Understanding India’s Corporate Taxation Framework: Key Insights for Businesses

As tax season approaches, understanding India’s evolving corporate taxation rules is critical for both domestic and foreign businesses. From concessional tax rates to cross-border compliance and dividend taxation, this guide unpacks everything companies need to know for AY 2025–26.

India’s corporate taxation framework regulates the taxation of both domestic and foreign companies, with applicable rates—standard or concessional—determined by company classification and eligibility. Recent reforms have been aimed at easing tax burdens, improving compliance mechanisms, and fostering a more investor-friendly environment.

Analysis of India’s corporate tax rates for AY 2025–26

India’s corporate tax structure for AY 2025–26 offers varied tax rates tailored to company size and legal entity type, reinforcing the objective to foster a competitive investment climate. Business structures—ranging from domestic companies to wholly owned subsidiaries and LLPs—are taxed differently based on their form and functional objectives.

Corporate tax comparison: India vs. major global destinations

Corporate tax laws are seen as key factors in global investment decisions, often influencing how companies allocate capital.

India has made notable strides in enhancing its tax competitiveness. Domestic companies can opt for a concessional base tax rate of 22 percent, while the standard rates remain at 25 percent or 30 percent, depending on turnover thresholds. When factoring in surcharge and cess, the effective tax rate hovers around 25.17 percent. Additionally, India imposes a Minimum Alternate Tax (MAT) at 15 percent, and dividends are taxable in the hands of shareholders.

In major global economies, such as the US, the federal corporate tax rate is 21 percent, with state taxes ranging from 0 to 12 percent, bringing the effective rate to 25 to 28 percent. Dividends face separate taxation, including withholding tax for foreign shareholders.

In the EU, corporate tax rates vary. Germany’s effective rate is around 30 percent, including trade tax and surcharges. France applies a flat 25 percent rate, while the Netherlands uses a tiered system—19 percent up to €200,000 and 25.8 percent above. Dividend withholding taxes also apply, differing by country.

ASEAN countries generally offer competitive tax regimes. Singapore’s headline rate is 17 percent, often lower due to incentives. Malaysia taxes at 24 percent, Thailand at 20 percent, and Indonesia at 22 percent, with plans to reduce it to 20 percent. Many offer tax holidays and sector-specific incentives. China’s standard rate is 25 percent, with a reduced 15 percent for high-tech firms in designated zones. Preferential tax areas and incentives support innovation and regional growth. Dividends to foreign shareholders are subject to a 10 percent withholding tax.

India’s key direct and indirect tax components affecting foreign businesses

India, the fifth-largest economy globally in 2025, presents significant opportunities for foreign investors and multinational corporations.

However, navigating the Indian tax landscape requires a comprehensive understanding of both direct and indirect tax regimes.

1. Corporate income tax and Minimum Alternate Tax

India’s corporate tax framework includes mechanisms like the MAT, which ensures companies with low taxable income still contribute a minimum tax. To promote greater compliance and transparency, the system also features digital reporting requirements, strict transfer pricing rules for related-party transactions, and general anti-avoidance measures to prevent tax evasion.

• A company shall be liable to pay MAT at 15 percent of book profit (plus surcharge and health and education cess, as applicable) where the normal tax liability of the company is less than 15 percent of book profit.
• For a company that is a unit of an International Financial Services Centre (IFSC) and derives its income solely in convertible foreign exchange, MAT shall be payable at 9 percent (plus cess and surcharge as applicable).
• As per the Income Tax Act, 1961, companies opting for special rate taxation under Section 115BAA and 115BAB are exempt from paying MAT.
• Companies opting for the special rate of taxation under sections 115BAA or 115BAB will not be allowed certain deductions like those under sections 80IA, 80IAB, 80IAC, 80IB, and so on, except deductions under sections 80JJAA and 80M.

Foreign companies are subject to Corporate Income Tax (CIT) on income earned within India. In the FY2024- 25 union budget, India proposed to reduce the tax rate chargeable on the income of a foreign company. From April 1, 2025, the rate of income tax chargeable on the income of a foreign company (other than that chargeable at special rates) would be 35 percent instead of 40 percent.

Note that MAT provisions are generally not applicable to foreign companies that do not maintain a place of business in India.

