Direct Taxes in India

Tax Deducted at Source (TDS)

India’s domestic tax law requires any person or establishment responsible for making salary payments to obtain a Tax Deduction Account Number (TAN) and withhold tax at appropriate rates on the salary remunerated to the employees.

Krishan Aggarwal

Senior Manager, International Business Advisory

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The tax deducted (TDS) has to be deposited with the tax authority within seven days from the end of the month of deducting the tax. For March, the tax needs to be deposited by April 7, in case where taxes on non-monetary benefits are borne by employer or April 30 in other cases.

The employer must file quarterly returns (e-TDS return) of withholding tax on salaries paid in the prescribed form (Form No.24Q) with Indian tax authorities on the prescribed due dates (July 31, October 31, January 31, and May 31). A certificate (namely Form No. 16 and Form 12BA) must be issued to the employee for the tax deducted by June 15.

Minimum Alternate Tax (MAT)

All companies, whether domestic or foreign, are obligated to pay MAT.

MAT is exclusively applicable to companies and does not extend to individuals, HUFs, partnership firms, and similar entities. For foreign companies that generate profits through business operations in India, the provisions of Section 115JA apply.

As per the concept of MAT, the tax liability of a company will be higher of the following:

Tax liability of the company computed as per the normal provisions of the Income-tax Act, that is, tax computed on the taxable income of the company by applying the tax rate applicable to the company. Tax computed in above manner can be termed as normal tax liability.
Tax computed at 15 percent (plus surcharge and cess as applicable) on book profit (manner of computation of book profit is discussed in later part). The tax computed by applying 15 percent (plus surcharge and cess as applicable) on book profit is called MAT.

Features of MAT

Taxation on dividends

The taxation of dividends has now shifted to the ultimate shareholders from the earlier responsibility of the company under Dividend Distribution Tax (DDT).

Companies are required to deduct tax at the rate of 10 percent before paying dividends to their resident shareholders. However, if the dividend payment doesn't exceed INR 5,000 in a financial year and is not made in cash, the company is not required to deduct tax at source.

Similarly, a person is required to deduct TDS at the rate of 10 percent before paying income to a resident investor in mutual funds or specified companies. However, TDS is not required to be deducted if the income paid or likely to be paid in a financial year is below INR 5,000 or is in the nature of capital gains.

Individuals earning dividend income exceeding INR 5,000 in a financial year and whose total income does not exceed the Basic Exemption Limit (BEL) must file an income tax return to claim a refund of TDS on dividends.

Resident individuals with estimated annual income below the BEL can submit Form 15G to the company or mutual fund to avoid deduction of TDS. Senior citizens can apply in Form 15H for the same purpose.

For non-resident taxpayers, companies must withhold tax at 20 percent (plus surcharge and cess) before remitting dividend under Section 195 read with Section 115A of the Income-tax Act. Taxpayers can choose between the beneficial TDS rate under the Income-tax Act or relevant Double Taxation Avoidance Agreement (DTAA) under section 90(2) of the Income-tax Act.

Buy-back tax

The Income Tax Act levies a buy-back tax at the rate of 20 percent (plus applicable surcharge and cess) on the company’s (both listed and unlisted) shares bought back on or after July 5, 2019, where the public announcement for buy-back has been made after this date. Such tax is to be paid by the company while buying back its own shares. Income from buy-back of shares is exempt in the hands of the shareholders.

Corporate Income Tax

Corporate tax is levied on the income earned by companies at a rate varying between 20-40%, depending on the companies’ particulars.

Any company registered under the Companies Act, or any foreign company that has its place of effective management in India will be considered as a domestic company. All income earned by a domestic company is taxed under corporate income tax. For foreign companies, only the income received or accrued in India is taxed under corporate taxation.

Withholding Tax

The applicable withholding tax rate is the rate prescribed in the Income Tax Act, 1961 or relevant Double Taxation Avoidance (DTA) Agreement, whichever is lower. Non-residents are liable to pay taxes in India on source income, including:

Interest, royalties, and fees for technical services paid by a resident
Salary paid for services rendered in India
Income arising from a business connection or property in India.

