Company Taxation

In India, all domestic companies are liable to tax on their global income, while foreign companies are liable to tax in India with respect to income received or deemed to be received in India or income which accrues or arises in India or income which is deemed to accrue or arise in India. The effective corporate tax rate (base rate + surcharge + cess) depends on the type of the company (domestic or foreign) and the quantum of its taxable income in the previous year. The year refers to the Financial Year (FY), which begins on 1 April and ends on 31 March, while the previous year refers to the previous financial year. The rate of tax, surcharge, and cess could be changed by the Finance Act passed by the Indian government every year.

After the Finance Act, 2019 received its presidential assent, in view of economic circumstances, the government announced sweeping tax reforms through The Taxation Laws (Amendment) Act, 2019. The most important aspect of which was a significant reduction in tax rates to boost the Indian economy

The key amendments as introduced by The Taxation Laws (Amendment) Act, 2019 are as follows¹:

• 1. Introduction of Section 115BAA: (applicable from FY 2019-20 onwards)
  • All domestic companies shall have an option to pay income tax at the rate of 22% (plus applicable surcharge and cess), provided the below-mentioned conditions are complied with. Such companies should not avail of any exemptions/incentives under different provisions of income tax. Therefore, the total income of such company shall be computed without:
    • a. Claiming any deduction especially available for units established in special economic zones under Section 10AA
    • b. Claiming additional depreciation under Section 32 and investment allowance under Section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal
    • c. Claiming deduction under Section 33AB for tea, coffee and rubber manufacturing companies
    • d. Claiming deduction towards deposits made towards site restoration fund under Section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India
    • e. Claiming a deduction for expenditure made for scientific research under Section 35
    • f. Claiming a deduction for the capital expenditure incurred by any specified business under Section 35AD
    • g. Claiming a deduction for the expenditure incurred on an agriculture extension project under Section 35CCC or on a skill development project under Section 35CCD
    • h. Claiming deduction under Chapter VI-A except for deduction under Section 80JJAA and Section 80M
    • i. Claiming a set-off of any loss carried forward from earlier years, if such losses were incurred in respect of the aforementioned deductions.
  • Such companies will have to exercise this option to be taxed under Section 115BAA on or before the due date of filing income tax returns, i.e., usually 31 October of the assessment year. Once the company opts for Section 115BAA in a particular financial year, it cannot be withdrawn subsequently.
  • Section 115JB of the Act relating to the Minimum Alternate Tax (MAT) states that the provisions of said section shall not apply to a person who has exercised the option referred to under the newly inserted Section 115BAA.
  • Domestic companies opting for Section 115BAA will not be able to claim MAT credits for taxes paid under MAT during the tax holiday period. The companies would not be able to reduce their tax liabilities under Section 115BAA by claiming MAT credits.
• 2. Introduction of Section 115BAB:- (applicable from FY 2019-20 onwards)
  • A domestic company will be entitled to the benefit of the low corporate tax rate (15% plus applicable surcharge and cess) if the domestic company has been incorporated and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2023. The company should be engaged in the business of manufacture or production of any article or thing, and research in relation to such article or thing. The company can also be engaged in the distribution of such article or thing manufactured or produced by it. Such a company should satisfy the following conditions:
    • a. Not be formed by the splitting up and reconstruction of a business already in existence except in case of a business re-established under Section 33B;
    • b. Does not use any plant or machinery previously used for any purpose. However, the company can utilize the plant and machinery used outside India and used in India for the first time;
    • c. The company can use old plant and machinery if its value of which does not exceed 20% of the total value of the plant and machinery used by the company;
    • d. Does not use a building previously used as a hotel or a convention center. A ‘hotel’ means a hotel of two-star, three-star or four-star category as classified by the Central Government. ‘Convention center’ means a building of a prescribed area comprising of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number, and having such other facilities and amenities, as may be prescribed.
  • The total income of such company shall be computed without:
    • a. Deduction under Section 10AA for units in Special Economic Zones
    • b. Deduction for additional depreciation under Section 32 and investment allowance under Section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal
    • c. Deduction under Section 33AB for tea, coffee and rubber manufacturing companies
    • d. Deduction towards deposits made towards site restoration fund under Section 33ABA by companies engaged in the extraction or production of petroleum or natural gas or both in India
    • e. Deduction for expenditure made for scientific research under Section 35
    • f. Deduction for the capital expenditure incurred by any specified business under Section 35AD
    • g. Deduction for the expenditure incurred on an agriculture extension project under Section 35CCC or on a skill development project under Section 35CCD
    • h. Claiming deduction under Chapter VI-A except for deduction under Section 80JJAA and Section 80M
    • i. Set-off of any loss carried forward from earlier years if such losses were incurred in respect of the aforementioned deductions.
  • Such companies will have to exercise this option to be taxed under the Section 115BAA on or before the due date of filing income tax returns, i.e., usually 30 September of the assessment year. Once the company opts for Section 115BAA in a particular financial year, it cannot be withdrawn subsequently.
  • Applicability of transfer pricing provisions
    • a. In a case where due to a close connection between the company and any other person, or for any other reason, the business between them is so arranged such that the company earns more than ordinary profits, the Assessing Officer may ignore the excess profits. The Assessing Officer will take only the amount of profits reasonably deemed to be derived from the business.
    • b. In a case where the business transaction involves a specified domestic transaction referred to in Section 92BA, the profits of the transaction will be determined with regards to the arm’s length price.
  • Applicability of MAT provisions
    • a. Section 115JB of the Act related to Minimum Alternate Tax (MAT) provides that the provisions of the said section shall not apply to a person who has exercised the option referred to under the newly inserted Section 115BAB.
    • b. The domestic companies opting for Section 115BAB will not be able to claim MAT credits for taxes paid under MAT during the tax holiday period. The companies also would not be able to reduce their tax liabilities under Section 115BAB by claiming MAT credits.
  • Presumptive Taxation

