Corporate Tax in India causes leading MNCs to think twice before reinvesting their capital in business with the intent of gaining reasonable profit in the Indian market. The reasons for the same have been explained in this blog.
Why Companies Are Leaving: A corporate is considered an independent and distinct legal entity and is not linked with its shareholders. The IT Act of India has mandated each foreign or domestic enterprise to furnish tax in India during their operational tenure.
A domestic company’s tax liability is determined by its universal revenue generation, while a foreign company must pay tax only on its earnings within India. Before further analyzing the concept of corporate tax in India, let us first understand the various sources of income for a company that is running its venture over time.
Basis of a Company’s Income in India
It is crucial to assess the concept of several income streams that the numerous private and public companies have access to while continuing their business functions all over India. Here are the key sources of income:
- Profits are generated from the selling of goods and services, this is the primary business plan;
- Capital gains;
- Rental income generated by lending properties to other operational ventures;
- Passive sources of income such as loans, dividends, etc.
Company Taxation Norms
As per the turnover, company tax in India was declared for the 2020-2021 annual year. For detailed information check the table:
| Sections | Taxation rate | Surcharge Fees |
| Section 115BA (Enterprises that will generate a turnover of 400 crores or above after the FY 2017-2018) | 25% | Surcharge amounts range between 7% and 12% |
| Section 115BAB | 15% | 10% |
| Section 115BAA | 22% | 10% |
| Other cases | 30% | This fees ranges between 7% and 12% |
The exact percentage or rate of surcharge fees is determined after taking into account the gross company income. It is valued at the rate of 7% when the total revenue generation exceeds the cap of ₹1 crore. This rate stays constant until the income in a certain FY remains less than ₹10 crores. A 12% surcharge is charged on any income above this taxation bracket.
On the other hand, if a business organization decides to pay company tax in India under either of the 115BAB or 115BAA sections, the surcharge is calculated as 10% disregarding the company’s turnover.
In the following table, you will get an idea about taxation rates applicable to the turnover of foreign companies as per the annual year declaration of 2020-2021:
| Category of business | Tax in India |
| Royalty received or charges for governmental tech services or any Indian collaboration as per the agreement signed prior to 1st April 1976. This has to be approved by the Government of India. | 50% |
| Other profit-making organizations | 40% |
Apart from tax levies, surcharge rates are even applicable for foreign companies who prefer to expand their business growth in India. The particulars are listed below for reference:
If the gross annual returns range between ₹1 crore and ₹10 crores for a foreign-based business in India, surcharge rates are applied at 2%. However, when this figure rises above ₹10 crores, a 5% tax of surcharge fees is estimated to be used for foreign companies in addition to the regular income tax deductions.
Further, 4% of taxation is applied to education and health duties in addition to the surcharge. Alternatively, each company needs to pay MAT or the Alternate Minimum Tax that is decided based on book profits (usually, this stays around 15% of the book profits).
MAT applies only when the cumulative taxation is not more than 15% of the company’s book.
Also, for enterprises that have not registered themselves under Section 115BAB or 115BAA, this law is not valid for them.
Why Are MNCs Leaving India?
Recent years have witnessed companies either moving from India to other developing countries or downsizing their operational scale. This trend has not ceased to disappear even after our honorable Prime Minister invited companies from abroad to come and invest more capital in India’s developing economy.
A bunch of big market players like Swiss construction company Holcim, German retail business Metro AG, US bike manufacturing tycoon Harley-Davidson, etc., have announced downsizing their ventures in India or, in worst cases completely quit their operations in the course of time.
This scenario must change if India wishes to make the most out of the changed world economic model and offer the companies a diversified supply chain for raw materials, a market that they can rely on, and also certain tax benefits that will encourage their commercial interests to reap long term benefits from trading within the boundaries of India.
Role of Tariff Behind the Decision of Companies
The Indian Government has faced constant challenges in simplifying tax laws. Companies often start their venture in India attracted by its huge market size and ample reserves of a competent workforce. But once the endeavor starts, companies frequently experience a tough time owing to high import tariffs and other taxes levied at an elevated scale as per the IT Act prescribed by the Central Government.
The authorities must soon determine the perfect mix so that bigger opportunities may arrive from overseas nations. Investors often leave bewildered after experiencing the complicated implications of the taxation framework in India. Government is resilient to simplification because there is a high chance of tax evasion and exploitation if a blueprint mechanism is suddenly implemented.
Despite repeated unwanted cases, the Government still tries to perform its best possible strategies for keeping the big companies invested in India for as long as possible.
In February 2022, the Central Government furnished a payment of ₹ 7,900 crores to British company Cairn Energy Public Limited Corporation to compensate for tariffs that the authorities had previously charged, demanding retrospective taxation. In 2021, the Indian Government enforced a legal jurisdiction ordering to diminish outstanding claims poised against multinational brands. The list included pharmaceutical market leaders Sanofi, brewer SABMiller, and telecom monopoly Vodafone.
Still, without a doubt, India needs to put more effort into luring companies to trust the market conditions, and this is possible by introducing stability in the overall tariff structure. Automaker companies like Tesla have put their strategies to sell EVs in India on halt as they failed to reach an agreement with the Indian Government on reducing the high import taxes. Indian Government, on the other hand, decided to stay strong on its formal policies, which compel the companies to meet taxes at a rate of 60% in the case of budget vehicles; this margin reaches up to 100% tax for cars that are priced above ₹30, 00,000.
Conclusion
Several administrative and legal hurdles, high logistics expenditure, complex and insufficient credit facilities, etc., have driven companies out of India throughout the past decade. Lack of integrated efforts across the supply and sales streams is also responsible for this alarming trend; the Government, however, has come up with numerous preventive measures to fight this situation.
To read more implications of tax in India, go through Vakilsearch’s blogs, and please reach out to us if you have queries.
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