Corporate Tax in India: Understanding the framework

What Is Corporate Tax in India and How Is It Structured?

Corporate Tax in India refers to the levy imposed on the profits earned by companies. The corporate tax is rooted in the Income Tax Act, 1961, as amended annually by the Finance Acts, and is supplemented by notifications, circulars and rules issued by the Central Board of Direct Taxes (CBDT). .
The Indian corporate tax rates are not uniform and are subject to various factors. The factors based on which the tax rate is determined are as follows:

Whether the company is domestic or foreign.
The level of turnover in the case of domestic companies.
The availability of concessional regimes introduced under recent Finance Acts.
Surcharge and health and education cess, which are applied in addition to the base rate.

I. Overview of Corporate Tax in India

A. Nature and scope of the levy

The expression Corporate Tax in India generally refers to the tax imposed on the profits of companies or income of the Company under the Income Tax Act , 1961. The levy extends to every company which carries on business in India or derives income from India, though the extent of charge depends upon the residential status of the company. A domestic company is subject to tax in respect of its worldwide income, while a foreign company is taxed in respect of income which accrues or arises in India.

B. Which Laws Govern Corporate Taxation in India?

The governing provisions are found primarily in the Income Tax Act, 1961 read with the annual Finance Acts. The act prescribes the Indian corporate tax rates, return filing and compliance obligations, and anti-avoidance provisions including transfer pricing and GAAR.

C. Classification of companies

For the purposes of the corporate tax structure India, companies are divided broadly into domestic companies and foreign companies.

D. What Types of Income Are Subject to Corporate Tax in India?

The scope of income is determined by residential status. Domestic companies are taxed on global income, while foreign companies are taxed on income sourced from India.

E. Points of emphasis

Corporate tax compliance in India extends beyond payment of taxs and the entities are required to comply with the return filing, audit, and reporting .
The corporate tax framework India is affected by treaty obligations and international developments.

II. Corporate Tax Rates and Structure

A. What Are the Tax Rates for Domestic Companies?

1. Standard rates

A domestic company is a company incorporated in India. Its profits are taxed on a worldwide basis. The applicable corporate tax in India for domestic companies varies according to turnover and whether they opt for concessional regimes. The tax rate applicable to a domestic company are as follows:

25% – for companies with turnover up to INR 400 crore in the previous financial year.
30% – for other domestic companies, where no special regime has been chosen.

2. Concessional regimes

Special provisions have been introduced to promote manufacturing and investment. These provisions enable a domestic company to pay a reduced tax rate which are as follows:

22% rate – under section 115BAA for companies not claiming specified incentives/exemptions.
15% rate – under section 115BAB for new manufacturing companies incorporated after 1 October 2019 and commencing production before 31 March 2024.

Companies availing concessional regimes are exempted from MAT provisions.

B. What Concessional Tax Regimes Exist?

A foreign company is taxed only on income that arises or is deemed to arise in India. The base Indian corporate tax rates are as follows:

40% – on business income earned in India.
Special rates apply to certain categories of income:
- Royalties and fees for technical services – typically 50% or lower if reduced under a Double Taxation Avoidance Agreement.
- Interest income – taxed at specific rates depending on the nature of borrowing and treaty provisions.

C. What Is Minimum Alternate Tax (MAT)?

1. Applicability

MAT is designed to ensure that companies that report substantial profits under the Companies Act but reduce taxable income through exemptions or deductions still pay a minimum amount of tax.

MAT is levied at 15% of “book profit”, as defined under section 115JB.
MAT applies to domestic and foreign companies with a place of business in India, unless exempted.

2. Credit mechanism

MAT credit can be carried forward for 15 years.
Companies opting for the concessional 22% or 15% regimes are exempt from MAT.

D. How Do Surcharge and Cess Apply?

The effective liability of a company is not limited to the base rate. A surcharge and cess are imposed on the tax computed:

Surcharge:
- 7% – if taxable income exceeds INR 1 crore but does not exceed INR 10 crore.
- 12% – if taxable income exceeds INR 10 crore.
Cess:
- Health and Education Cess at 4% of the total tax plus surcharge.

E. Key Takeaways

Effective tax varies by company type and regime chosen.
MAT continues to apply unless concessional provisions are opted for.

III. Taxation of Dividends and Distributed Profits

A. How Are Dividends Taxed in India?

Dividend Distribution Tax was withdrawn with effect from April 1, 2020. Dividends are now taxable in the hands of shareholders, with companies acting as withholding agents.

B. What Is the Tax Treatment for Residents?

Dividends are taxed as part of total income. Companies must deduct tax at source at 10 per cent if the prescribed threshold is crossed.

C. How Are Non-Resident Dividends Taxed?

Dividends are subject to withholding at 20 per cent, subject to treaty relief.

D. What Is Buy-Back Tax?

Tax at 20 per cent is payable by the company under section 115QA, with shareholder income exempt.

