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The imposition of a tax is the fundamental principle of an economy. Taxes are imposed on all the subjects of the country having a separate legal identity. By way of taxation, the government tends to create a balance in the economy by reducing inflation and financial inequalities. Taxes are of two types – direct and indirect.
1) Indirect tax- The impact of this tax does not fall on a singular legal entity, i.e, the burden of the tax can be transferred by the taxpayer to someone else. For example, Customs duty, import duty, central excise, service tax, and value-added tax.
2) Direct tax- This tax is levied on income, salary, or profits of individuals and corporations, and the burden cannot be transferred to someone else. For example, Income-tax, corporation tax, property tax, inheritance tax, and gift tax. But the rate at which this tax is to be paid varies with the type of the taxpayer registered with the Income-tax department. Hence direct taxes are subdivided as,
- Income tax- It is paid by an individual, Hindu Undivided Family (HUF), or any other taxpayer excluding the companies, on the income received. The rate of taxation is decided based on the slabs.
- Corporate tax- It is paid by the companies registered under Company law in India on the net profit they make. Changes are made as per the latest amendments to the Income Tax Act, 1961.
In this article, we will be dealing specifically with the direct taxes imposed on the corporations.
What is Corporate tax? Who is liable to pay it?
Corporate tax is a direct tax levied on the net income of the corporation earned from their business. Irrespective of its nature, that is, a private and public company are required to pay corporate tax. This tax is payable at a fixed rate as specified by the government and is governed by the legal rules enunciated under the Income Tax Act.
Corporate tax is imposed on the income earned by the company which may include profits earned through business, capital gains, rental income and other sources like interest, dividends, lotteries, and etc. This tax is applicable to both domestic as well as foreign companies as provided by the Income tax Act. Domestic companies or resident companies are those which are established in India and are registered under the Companies Act and it includes even those companies, whose management and control is wholly based in India even though it is a foreign company. On the other hand, foreign company or non-resident company are not those which are established/registered in India nor their management and control are situated in India.
However, both domestic and foreign company, have to pay corporate tax but the only difference is that domestic companies are taxed on their income earned worldwide while foreign companies are taxed only on the income generated accrue/arise in India.
As discussed above, all domestic and foreign companies, whether private and public are liable to pay corporate tax. Apart from these there are other corporate entities such as –
- Every corporation incorporated in India
- Corporations earning revenues from India and doing business on those earned incomes.
- Foreign enterprises permanently established in India
- Corporations that have earned the title of being an Indian resident only for the purpose of tax payment.
Salient features –
- In certain cases, corporate tries to minimize their taxes by taking the benefits of deductions, exemptions from the government. This is done by the companies to display their incomes as zero or negative by showing profits in the Profit and Loss Accounts but then shows they distributed huge dividends or have taken deductions or exemptions. Hence, reducing their net income to zero, so as to get exempted from corporate taxing.
- Corporate tax is a precious source of revenue for developing countries as they are progressive in nature and can be used to raise a significant amount of money for public services. Corporate tax acts as a chief source of revenue as alternative revenue sources of some developing countries are very thin and cannot be entirely dependent upon. Moreover, corporate taxing is an essential instrument to put a brake on excessive corporate power.
- The incidence of Corporate taxation is much larger in urban areas than the rural areas due to the accumulation of companies in cities, and the main occupation in rural areas being agriculture.
- The corporate tax is quantitative and not qualitative. The same rate is imposed indiscriminately on all companies irrespective of their area of work/production, type of commodity, or class of consumers.
Legal provisions –
Corporate Taxation is regulated by the provisions mentioned under the Income Tax Act. There are various provisions which deal with corporate tax but this article tends to highlights only ones which are critical as they specifically deal with tax on the domestic company.
Section 115 BAA talks about tax imposed on the total income of the domestic company. This provision lays down the rate of 22% at which the domestic companies are liable to pay tax on their total income earned through their business. Earlier, the rate of tax was 25-30% which is relatively higher than the rate of 22%, which was introduced in the amendment act of 2019. The only condition specified under the new amendment act for the domestic companies to take the benefit of the reduced tax rate of 22% is that it must fulfil the following conditions as mentioned under section 115BAA –
- The domestic companies taking the benefits of reduced rate of tax(22%) must not avail the benefits of various exemption or deductions as specified under the act, such as exemption enjoyed by a unit of SEZ (Tax Holiday), Investment allowances for certain scientific research expenditure, deductions in respect of certain incomes and additional depreciation or accelerated depreciation benefits etc.
