Indian Corporate and Startup tax laws: An overview

While operating a business, tax laws can tend to get tricky to grasp, especially for new founders starting their companies. At the same time, navigating through taxes with full compliance is essential to avoid sanctions or penalties from regulators. Corporate taxes in India are also differentiated into multiple rates and implemented based on various factors of your business.

This article attempts to simplify Indian corporate tax laws for the country’s budding entrepreneurs and businesspersons!

Source | Indian corporate tax laws

Indian corporate tax laws

Source | Corporate Taxes in India

The Income Tax Act of 1961 of India mandates all companies operating in India to pay taxes on their income. However, there is a difference in corporate income tax between foreign companies and domestic companies.

Domestic corporations in India are registered under the Indian Companies Act 2013 and are liable to pay corporate income tax on their overall income. On the other hand, foreign companies that operate in India only have to pay a corporate income tax on their incomes arising from India.

Indian corporate tax laws have several sections for different corporate tax rates that are applicable to companies. Here are some of them:

Section 115BA

Section 115BA is applicable to companies that are set up or registered on or after March 1, 2016. Moreover, the section is only applicable to companies that are engaged in manufacturing and production. A flat Indian corporate tax rate of 25% is levied on companies under section 115BA, but they can only apply for this section if they do not claim any deductions or exemptions while filing their taxes.

In 2019, the Government of India introduced two new sections that enabled companies to pay lower corporate tax rates in India. 

The Taxation Laws (Amendment) Ordinance 2019 enabled this change in corporate tax rates in India. Those domestic companies who do not opt for the sections can continue to pay a 25% corporate income tax for an annual turnover of upto INR 400 crores. Other domestic companies with turnovers beyond this mark would have to pay a corporate income tax of 30%.

These new sections, listed below, ushered in a new period for corporate taxes in India:

Section 115BAA

All companies filing under Section 115BAA are liable to pay taxes at an Indian corporate tax rate of 22%. This rate is applicable to companies that do not claim deductions or exemptions. Under this section, companies cannot set off any losses carried forward.

Section 115BAB

Section 115BAB was introduced by the Government of India to incentivize manufacturing and production in India under the ‘Make in India’ initiative. A tax rate of only 15% is levied on companies that are registered in India between on or after October 1, 2019, and commence their manufacturing operations after the same date and on or before March 31, 2024.

Meanwhile, the income for these companies, which is generated from non-manufacturing activities and short-term capital gains from non-depreciable assets, attracts taxes at 22%,

Companies cannot claim any deductions or exemptions under Section 115BAB.

Surcharge

Apart from the regular Indian corporate tax rates, companies in India also attract surcharges on their payable taxes. The different slabs for surcharges are:

1. Companies with total incomes over one crore: 7%

2. Companies with total incomes over ten crore: 12%

3. Companies opting for Section 115BAA and Section 115BAB: 10%

A health and education cess of 4% is also levied on the taxes and surcharges of companies in India.

Corporate tax rates in India for foreign companies

Foreign companies in India pay corporate taxes at 40% of their average taxable incomes. Surcharges are applied to foreign companies having incomes between INR 1 crore and INR 10 crore at 2%. If a foreign company’s income crosses INR 10 crore, a surcharge of 5% is levied on its corporate taxes.

Corporate tax rates in India for partnerships

A local authority, partnership firm, or limited liability partnership (LLP) firm has to pay corporate taxes at 30% of its average taxable income.

Startup tax exemptions in India

The Indian government also offers various incentives and exemptions to startups in India. These include:

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• A 3-year tax holiday: A startup in India that is incorporated or registered between April 1, 2016, and March 31, 2025, can get an exemption from taxes on their profits for three years in a block of 10 years. Its turnover must be limited to below INR 100 crores in a particular financial year.

• Long-term capital gains exemption: If startups invest their long-term capital gains in a government-specified fund for at least three years, they can claim an exemption on their gains through section 54EE.

• Investments above fair market value (FMV): If angel investors, individuals, funds, or incubators invest in startups fulfilling specific criteria above their fair market values (FMV), their investments will be tax exempted.