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Successful business incorporation is not an end to compliances, rather it’s the start. Once a company is incorporated it is mandatory for it to stay compliant with the tax structure, in order to operate hassle free. India’s tax framework may seem complex at first, but it has evolved in recent years, for example the introduction of GST unified a fragmented indirect tax regime into a single national system.
It becomes crucial to understand the tax system, not to memorise the rates and forms but to be able to know which taxes apply to your business. Knowing what compliance comes at what stage is important to maintain a swift operation of the business. This guide dives into the corporate tax in India and its important components.
The Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) are the administrative bodies that handle the Indian Tax System.
The system operates as a two-tier tax framework. For a business entity these taxes fall under two broad categories:
These taxes are levied on profits and income of businesses, for example corporate income tax on profits earned, and capital gains tax on profits from the sale of assets. The key direct taxes in India are:
Corporate Income Tax: This is the primary tax for companies operating in India. Whether it is a domestic subsidiary or a foreign branch, corporate tax is levied on the net taxable income for the financial year. The tax rates differ depending on the type of entity and the nature of the business.
Capital Gains Tax: When selling shares, property, or a business stake, profit generated is levied by tax, this is capital gain tax. This is applied to the profits earned by the sale of assets like shares, property, business stakes or financial instruments. The rate depends on how long the asset was held before the sale, with short-term and long-term gains taxed at different rates.
Minimum Alternate Tax (MAT): Structuring your business to minimise taxable income is smart planning, but MAT sets a floor. At 15% of book profits, it ensures that even well-optimised businesses contribute a minimum amount of tax. For most healthy businesses, MAT kicks in only when aggressive deductions bring taxable income unusually low.
Withholding Tax (TDS): Every payment flowing out of India to a foreign entity — fees, royalties, interest, dividends is subject to tax. The Indian entity deducts TDS before the remittance leaves the country. The rate can often be reduced if your home country has a DTAA with India, making it worth reviewing your treaty position before setting up your India pricing or intercompany structure.
Selling or importing goods and services, all these transactions are levied by tax. These taxes are called Indirect Tax. It collected by businesses and then remitted to the Government. Some Indirect taxes are:
Goods and Services Tax (GST): GST replaced a complex system of VAT, service tax, central excise duty, and entry tax. After its introduction in July 2017, it became one of the most important taxes of India. It applies as a single tax to the supply of almost all goods and services across India. The rates differ based on the category of the goods or services.
For foreign businesses, GST applies when they start supplying goods or services in India. In some cases, it applies even before they have a physical presence.
Customs Duty: The goods imported into India are levied by this tax. This is relevant for foreign businesses that manufacture abroad and sell into India, or those that import raw materials, machinery, or components for Indian operations. Customs duty rates vary significantly by product category and are governed by the Customs Act, 1962.
Equalisation Levy: This tax applies to certain digital payments made to foreign companies. Originally introduced at 6% on digital advertising payments made to foreign companies, it was later expanded. The 2% levy on e-commerce operators was withdrawn in Budget 2024, but the 6% levy on digital advertising remains in force. Foreign businesses in the digital economy need to factor this in.
Stamp Duty: This is a state level tax and is applicable on legal instruments including share transfers, property transactions, and certain business agreements. Rates vary from state to state and are relevant at the time of company incorporation and during equity transactions.
The tax you pay on the profits and income of the company depends on the strategy you follow to operate your business. The rate your company pays is directly tied to whether you are operating as a foreign company or whether you have incorporated an Indian subsidiary.
If you operate in India through a branch office, project office or liaison office and don’t incorporate as a separate Indian entity, Indian tax authorities see you as a foreign entity. Foreign companies pay corporate tax in India at the base rate of 40% on their Indian-sourced profits. After certain applicable charges the effective tax rate climbs to 44% for most foreign companies.
Now, if you incorporate a Wholly Owned Subsidiary in India, it will be treated as a domestic company under Indian tax law. Domestic companies pay a much lower tax rate than foreign companies, i.e. 22%.