Withholding tax (WHT), also called retention tax, is an obligation on the individual (either resident or non-resident) to withhold tax when making payments of a specified nature - such as rent, commission, salary, for professional services, to satisfy contract provisions, etc. – at rates specified in India’s tax regime.

Advance tax

Advance tax is a pay-as-you-earn system where taxpayers estimate their total income and tax payable for the year, and make advance tax payments at specified intervals during the financial year itself, as required by the Income-tax Act, 1961.

Although tax is deducted at source by the taxpayer in several cases, it may not cover the final tax amount that needs to be paid. Therefore, it's crucial for taxpayers to understand their obligation to pay advance tax and the consequences of non-payment or insufficient payment.

Who needs to pay advance tax?

Advance tax is payable during a financial year in every case where the amount of such tax payable by the taxpayer during that year is INR 10,000 or more.

Individuals not liable to pay advance tax

A resident senior citizen (an individual of the age of 60 years or above during the relevant financial year) not having any income from business or profession is not liable to pay advance tax.

While salaried taxpayers are also covered for payment of advance tax, they are generally not required to pay advance tax as their employers are obligated to deduct withholding tax or TDS on their salaries. However, such a salaried person would still be liable to make advance tax payment on income under other heads such as dividend income, interest income, rental income, shortfall of TDS for salary income, etc.

Due dates to pay advance tax

The due dates for payment of different instalments of advance tax for both corporate as well as non-corporate assessee for FY 2024 are as follows:

Due date	Advance tax liability for FY 2024
June 15, 2023	15% of the tax liability
Sept. 15, 2023	45% of the tax liability
Dec. 15, 2023	75% of the tax liability
March 15, 2024	100% of the tax liability

Capital gains tax

It is levied on the transfer of a capital asset.

Capital gains are computed by deducting the cost of acquisition/improvement from the sale consideration. Capital gains are categorized into short-term capital gain (STCG) and long-term capital gain (LTCG) depending on the period of holding of the transferred asset.

Capital gains will be computed by reducing the cost of acquisition of the debenture and the expenditure incurred wholly or exclusively in connection with the transfer or redemption of such debenture from the sales consideration. Furthermore, no deduction is to be allowed for STT.

Capital Gains Tax in India
Equity Oriented Schemes · LTCG (units held for more than 12 months) · STCG (units held for 12 months or less)
	Individual/ HUF	Domestic company	Non-resident Indian
LTCG	10	10	10
STCG	15	15	15
Other Than Equity Oriented Schemes · LTCG (units held for more than 36 months) · STCG (units held for 36 months or less)
	Individual/ HUF	Domestic company	Non-resident Indian
LTCG	20	20	Listed - 20 Unlisted - 10
STCG	30	30/25/22/15	30

Notes:

Income-tax at the rate of 10 percent (without indexation benefit and foreign exchange fluctuation) to be levied on long-term capital gains exceeding INR 100,000 provided transfer of such units is subject to Securities Transaction Tax (STT).
Surcharge to be levied at:

37 percent on base tax where specified income exceeds INR 50 million
25 percent where specified income exceeds INR 20 million but does not exceed INR 50 million
15 percent where total income exceeds INR 10 million but does not exceed INR 20 million; and
10 percent where total income exceeds INR 5 million but does not exceed INR 10 million
In case total income includes income by way of dividend on shares and short-term capital gains on units of equity oriented mutual fund schemes and long-term capital gains on mutual fund schemes, the rate of surcharge on the said type of income not to exceed 15 percent. In case investor is opting for ‘New Regime’, the rate of surcharge not to exceed 25 percent.

Further, Health and Education Cess to be levied at the rate of four percent on aggregate of base tax and surcharge.
Surcharge at seven percent on base tax is applicable where total income of domestic corporate unit holders exceeds INR 10 million but does not exceed INR 100 million and at 12percent where total income exceeds INR 100 million. However, surcharge at flat rate of 10 percent to be levied on base tax for the companies opting for lower rate of tax of 22percent/15percent.
Further, “Health and Education Cess” to be levied at the rate of four percent on aggregate of base tax and surcharge.
Short term/ long term capital gain tax (along with applicable Surcharge and Health and Education Cess) will be deducted at the time of redemption of units in case of NRI investors. Tax treaty benefit can be claimed for withholding tax on capital gains subject to fulfilment of stipulated conditions.

