Breaking down budget jargons, one term at a time. In the run up to the Budget, we will be decoding one finance jargon per day.
Just like how individuals earning income are supposed to pay a tax on it, corporates too have to pay tax on a certain part of their earned income and this is known as corporate tax. A company is an independent and separate legal entity from its shareholders and in India, companies both public and private registered under the Companies Act 1956, are liable to pay a corporate tax.
Indian companies are taxable on the income from not only on their domestic, but also their worldwide operations. Foreign companies are taxable on the income that comes from their operations in India. Royalty, interest, gains from sale of capital assets in India, dividends from Indian companies and even fees for technical services are all classified as income arising from India.
The current tax rate for a domestic company is 30% of the total company income. But don't be mistaken to assume that corporates earning different ranges of income will have the same tax rate of 30% be imposed on them. The government has levied a surcharge of 7% of income tax for companies having a total income exceeding Rs 1 crore but less than Rs 10 crore. For companies having a total income that exceeds Rs 10 crore, a surcharge at the rate of 12% will be levied on such income.
The amount of income-tax on corporates is further increased by an 'Education Cess' calculated at the rate of 2% of such income-tax and surcharge. This is further increased by the 'Secondary and Higher Education Cess' calculated at the rate of 1% of such income-tax and surcharge.
For foreign companies, royalty or fees received in a predefined time-frame are subject to a tax at the rate of 50% and if not this, the income is taxed at a rate of 40%. Surcharge at the rate of 2% is levied for such companies having an income in the range of Rs 1 crore to Rs 10 crore and if the income exceeds Rs 10 crore, a surchage of 5% is imposed.
The corporate tax rate of India is one of the highest in the world after the US and before countries like China, Brazil, France, UK and Russia. Last year's Budget saw the Finance Minister Arun Jaitley lower the corporate tax to 25% (plus surcharge and cess) for new manufacturing companies which are incorporated on or after March 1, 2016 on the condition that they do not claim other exemptions. Jaitley also lowered the corporate income tax rate for companies, with a turnover not exceeding Rs 5 crore, to 29%.
Corporate tax rate is expected to be lowered in the upcoming Budget, not only because of the faltering economy but because Jaitley had promised in his 2015 Budget Speech that it would be reduced from 30% to 25% over the next four years, along with the phasing out of exemptions and deductions. In a survey by Deloitte Touche Tohmatsu India LLP, commissioned on budget expectations of India Inc, 53% of the respondents expect the corporate tax rate to be reduced this time.
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