- Domestic Companies availing for reduce rate has already been excluded from the application of MAT provision.
- The option of reduced rate must be exercised by the domestic company in the manner prescribed under the act and before the due date prescribed under the act for furnishing the returns of income.
- The domestic company must not claim set-off of any losses and should not avail the benefit of unabsorbed depreciation which are carry forwarded from the previous years.
But under certain circumstances, if company fails to fulfill any of the above conditions, then in such case the company can take the benefits of the exemptions and continue to pay taxes at pre-amended rate(25%-30%).
Section 115BAB talks about tax imposed on the total income of the newly set up domestic manufacturing companies. This provision lays down the rate of 15% at which the newly set up domestic manufacturing company is to be taxed. This reduced rate of tax was introduced by the Taxation Laws (Amendment) Act, 2019. However, to avail the benefits of this reduced rate the domestic companies have to satisfy certain conditions as mentioned under sub-section 2 of the provision –
- The company claiming the benefits under this section has been set up on or after 1st day of October 2019 and, the manufacturing and production of the article have been started before 31st day of March 2023.
- The business must not be formed by split up or reconstruction of a business already in existence but if a business is formed as a result of re-establishment or revival, then this condition will not apply.
- The company must not use any machinery or plant previously used for any other purpose. However, if machinery or plant is used outside India, then it will not be regarded as previously used unless it has not been used previously in India before installation, imported into India and depreciation as a deduction has not been allowed previously for any person before installation.
- The company must not use any building which is previously used for hotel or convention centre and there must be no deductions claimed or allowed with respect to those buildings.
- The company claiming the benefits under this section must not be engaged in business other than that of manufacturing or production of the article.
- Rest all the provision of Section 115BAA with respect to company barred, from claiming exemption and deductions, setting-off any losses or availing the benefits of unabsorbed depreciation, must apply.
- The newly set up domestic company must have already been excluded from the application of MAT provision.
- The option of reduced rate must be exercised by the newly set up domestic company in manner prescribed under the act and before the due date prescribed under the act for furnishing the returns of income.
But under certain circumstances, if a company fails to fulfil any of the above conditions then in such case the company can always avail the benefits of reduced rate of taxation under Section 115BAA.(22%)
Section 115JB talks about minimum alternate tax(MAT). MAT is applicable to all the companies. Earlier, companies in wake of avoiding taxes use to show their net income as zero or negligible even though their profit and loss accounts show profits but then they manipulate their net income by showing that they have distributed such profits in huge dividend or has been exempted or deduction has taken place hence making the company’s net income as zero or negligible. This is done by the company’s to avoid taxation.
So to reduce tax avoidance and to compel company’s having “ability to pay” to pay a token of tax. MAT is payable when the taxable income of the company as calculated by the normal provision of the income tax act comes out to be less than 18.5% of the books of profit and loss of the company. The reasoning behind this condition for the application of MAT is that if the book profits of the company show profits than how come the taxable income of the company be so less.
Hence, MAT is levied upon the company at the rate of 18.5% of book profits as in this case the book profits are deemed to be taken as the total income of the company. In case a company paid its tax by MAT then that company is entitled to claim credit excess over the normal tax liability of company which gets carry forward to the following year. This excess credit is called MAT credit. Section 115JAA deals with MAT credit. These credits have a life span of 15 years if not utilized within this time span then it will get lapsed.
However, in case of foreign companies, the tax imposed on them is completely different from the domestic companies as the rules or at what rate the corporate tax is to be imposed on the foreign company totally depends upon the taxation agreements that exist between India and the foreign company.
We can sum up by saying that corporate tax is extremely significant particularly for a developing economy like India. Corporate tax holds together the whole tax system as it acts as a chief source of revenue for any economy. It helps in curbing inequalities and protects democracy by enhancing national welfare. Corporations contain huge amounts of idle cash for the purpose of their business but corporate tax injects that cash into the economy, which the government spend on roads, education and other services. Hence, we can say that corporate tax is quintessential for a flourishing economy of developing nation.
As we know, every private and public companies registered under the companies act are required to pay a certain tax imposed on them, to manage their tax, most of the big corporate entities attain the practice of tax planning, by which, corporates with the help of financial experts, strategize the business of the corporation in such a way that maximizes profit and minimizes payable tax. These financial experts must take into consideration all the legal and financial rules set out by the government while computing the tax payable by the corporates and should avoid using practices like non-payment and tax evasion.
Author: Kumar Writwik from Symbiosis Law School, Pune.
Editor: Yashika Gupta from Rajiv Gandhi National University of Law, Patiala.