Transaction	STCG^(a)in %	LTCG^(a)(b)in %
Sale transactions of equity shares/ unit of an equity-oriented fund which attract STT	15%	10%
Sale transactions other than those mentioned above
Individuals (resident and non-residents)	Progressive slab rates	20/10^(b)(c)
Firms	30%
Resident companies	30/25^(d)/22^(e)/15^(f)
Overseas financial organizations specified in section 115AB	40 (corporate) / 30 (non-corporate)	10%
FPIs	30%	10%
Foreign companies other than ones mentioned above	40%	20 / 10^(c)
Local authority	30%	20/10
Co-operative society rates	Progressive slab or 22^(g)/15^(h)	20/10

Notes:

(a) These rates will further increase by applicable surcharge and health and education cess.

(b) Income-tax rate of 20 percent with indexation and 10 percent without indexation.

(c) LTCG arising to a non-resident from transfer of unlisted securities or shares of a company, not being a company in which the public are substantially interested, subject to 10 percent tax (without benefit of indexation and foreign currency fluctuation).

(d) If total turnover or gross receipts in the FY 2021-22 does not exceed INR 4 billion.

(e) This lower rate is optional and subject to fulfilment of certain conditions as provided in section 115BAA.

(f) This lower rate is optional for companies engaged in manufacturing business (set-up and registered on or after 1 October 2019) subject to fulfilment of certain conditions as provided in section 115BAB.

(g) Co-operative societies have the option to be taxed at progressive slab rates or 22 percent subject to fulfilment of certain conditions as provided in section 115BAD.

(h) This lower rate is optional for co-operative societies engaged in manufacturing or production business (set-up and registered on or after 1 April 2023) subject to fulfilment of certain conditions as provided in section 115BAE.

Taxation of virtual digital asset in India

India has a 30 percent tax rate on income from virtual digital assets, such as cryptocurrency and NFT. Income from transfer of VDA is taxable without deduction of any expenditure, allowance or set-off of loss, except cost of acquisition of such virtual asset, if any. Further, loss on the transfer of VDA can neither be carried forward nor be set off against any other income.

The virtual digital assets attracting the new tax liability include crypto assets like Bitcoin, Dogecoin, etc., Non-Fungible Tokens (NFTs), and any such assets that might be developed in the future.

Features of cryptocurrency tax in India

High tax rate: From April 1, 2022, any gains made from the sale of crypto assets are be taxed at a 30 percent rate, which is higher than other assets. This has impacted smaller investors and students who were earlier enjoying tax-free returns on crypto investments.
One percent TDS on transfers: From July 1, 2022, there is one percent tax deducted at source (TDS) in case of a resident seller for the transfer of virtual digital assets, which is irrespective of gain or loss.
No basic exemptions or deductions: No deduction towards any expenditure, except the cost of acquisition, is permissible while paying tax on virtual digital assets in India, and no exemptions are considered while taxing individuals making gains from the transfer of such assets, irrespective of their income levels or age.
Losses from virtual digital assets can't be set-off: Unlike assets like equity, property, gold, and debt funds, losses from crypto assets cannot be set off against gains from other assets and can't even be carried forward to subsequent years.
No indexation benefits: No indexation benefits are extendable to virtual digital assets, irrespective of the holding period.
Tax on gifts: Crypto assets acquired either as gifts or through inheritance are also taxed at a 30 percent rate, irrespective of the income level of the recipient.

FAQ:Common Compliances for Companies in the Indian Regulatory Landscape

What are the challenges companies face while ensuring that necessary regulatory compliances are completed?

Managing compliances in today’s highly complex economic and regulatory environment is no easy task. Companies face many challenges, including:

Rapid globalization;
Ongoing developments in tax and other allied laws;
Changes in accounting standards;
Increased demand from regulatory authorities for greater transparency and cooperation;
Acute shortage of qualified professionals;
Obtaining accurate data in an efficient manner;
Global trends towards centralization of compliances; and
An ever-evolving technology ecosystem.

