Corporate Tax is a direct tax levied by the Central Government on the net income or profit earned by companies. It is a concept and a statutory provision governed by the Income Tax Act, 1961. The legal definition of a "company" is provided in Section 2(17) of the Income Tax Act, 1961, which includes entities incorporated in India or outside India.
The history of corporate taxation is tied to the broader income tax system, which was first introduced in India in 1860 by the British to recover losses from the rebellion of 1857. The current framework was established with the passing of the Income Tax Act, 1961, which came into force on April 1, 1962, to ensure the smooth collection of income taxes.
The mechanism involves taxing a company's total taxable income after allowing for various deductions. Domestic companies, registered under the Companies Act, are taxed on their worldwide income, while foreign companies are taxed only on the income earned within India. A related concept is the Minimum Alternate Tax (MAT), which is a baseline tax, generally 15% of book profit, designed to ensure that companies with substantial profits do not avoid tax entirely by claiming numerous exemptions.
A major recent change occurred in September 2019 with the introduction of the Taxation Laws (Amendment) Ordinance, 2019, later enacted as the Taxation Laws (Amendment) Bill, 2019. This amendment introduced a concessional tax regime to boost investment. Existing domestic companies were given the option to pay tax at a rate of 22% (effective rate 25.17% including surcharge and cess) if they forgo certain exemptions. Furthermore, new domestic manufacturing companies incorporated on or after October 1, 2019, that begin production before March 31, 2023, can opt for an even lower rate of 15% (effective rate 17.16% including surcharge and cess). Companies opting for these new concessional rates are exempted from paying MAT.