E. Key observations

Liability on dividends rests with shareholders, while buy-back tax rests with the company.
Cross-border dividend distribution requires treaty analysis.

IV. Capital Gains Taxation for Companies

A. What Are Capital Gains?

Capital gains arise on transfer of capital assets and are taxed separately from business income.

B. Short-term and long-term distinction

Listed equity held beyond 12 months is long-term.
Long-term gains on listed equity above INR 1 lakh are taxed at 10 per cent.
Other long-term gains are taxed at 20 per cent with indexation.

C. What Exemptions Are Available?

The Income Tax Act for Companies in India provides certain reliefs:

Section 47 excludes specific transactions such as amalgamation or demerger from the definition of “transfer”.
Section 54EC allows investment of long-term gains in specified bonds, up to INR 50 lakh, to obtain exemption.
Section 72A permits carry-forward of losses and unabsorbed depreciation in certain corporate reorganisations.

These provisions reflect a policy choice to facilitate restructuring while maintaining the integrity of the tax base.

D. Observations

Taxation depends on asset type and holding period.
Compliance errors often lead to litigation.

V. Transfer Pricing and International Taxation

A. What Is Transfer Pricing?

Transfer pricing provisions aim to prevent profit shifting through associated enterprise transactions.

B. Transfer pricing rules

Arm’s length pricing is mandatory.
Documentation and Form 3CEB filing are compulsory.

C. What Is an Advance Pricing Agreement (APA)?

To reduce disputes, the law introduced the APA mechanism.

A unilateral APA is entered between the taxpayer and the Indian authority.
Bilateral and multilateral APAs involve treaty partners.
APAs provide certainty for five years, and rollback can apply for four earlier years.

In practice, large multinationals have used APAs widely to settle positions. While the process involves disclosure and negotiation, it gives comfort on corporate tax compliance in India and reduces prolonged litigation.

D. How Does BEPS Affect India?

India has adopted a number of measures under the OECD’s Base Erosion and Profit Shifting project:

Country-by-Country reporting, for groups above €750 million turnover.
Master file and local file documentation.
Significant Economic Presence provisions to tax digital activity.
The Multilateral Instrument, to prevent treaty abuse.

These steps expand the reach of corporate tax in India well beyond traditional rules, and companies must adjust compliance systems accordingly.

E. Observations

Transfer pricing is central to the corporate tax framework India.
Compliance systems are essential.

VI. General Anti-Avoidance Rules (GAAR)

A. Position under present law

The concept of anti-avoidance was not new to corporate tax in India even before GAAR. Courts had developed principles such as “substance over form” and “look at the transaction as a whole”. What GAAR did was to give these principles statutory backing. The provisions are now contained in Chapter X-A of the Income Tax Act for Companies in India. The law allows the revenue authorities to declare an arrangement as an impermissible avoidance arrangement if the main purpose of the arrangement is to obtain a tax benefit.

B. Consequences

Where GAAR is invoked, the officer may:

disregard or re-characterise the arrangement;
deny tax benefits otherwise available under exemptions, deductions or treaties;
reallocate income or expenses between parties.

In practice, this means that aggressive tax planning, if not supported by commercial substance, can be neutralised. For companies, the message is clear: the corporate tax structure India now gives wide discretion to revenue authorities, and structures must be commercially defensible.

C. How Does GAAR Affect Corporate Structuring?

Transactions that use conduit entities in low-tax jurisdictions, or multi-layered holding chains created only for treaty benefits, are vulnerable.
Restructuring arrangements which lack commercial justification beyond tax saving can be challenged.
Companies must now document purpose, board approval, and business rationale in order to meet corporate tax compliance in India standards.

D. Other statutory anti-abuse measures

Alongside GAAR, the Income Tax Act for Companies in India contains targeted provisions:

Transfer pricing rules to ensure arm’s length pricing.
Dividend stripping and bonus stripping rules.
Thin capitalisation restrictions under section 94B.
Limitation of benefit clauses in treaties.
Indirect transfer provisions under section 9.

VII. Indirect Taxes and GST

A. How Does GST Apply to Companies?

GST applies to supply of goods and services and operates alongside corporate tax in India.

B. What Are the GST Compliance Requirements?

Scope – GST applies on the supply of goods and services. Registration becomes compulsory once the turnover limit is crossed.
Input tax credit – one of the central features, allowing companies to set off the tax paid on inputs against their output liability. This reduces cascading, but the matching rules and reconciliations often create practical difficulties.
Compliance – periodic filing of returns, payment of tax, maintenance of invoices and reconciliations. These obligations are ongoing, unlike annual direct tax filings.

It is in practice as compliance-heavy as direct tax, though the base and rates differ from Indian corporate tax rates.

