THE EXPLANATION OF CORPORATE TAX
Shashank Shekhar, Student, Central University of South Bihar
Corporate Taxation in India
In a Welfare State, the Government takes primary responsibility for the welfare of its citizens, as in matters of health care, education, employment, infrastructure, social security and other development needs. But to facilitate these, Government needs revenue. So government take taxes from the public on one hand and incurs welfare expenditure for public at large on the other hand. It is also rightly said by Justice Holmes of US Supreme Court that ‘tax’ is the price which we pay for a Civilized Society. Indian Taxation system Direct Taxes and Indirect Taxes. The direct taxes are paid directly by the person concerned and its incidence and impact fall on the same person whereas indirect taxes are those in which the tax payer pays indirectly and its incidence & impact fall on two different persons. Thus the former includes Income Tax, Gift Tax and Wealth Tax whereas later include Sales Tax; Entry Tax, Service Tax, GST etc.
Direct Taxes in India is subdivided into Income Tax and Corporate Tax. Income tax is paid by the taxpayers other than companies registered under company law in India, on the income earned by them and they are taxed on the basis of slabs at different rates. Whereas the Corporate tax is paid by the companies registered under company law in India on the net profit that it makes from businesses and it is taxed at a specific rate as prescribed by the Income tax Act. Corporate taxation is an important source of government revenue around the world and a major consideration in planning business activities. The taxation of corporate income encourages entrepreneurs and managers to structure and conduct their business operations in ways designed to avoid taxes. The greater part of corporate tax policy is used by government to encourage investment from overseas.
The legal Definitions and Important Laws regarding it
Corporate Income Tax system aim to tax the profits of companies generated inside a given jurisdiction. A corporation is a legal entity organised under the corporate or company laws of some jurisdiction. In our country the Companies Act, 1956 (now amended 2013) are the major Acts of legislation that impinge on the governance of Indian companies. Section 3 (1) (i) of the companies Act, 1956 defines a company as a company formed and registered under this Act and section 3 (1) (ii) of the Act states that an existing company means a company formed and registered under the any of the previous companies laws. Any corporation may be taxed on their incomes, property, or existence by various jurisdictions but most of the jurisdictions tax on their income. The corporation tax which is popularly known as corporate tax is levied on the net income or profit that corporate enterprises make and tax is imposed at a specific rate as per the provision of Income Tax Act, 1961. Thus in legal words corporation tax is a tax which is levied on the incomes of the registered companies and corporations. Income of a company means profits earned from the business, capital gains, income from renting property, income from other sources like dividend, interest.
Here Company whether Indian or foreign is liable to taxation under the Income tax Act, 1961. However, for the purpose of taxation companies are broadly divided into two namely a.) Domestic company under Section 2(22A) which means an Indian company or any other company which in respect of its income liable to tax, under the Income tax Act, and has made the prescribed arrangement for declaration and payments within India of the dividend payment out of such income, and (b.) Foreign company under Section 2(23A) which means a company whose control and management are situated whole outside India, and which has not made prescribed arrangements for declaration and payment of dividends within India.
Article 265 of the Constitution of India lays down that no tax shall be levied or collected except by the authority of law. It means tax proposed to be levied must be within the legislative competence of the legislature imposing the tax. The Income tax department set by the government, is governed by Central Board of Direct Tax (CBDT) and is part of department of revenue in the Ministry of Finance. For all matters relating to income tax, the Income Tax Act, 1961 is the Umbrella Act which empowers the Central Board of Direct Taxes to formulate rules for implementation the provision of the Act.
Corporate tax in India is a fixed percentage of the net profit after allowing admissible expenses and it has to be self- assessed in nature. The legislation requires that every company, unless specifically exempt, is subject to corporate tax on chargeable income derived by the company in a year of assessment. The corporate tax that should be paid by a
company, is in form of Chargeable income which is calculated by deducting all allowable deductions incurred wholly and exclusively in the production of income subject to tax and capital allowances from the gross income. Every company is required to file its annual income tax return on or before 30th June every year, unless the company has been approved by the Commissioner General to use a substituted accounting period. A substituted accounting period may be any period of twelve months which does not commence from 1st April and ends on 31st March. Corporate tax have to pay in quarterly installments and is legal requirement under section 150 of Income Tax Act as it helps reduce the burden of paying substantial amount of tax at end of the financial year.
There are also concept of Minimum Alternative Tax (MAT) in form of direct tax for the companies having large profits and declaring substantial dividends to shareholders but who are not contributing to the government by way of corporate tax, by taking advantages of the
various incentives and exemptions provided in the Income tax Act, have to pay fixed percentage of book profit as minimum alternative tax. So, it is for ‘Zero tax’ companies and is liable to pay tax on the income computed as per the provisions of Income Tax Act, but the profit and loss account of the company is prepared as per provision of the Companies Act.