    The law also provides a presumptive taxation regime to small and medium enterprises wherein a certain percentage of the turnover is claimed as deemed total income from tax purposes.

    • 1. In case of business (other than agency and commission business), 8% or more of the turnover can be claimed as total income of the assessee. The said provisions are applicable if the turnover does not exceed INR 20 million.
      
      Furthermore, a reduced rate of 6% is applicable if the transactions (both receipts and payments) in cash does not exceeds 5% of the total transaction value. In such cases, the provisions of presumptive taxation are available for turnover up to INR 30 million.
    • 2. In case of profession, 50% or more of the turnover can be claimed as total income of the assessee. The said provisions are applicable if the turnover does not exceed INR 5 million.
      
      Furthermore, if the transactions (both receipts and payments) in cash does not exceed 5% of the total transaction value, the provisions of presumptive taxation are available for turnover up to INR 7.5 million.

The Finance Act 2023 has not altered the tax rates applicable for corporates, and the same remains in line with rates announced in Finance Act 2021.

The tax rate applicable for FY 2023-24 in case of domestic companies not opting for the beneficial regime and having a turnover or gross receipts in FY 2021-22 not exceeding INR 4 billion is 25% of the total income plus the applicable surcharge and health and education cess. For all other domestic companies (not opting for the beneficial regime and have turnover exceeding INR 4 billion), the base tax rate shall continue to be 30% plus applicable surcharges and the health and education cess.

Furthermore, up till FY 2017-18, Education Cess at the rate of 2% and Secondary and Higher Education Cess at the rate of 1% was payable on the base tax rate and surcharge. The Finance Act, 2018, has discontinued the same from FY 2018-19, and a new cess, namely the Health and education cess at the rate of 4% has been introduced

The corporate tax rates applicable for FY 2023-24 are outlined below:

*Domestic companies which have been incorporated and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2024

Minimum Alternate Tax (MAT) (also known as book profits tax)

The Income Tax Act, 1961 (ITA), also provides for tax on ‘book profits’ in case the tax on the company’s book profit (post certain adjustments) is greater than the tax on income computed as per the standard provisions of the ITA. This is commonly known as MAT, which is charged at a rate of 18.5% on book profits plus appli-cable surcharge and 4% Health and education cess on the tax and surcharge. The limits for the applicability of the surcharge are the same as mentioned in the table above.

