Corporate taxation is a critical aspect of India's tax system, and it has undergone significant changes over the years. In recent times, there have been several amendments to the legal provisions related to corporate taxation in India. This blog will provide an overview of the current legal provisions on corporate taxation in India as of 2023.
Overview of Corporate Taxation in India In India, corporate tax is levied on companies that are registered in India or have a business presence in the country. The Indian Income-tax Act, 1961 (the "Act") is the primary legislation that governs corporate taxation in India. The Act divides companies into two categories for tax purposes: domestic companies and foreign companies.
Domestic Companies A company is considered a domestic company if it is incorporated in India or has its registered office in India. Domestic companies are taxed on their worldwide income, meaning they must pay taxes on all their income earned in India and outside India. The tax rate for domestic companies varies depending on the type of company and its profitability. For instance, companies with a gross receipt of up to INR 400 crores are taxed at a rate of 25%, while those with higher gross receipts are taxed at a rate of 30%.
Foreign Companies A company is considered a foreign company if it is not incorporated in India but has a business presence in the country. Foreign companies are taxed only on their Indian income, which means they must pay taxes on the income they earn from their operations in India. The tax rate for foreign companies varies depending on the nature of their business and the Double Taxation Avoidance Agreement (DTAA) between India and the country where the company is incorporated.
Key Changes in Legal Provisions Relating to Corporate Taxation in India in 2023 There have been several key changes in the legal provisions relating to corporate taxation in India in 2023. Some of these changes include:
Reduction in Corporate Tax Rates The Union Budget 2023 introduced significant changes to the corporate tax rates in India. The budget proposed reducing the corporate tax rate for domestic companies to 22% for companies with a gross receipt of up to INR 400 crores. Additionally, the budget also proposed a reduction in the Minimum Alternative Tax (MAT) rate from 18.5% to 15%. These changes aim to promote economic growth by reducing the burden of taxes on small and medium-sized enterprises.
Introduction of New Tax Regime The Union Budget 2023 also introduced a new tax regime for domestic companies. Under this regime, companies can opt to pay taxes at a lower rate of 25.75% if they do not claim any exemptions or deductions. This new regime aims to simplify the tax structure and reduce compliance costs for companies. However, companies that choose to opt for this regime cannot revert back to the old regime later.
Withdrawal of Dividend Distribution Tax (DDT) The Finance Act, 2023, abolished the dividend distribution tax (DDT), which was previously paid by companies distributing dividends to shareholders. Instead, dividends distributed by companies are now subject to TDS (tax deducted at source) at the rate of 10%. This change aims to remove the cascading effect of taxes on dividends and make them more attractive to investors.
Limitation on Interest Expense Deduction The Finance Act, 2023, introduced a limitation on interest expense deduction for companies. According to this provision, the interest expense deduction allowed to a company would be limited to 30% of its EBITDA (earnings before interest, taxes, depreciation, and amortization). This limit applies to both domestic and foreign companies and aims to prevent excessive borrowing and aggressive tax planning strategies.
Anti-Abuse Provisions The Finance Act, 2023, introduced anti-abuse provisions to prevent misuse of tax laws. These provisions target transactions that lack commercial substance and are designed to manipulate profits or avoid taxes. The anti-abuse rules apply to cross-border transactions involving related parties and aim to ensure that companies pay taxes on their actual income.