India Tax Overview for FIEs
Jun. 24 – Tax rates in India depend on many variables, such as whether a company is deemed a permanent establishment, the nature of its income, and the provisions of relevant double taxation avoidance agreements. India’s tax system clearly demarcates authority between central and state governments and local bodies, and the central and state governments provide various tax incentives for foreign investors that establish companies in India.
Corporate Income Tax (CIT)
CIT is levied against profits and income under the provisions of the Income Tax Act. Business losses can be carried forward eight years and set off against future profits. A company is considered a foreign company if its core management is located outside of India for the duration of the year. Companies formed in India, even subsidiary units with mother companies in foreign countries, are considered domestic Indian companies.
CIT must be paid by all types of foreign invested entities, except for liaison offices, which are not permitted to earn income. A tax return must be sent to the income tax authorities by September 30. CIT must be paid in increments throughout the year according to the advance CIT payment schedule as follows: July 15 (15 percent), September 15 (45 percent), December 15 (75 percent), March 15 (100 percent).
Goods and Service Tax Reform
The Government of India is currently finalizing negotiations for a comprehensive indirect tax reform, which will introduce the new goods and service tax (GST). 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.
When implemented, the tax will replace current value-added tax (VAT) and central sales tax (CST).
At the time of writing, most states in India impose a VAT on goods, not on services. The VAT paid on goods purchased from within the state is eligible for VAT credits, which can be used to offset the VAT/CST due on the sale of goods. Every business is required to register its VAT, although businesses with less than INR500,000 turnover are exempt from payment.
Until the introduction of GST, a service tax is also in effect and is charged at a rate of 10 percent, with a 3 percent education cess on the value of total tax. Goods manufactured in India are also currently subject to excise duties (central VAT) on the value of goods sold or the maximum retail price of the goods sold, depending on the type of products manufactured. The general rate is 12 percent, with the rates for other goods varying greatly.
Capital Gains Tax
When the income from a sale is classified as business income under Indian law, it will be taxable in India 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 percent. 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 percent. Short-term capital gains are taxed at the normal CIT rate, which is usually 30 percent.
Relief from certain types of capital gains is often sought through double taxation avoidance treaties, which may allow structuring alternatives for foreign investments that entirely relieve investors of the capital tax liability or significantly mitigates the same.
A dividends distribution tax is levied on the distributing Indian company, not its shareholders, and the company is liable to pay a rate of 16.225 percent on dividends. A wealth tax of 1 percent is also imposed on specific assets held by a taxpaying company in excess of the basic exemption of INR3 million (i.e. expensive cars, yachts).
A minimum alternative tax (MAT) is levied at 10 percent of the adjusted book profits if a company’s income tax payable on taxable income is less than 10 percent of the adjusted book profits according to the normal provisions of the Income Tax Act. A surcharge of 10 percent is applicable in the case of domestic companies if adjusted book profits are in excess of INR10 million.
Portions of this article came from the current April 2013 issue of the India Briefing Magazine, titled “An Introduction to Audit in India.” In this issue, we examine how India’s accounting standards differ from the globally accepted IFRS and IAS protocols, and outline the standard steps and procedures an Indian auditor will go through during the audit process and explain pre-audit preparations that can be carried out to make the process easier to follow and understand for foreign executives.
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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