C. How Are Cross-Border Supplies Taxed?

Imports – subject to Integrated GST at the border, which increases landed cost though credit is often available.
Exports – treated as zero-rated; companies either export without tax under an undertaking or pay and later claim refund. Delays in refund processing are a frequent issue.
Digital services – non-resident suppliers to Indian customers must register; alternatively, the Indian recipient must pay under reverse charge. This shows how the corporate tax framework India has been extended to capture digital economy revenue.

D. What GST Incentives Are Available?

The law contains specific incentives that interact with direct tax concessions:

Supplies to SEZs are zero-rated.
Exporters are entitled to refund of accumulated credits.
Concessions are given to certain sectors such as renewable energy and education.

These concessions reduce indirect cost of doing business and complement direct corporate tax in India concessions under the Income Tax Act for Companies in India.

VIII. Tax Incentives and Concessions

The system of corporate tax in India is not only about levy and collection but also about the use of tax as a policy tool. Over the years, Parliament has amended the Income Tax Act for Companies in India to include deductions, exemptions and concessional regimes. The intention is to channel investment into priority areas such as infrastructure, exports, research, and employment generation.

A. What Benefits Are Available for New Companies?

The position now is that newly incorporated companies can opt for sections 115BAA or 115BAB.

Section 115BAA prescribes a 22% base rate if the company does not claim specified deductions.
Section 115BAB prescribes a 15% rate for certain new manufacturing entities incorporated after 1 October 2019.

Other provisions such as section 80JJAA (deduction for new employees) and accelerated depreciation also operate, but these are narrower in scope.

B. What Are SEZ Tax Benefits?

SEZ units continue to enjoy relief. The Section 10AA allows phased deduction whereby the entities enjoys a full exemption for five years. Subsequent to which a partial exemption for the next five, and conditional for another five. The relief is linked strictly to profits from exports. At the same time, GST law zero-rates supplies to SEZs, reducing the indirect tax burden.

D. Start-ups and MSMEs

Recognised start-ups have specific concessions. Section 80-IAC allows 100% deduction of profits for three years out of ten. Relief from angel tax and exemptions from capital gains in specified circumstances are also relevant.

E. R&D, infrastructure and export-related deductions

Research and development continues to attract deduction under section 35, though the weighted deduction has been reduced. Contributions to approved institutions are also covered.
Infrastructure undertakings may claim deduction under section 80-IA. Activities such as power generation, roads, ports and waste management are eligible.

Export-related relief overlaps with SEZ benefits and with GST refunds. Duty drawback and remission schemes reduce the overall cost of exporting.

IX. Compliance, Filing, and Payment

A. What Are Corporate Tax Compliance Duties?

The levy of corporate tax in India is only one part of the system; the other equally important part is compliance. The Income Tax Act for Companies in India is not confined to prescribing rates and charging provisions. It sets out a detailed machinery of return filing, audits, advance tax and withholding obligations, and these obligations together form the real corporate tax framework India.

B. Core obligations

Companies must maintain books, file returns, pay advance tax, and deduct tax at source.

C. Tax audit and consequences

Section 44AB requires companies to undergo tax audit. The audit is conducted by a chartered accountant, and the report in Form 3CA/3CB with detailed particulars in Form 3CD is submitted. The audit goes beyond accounts and covers compliance with depreciation, TDS, related party transactions and other matters. This underlines the policy that the corporate tax structure India is compliance-heavy for corporates compared to non-corporates.

X. Double Taxation Avoidance and Withholding

A. Treaty framework

DTAAs allocate taxing rights and provide relief from double taxation. It protects the corporate against the taxation on the same income in another jurisdiction provided that such jurisdiction shall have a treaty preventing such double taxation.

B. Withholding obligations

Companies must deduct tax on payments to non-residents.

C. Observations

Errors in withholding are a major source of litigation.

XI. Dispute Resolution and Advance Rulings

A. Dispute framework

Disputes may be resolved through appeals, Dispute Resolution Panel, Mutual Agreement Procedure or advance rulings.

B. Observations

Litigation is common, particularly in international tax matters.

XII. Emerging Trends and Future Outlook

A. Recent reforms

Reduction of rates – Sections 115BAA and 115BAB now allow domestic companies to opt for concessional Indian corporate tax rates, though only if they give up deductions and exemptions.
Dividend taxation – The abolition of Dividend Distribution Tax from 2020 shifted the burden to shareholders, with companies retaining the withholding role. This brought the corporate tax structure India closer to international practice.
MAT adjustments – MAT continues at 15 per cent, but companies choosing concessional regimes are exempt. The dual regime has created compliance questions and choices for corporates

B. Global influence

OECD BEPS initiatives and digital taxation measures influence Indian law

XIII. Conclusion

The corporate tax in India has evolved into a complex framework combining rate provisions, compliance obligations, dispute resolution mechanisms and incentive regimes. The Income Tax Act for Companies in India, governed by Finance Acts, and continues to adapt to domestic policy goals and international developments. For corporates, strategic planning, robust compliance systems and readiness for disputes are now indispensable features of operating within the corporate tax framework India.

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