The Taxation Laws (Amendment) Act, 2019, has reduced the MAT rate from 18.5% to 15%. Furthermore MAT provisions will not be applicable for domestic companies opting for beneficial tax regime (i.e., domestic companies opting for 22% base tax rate or new manufacturing companies opting for 15% base tax rate).

Credit for MAT paid can be carried forward and claimed against standard corporate tax payments arising in the future, subject to a limitation period of 15 years instead of 10 years as provided earlier.

However, as per The Taxation Laws (Amendment) Act, 2019, credit for MAT is not available for companies opting for beneficial tax regime. The Act expressly amends the MAT Credit provisions to deny MAT Credit to any company which opts for the reduced tax rate.

In the case of income earned by Foreign Institutional Investors/Foreign Portfolio Investors (FIIs/ FPIs) and foreign companies from various sources, such as capital gains, interest, royalty, and fees for technical services, MAT provisions will not be applicable from FY 2015–16 onwards. Also, MAT shall not apply to foreign companies not having any Permanent Establishment (PE) in India or which are not required to be registered under the Companies Act in India.

Apart from the above, foreign companies engaged in the business of shipping, exploration of mineral oils, operation of aircraft, and civil construction concerning turnkey power projects can opt for presumptive taxation. In such a case, income is first taxed at a certain fixed percentage of the gross receipts, and then the above- referred corporate tax, surcharge, and health and education cess shall be applicable.

Abolishment of Dividend Distribution Tax (DDT)

The Finance Act, 2020, states that the provisions of Section 115-O of the Act relating to levy of DDT on companies declaring dividend would be applicable only to those dividends that are declared, distributed or paid on or before 31 March 2020. This means that companies declaring or distributing dividends after 1 April 2020 no longer have to pay DDT. The key impacts of this amendment are as follows:-

• a. Any dividends received on or after 1 April 2020 will no longer be exempt in the hands of the shareholders, and the same would be taxable as per the rates applicable to the recipient
• b. The company shall be liable to deduct Tax Deducted at Source (TDS) @ 10% while making a payment of dividend to a shareholder being a person residing in India, as per Section 194, if the amount of dividend exceeds INR 5,000
• c. The company shall be liable to deduct TDS @ 20% while making payment of dividends to a shareholder being a person non-resident in India plus surcharge and cess as applicable. However, provisions of the tax treaty with the country of residence would apply if it is more beneficial
• d. The Finance Act, 2020 has also clarified that dividend income, which is subject to DDT and received after 1 April 2020, shall be exempt in the hands of the shareholder/unitholder
• e. Furthermore, Finance Act 2022 has specified that dividend received from a foreign company is taxable as per rates applicable to the recipient company and not at a flat rate of 15%
• f. No cascading effect will occur on the taxation of dividends by providing deduction of dividend received by one domestic company from another domestic company, or foreign company, or from a business trust, to the extent of dividend distributed or actual dividend received, whichever is lower.

Relaxation of Buyback Tax Provisions

The Finance Act (No. 2), 2019 extended the scope of Buyback Tax as per Section 115QA to listed companies as well. In order to provide some relief, The Taxation Laws (Amendment) Act, 2019 has provided that provisions of Section 115QA shall not apply to such buy-back of shares on listed companies, who have made a public announcement in this regard, on or before 5 July 2019.

• 1. The Taxation Laws (Amendment) Act, 2019, Income Tax Department, https://www.incometaxindia.gov.in/Pages/acts/taxation-laws-amendment-act-2019.aspx, as accessed on 17 July 2023