2. Dividend Distribution Tax and withholding taxes

India abolished Dividend Distribution Tax (DDT) in FY 2020-21, shifting the tax burden from the company to the shareholders. Now, dividends received by foreign shareholders are subject to withholding tax, typically at 20 percent, subject to relief under applicable Double Taxation Avoidance Agreements (DTAAs). Foreign investors must consider treaty provisions that may offer reduced rates, provided the required documentation and conditions (such as a tax residency certificate) are submitted.

For non-resident persons, Tax Deducted at Source (TDS) is applied at a 20 percent rate, subject to the DTAA, if any. To avail of the benefit of a lower deduction due to the beneficial treaty rate with the country of residence, the non-resident has to submit documentary proof, such as Form 10F, a declaration of beneficial ownership, a certificate of tax residency, and so on. If these documents aren’t submitted, a higher TDS would be applied, which can be claimed at the time of filing the income tax return.

Additionally, interest, royalty, and fees for technical services payments to non-residents are also subject to withholding taxes, ranging from 10 percent to 20 percent, again subject to DTAA relief.

3. GST framework and cross-border transactions

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India’s Goods and Services Tax (GST) is a unified indirect tax regime that replaced multiple state and central taxes. While GST has simplified domestic taxation, its implications for cross-border transactions remain complex. Imports of goods and services attract Integrated GST (IGST), which is creditable against output tax liability for registered businesses. Foreign businesses involved in online services (for example, digital advertising and streaming services) may be required to register for GST as a non-resident taxable person (NRTP) or under the Online Information and Database Access or Retrieval (OIDAR) services regime. Furthermore, exporters and foreign service providers must be mindful of GST compliance requirements, input tax credits, and refund procedures.

4. Capital gains tax for foreign investors

Foreign investors are subject to capital gains tax on the sale or transfer of capital assets in India, including shares, debentures, and real estate. The applicable tax rate depends on the nature and holding period of the asset.

• Short-term capital gains (STCG) on listed securities held for ≤12 months: 15 percent
• Long-term capital gains (LTCG) on listed securities held for >12 months: 12.5 percent (above INR 100,000, without indexation)
• For unlisted shares and other assets, STCG is taxed at 30 percent, and LTCG at 10 percent or 12.5 percent, depending on treaty provisions and indexation.

Foreign investors often leverage tax treaties to avail reduced tax rates or exemptions, though India has renegotiated numerous treaties to include anti-abuse provisions.

5. Tax implications for company mergers and acquisitions

Mergers, acquisitions, and business reorganizations involving foreign entities are subject to complex tax considerations in India. Transactions may attract capital gains tax, stamp duty, and indirect tax implications, depending on the deal structure (asset purchase versus share purchase).

India provides tax neutrality for certain amalgamations and demergers, provided statutory conditions are fulfilled under the Income Tax Act, 1961. However, cross-border mergers must comply with the Foreign Exchange Management Act (FEMA) regulations and may involve transfer pricing considerations and withholding obligations.

India’s tax reforms affecting foreign businesses

India continues to integrate more deeply into the global digital economy. These reforms, aimed at fostering fair taxation and aligning with global standards, carry considerable implications for foreign businesses operating in or engaging with the Indian market.

1. Digital taxation and e-commerce compliance

a. Abolition of equalization levy

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Under the Finance Act 2025, India has withdrawn the equalization levy on digital services, initially introduced in the Finance Act 2020. This levy imposed a 2 percent charge on e-commerce platforms and a 6 percent charge on online advertising services. Its removal aims to simplify the taxation of digital transactions, reduce the tax load on foreign digital service providers, and encourage increased foreign investment in India’s digital sector.

b. GST on cross-border digital services

India mandates foreign service providers—especially those offering software-as-a-service (SaaS), cloud computing, online subscriptions, and digital content—to register for GST under the OIDAR services category. Foreign entities are required to charge and remit GST on B2C services, adding a layer of indirect tax compliance unfamiliar to many offshore firms.

2. Global minimum tax and its business implications

In 2025, India is expected to evaluate joining the OECD’s global minimum tax regime. The Pillar Two approach proposes a 15 percent minimum tax on multinationals, impacting those in low-tax jurisdictions or using aggressive tax planning. Foreign firms with Indian subsidiaries or permanent establishments may face higher tax liabilities, requiring adjustments to profit allocation and transfer pricing.

Businesses should assess their Indian operations, focusing on holding structures, repatriation strategies, intercompany pricing, and compliance.

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