For a company incorporated after 1 October 2019 that is set up specifically for manufacturing in India, the rate drops even further. It is charged at a base rate of 15% under Section 115BAB of the Income Tax Act, with an effective rate of approximately 17%. This was a step from the Indian government to attract global manufacturers to India, and it has been one of the most significant incentives for corporate taxation in India in recent years.
| Entity Type | Base Tax Rate (%) | Effective Rate (with surcharge and cess) (%) |
|---|---|---|
| Foreign Company (Branch / Project Office) | 40 | 43.68 |
| Domestic Company (Indian Subsidiary) | 22 | 25.17 |
| New Manufacturing Company (post Oct 2019) | 15 | 17 |
*Rates may change. Check government portals.
This tax is applicable when a company have legitimately low taxable income in a certain year, because of any depreciation write-offs, carry forward losses, or deductions under various incentive provisions.
Under MAT, if a company’s regular tax liability falls below 15% of its book profits (profits as reported in the financial statements, before tax adjustments), the company is required to pay tax at 15% of those book profits instead.
In this, the dividends distributed by a company are taxed in the hands of shareholders at their applicable income tax rates, instead of being taxed at the company level. This tax was introduced as a change, in Union Budget 2020 India. Earlier companies used to pay Dividend Distribution Tax (DDT) before distributing dividends.
The domestic rate is 20%. But India’s treaty network is extensive, and if your home jurisdiction has a DTAA with India, the effective rate on dividends typically drops to 5%-15%. That difference directly impacts your net repatriation yield and with sizeable dividend flows, the treaty benefit is worth structuring deliberately, not as an afterthought.
This is a system in which taxpayers are required to pay their income tax liability in Instalments during the financial year itself, instead of paying the entire amount at the end of the year. Underfunding any instalment triggers interest under Sections 234B and 234C, which is an entirely avoidable drag on returns.
For new businesses the practical step is simple, lock the four payment dates into your finance calendar at incorporation. Estimating liability conservatively and adjusting in later instalments is far cheaper than paying interest penalties on shortfalls.
GST is collected by business and remit on the sales. It was introduced on 1 July 2017, replacing VAT, service tax, central excise duty, and several other levies with a single consumption tax.
India operates as a dual GST model. When the transaction is intra-state, the tax is split equally between the Centre and the state as CGST (Central GST) and SGST (State GST). However, when the transaction is across states, it becomes IGST (Integrated GST), collected entirely by the centre and apportioned to the destination state. For businesses, the compliance obligation stays consistent across both models, applicable rate, return format, and payment mechanism remain the same.
| GST Slab | Category Examples |
|---|---|
| 0% | Essential food items, healthcare, education |
| 5% | Household necessities, economy transport |
| 12% | Processed foods, business class air travel |
| 18% | Most services (IT, consulting, SaaS), standard goods |
| 28% | Luxury goods, automobiles, tobacco, premium services |
Most of foreign-owned companies in B2B services falls within the 18% GST slab. It includes software, consulting, marketing, and analytics companies. SaaS companies operating in India need to be especially mindful of the place of supply rules that determine whether CGST+SGST or IGST applies to a given transaction.
Registration for GST is mandatory for the companies with the aggregate annual turnover of more than INR 20 lakhs (Approx USD 2,400) for most states. The registration for GST is still mandatory in any of the following circumstances:
Registration is done through the online GST portal (gstn.gov.in) and generally completed within 7 to 10 working days, subject to document verification.
The Input Tax Credit mechanism is central to the design of GST. A registered entity may offset GST paid on eligible business inputs including professional services, office premises, software subscriptions, and raw materials, against its output tax liability. Only the net amount is remitted to the government.
ITC entitlement is, however, conditional. The claiming entity must ensure that its supplier has filed the corresponding GSTR-1 and that the transaction is reflected in the recipient’s GSTR-2B auto-populated statement. If the supplier fails to file returns, the buyer’s ITC entitlement gets suspended.
In this mechanism the responsibility to pay GST shifts from the supplier to the recipient of goods or services. This typically applies when an Indian business procures services from an unregistered supplier or imports services from outside India.
For foreign companies, RCM is commonly triggered when the Indian subsidiary pays a management fee, license fee, or service charge to its foreign parent. In such cases, the Indian entity must self-assess and pay GST under RCM.
It is applied to the profits generated by the sale of assets. These assets can be shares in a company, property, or financial instruments, the profit from that sale is taxed as a capital gain. The tax rate depends on two factors: the nature of the asset and the holding period. Capital gains in India divides into two categories- Short Term Capital Gain (STCG) and Long-Term Capital Gains (LTCG).
