Types of Taxes that Corporations or Businesses Must Be Aware Of

As a business owner, you must comply with various regulations pertaining to safety, social responsibility, or industrial laws for smooth business operations. Among these various business compliances are the tax laws enforced by the government of India.

The government levies different types of taxes on businesses and individuals under various tax slabs to generate income for projects, boost the country's economy, and enhance the country's standard of living. As a result, businesses must understand the different types of taxes and ensure timely tax payments to reduce their tax burden, avoid legal trouble, and make sound financial decisions.

This blog will walk you through the different types of taxes that corporations must be aware of to help you run your business efficiently.

What are the types of taxes?

Taxation in India is broadly divided into two categories: direct tax and indirect tax.

1. Direct tax

Direct tax is levied on an individual's or business's income and is directly paid to the government. This includes income tax, wealth tax, personal property tax, and more. The burden of this tax payment is borne by the taxpayer and cannot be passed on to someone else.

2. Indirect tax

On the other hand, the government levies indirect taxes on goods and services. So, the burden of this tax can be shifted from one taxpayer to another. For instance, a distributor can pass on the tax burden to the retailer, who can then pass it on to the customer. Indirect taxes include sales tax, service tax, customs duty, and more.

Types of business taxes

In the case of business entities, various types of direct taxes are levied on both domestic and foreign corporations operating in the country based on the income generated in a financial year. The quantum of these taxes depends on the tax slab you belong to.

These various types of taxes include-

A. Corporate tax

Corporate tax is a direct tax levied by the government of India on both foreign and domestic corporations on their net income (gross income – applicable tax deductions) under the Income Tax Act 1961. Domestic companies registered under the Companies Act are obligated to pay corporation tax based on their net earnings. In comparison, foreign companies that have management outside of India have to pay tax on their income accrued or received in India.

Business entities that are liable to pay corporation tax in India include-

• Businesses incorporated in India
• Businesses that earn revenue in India and use this earned income to conduct business
• Corporations that have the title of an Indian resident only for the purpose of tax payment
• Other foreign businesses permanently operating in India

What constitutes income from the business?

Since a company will have multiple streams of revenue and expenditure, it is essential to know what constitutes net income to determine the corporate tax. Here are the various types of income that a company earns-

1. Profits: Gross profits earned by the business when total revenue exceeds total expenditure.

2. Capital gains income: Income generated from an increase in the value of a company's assets is capital gains income.

3. Income from rental properties: The income earned by a business on their rental property comes under business income.

4. Income from other sources: It includes all the other sources of income not taxed under the other categories, such as income from interest, dividends, and more.

Corporation tax rates in India

Business taxation depends on the type and nature of your business, where foreign companies attract a relatively higher tax rate than domestic businesses.

2. Income tax

From a business perspective, an individual who is the owner of a proprietorship firm, a registered company, a limited liability partnership, etc., is liable to pay income tax based on their annual earnings.

To determine your income tax obligation as a business owner, you need to know the taxable income of your business. In India, taxable business income is calculated on the basis of normal provision and presumptive taxation.

Under normal provisions, the taxable income is calculated by deducting the cost of goods sold and expenditure from the total sales. With presumptive taxation, the taxable income for businesses with a turnover of more than Rs. 2 crores is calculated as a fixed percentage of the total sales. Your income is then taxed based on the individual tax slabs under the prevailing tax regime.

3. GST on commercial property

If you're running a business from a property owned by you or have rented the said property for business purposes, the income from letting out of the property becomes taxable under the head 'income from house property'.

If you let out your property for commercial activities and earn Rs. 20 lakhs or more in annual (or rental) income, you're liable to pay GST at a rate of 18% on rent.

Similarly, a commercial property tax is to be paid by the property owner to the local government on the property used for commercial purposes. The tax rate varies based on the municipal corporation of the city in which the property is located.

To conclude

Are you an entrepreneur looking to start your own business? Before you do so, it is crucial to understand the tax scenario for your business to manage your business obligations better and avoid any legal trouble. Business taxation is an ever-evolving system in the country. Hence, it is critical to stay up-to-date with the changing tax laws for smart tax planning for businesses.

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