Computation of Taxable Income of Companies

All companies must submit yearly tax returns to the Internal Revenue Service and pay income taxes on their earnings, just like individual taxpayers. A company is taxed on its profit after deducting all permitted expenses from its total revenue. However, taxable income is calculated in the same manner by all companies. Knowing how to calculate taxable income is crucial because it forms the basis for figuring out how much income taxes must be paid and how much net profit to keep.

Corporate Tax relates to the taxation of companies in India. For taxation laws, a company means:

●     A company resident in India or a corporate body incorporated in or outside India.

●     Any institution, organization, association, or body corporate, whether incorporated or not and resident or non-resident, is declared as a company by CBDT.

 

The income used to calculate tax liability is referred to as Total Income. To determine tax liability, total income must be calculated. Certain deductions that can be taken from Gross Total Income are provided in Sections 80C to 80U. The income left over after deducting these expenses from GTI is referred to as Total Income. To put it another way, GTI fewer deductions (u/s 80C to 80U) equal to total income.

 

The country's supreme tax body imposes direct taxes on individuals and businesses. Individuals subjected to direct taxes pay them directly means the burden to pay Tax is on the same person who is paying it unlike indirect taxes. For example, taxpayers directly pay the government - income, property, asset-based, and gift taxes. The Income Tax Department documented different tax categories and tax rates.

Although they are both taxpayers, an individual and a company are still not taxed equally at the same rate. 

Calculation of Net Taxable Income and Gross Total Income

Determine the company's "total income" by adding up the incomes from the following four heads of income:

−        Income from House Property

−        Profits and Gains of Business or Profession

Particulars	Amount
Income from Salary	XXXX
Income from House Property	XXXX
Profit and gains of Business & Profession	XXXX
Capital Gains	XXXX
Income from other sources	XXXX
GROSS TOTAL INCOME	XXXX
Less: Deductions u/c VI-A (i.e. Section 80C to 80U)	XXXX
Total Income/ Net taxable income	XXXX

 

Corporate Income Tax (CIT)

Taxes must be paid on the worldwide income of a corporation that is resident in India or a local company. In the case of non-resident firms, only income received in India, money that accrues or arises in India, or income that is presumed to accrue or arise in India, is subject to taxation in India (i.e., a foreign company). Either a private or public corporation may be involved.

 

For the AY 2022-23, the corporate income tax (CIT) rate that applies to domestic and foreign companies is as follows:

TAX SLABS FOR AY 2022-23

Particulars	Rate (excluding surcharge and cess)
Turnover/ Gross receipts in PY 2018-19 does not exceed Rs. 400 crores	25%
If opted for Sec 115BA	25%
If opted for Sec 115BAA	22%
If opted for Sec 115BAB	15%
Any other domestic company	30%

 

SURCHARGE:

Particulars	Rate
Taxable income above ₹ 1 crore– upto ₹ 10 crore	7%
Taxable income above ₹ 10 crore	12%
If Company opting for taxability u/s 115BAA or Section 115BAB	10%

 Health and Education Cess (HEC):

In addition to paying income tax plus the surcharge, a 4% health and education levy must be paid (if any).

 

NOTE –

●     Suppose a company's normal tax liability is less than 15% of book profit. In that case, it must pay the Alternate Minimum Tax (MAT) at 15% of book profit (plus surcharge and Health and Education Cess, as applicable).

●     A company must pay MAT at 9% if it receives all of its income in convertible foreign currency and is a unit of an international financial services center (IFSC) (plus cess and surcharge as applicable).

●     A company that opts for Sections 115BAA and 115BAB's special rate taxation is exempt from paying MAT.

●     Companies that choose to pay a reduced tax rate under Sections 115BAA or 115BAB are not eligible for deductions under Sections 80IA, 80IAB, 80IAC, 80IB, and so forth, with the exception of Sections 80JJAA and 80M.

 

FOREIGN COMPANIES

Income tax rates for foreign companies for FY 2021-22 or AY 2022-23, as per the Finance Act of 2021, remained the same as those that applied for FY 2020-21 or AY 2021-22 the Finance Act of 2020, i.e., there was no change from the previous year.

Illustrated as below –

1. Fees for providing technical services pursuant to an agreement made after February 29, 1964, but before April 1, 1976, or royalties received from the government or an Indian concern pursuant to an agreement made with the Indian concern after March 31, 1961, but before April 1, 1976, where such agreement has, in either case, been approved by the Central Government. – will be taxed at the rate of 50%
2. Other income will be taxed at the rate of 40%

Further, when total income exceeds one crore rupees but falls between one and ten crore rupees, an additional surcharge of 2% of that Tax will be applied, and 5% of that Tax will be applied when total income exceeds ten crore rupees.

Health and education taxes will be added to these amounts, which are computed at a rate of 4% of the applicable income tax and surcharge.

 

 Minimum Alternative Tax (MAT)

The MAT credit, which can be carried forward and used for 15 years, is the amount paid above and beyond the ordinary tax burden. To the extent that there is a mismatch between the foreign tax credits allowed against MAT and such credit available against the Tax under other provisions of the Income-tax Act, the MAT credit will not be eligible to be carried forward.

Foreign companies are exempt from the MAT requirements if they do not have an Indian PE. Foreign businesses, however, whose sole source of income is from the shipping, mineral oil, aviation, or civil construction industries and whose income from these sources is offered for taxation in conformity with the regulations imposed under the Act, are exempt from the MAT restrictions.

Companies which opt for the 22% lower tax rate option are not subject to the MAT and MAT credit rules.

Companies must pay MAT on their adjusted book profits (other than income from life insurance business) if their tax liability under the normal provisions of the Income-tax Act for the tax year is not more than 15% (excluding surcharge and health and education cess) of such book profits. In addition, companies that continue to pay taxes under the existing tax regime (not exercising the option under the alternative tax regime) are also subject to MAT.

 

DIVIDEND DISTRIBUTION TAX (DDT)

Any amount declared, distributed, or paid as a dividend by a domestic company is subject to dividend tax under Section 115-O of the Income Tax Act. The Tax is only payable by a domestic company; foreign companies are not subject to it. In addition to the income tax due on the entire income, there is a Tax on distribution profits. Whether the dividend is interim or not, it still applies.

 

Additionally, it applies regardless of whether the dividend is paid using current or accumulated profits. The Tax must be paid within 14 days of the dividend payment, distribution, or declaration date, whichever is earlier. In accordance with Section 115-P of the Act, failure to submit this deposition will result in paying the prescribed interest for each month of delay.

 

 Conclusion

India has a robust tax system with distinct lines of jurisdiction between the Central, State, and municipal governments. Customs charges, central excise, service tax, and income taxes are all levied by the central government, with the exception of the Tax on agricultural income, which the state governments levy. The State Governments impose Value Added Tax (VAT), stamp duty, state excise, land revenue, and Professional Tax. In addition, a tax on real estate, octroi, and amenities like water supply, drainage, etc. may be assessed by local authorities.

Indian companies must pay taxes in India on all of their worldwide income, regardless of where it came from or where it went. However, only income from activities conducted in India, or some circumstances, income deemed to have occurred in India, is subject to taxation for foreign companies. The latter comprises royalties, technical service fees, interest, earnings from the sale of assets with a physical presence in India (including gains from the sale of shares in an Indian firm), and dividends from Indian corporations. As a result, a company's residency status affects the tax responsibility on its income.