The process of taxation has been in a role since the country before Independence. There is various number of taxes that are levied by the Government of various countries. In India, the most significant taxes which are paid by the customers are the wealth tax, income, capital gains etc.
The Corporate Taxes be it domestic or foreign are required to pay the taxes in order to run their business. One of the taxes, that the corporates are required to pay the Indian Government is the Corporate Tax or company tax. In this article we will be talking about the Corporate Tax, its types, Tax Rebates etc.
- 1 What is a Corporate Tax?
- 2 Definition of a Corporate Tax
- 3 Dividend Distribution Tax
- 4 Corporate Tax Rate
- 5 Income of a Company
- 6 Corporate Tax Rate for the Domestic Companies in India
- 7 Corporate Tax for the Foreign Companies in India
- 8 The Tax Rebates Applicable to the Corporate Tax
- 9 Corporate Tax Planning
- 10 Advantages of the Corporate Taxation
- 11 Corporate Tax Budget 2015
What is a Corporate Tax?
A Corporate tax is a tax that is levied on the profit of a firm to raise taxes. The Corporate Tax in India is levied on both the domestic and foreign companies. The individuals who are earning are supposed to pay tax on their certain amount of income in business houses, income etc. Hence, this tax is called as corporate tax, corporation tax or company tax.
Definition of a Corporate Tax
A corporate tax is a tax imposed on the net income of the company. If any juristic person is having a separate and an independent body from its shareholders, then he/she is termed as a Corporate. The total income that is earned by the company is computed and assessed separately from the dividends that offer to its shareholders. These dividends do not figure out in the tax calculation of the company but also are assessed as a part of the income of the shareholder.
To make the tax calculation more sophisticated and easy, the companies in India are broadly divided into two categories:
- Domestic Corporate:Any company that is Indian from its roots or if a company is foreign but the control and management are wholly situated in India are known to be as a Domestic Company. An Indian Company means that the company must be registered under the Companies Act 1956.
- Foreign Corporate:A Foreign Company is said to be a company who does not have an Indian Origin and has some part of the control and management affairs located outside India.
Dividend Distribution Tax
A Corporate Tax is a tax that is paid by the Companies on the revenues earned minus the expenses. In a similar way, the Dividend Distribution Tax is the tax that is paid by the Corporates on the dividends that pay to their shareholders. The corporate dividend tax is the percentage of the dividend that is paid. Currently, the Dividend Distribution Tax in India is 15% according to the Union Budget 2007, India.
Let us get into the details of what does a Dividend Distribution Tax means:
In India, the domestic companies pay the Dividend Distribution Tax (DDT) which is a levy in addition to the income tax which is chargeable on their total income in an assessment year. A dividend is basically a portion of return that is given by the company to its shareholders out of profits made during a particular year. They are usually given in a proportion to the number of the shares they have owned.
The provisions of the Dividend Distribution Act was introduced by the Finance Act 1997. This tax is only liable to the domestic companies. The Domestic Company have to pay the tax even if the company is not liable to pay tax on its income.
This is applicable whether it is paid out of the current or accumulated profits. The amount of the dividend paid by the company will be reduced by the amount of the dividend that is received from the domestic subsidiaries if these subsidiaries have paid DDT. The tax is paid by the parent company on the income for the subsidiary if the subsidiary is a foreign company.
Corporate Tax Rate
Depending on the type of company, domestic or foreign and on the basis of the income earned in one financial year, the corporate tax rates vary from company to company. Currently, the Corporate Tax of India for the financial year 2015-2016 has been reduced up to a certain percentage.
Income of a Company
It is essential to know all the factors that are responsible for making the total income of any company. Doing this will ease up the process of computing the corporate tax on the income of the company.
Thus, the factors that are responsible for the income of the company are as follows:
- Profits from the business
- Income from the property
- Capital Gains
- Income from other sources such as the foreign dividends, interests etc.
Corporate Tax Rate for the Domestic Companies in India
A domestic company mainly refers to the company that has its base location in India and basically has an Indian origin. Given below are the tax rates that are applicable to the Domestic Businesses in the country.
- A flat rate of 25% corporate tax is levied on the income earned by a Domestic Corporate.
- A surcharge of 5% is levied on the company who has a turnover of more than Rs 1 Crore for the specific financial year.
- Educational Cess of 3% is levied.
- The corporate tax is also levied on the Global earnings of the Domestic Company. This takes to the account income earned by the abroad company.
Corporate Tax for the Foreign Companies in India
A foreign company means the company or the enterprise that has its origin or operations anywhere in another country except India. The taxation rules are not that simple as that of the Domestic Companies. The company depends on a lot of the taxation agreements made between India and other foreign countries. Like for an example: an Australian Based Company in India will depend upon the taxation agreement between the Governments of India and Australia.
The Tax Rebates Applicable to the Corporate Tax
Apart from the different taxes levied on the company income, there are several provisions of tax rebates available for different companies.
The list of the different rebates are as follows:
- In certain cases, the domestic companies can deduct dividend received from other domestic companies.
- Special Provisions are applicable to venture the fund and venture the capitalist enterprises.
- Deductions, in some cases, are allowed for the exports and new undertakings.
- New Infrastructure and power sources are set up subjected to certain decisions.
- Business Losses have the provision of being carried over for a maximum of 8 years.
- The interest, capital gains, and dividends can also get deducted in some cases.
Corporate Tax Planning
A corporate tax planning can be called as planning a strategy for one’s financial business so as to maximize the profit and minimize the payable tax by taking it to an account that allows the benefits of deductions, rebates, and exemptions. The tax management is quite risky as well as tricky and most of the corporate companies that have a huge turnover in the market hire financial experts to take care of their taxation process.
In India, there are different financial players that provide consultation and implementation of the corporate tax. For a healthy tax planning, a perfect guidance towards the tax laws, rules and regulations is a must.
Corporate Tax Planning is different to that of the Tax Evasion or Non-Payment. Tax planning refers to the act of planning one’s finances in such a way that the payable tax is reduced and the gains are maximized. One of an essential feature of the tax planning is that it is absolutely in line with the legal and financial rules set up by the Indian Government.
Advantages of the Corporate Taxation
- Paying corporate taxes is quite beneficial for the business owners when compared to paying an additional individual income tax.
- The corporate tax returns deduct the medical insurance as well as the fringe benefits which includes the retirement plans and tax-deferred trusts.
Corporate Tax Budget 2015
The changes which are needed to be made in the Corporate Taxes have been watched with eagerness. The new Government has announced a rate cut of 5% in the corporate tax from 30% to 25% for the next 4 years. The main objective of this budget is to encourage the foreign investment for the various infrastructure projects like the roads, railways and the energy as well as starting up the shops in India by the foreign companies and much more.
The Corporate Rate Cut will ease out the process of the tax burden, resulting in a higher level of an investment, growth as well as job creation. This action started by the Government will foster a better and a higher investment in the economy of the country.