This research paper investigates corporate taxation as outlined in the Indian Income Tax Act of 1961, highlighting the Act's central role as a cornerstone of India's tax system and the contribution of corporate tax to the national exchequer. It examines provisions that affect corporate tax liabilities, such as the assessment of taxable income, applicable tax rates for both domestic and foreign corporations operating in India, and the various exemptions and deductions available.

To enhance the reader's understanding of the corporate tax system in India and its impact on the economy and research landscape, the paper also explores the evolution of corporate tax laws, including significant modifications and amendments—most notably, the latest amendment: the Income-tax Bill, 2025.

Introduction
The Income Tax Act, 1961 laid the foundation for the income tax system in India. When it was amended and came into effect on April 1, 1962, it effectively repealed previous laws relating to income tax and super-tax. It emerged as a comprehensive statute that streamlined taxation, administration, collection, and recovery, making these processes more efficient. The timing of its enactment highlights the significance and role it was intended to play in fiscal policymaking and in advancing the broader developmental goals of a newly independent nation.

The shift to a unified framework of revenue collection—administering a single statute rather than multiple pre-1961 laws—marked a simplification of the legal structure and reflected an intent to consolidate various provisions under one cohesive legislation. The Income Tax Act, 1961 is often regarded as the cornerstone of India's taxation regime, comprising 23 chapters and 298 sections.

Corporate tax, a direct tax levied on the income of both domestic and foreign companies operating in India, plays a crucial role in the Indian economy. It contributes approximately one-third of the gross tax revenue collected by the government and serves as a key source of funding for social service delivery, the provision of public services, and infrastructure development.

Beyond revenue generation, corporate tax also has regulatory importance. Tax policy can be used to encourage economic activity in sectors deemed vital for national growth, such as infrastructure, startups, and renewable energy, through incentives and exemptions. While corporate tax rates may not follow a uniformly progressive structure like individual income tax slabs, the inclusion of surcharges based on income levels helps support the government's broader goals of equitable wealth distribution and inclusion within the general taxation framework.

Overview Of The Income Tax Act 1961

The origin of income tax in India dates back to 1860, when Sir James Wilson introduced the first Income Tax Act during the British Raj, with the objective of increasing government revenue following the Revolt of 1857. However, the Income Tax Act of 1918 is considered the first legislation to establish the structure and principles of modern income tax laws in India. Subsequently, in the post-independence era, the Income Tax Act, 1961 came into force on April 1, 1962. This marked a significant development in the newly formed nation, aimed at consolidating and rationalizing the rules related to taxation. These laws reflect not only the technical aspects of fiscal policy but also the broader goals of the Indian government in creating a stable and sovereign financial system for its citizens after gaining independence. Since then, the Act has been amended numerous times through the annual Finance Acts passed by the Indian Parliament along with the national budget. This process of professional and systematic amendment illustrates the dynamic nature of tax law, which evolves in response to changing economic conditions, government policies, and judicial interpretations. In light of the increasing complexity of the existing framework, the Income-tax Bill, 2025 was introduced in Parliament on February 13, 2025. It aims to radically simplify the Income Tax Act, 1961 by reducing both the volume and complexity of its provisions, without substantially altering tax policy, rates for ordinary income return (OIR), or other core features applicable to corporations or individuals. The focus on simplification highlights a long-term goal: to reduce the burden of navigating complex tax laws for all taxpayers. The Income Tax Act, 1961 is systematically divided into 23 chapters and comprises 298 sections. This structured format facilitates a clear understanding of income tax law across various domains, including corporate taxation.

Several chapters are particularly relevant for the analysis of corporate tax, as outlined below:

• Chapter IV – Computation of Total Income: Lays down the basic principles for computing taxable income for all assessees, including companies.
• Chapter V – Income Tax Authorities: Defines the duties, roles, and powers of the tax authorities responsible for administering and enforcing the Act.
• Chapter VI – Deductions: Lists the types of deductions and expenses that taxpayers, including companies, may claim to reduce their taxable income.
• Chapter VIB – Restrictions on Deductions: Specifies particular restrictions applicable to certain deductions for companies, which differ from those applicable to other taxpayers.
• Chapter XII – Tax Computation in Special Cases: Contains special rules for computing corporate income in unique situations such as winding up or income from insurance businesses.
• Chapter XIIB – Special Tax Provisions for Certain Companies: Outlines specific tax treatments for selected types of companies.
• Chapter XIIBC – Special Tax Provisions for Resident Companies: Addresses tax implications specifically applicable to domestic corporations.
• Chapter XIID – Taxation of Distributed Profits of Domestic Companies: Covers the treatment of dividends and other distributions with regard to additional tax liabilities.
• Chapter XII-DA – Taxation of Distributed Income in Case of Share Buy-back: Prescribes special tax rules applicable to share buy-backs conducted by domestic companies.
   