The Salient Features of Corporate Taxes
There are several salient features of corporate taxes as follows:-
1. Corporate taxes seems necessity as without it personal income tax would be substantially undermined by entrepreneurs who could shift the return of their efforts into untaxed corporate profits. Taxation influences the timing, magnitude, and composition of corporate investment in plant and equipment, investors, research and development, and other business assets.
2. Collecting the tax at the corporate level is superior to other forms of collection as Corporate Income Tax (CIT) provides a substantially easier way of taxing owners especially foreign shareholders which is key role of CIT in developing countries.
3. A well-designed CIT i.e. properly integrated with the system of personal income taxation can also help prevent the owners of small companies avoiding tax by converting income from labour income to capital income.
4. Personal Income Tax raise a substantially lower share of GDP and total tax revenue in developing countries than in advances countries whereas CIT raise a roughly comparable share of GDP and a higher share of total tax revenues.
5. There are generally large pressure to develop and maintain CIT regimes in developing countries as they have a particular reliance on Foreign Direct Investment (FDI) to assess new technologies, investment, jobs and so CIT regimes needs attractive to overseas investors.
6. As lower investment leads to lower growth and it is generally a particular concern for developing countries. So, developing countries in contrast to advanced countries have made tax bases narrower and have tended to make substantial use of targeted tax incentives, which is reflecting the aim of attracting mobile investment.
7. Allowing Corporations to increase capital investment as a result of reduced corporate taxes increases government’s tax revenues despite a declining proportional stake in firms. According to UNCTAD, 2013 report the developing countries absorbed more FDI than advanced countries in 2012 for the first time.
8. CIT systems in developing countries are of increasing relevance, not only as contributors or impediments to economic development in their countries, but also for their impact on world trade and financial flows and through tax competition there is CIT revenues everywhere.
9. CIT system are vulnerable to increasing capital mobility and corporations locate new investments in countries offering attractive tax regimes which can be in form of low tax rates, tax holidays or investment allowances etc.
10. Tax cut give rise to competitive pressure between countries. The tax rate cut benefits
as for every rupee of profit a company makes progressively it has more with itself to invest or pass on to consumers through price cuts. Indian governments (in wake of economic reforms) has also brought down the corporate tax rate and surcharge over the period of time in order to increase the industries growth and turn the foreign investors toward India.
11. Industries in India are corporate groups in a widely prevalent organizational form like in most emerging markets and in many developed economies as they play a prominent role in the economics of our country. As per the data of Ministry of Finance corporation tax is India’s biggest revenue sources (21 Paisa out of 100). 12. The use of Tax incentives for countries with weak administrative capacity may cause more harm than good as targeting of more mobile activities is difficult, administrative risky and prone to rent seeking corruption.
The Reduction in Recent times
Corporate tax rate in India is reported by the ministry of Finance and during the 2001 – 2014 the Corporate Tax rate in India were at 33.99%. Corporate tax rate in India was an average of 33.05% from 2000 until 2014 reaching an all-time high of 38.95 % in 2001 and record low of 32.44% in 2011. Recently in 2019, Finance Minister Nirmala Sitharaman had announced major changes in corporate income tax rates to revive growth in the broader economy. This has been achieved through an ordinance– the Taxation Laws (Amendment) Ordinance 2019. The corporate income tax rate were slashed from 30 percent to 22 percent for all companies. Inclusive of cess and surcharges the effective corporate tax rate in India now comes down to corporate tax to 25.17 per cent.
Under the new corporate tax policy, new companies that set up manufacturing facilities in India after October 1, 2019 and commence production before the end of March, 2023 will be taxed at an effective rate of 17%.
[The corporate tax cut is part of a series of steps taken by the government to tackle the slowdown in economic growth. This new Corporate income tax rates in India now lower than USA (27%), Japan (30.62%), Brazil (34%), Germany (30%) and is similar to China (25%), Korea (25%). Also the tax cut effectively have brought India back in competition with Asian peers (East Asia). The recent steps of government may help reviving the domestic manufacturing sector, competitiveness of private sector, and may result in restoring the investor’s confidence which will further create jobs and thus boost up the economy. However everything have its own pros and cons, similarly the step biggest cons could be a yearly revenue loss of R.s. 1.45 lakh crore to government which is already struggling to meet its fiscal deficit target. But if government however, manages to revive the economy the present tax cut can help boost tax collection and compensate for loss of revenue.
It is undoubtedly true that corporate taxation is an important source of government revenue
around the world and in welfare state this revenue is for welfare of its citizens. But this does not solve the whole equation in the present world of globalization with complex trade relations and competitiveness. The developing countries have its own difficulties and as India is a developing country it definitely would require investments, technologies and jobs and so it have to take the decisions effectively to handle the global pressure. It on the other hand have to take into consideration of the facts that corporate tax is one of the greatest source of revenue for India. We, thus, would require to harmonize the two as we cannot have option to choose one of them. However there can be Structural reform, for long run, in corporate taxation which might be government’s next step other than cutting the rates which would definitely requires more reforms through new ideas in the field of Corporate Taxation.