Assessment of Various Entities: Tax Rates, MAT & MCQs

The assessment of various entities—domestic companies, foreign companies, LLPs, AOPs, and individuals—forms the backbone of Direct Tax Laws at CA Final. Each entity class attracts different tax rates, surcharges, and alternative minimum tax provisions. Understanding these distinctions is non-negotiable for scoring well in both the written exam and case studies.

Classification & Deemed Status of Entities

Under the Income Tax Act, an 'entity' for income-tax purposes is assessed based on its legal form and residence status. The CBDT has the power to declare any institution, association, or body (whether incorporated or not, Indian or non-Indian) to be a 'company' for tax purposes. This declaration is not permanent—it applies only to the assessment years specified in the CBDT's order. This is a subtle but exam-critical point: a deemed company status is always limited in duration, never blanket.

The major entity categories assessed under the Act are:

• Domestic Company: incorporated in India, or Indian government company.
• Foreign Company: any company not incorporated in India.
• Person (Other): Individual, HUF, Partnership, AOP, LLP, Trust, etc.

Tax Rates for Domestic Companies (A.Y. 2026-27)

Domestic companies can be assessed under two broad regimes:

Normal Provisions (Non-Concessional)

The standard marginal rate for domestic companies is 30%. This is the rate before surcharge and cess. The structure is progressive for companies with higher profits:

For a domestic company with total income exceeding ₹1 crore, the applicable surcharge is 7%. Combined with the 4% cess, the effective tax rate (excluding surcharge calculations) reaches approximately 32.92%. For companies below ₹1 crore total income, no surcharge applies—only the 30% tax and 4% cess (effective ~31.2%).

Concessional Regime @ 22%

A domestic company can opt for a concessional tax rate of 22% in lieu of normal provisions, provided it does not claim certain deductions (primarily those under Chapter VI-A). The surcharge on this regime is a fixed 10%, irrespective of total income amount. The effective rate becomes 24.2% (22% + 10% surcharge + 4% cess).

Critical restriction: Once a company opts for the 22% regime in any assessment year, it must continue to be governed by this regime for all subsequent years. There is no flexibility to revert or opt out based on annual income fluctuations. This perpetual commitment makes the election a strategic decision.

Concessional Regime @ 15% (New Manufacturing Company)

A domestic manufacturing company, set up and registered after 01.10.2019, commencing manufacturing before 31.03.2024, can avail a concessional rate of 15% for 15 assessment years from the year of commencement. The surcharge on this regime is 10%, and cess is 4%, making the effective rate approximately 17.16%—the lowest rate available to any corporate entity. This is a game-changer for eligible new manufacturing firms.

Tax Obligation for High-Turnover Companies

A domestic company with turnover exceeding ₹400 crore in the previous year must compulsorily pay a minimum amount of tax on its income, even if the income is low. The minimum tax is calculated as the higher of the normal tax or the applicable minimum (MAT or AMT rules, discussed below). This provision prevents aggressive tax planning via inflated deductions on high-turnover businesses.

Tax Rates for Foreign Companies (A.Y. 2026-27)

Foreign companies face a higher marginal tax rate of 40% under normal provisions. However, they qualify for lower surcharge rates. Specifically:

• Base Tax Rate: 40%
• Surcharge: 5% (not 7%, and not progressive with income level)
• Cess: 4%
• Combined Maximum Effective Rate: 40% + 5% + 4% = 49% (before any rebates or relief)

The 5% surcharge on foreign companies is a major concession compared to the 7% for domestic companies. This reflects India's attempt to attract foreign investment while maintaining a robust corporate tax base.

Minimum Alternate Tax (MAT) — Domestic & Foreign Companies

MAT is a safety-net provision to ensure that companies with substantial book profits cannot escape tax via excessive deductions. It is not an alternative to normal tax—whichever is higher is payable.

MAT Rate & Computation

Domestic Companies: 15% of book profit. Book profit is computed by adding back certain disallowed items (e.g., provisions, donations, losses of subsidiary) to the net profit shown in the Profit & Loss Account. Importantly, brought forward business loss cannot reduce book profit below zero; only unabsorbed depreciation up to the amount of net profit may be deducted. Once you add back business losses, they stay added.