In addition to these directly relevant chapters, the Act also includes provisions applicable to corporate entities in other parts, such as:

• Chapter XV – Tax Liabilities in Special Cases
• Chapter XVI – Special Tax Provisions Applicable to Firms
• Chapter XVII – Rules for Tax Collection and Recovery

The structured division of the Act into chapters facilitates a systematic understanding of the legal framework governing income taxation in India.
 

Key Aspects Of Corporate Tax Under The Income Tax Act 1961

Corporate tax, commonly referred to as Corporation Tax, is the income tax that companies are required to pay under the provisions of the Indian Income Tax Act and the Finance Act each year. It is levied on a company's total income for the previous financial year, after excluding any agricultural income. The tax applies to income that is received, deemed to be received, accrues, arises, or is deemed to accrue or arise in India. Corporate tax liability applies to both domestic and foreign companies, to the extent that they have an economic presence in India, as prescribed under the Income Tax Act, 1961. The Act distinguishes between domestic and foreign companies, adhering to a basic principle of international taxation. Domestic companies are generally taxed on their global income, whereas foreign companies are taxed only on income sourced from India. This distinction aligns with common international tax practices and helps prevent issues related to double taxation.
 

Heads of Income for Companies

Under the Income Tax Act, 1961, the calculation of taxable income for corporations requires categorizing the income under specific heads. For companies, the most common heads of income include:

• Profits and Gains from Business or Profession – covering income from primary business operations;
• Capital Gains – profits earned from the sale or transfer of capital assets;
• Income from House Property – rental income from properties owned by the company;
• Income from Other Sources – residual income such as interest on investments, dividends received from other companies, etc.
   

Deductions and Disallowances

The Act permits companies to compute their taxable income by claiming deductions aligned with business needs and broader economic objectives. Commonly claimed deductions include:

• Depreciation on tangible and intangible assets used in business
• Interest paid on borrowed capital
• Rent of business premises
• Property taxes
• Expenses for repairs and maintenance
• Insurance premiums
• Costs related to scientific research
   

However, the Act also specifies certain disallowances. For instance:

• Expenditure on Corporate Social Responsibility (CSR) activities
• Illegal payments such as bribes

These provisions aim to ensure that only legitimate business expenses reduce a company's taxable income and to prevent tax avoidance through improper claims.
 

Corporate Tax Rates

Over the years, corporate income tax rates in India have fluctuated in response to government economic policies and the need to remain globally competitive. Historical trends show that, over the last few decades, tax rates for both domestic and foreign companies have declined. Currently, domestic companies are subject to varying income tax rates. While the standard rate is 30%, it has been reduced to 25% for companies whose total turnover or gross receipts did not exceed ₹400 crores in the financial year ending March 31, 2018 (applicable for FY 2020–21). Additionally, domestic companies can opt for a concessional regime under Section 115BAA, which offers a 22% tax rate if they forgo certain specified deductions and incentives. New domestic manufacturing companies that meet specified conditions may qualify for an even lower rate of 15% under Section 115BAB. Foreign companies, on the other hand, are currently subject to a corporate income tax rate of 35% on their income from India—down from the earlier rate of 40% as of April 1, 2024. Certain types of income, such as royalties and fees for technical services arising from agreements entered into before April 1, 1976, may still attract higher tax rates.

Table 1: Current Corporate Tax Rates in Inda (AY2025-26)

Category of Company	Conditions	Tax Rate	Surcharge	Health & Education Cess	Effective Tax Rate (approx.)
Domestic Company	Turnover up to Rs. 400 crore in FY 2017-18	25%	7% / 12%*	4%	26.75%/29.12%
Domestic Company	Opting for Section 11BAA	22%	10%	4%	25.17%
Domestic Company	Opting for Section 11BAB (New manufacturing Companies)	15%	10%	4%	17.16%
Any Other Domestic Company	Not meeting the above conditions	30%	7% /12%*	4%	32.10% /34.94%
Foreign Company	N/A	35%	2% /5%**	4%	36.02% / 38.22%
Royalty/ FTS (pre-April1,1976 agreement)	Approved by Central Government	50%	Applicable	4%	N/A
Other Income (Foreign Company)	From AY2025-26 onwards	35%	2% / 5%**	4%	36.02%/ 38.22%

In addition to the basic tax rates, companies are subject to a surcharge on the corporate tax payable. The surcharge amount depends on the total income of the company. For domestic companies, 7% is the surcharge when total income exceeds INR 1 crore but is less than or equal to INR 10 crore. A surcharge of 12% applies for total income over INR 10 crore. However, for domestic companies that have selected the concessional tax regimes of Section 115BAA or Section 115BAB, a flat surcharge of 10% applies, regardless of total income.