Listed equity shares and equity-oriented mutual funds are the most commonly held financial assets for businesses with treasury operations or strategic investments.
| Type | Holding Period | Tax Rate (%) | Exemption Threshold |
|---|---|---|---|
| Short-Term (STCG) | Less than 12 months | 20 | Nil |
| Long-Term (LTCG) | 12 months or more | 12.5 | INR 1.25 lakh per financial year |
*Rates may change. Check government portals.
These rates were updated in the Union Budget 2024, effective 23 July 2024. The STCG rate went up from 15% to 20%, and the LTCG rate from 10% to 12.5%. While the annual exemption threshold for LTCG was raised from INR 1 lakh to INR 1.25 lakh.
For unlisted company shares and immovable property, the holding period threshold for long-term treatment is longer.
| Asset Class | STCG Threshold | LTCG Threshold | LTCG Rate |
|---|---|---|---|
| Unlisted shares | Less than 24 months | 24 months or more | 12.5% |
| Immovable property | Less than 24 months | 24 months or more | 12.5% |
| Debt mutual funds | All holding periods | Not applicable | Taxed at slab rate |
*Rates may change. Check government portals.
There are two recent changes from the Finance Act 2023 and Budget 2024, first the indexation benefit on immovable property which previously allowed sellers to adjust the purchase price for inflation before calculating the gain, was withdrawn for properties sold on or after 23 July 2024.
This increases the taxable gain on property held for long periods. Second, debt mutual funds lost their long-term status entirely under the Finance Act 2023. All gains from debt funds are now taxed at your regular income tax slab rate, regardless of how long you held them.
Tax Deducted at Source (TDS) is one of the most operationally significant taxes a business encounters in India. TDS is deducted at the time of payment unlike corporate taxation in India.
For foreign-owned companies, TDS is important on two fronts. First as a taxpayer, your company is legally required to deduct TDS from your fees before the payment. Second as a recipient, Indian clients when pay you must deduct TDS before the payment.
| Payment Type | TDS Rate (Resident) | TDS Rate (Non-Resident) |
|---|---|---|
| Salary | As per slab | As per slab |
| Contract / sub-contract payments | 2% | Varies by DTAA |
| Professional / technical fees | 10% | 10% (may vary by DTAA) |
| Rent (plant & machinery) | 2% | N/A |
| Rent (land / building) | 10% | N/A |
| Interest payments to non-residents | – | 20% (or DTAA rate) |
| Royalties / fees for technical services to non-residents | – | 20% (or DTAA rate) |
*Rates may change. Check government portals.
If the business fails to deduct TDS or deducts the wrong amount, the entire expensive can be disallowed. This means the payment is treated as non-deductible, increasing the taxable income for that year.
India’s tax framework has been designed to attract manufacturing investment, technology companies, and export-oriented businesses. Here are some incentives and exemptions:
Startups recognised by the DPIIT, which are incorporated between 1 April 2016 and 31 March 2025, are eligible for a 100% deduction on profit for any consecutive years out of the first 10 years of incorporation.
The scheme covers 14 sectors, including automobiles, pharmaceuticals, electronics (Mobile manufacturing), textiles, white goods, food processing and solar modules. These are not strictly tax incentives, but they directly improve post-tax profitability and are worth factoring into your business case.
If your business operates within an SEZ, you pay zero income tax for the first five years, half the usual rate in years six and seven, and another partial exemption on reinvested profits through year ten. And also, you’re exempt from GST and customs duties on goods and services used within the zone.
Double Taxation Avoidance Agreements are legally binding treaties that override domestic tax law on applicable provisions. If your home country has a DTAA with India, you should always benchmark your Indian tax position against the treaty rate rather than the domestic rate. This is particularly impactful for dividends, royalties, and interest remittances.
Businesses are best positioned to manage costs, avoid penalties, and improve after-tax profitability, when they align their business model with India’s tax design. After a successful market entry, clear understanding of the company taxation in India is important for successful operation. Most foreign businesses end up losing huge amounts of money with wrong tax planning, especially due to limited understanding of business tax components like corporate tax in India.
This is where the experts can help. We have years of experience in setting up businesses in India and maintaining tax compliance. To make a solid foundation for your business contact Stratrich today.
