An Overview of India’s Taxes on Business
Feb. 13 – In this article, we give a brief overview of India’s major taxes and duties on business, including Corporate Income Tax, Dividend Distribution Tax, Minimum Alternative Tax, Value-Added Tax, Central Sales Tax, Goods And Service Tax, Customs Duty, Excise Duty (CENVAT) Service Tax, Capital Gains Tax, Wealth Tax, and Withholding Tax.
The central and state governments provide various tax incentives for foreign investors establishing companies in India, including indirect and direct tax incentives, reductions in indirect taxes (sales tax and tax depreciation allowance), tax deduction for the first ten years of operation of new industrial units in specific areas, and special tax provisions for 100% export-oriented operations. Special economic zones offer additional important benefits and tax reductions.
Corporate Income Tax
Corporate income tax is levied against profits and income under the provisions of the Income Tax Act. Corporate income tax must be paid by all types of foreign-invested entities, except for liaison offices, which are not permitted to earn income. Foreign and domestic companies are subject to different corporate income tax rates. A company is considered a foreign company if its core management (i.e. where key decisions on management are made) is located outside of India for the duration of the year.
Corporate income tax must be paid in increments throughout the year according to the advance corporate tax (ACT) payment schedule, as follows:
- July 15 – 15%
- September 15 – 45%
- December 15 – 75%
- March 15 – 100%
Dividend Distribution Tax
Dividend distribution tax (DDT) is levied against the distributing Indian company, not its shareholders, at 16.22% on dividends.
Minimum Alternative Tax
Previously, there were large number of companies who had book profits as per their profit and loss account, but were not paying any tax because their income computed as per provisions of the Income Tax Act was either nil or negative. To tax such companies, minimum alternative tax (MAT) is levied on companies for which income tax payable on the taxable income according to normal provisions of the Income Tax Act is less than 18% of the adjusted book profits. MAT is levied at 18.5% on book profits, plus surcharges and education fee (cess).
Value-added Tax, Central Sales Tax, and Goods and Service Tax
At time of writing, Indian states impose a Value-added Tax (VAT) on most types of goods at a standard rate of 12.5%, with lower rates of 4% and 1%. There is no VAT on imports into India and exports are zero-rated. Businesses with less than Rs500,000 turnover are exempt from VAT.
Central Sales Tax applies to goods traded interstate. If registered dealers buy and sell goods for the purpose of trading, for manufacturing inputs, or for specified activities, 2% sales tax applies.
The government plans to introduce Goods and Service Tax to replace Central Sales Tax (CST), with planned implementation in April 2013. The dual GST model would come with two tax rates: one that will be charged uniformly across the states and another by the central government. Legislation is still being shaped, but it is likely that virtually all goods and services will be included, with minimum exemptions including alcohol, tobacco and petroleum products.
Customs Duty is applied to certain goods being imported into and being exported from India. For most goods, customs duty rates are up to 10% on the transaction value of imports or exports. An education fee of 2% is levied on the aggregate of the customs duty on imported goods.
The rate of customs duty depends on classification under the Customs Tariff Act, which is aligned with the World Customs Organization’s Harmonized Commodity Description and Coding System of Tariff Nomenclature (HSN).
CENVAT (Excise Duty)
Central Value-added Tax (CENVAT) is levied on the manufacturing or production of moveable goods at rates according to classification in the Central Excise Tariff Act. Most products attract excise duties at a rate of 10%, with the peak at 12%.
Those providing taxable services are liable to pay Service Tax, which is levied at 12.36%. Small service providers are exempted from Service Tax where value of taxable service does not exceed Rs1,000,000 in the previous financial year. In October 2012, CBEC (Central Board of Excise and Customs), the governing authority of Service Tax, changed the service tax return filling from half yearly to quarterly.
Capital Gains Tax
The tax rate on capital gains in India varies based on the type of asset (shares, property, debt instruments), the length of time the investor has held the asset, and whether the transactions have taken place on a recognized stock exchange in India. When the income from a sale is classified as business income under Indian law, it will be taxable in India, but only if such income accrues or arises in India or is attributable to a “business connection” in India. The rate of tax applicable to the business income of non-residents is higher than the rate applicable to domestic entities: approximately 42%.
Equities held for more than one year, other assets held for more than three years, and real estate are considered long-term capital and generally taxed at a basic rate of 20%. Short-term capital gains (securities held for less than one year, three years for other assets) are taxed at the normal corporate income tax rate, which is usually 30%.
Relief from certain types of capital gains is often sought through double taxation avoidance agreements.
Wealth tax is charged annually at a rate of 1% on individuals and companies with over INR3 million in non-productive assets.
The Income Tax Act provides for deduction of tax at source on payments. These provisions are also applicable in case of payment made to non-residents. The person responsible for payments to non-resident should deduct tax at source at the time of payment or at the time of credit of the sum to the account of the non-resident. Withholding tax rates for payments made to non-residents are determined by the Finance Act passed by the Parliament.
This article was extracted from the new issue of the India Briefing Magazine, titled “India’s Taxes for Foreign-invested Entities.” In this issue, we provide an overview of India’s taxes on business, which includes a section on India’s double taxation avoidance agreements, and then discuss individual income tax rates and deductions. Finally, we discuss India’s tax reforms in 2013, including an article by Chandrahas Choudhury, New Delhi correspondent for Bloomberg View, “Can India Tax Itself to Prosperity?”
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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