Foreign companies are charged surcharges of 2% when total income is over INR 1 crore and less than or equal to INR 10 crore, and 5% when total income exceeds INR 10 crore. In addition to income tax and surcharge, all companies must also pay a Health & Education Cess which is a surcharge of 4% of the total tax liability. The impact of these surcharges means that the effective tax rates on corporations are greatly affected, with a degree of progressivity with respect to income.

There are specific tax incentives developed for certain classes of companies in the Income Tax Act 1961 to promote certain economic activities. For instance, new manufacturing companies meeting specific criteria are taxed at a lower tax rate of 15% (Section 115 BAB). Companies with revenue that is less than specific limits (currently INR 400 crore) also enjoy a reduced tax rate of 25%. Resident companies choosing to relinquish certain deductions and incentives have the option of being taxed at a lower rate of 22% under Section 115 BAA.

The legislation also has a Minimum Alternate Tax (MAT) requirement to ensure that even very successful companies that make extensive use of deductions and exemptions still owe some income tax. MAT is charged at 15% of the book profits of the company if it has a regular income tax liability that is lower than this. The MAT provisions apply to all companies (including foreign companies operating in India).

The Income Tax Act 1961 provides various exemptions, deductions and incentives to companies to motivate certain economic activities and investments. The Income Tax Act 1961 also provides deductions under Chapter VIA of the Act for investments in certain types of infrastructure as well as for expenditures in scientific research and development. Companies may also deduct costs of their tangible assets through depreciation allowances under Section 32 of the Act during the lifetime of the asset in question, which would help the companies reduce their taxable income.

In fact, the Income Tax Act 1961 allows for accelerated depreciation rates for certain classes of plant and machinery. Of course there are certain exemptions for certain income and also companies registered within special economic zones (SEZ). Companies can deduct expenditures incurred before the business obtains a certificate of commencement to amortize those expenditures over a 5 year period. On a related note, companies that elect the concessional tax regimes under Section 115BAA and Section 115BAB generally cannot claim the deductions, and exemptions mentioned above, so it is important to analyse the advantages of electing a lower rate of tax while considering those foregone deductions.

Amendments and Updates to Corporate Tax Provisions
The Income Tax Act of 1961 has undergone numerous amendments since its original inception and typically through Finance Acts passed through Parliament on an annual basis. Each of these amendments is an attempt by the government to amend the tax legislation to address evolving economic circumstances, new policy imperatives as well as interpretations and loopholes that have arisen over time. The idea that tax law continues to be a fluid situation and that earnings could be impacted by a legislative change is indicative of the need to be mindful of a legislative change.

Examples of the type of amendments that have occurred to the Income Tax Act include: changing corporate tax rates; adding and changing various deductions and exemptions; and provisions for certain companies or types of transactions. These modifications impact a corporation's potential tax liability and responsibilities of compliance associated with working within the framework of the Indian tax laws.

The Finance Act of 2024, for instance, altered the tax deduction at source (TDS) rates on a number of payments. One of these adjustments was lowering the TDS rate for royalties and technical services to 2%, which went into effect on October 1, 2024. The timing of the government's tax revenue collection as well as the cash flow management of the businesses making those payments will be considered by the new TDS rates.

Another significant amendment made by the Finance Act, 2021 was the effective exclusion of 'goodwill of a business or profession' from the definition of block of assets, meaning no depreciation deductions regarding goodwill would be allowed going forward. This amendment has specific consequences for companies involved in mergers and acquisitions, since goodwill is commonly shown on the balance sheet in a company as an intangible asset.

More recently, the Income-tax Bill 2025 was introduced in Parliament with the sole object of simplifying the language and structure of the Income-tax Act 1961. The Bill sets out to reduce the Act and reduce the number of words, chapters, and sections. The Bill does not intend to change significant aspects of existing tax policy or change any tax rates, whether for corporations or for individuals.

The user-friendly approach described in the Bill, which can only be assumed to have been developed as part of a long-term strategy, is meant to provide a better user experience with tax law to reduce tax appeals, without affecting either corporations' core tax obligations existing in the Income-tax Act, 1961. Substantial changes to corporate tax rates and provisions in the Income-tax Act, 1961 are normally made by the Finance Acts each year.

For example, the last two Finance Acts had the 40% corporate tax rate for foreign companies lowered to 35%, effective April 1, 2024, and various modifications to withholding regulations, and definitions in the Income-tax Act. The Finance Acts' ongoing revisions demonstrate the government's more active management of the tax system to meet specific economic conditions and its overall fiscal policy.