Can you list a few common laws and legislations that are applicable to companies in India?

The following laws are applicable to companies:

The Companies Act 2013 and Rules thereof;
Labor and Employment Laws;
Environmental Laws; and
Tax and Stamp Duty.

Can you explain the scope of compliances under Companies Act, 2013?

The scope of compliances under the Companies Act covers but is not limited to the following:

The Companies Act, amongst other provisions, lays down detailed guidelines regarding qualification and appointment/ removal of directors, retirement of directors, their remuneration, passing board resolutions, arranging board and shareholders meetings, oversight on related party transactions, timely maintenance of books of accounts and the preparation and presentation of annual accounts (matters that must be included in the annual reports of the companies), filing of forms with the Registrar of Companies periodically, etc.

Subsequent to the completion of all legal formalities required for incorporation, and the issuance of the certificate of incorporation, the company is recognized as a separate legal entity in the eyes of the law, distinct from its members who have incorporated the entity.

Whether it is a private or a public company, various things are supposed to be dealt with post incorporation. There are matters that must be undertaken in the first board meeting immediately post incorporation, and then there are tasks that are required to be carried out on a periodical basis.

A company conducts its business through its Directors who are accountable in the event of failure to comply with the above compliances.

Soon after a company is incorporated, but no later than 30 days, an appointed director is under obligation to call the First Board Meeting by issue of notice (together with the agenda) of the meeting at least seven days prior to the meeting. Several important matters need to be resolved in this first board meeting.

A company must also place its sign board outside the registered office address, with its name, registered office address, company identification number, e-mail ID, and phone number (mandatory fields as per the current mandate), Website address and fax number, if any, stated on it. These details must also be printed on all business letters, billheads, and all other official publications.

As mentioned under section 173(1) of the companies act of 2013, a company must convene at least four board meetings, in addition to the first board meeting, with a gap of no more than 120 days between two consecutive board meetings in a calendar year. Detailed minutes of the meetings should be prepared, recording the important actions taken by the Board of Directors and the same must be maintained as a permanent document by the company. Within 30 days from the meeting, the minutes must be prepared, duly signed, and maintained in a minute’s binder.

Similarly, on allotment of shares, the company must issue share certificates to those who have been allotted the shares and must maintain both a members register and a shares allotment register. A company is also required to file various financial statements along with the auditor’s report and annual return before the due date every financial year with the Registrar of Companies.

Additionally, there are several instances wherein a company has to intimate the concerned Registrar of Companies, on a timely basis, about the appointments/ removal of directors and certain other changes in a prescribed manner.

The above-mentioned compliance requirements under the Companies Act is not an exhaustive list. Some companies may also be required to ensure several other additional compliances such as registration under the GST, Professional Tax, and Shops and Establishment Act. It is important to understand that the responsibility of complying with the central and state by-laws is indeed, a continuous process.

What is the scope of compliances under Labor and Employment Legislation?

The scope of compliances under Labor and Employment Legislation covers, but is not limited to, the following:

Businesses with production lines, factories, must consider and comply with a host of statutes such as:

The Employees' State Insurance Act, 1948
The Maternity Benefits Act, 1961
The Industrial Disputes Act, 1948
The Contract Labor (Regulation and Abolition) Act, 1970
The Trade Union Act, 1926
The Equal Remuneration Act, 1976
The Payment of Gratuity Act, 1972
The Workmen’s Compensation Act, 1923
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, etc.

The above statutes govern pressing issues such as duration of work, conditions of employed workers, minimum wages and remuneration, rights and obligations of the trade unions, insurance cover for employees, maternity benefits, employment retrenchment, payment of gratuity/provident fund, payment of bonus, and regulations of the contract labor, amongst other issues concerning employees.

However, many provisions of the existing labor laws trace their origins to the time of the British Colonial era, and with changing times, many of them have either became ineffective or do not have any contemporary relevance. Rather than protecting the interests of workers, these provisions ensured unwarranted difficulties for them.

The web of legislations back in the British colonial era were such that workers had to fill four different forms to claim a single benefit. Therefore, the present Government has repealed the outdated Labor Laws and has codified 29 of such labor Laws into four new Labor Codes.