Foreign Companies: Also 15% of book profit, computed on the same principles as domestic companies.

Key Adjustments for Book Profit

When computing book profit, reverse:

• Provisions for tax, diminution in asset value, doubtful debts, losses of subsidiary.
• Donations and contributions (certain categories).
• Capital expenditure written off.
• Deferral or timing differences in accounting policies.

Deduct only:

• Unabsorbed depreciation (to the extent of net profit).
• Not brought forward business loss (it must be added back).

MAT Credit & Carry-Forward

If MAT is paid in a year because it exceeds the normal tax, the excess MAT can be carried forward and set off against normal tax liability in subsequent 15 assessment years (a long carry-forward window). Once exhausted, the credit lapses. This is a vital relief mechanism for companies with lumpy profits or timing mismatches.

Exemptions from MAT

A domestic company opting for the concessional tax regime (@15% or @22%) is exempt from MAT. This exemption is a major tax-saving feature: if you lock into a lower rate, you bypass the MAT liability entirely. Similarly, a foreign company resident of a DTAA country without a PE in India is exempt from MAT—this protects non-resident foreign entities engaged in passive income streams from excessive tax liability.

Alternate Minimum Tax (AMT) — Persons Other Than Companies

AMT applies to individuals, HUFs, LLPs, AOPs, and co-operative societies that claim substantial deductions under Chapter VI-A (e.g., §80P for co-operatives, §80JJAA for employment incentives). The rate is 18.50% of adjusted total income (ATI).

However, an Individual or HUF is exempt from AMT if their Adjusted Total Income does not exceed ₹20 lakh. This relief threshold protects smaller assessees from the complexity and burden of alternative tax calculations. In contrast, an LLP claiming large deductions has no such exemption; it remains liable to 18.50% AMT if ATI exceeds the threshold.

Deductions & Provisions: Impact of Concessional Regimes

A company opting for the 22% concessional rate foregoes many deductions under Chapter VI-A. Specifically, deductions under:

• §80-IA (SEZ units)—not available.
• §80-IC (Infrastructure)—not available.
• §80-ID (certain industries)—not available.
• §80A-H (various development activities)—not available.
• §80JJAA (employment incentive)—still available.
• §80P (co-operative deduction)—not applicable to companies.
• Deduction for interest on borrowed capital—still available.
• Deduction for scientific research (§35, §35AD)—available, but only for core research; not for applied research contributions to National Laboratories.

This is a critical exclusion: if your company is set up for scientific research and you plan to fund a national lab, the concessional regime @22% may NOT be optimal, because you lose the deduction for that specific expenditure.

Practical Illustration: Selecting the Right Regime

Scenario 1: New Manufacturing Company (Registered 15.11.2019, commenced 01.03.2024)

Income: ₹50 lakh. Under the 15% concessional regime (if eligible), the effective tax rate is 17.16% (15% + 10% surcharge + 4% cess). Tax liability: approximately ₹8.58 lakh. This is far lower than the 30% normal rate (effective 32.92%), which would yield ₹16.46 lakh. Opt for the 15% regime.

Scenario 2: Domestic Company, High-Turnover (Turnover ₹500 crore, Income ₹50 lakh)

The company must pay a minimum tax equal to the higher of normal tax or MAT. Normal tax: 30% + 7% surcharge + 4% cess on ₹50 lakh = ~₹16.46 lakh. MAT (15% on book profit, assuming book profit ≈ ₹50 lakh): ₹7.5 lakh. Normal tax is higher, so ₹16.46 lakh is due. But wait—the company can opt for the 22% regime. Under 22% + 10% surcharge + 4% cess, the tax is ~₹12.2 lakh on ₹50 lakh income. By opting into the concessional regime, the company saves ₹4.26 lakh permanently (because the option cannot be reversed). This is often the optimal choice unless the company relies heavily on excluded deductions.

Practice Questions