4 Tax rates for Companies. Know which option to choose

Corporation Tax popularly known as Corporate Tax is a direct tax levied on the net income or profit that corporate enterprises make from their businesses. The tax is imposed at a specific rate as per the provisions of the Income Tax Act, 1961. A corporate is an entity that has a separate and independent legal entity from its shareholders. In India, corporations are classified into two different categories as follows:

Domestic Companies – A company that is established in India and is registered under India’s Companies Act, 2013 is termed as a Domestic Corporate. Even a foreign company can be considered as a domestic corporate if the Indian arm’s management and control is wholly based in India.
Foreign Companies – In case of Foreign Corporation, as the name suggests, a company that is situated overseas and not in India is called a foreign corporate. Again, if some part of a foreign company’s management and control is situated outside of India, then also it is called a foreign company.

This distinction is important as domestic companies in India are charged corporate tax on their universal income while foreign corporations get charged tax only on the income, they generate through their Indian operations only.

Let us learn more about these rates in detail below:

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Tax rate of 25% is applicable for company who opted section 115BA

Section 115BA provides that subject to the fulfilment of conditions specified therein, the total income of certain newly set-up domestic companies shall, at their option, be taxed at the rate of 25%.

The following conditions shall apply:

the company has been set-up and registered on or after the 1^st March, 2016;
the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and
the total income of the company has been computed:

1. without any deduction under the provisions of section 10AA, 32AC, 32AD, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB), 35AC, 35AD, 35CCC, 35CCD, section 80H to 80TT (Other than 80JJAA)

2. without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred above and

3. depreciation under section 32, other section 32(1)(iia), is determined in the manner as may be prescribed.

Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under section 139(1) for furnishing the first of the returns of income which the person is required to furnish under the provisions of this Act
Once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

Tax rate of 22% is applicable for company who opted section 115BAA

Section 115BAA was inserted in the Income Tax Act, 1961 to give the benefit of a reduced corporate tax rate for the domestic companies. Section 115BAA states that domestic companies have the option to pay tax at a rate of 22% on the fulfilment of the following conditions:

The total income of such company shall be computed without claiming the below deductions:

Deduction available for units established in special economic zones under section 10AA
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
Deduction under section 33AB for tea, coffee and rubber manufacturing companies
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
Deduction under Section 35 for expenditure on scientific research, or an amount paid to a university or research association or National Laboratory or IIT.
Deduction for the capital expenditure incurred by any specified business under section 35AD
Deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
Deduction under chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA and 80M.
Deduction under chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA
Set-off of any loss carried forward or depreciation from earlier years, if such losses were incurred in respect of the aforementioned deductions
A claim by an amalgamated company for set-off of carried forward loss or unabsorbed depreciation belonging to an amalgamating company if such loss or unabsorbed depreciation is on account of the above deductions; claiming a deduction for additional/accelerated depreciation. The normal depreciation can however be claimed.

The above losses shall be deemed to have been allowed and shall not be eligible for carry forward and set off in subsequent years this means that if the company opts for 115BAA then the opportunity for claiming set off is lost forever.

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. Once the company opts for section 115BAA in a particular financial year, it cannot be withdrawn subsequently. There is no restriction on turnover and the company need not be a new company, any existing company can migrate into this section at any point.

Tax rate of 15% is applicable for company who opted section 115BAB

Section 115BAB states that domestic companies have the option to pay tax at a rate of 15% on the fulfilment of the following conditions:

1. The company has been set up and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2023. Such a company should:

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
Does not use any plant or machinery previously used for any purpose.
However, the company can use plant and machinery used outside India and used in India for the first time.
Also, the company can use old plant and machinery, the value of which does not exceed 20% of the total value of the plant and machinery used by the company.
Does not use a building previously used as a hotel or a convention centre.
‘Hotel’ means a hotel of two-star, three-star or four-star category as classified by the Central Government.
‘Convention centre’ 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.

2. 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.

3. The total income of the company should be calculated without claiming tax exemptions and incentives:

Deduction under section 10AA for units in Special Economic Zone
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
Deduction under section 33AB for tea, coffee and rubber manufacturing companies
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
Deduction for expenditure made for scientific research under section 35
Deduction for the capital expenditure incurred by any specified business under section 35AD
Deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
Deduction under Chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA
Set-off of any loss carried forward from earlier years if such losses were incurred in respect of the aforementioned deductions
Deduction for depreciation under section 32, except the additional depreciation

4. The company has to exercise the option on or before the due date of filing income tax returns. Once the company opts for section 115BAB in a particular financial year, it cannot be withdrawn subsequently.

Tax Rate for Other Domestic Companies

A domestic company is taxable at 30%. However, the tax rate is 25% if turnover or gross receipt of the company does not exceed Rs 400 crores in the previous year.

It is also important to remember that, surcharge + education cess as given below will be added to the above tax rate:

Surcharge @ 7% of Income tax where total income exceeds Rs.1 crore
Surcharge @ 12% of Income tax where total income exceeds Rs.10 crore
Surcharge @ 10% of income tax where domestic company opted for section 115BAA and 115BAB
Education cess @ 4% of Income tax plus surcharge