For ensuring workers’ right to minimum wages, the Central Government has amalgamated 4 laws in the Wage Code, 9 laws in the Social Security Code, 13 laws in the Occupational Safety, Health and Working Conditions Code, 2020 and 3 laws in the Industrial Relations Code. By getting these Bills passed in the parliament, the Central Government has made significant headway in changing the standard of living of workers.

These labor reforms will enhance ease of doing business in the country. Employment creation and output of workers will also improve. The benefits of these four Labor Codes will be available to workers in both the organized and unorganized sector. Now, the Employees’ Provident Fund (EPF), Employees’ Pension Scheme (EPS) and coverage of all types of medical benefits under Employees’ Insurance will be available to all workers.

Companies must put consistent effort to ensure that proper compliance of these various statutes vis-à-vis the working condition for its employees are in order, and that the HR policies are formulated in accordance with the guidelines mentioned in the central and state by laws.

What is the scope of compliances under Environmental Laws?

The scope of compliances under Environmental Laws covers, but isn’t limited, to the following:

Environmental and pollution control matters fall under the ambit of various statutes such as:

The Environment (Protection) Act, 1986
The Water (Prevention and Control of Pollution) Act, 1974.
The Air (Prevention and Control of Pollution) Act, 1981
Hazardous Wastes (Management, Handling and Trans boundary Movement) Rules, 2008
The Manufacture, Storage, and Import of Hazardous Chemicals Rules, 1989
The Indian Forest Act, 1927
The Forest (Conservation) Act, 1980
The National Environment Tribunal Act, 1995
The Public Liability Insurance Act, 1991, etc.

Companies are required to comply with the provisions of these environmental laws to the extent specifically applicable to their business operations. The consequences of non-compliance with the provisions of any such statutes and rules are provided in the respective statutes.

What is the scope of compliances under Tax and Stamp Duty related laws?

The scope of compliances under the Tax and Stamp Duty related laws covers, but is not limited, to the following:

There is a federal tax structure in India and taxes are levied by both the Central and State Governments, along with other local regulatory authorities. These taxes are broadly classified as:

Direct Tax (which includes income tax, dividend distribution tax, minimum alternate tax (MAT), share buy-back tax),
Indirect Tax (which includes GST, Excise Duty, Customs Duty, Entry Tax, R&D Cess), and
Charges on transactions (including stamp duty, securities transaction tax, and commodity transaction tax).

All Indian companies are subjected to payment of tax and stamp duty for their business transactions undertaken during any financial year and on the income generated from such operations. Delayed/ non-payment and inadequate payment of tax and stamp duty may attract moderate to heavy penalties, cause enforceability issue of the documents and, in some cases, impounding of the documents by the authority.

Apart from the ones mentioned above, are there any other enactments that are applicable for companies in India?

Whilst the above explained laws and enactments lays down the general laws governing a company in India, local state laws also play a very important role. Therefore, the need for companies to be mindful of adhering to local state laws in which they are registered and conducting their business must not be overlooked.

What are the consequences of non-compliance of the provisions of Acts and Enactments as mentioned above?

The policy and procedures regulating, and governing Indian corporations have been progressively liberalized and simplified over the last few years. However, there are several compliance mandates that must be adhered to, failure to do so could trigger various compliance risks such as disqualification of directors, attracting of penal provisions and in some cases even imprisonment of the directors and key management personnel.

What is compliance risk and how can companies manage it?

Compliance risk refers to an exposure to legal penalties, financial forfeiture, and the material loss an organization faces when it fails to act in accordance with industry laws and regulations, internal policies, or prescribed best practices. Compliance risk can also be referred to as integrity risk. Several compliance regulations are enacted to ensure that companies operate ethically and in a fair manner.

Compliance risk management constitutes the widely known collective governance, risk management, and compliance (GRC) discipline. The three fields have been known to overlap frequently in the areas of internal auditing, incident management, operational risk assessment, and compliance with regulations such as the Sarbanes-Oxley Act of United States. Penalties for compliance violations include payments for damages, fines, and voided contracts, which can lead to a loss of reputation and business opportunities for organisations, as well as devaluation of its franchises.