plus any relevant cess and surcharge.

For a maximum of 15 years, businesses can carry forward and modify the MAT credit against  their ordinary tax liability. The aim of MAT is to include businesses that are able to evade  taxation by means of several incentives and exemptions in the tax net.

THE TAXATION LAWS (AMENDMENT) BILL, 2019

The Taxation Law (Amendment) Act, 2019 was a positive attempt towards improving the  corporate tax regime and promoting the interests of domestic companies and enabling them to  stand out globally. The main aim of this act was to enhance the competitiveness of Indian corporate tax regime. The act brought various key changes and new provisions in the Income  Tax Act, 1961. Major provisions of the act relating to the corporate tax regime are:

1. Addition of Sec. 115BAA- Sec. 115BAA of the act gives the domestic companies an opportunity to pay tax at a lesser rate i.e. 22% plus 10% surcharge and 4% cess which makes the effective tax rate as 25.17%.

Availing the benefits of this section is however conditioned to certain restrictions. 2. If a corporation avails the concession rate under the new tax regime then it cannot avail  certain exemptions and deductions under the income tax act, 1961. These are-a.  Deductions under Chapter VI-A (other than Section 80JJAA).

1. Deduction under Section 10AA for units in Special Economic Zones (SEZs). c. Additional depreciation under Section 32(1)(iia).
2. Investment-linked deductions under Section 35AD
3. All those corporations who choose the new tax rates will not be bound under the provision of MAT (Minimum Alternate Tax) and those who decide not to adopt the new tax rate, the MAT has been reduced from 18.5% to 15%.
4. New domestic manufacturing companies i.e. those which have been set up and registered after 30 September, 2019 and started manufacturing before 1 April, 2023 have an option to pay tax at the rate of 15% given that they do not claim certain deductions.
5. A company can choose to follow the new tax rates in any year but once it has decided to follow it, it shall apply to all subsequent years.

CONCLUSION

India’s tax regime can be considered to be a very comprehensive one. Different slabs have been  set for domestic and foreign companies. The new corporate tax regime has been brought in with  a view to promote the country’s development and allow the Indian companies to stand out  globally. It seeks to do so by lowering the tax rate for new domestic manufacturing units and allowing the domestic companies to evade MAT. It can thus be concluded that the Indian  government’s ongoing efforts to create a more business-friendly tax environment are expected to  further enhance the attractiveness of India as a destination for domestic and international  investments.