Corporate Income Tax

The taxability of a company's income depends on its domicile.

• Indian companies are taxable in India on their worldwide income.
• Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interst, gains from sale of capital assets located in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees for techincal services are all treated as income arising in India.

Income of companies is taxed at the following rates

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   Type of company           Old Rate (%)   New Rate (%)
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   Domestic company
     Widely held company          45             40
     Closely held company         50             40
   Foreign company                65             55
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A surcharge of 15% of the amount of tax payable is levied on domestic companies, if taxable income exceeds Rs.75,000.

Taxable income

The main source of income of a company is generally from "business". A company would also earn income from under the following heads:

• income from house property
• income from capital gains
• income from other sources

Taxable income is calculated according to the rules for each class of income and then aggregated to determine total taxable income.

Deductability of expense

While calculating income from business or profession, expense incurred wholly and exclusively for business purposes are generally deductible. These include depreciation on fixed assets, interest paid on borrowings in the financial year etc.

Certain expenses are specifically disallowed or the amount of deduction is restricted. These expenses include:

• Entertainment expenses
• Interest or other amounts paid to a non-resident without deducting without tax
• Corporate taxes paid
• Indirect general and administrative costs of a foreign head office.

Set-Off and carry forward of Losses

Business losses incurred in a tax year can be set off against any other income earned during that year, except capital gains. Unabsorbed business losses can be carried forward and set off against business profits of subsequent years for a period of eight years; the unabsorbed depreciation element in the loss can however, be carried forward idefinitely. However, this carry forward benefit is not available to closely-held (private) companies in which there has been no continuity of business or shareholding pattern. Also, any change in beneficial interest in the shares of the company exceeding 51 per cent disqualifies the private company from the carry forward benefit.

Centre for Monitoring Indian Economy, Bombay
Contact Addresses for More Information
Last updated: May 1995.