Everything you need to know as a CFO about the Indian tax system

Direct and Indirect Taxes

There are two types of taxes in India: direct taxes and indirect taxes. Direct taxes are levied on the income earned by companies or individuals in a financial year. The income tax paid by individual taxpayers is the Personal Income Tax (PIT). Individuals are taxed on the basis of tax slabs at different rates. The income tax paid by domestic companies and foreign companies on their income in India is the Corporate Income Tax (CIT). The CIT has a specific rate as stipulated in the Indian Income Tax Act.

As the name suggests, indirect tax is not directly imposed on the taxpayer. Instead, it is levied on goods and services. Some examples of indirect taxes in India are the Central Excise and Customs Duty, and Value Added Tax (VAT). One of the most important indirect taxes is the Goods and Services Tax (GST).

Corporate Income Tax

In India, both domestic and foreign companies are required to pay corporate income tax. According to the Indian Income Tax Act, you are a domestic company if you have a registered office or head office in India. A subsidiary also falls under this category. You are taxed as a foreign company if you have a branch office, project office or permanent establishment in India. While a domestic company is taxed in India on its universal income, a foreign company is taxed only on the income earned in India. This sounds more advantageous, but it is not always the case.

Corporate Income Tax – Domestic Companies

The rate of Corporate Income Tax (CIT) applicable to a domestic company for the financial year 2023-24 is as follows:

Sections 115BAA and 115BAB

In September 2019, the Indian government added a new section, 115BAA, to the existing Income Tax Act, 1961. This section provides domestic companies a reduced corporate tax rate from the financial year 2020-21 onwards if they meet certain conditions. The tax rate will no longer be 25 or 30 per cent, but 22 per cent.

What are the conditions of Sections 115BAA and 115BAB?

Firstly, domestic companies must not already be availing of other exemptions or incentives to qualify for the deduction under 115BAA. Therefore, the total income of such companies must be calculated without:

• Claim of any deduction specifically available to units located in special economic zones (Section 10AA).
• Claim for additional depreciation under section 32
• Deduction for investment in new plant and machinery in designated backward areas in the states of Andhra, Pradesh, Bihar, Telangana and West Bengal under section 32 AD.
• Deduction under section 33AB for tea, coffee and rubber companies.
• Claiming deduction under section 33ABA for deposits made in land restoration funds by companies engaged in extraction or production of petroleum, natural gas or both in India.
• Claiming deduction under section 35 for scientific research.
• Claiming deduction for capital expenditure of specified companies under section 35 of the Agriculture Act.
• Section 35CCC – Expenditure on agricultural extension projects.
• Section 35CCD – Expenditure on skill development project. Claims for deductions under Chapter VI-A (80IA, 80IAB, 80IAC, 80IB, etc.) are not allowed, but deductions under Section 80JJAA are exempted. Section 80JJAA allows an employer to reclaim part of the salary of new employees through tax.
• Claiming offset of any losses carried forward from previous years, if such losses were incurred in respect of the above deductions.

The conditions for 115BAB are:

• The company was incorporated and registered after 1 October 2019.
• The production commences before 1 April 2024.
• The company must be engaged in the manufacture or production of any article or product, and/or the research relating to such product. The company may also be engaged in the distribution of the article or product produced by them.
• The company cannot rely on this condition if it is formed by demerger or reconstruction of an already existing company within the meaning of Section 33B.
• The company cannot apply this condition if it is using a plant or machine that has been used for any purpose before. Used imported machines are allowed if these machines have never been installed in India and no claim has been made for depreciation of these machines in India.

Please note!

It is extremely important that companies are sure that they are getting a better deal by opting for the lower tax rate of 115BAA before they actually take that step because once a company takes advantage of the reduction, it has to be continued in subsequent assessment years. Since there is no time limit within which the option under section 115BAA can be exercised, it is better to take time and try out how much benefit other exemptions and incentives can give the company. Then, one can always opt to apply 115BAA, but note that once it is exercised, it has to be continued.

Corporate Income Tax – Foreign Companies

As explained earlier, you will be taxed as a foreign company if you have a branch office, project office or permanent establishment in India. While a domestic company is taxed in India on its universal income, a foreign company is taxed only on the income earned in India. The rate of Corporate Income Tax (CIT) applicable to a foreign company for the financial year 2020-21 is as follows:

These rates are higher than the rates for domestic companies and as a foreign company you cannot claim rate reductions such as the 115BAA. If you have just started in India and your turnover is still low, these high rates are still manageable. However, once you start growing, it is advisable to set up your own entity in India so that you can benefit from the favorable tax rates for domestic companies.

Filing income tax returns

Normally, all companies, including foreign companies, must file their income tax returns on or before October 30 of each year. Even if the company was incorporated in the same financial year, an income tax return must be filed for the period before October 30. In addition, companies with a turnover, profit or gross receipts of more than INR 10 million or approximately EUR 110,000 are required to have an audit carried out. This audit report must be submitted to the Indian Tax Department along with the income tax return. The audit report must be submitted annually, if the rule applies to your company, before September 30.