Introduction
Starting a small business in India involves many important decisions, and one of the most crucial among them is understanding the applicable tax structure. One common question that entrepreneurs often ask is whether corporate tax applies to small businesses. While the answer is yes, it comes with important qualifications. Whether or not corporate tax is applicable depends primarily on the legal structure of the business, and not just its size or turnover.
What is Corporate Tax in India?
Corporate tax refers to the tax imposed on the net income or profit of companies that are registered under the Companies Act. These include Private Limited Companies, One Person Companies (OPCs), and Public Limited Companies. Therefore, if a small business is incorporated under one of these structures, it is automatically subject to corporate tax, regardless of how small its operations or revenues might be.
Corporate Tax Rates for Registered Companies
For incorporated entities, the Indian government has provided some relief for small and medium-sized companies. As per the current income tax provisions, a domestic company whose turnover or gross receipts do not exceed ₹400 crore in the previous financial year is eligible to pay tax at the rate of 25%. Additionally, under Section 115BAA, companies can opt for a flat 22% corporate tax rate if they are willing to forgo most exemptions and deductions. This regime is aimed at simplifying compliance and boosting ease of doing business.
What About LLPs and Partnership Firms?
Not all small businesses operate as companies. Many choose to function as Partnership Firms or Limited Liability Partnerships (LLPs) due to their simpler structures and lower compliance burdens. Although these are not considered corporate entities, they are still taxed at a flat rate of 30%. However, unlike registered companies, they are not eligible for concessional corporate tax rates or the benefits under Section 115BAA.
Sole Proprietorships and Individual Taxation
The most informal and commonly used structure in India is the sole proprietorship. In this setup, the business is not a separate legal entity and is treated as an extension of the owner. Therefore, the income earned through the business is added to the proprietor’s personal income and taxed according to individual income tax slabs. In this case, there is no corporate tax levied at all.
Choosing the Right Structure Impacts Your Tax Burden
Your choice of business structure not only determines your compliance responsibilities but also directly impacts how much tax you pay. For instance, while a sole proprietorship is easier to manage and has minimal compliance, it may limit your growth potential and access to funding. Conversely, a private limited company, despite being subject to corporate tax, enjoys wider credibility, easier funding, and eligibility for various government incentives.
Conclusion: Diligen Professionals Are Here to Help
In conclusion, corporate tax is indeed applicable to small businesses in India, but only when the business is registered as a company. Businesses operating as LLPs, partnerships, or sole proprietorships are taxed differently and are not subject to corporate tax in the strictest sense. Therefore, choosing the right business structure is a strategic decision that impacts taxation, legal liability, and long-term success.
At Diligen, our team of professional experts helps you navigate every minor detail—from selecting the ideal structure to filing taxes compliantly. Whether you’re just starting out or looking to restructure, Diligen Professionals are here to guide you every step of the way.