The changes to the Income Tax Act, particularly changes that impact tax rates, such as the reduced rates for foreign companies, directly influence the corporate taxes the affected companies will have to pay. A lower tax rate can improve a company's profitability and increase the likelihood of making India an attractive destination for foreign investment. Similarly, changes to the rules concerning deductions and exemptions can also affect corporate taxable income and modify how companies must account and tax plan.

The reduction of depreciation for goodwill, for example, will increase taxable income of companies that have goodwill. Therefore, staying on top of these changes is important. If companies want to calculate taxes accurately, and avoid potential penalties for non-compliance, they must stay up to date. While the Income-tax Bill 2025 is explicitly about simplicity, in the best-case scenario, it will modernize India's tax laws to be simpler and easier to understand.

In a world where corporations, particularly smaller corporations, have less regulatory compliance, then compliance burden could be reduced. Significantly, a more direct and less complicated tax law would improve compliance and reduce the amount of time companies have to use to navigate very complicated tax legislation.

Legal Jurisdiction
The Supreme Court is at the top of the Indian judicial system and serves as the highest authority in interpreting Income Tax Act 1961. In terms of corporate tax, it issues peremptory rulings on matters of law that are considered precedent statements and bind lower courts and tax authorities throughout India. Such decisions provided clarity to the ambiguous law and have set out basic rules of interpretation, as well as some rudimentary rules of practice.

Analysis of above shows how the highest court in India will make a very important contribution to the ultimate understanding as to the legally definitive statements on corporate tax in India. Each of the High Courts in different parts of our country has an effect on the development of the law when it makes a decision involving corporate tax. Decisions of the Supreme Court are mandated in all areas of India, while decisions of the High Court apply only to that area of the country, and their facts and circumstances.

The rulings of High Courts are as valuable as a source of law and indeterminate interpretations of the Act as case law. Moreover, tax issues, including corporate tax disputes, can be raised in Tax Tribunals and reviewed by the courts upon appeal. The Tax Tribunals (Income Tax Appellate Tribunal, ITAT) provide a first taxpayer appellate tax tribunal that hear and decides tax dispute issues, including corporate tax matters. While the orders from these tribunals relate to the particular cases before them, they also add to the overall understandings of how corporate tax provisions are applied in the different factual situations related to businesses and tax authorities.

Conclusion
The corporate taxation provisions enshrined in the Income Tax Act of 1961 have a major influence on the financial performance of companies based in India; they have major effects on their profitability and thus, decisions on investment and expansion. The extent to which these provisions are fulfilling the objectives of government including revenue generation, regulation of economic activity, and promotion of social justice is being debated and examined in academic and policy circles. Investigations into the buoyancy of corporate tax revenue relative to GDP in India provides insight into the responsiveness of this much sought after revenue source, to aggregate economic growth; this information is useful for government forecasting of future revenue and stability of the corporate tax base. Concessional tax rates and distinct incentives offered under the Act are aimed at promotion of manufacturing and increasing investments into the country.

Ultimately, the actual influence and effectiveness of these policies is an empirical question; bringing into question whether public funding is achieving its maximum potential, where the interventions are creating unexpected consequences.

This research paper has examined in detail the place of corporate tax law under the Income Tax Act 1961. The Act is the basic framework for income tax in India and corporate tax constitutes a main source of revenue and tool for economic regulation. The key provisions of the Act provide rules calling out the ambit of corporate tax liability along with rules on how to discern the amount of taxable income, the various tax rates depending on type of corporate structure, as well as the different deductions and exemptions available.

The ongoing process of legislative amendments suggests the government prioritizes keeping the tax law aligned with changes in economic conditions and policy preferences. The recent Income-tax Bill 2025 aimed at simplification indicates that the law continues to evolve. Court precedents establish practical doctrine for using the Act importantly influence the interpretation and practical application of the Congress's tax law. Academic studies provide meaningful information on the evolution and impacts and value of corporate tax schemes in India.

The analysis of the corporate tax regime identifies its benefits and the evidence indicates comprehensive coverage and a variety of incentives to stimulate economic behaviour. However, the current complexity presents problems for taxpayer compliance and can lead to avoidable litigation. Therefore, potential reform options from the review and analysis could include: continued simplification of existing provisions to the legislative framework for clarity and compliance; a commitment to strengthen tax administration and enforcement; and further empirical analysis to measure the consequences of recent changes, and the changed tax incentives, on achievement of the objectives stated.

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Written By: Anushka, BA.LLB, Manav Rachna University