Corporate taxes are a form of taxation levied on the profits earned by companies and firms operating within the country. The rate of taxation applicable on a company depends on the scale of the company’s profits/taxable income as well as on factors such as capital depreciation, Cost of goods sold(COGS) as well as selling, general and administrative expenses. Careful management of these expenses can be a useful aid to save corporate tax and minimize the loss of income through taxation.
Types Of Corporations :
A corporation can be defined as a legal entity independent from its shareholders that is entitled to certain rights and functions/duties of its own. In India, corporations can be divided into two categories :
- Domestic Corporations : Any company whose management and control is entirely situated in India and is registered under the Indian Companies Acts of 1956 or 2013 is referred to as a domestic corporation. If the Indian arm of a foreign company is wholly controlled and managed within the country, it may also be deemed as a domestic corporation.
- Foreign Corporations : A company that is based outside India or has a portion of its operations controlled and managed outside the nation’s borders is referred to as a foreign corporation.
Corporate Tax Structures For Both Types Of Organizations :
Corporate tax is levied upon the net profit of a company gained through avenues such as capital gains, rent, dividends, interest or from the business itself. Once the taxable income is determined after deductions, taxation occurs in the following manner :
Domestic Corporations :
- 25% if gross turnover is below or equal to Rs 400 crore.
- 30% if the gross turnover exceeds Rs. 400 crore
- Additionally a surcharge of 7% is levied if the income is between Rs 1 and 10 crores and this value rises to 10% if the income exceeds Rs. 10 crores.
- Health & education Cess is also charged @4% on the Income tax and surcharge
Foreign Corporations :
- Royalties or fees for technical services from the government or any Indian concern are taxed at a rate of 10%
- Additionally, any other type of income is taxed at 40%
- The surcharges are 2% for corporations with incomes between Rs.1 crore – Rs.10 crore and 5% for those exceeding this range.
- Health & education Ceess is also charged @4% on the Income tax and surcharge
- Alternately, companies can pay a Minimum Alternate Tax of 15% if the amounts calculated as per the above rates is less than 15% of book profits. There is an additional health and education cess of 4% as well thereon along with surcharge as per applicable rate.
Corporate Tax Planning :
From the above, it is fairly clear that it is no simple task to effectively navigate and save corporate tax in the current landscape. This is where the concept of corporate tax planning comes in. The term should not be associated with tax evasion which is an illegal practice but rather, involves the careful management of a company’s assets and operations in order to maximize gains and prevent the loss of large portions of the corporation’s income to taxation.
Available Deductions :
Minimizing payable taxes can be done by taking note of deductions, exemptions and rebates as well as the appropriate management and reporting of the organization’s expenses. These deductions may include :
- Capital Gains which can either be taxed at a flat rate of 15% or 20% or may be tax exempt under Sections 54D, 54G, 54GA 54EC etc.
- Donations to charitable organizations which may be 50 -100% tax exempt under Section 80G subject to terms and conditions.
- Dividends which may be eligible for rebates in certain cases.
- Deductions for depreciation under Section 32 which allows for a 15% deduction for the depreciation of the cost of old assets such as machinery and an additional 20% on the purchase of new assets in the business of manufacture or production of any article or thing in the business of generation, transmission or distribution of power.
- Deduction in respect of employment of new employee u/s 80JJAA
Measures For Appropriate Planning :
In addition to the above deductions, here are some measures that can be taken in order to save corporate tax. These depend entirely on how the company's management devises it’s tax saving strategy.
- Effective Management Of Expenses : Many businesses within the country operate with unorganized labour which may hinder proper record keeping. Hence it is vital to maintain detailed reports of overhead costs and wages paid out in order to claim deductions on labour and production expenses.
- Equity Valuation : While stock prices are generally valued at cost there are cases involving shorter shelf lives where it can also be valued at its Net Realizable Value or NRV which could prevent it from being overvalued and limit the taxable income from capital gains. This may only be applicable in certain cases where this value remains fairly steady as large fluctuations may be grounds for fraud.
- Making Use Of Deductions : Deductions may be the most effective method of regulating taxable income and their proper management could prove to be vital for companies looking to save corporate tax.
Conclusion : It is important to strike a balance between the various available methods in order to save corporate tax such as deductions and rebates as well as the effective management of expenses. Fully understanding the situations that these measures are best suited to also goes a long way in maximizing the gains of your corporation.