tax in India

India: Tax system

Tax Rate

Corporate tax rate Domestic companies and partnerships 30%; Foreign companies (and branches) 40%
Surcharge Domestic companies at 5% if income above INR 10 million and 10% if income above INR 100 million; Foreign companies at 2% and 5% respectively
Education Cess 3% (2% Education Cess and 1% Secondary & Higher Education Cess)
Effective tax rates
Net income below INR 10 million Domestic companies 30.9%; Foreign companies 41.2%
Net income between INR 10 – 100 million Domestic companies 33.1%; Foreign companies 42.0%
Net income above INR 100 million Domestic companies 34.6%; Foreign companies 43.3%
Tax Rate For Foreign Companies
Non-resident companies and branches of foreign companies are taxed at a rate of 40% and 3% cess, plus a surcharge depending on the turnover value. Nonresident companies engaged in specific businesses are taxed at 10% (e.g. exctraction and production of mineral oils, civil construction), 7.5% (operating ships) and 5% (operating aircrafts) of amounts specified in the Income Tax Act. Income tax relief is provided for foreign double taxation.
Capital Gains Taxation
Tax treatment varies on long term (assets held for more than 3 years, listed shares and certain securities for more than 1 year) and short term capital gains. Long term gains on listed shares and securities are taxed at 10% or exempt if subject to the securities transaction tax (STT). Long term gains on assets are taxed at 20% with inflation adjustment. Short term gains are taxed at normal tax rates or at 15% if subject to the STT.
Main Allowable Deductions and Tax Credits
Employer social security contributions are tax exempt up to 12% of monthly pay.Dividends paid by a domestic company are tax exempt for recipients if the distributor is subject to dividends distribution tax (DDT).

Specific deductions are provided for varying amounts for interest payments on funds borrowed for business objectives, in-house R&D expenditure, investment-linked expenditure, business losses, royalties and fees and more.

Various incentives are provided for companies carrying out specific business activities in India, for example:

– A 10-year tax holiday on 100% profits for developing, operating or maintaining infrastructure, power or network and distribution facilities;
– A 7-year tax holiday on 100% profits for qualifying production of mineral oil and natural gas;
– A 10-year tax holiday on 100% profits for developing a Special Economic Zone (SEZ);
– A 5-year tax holiday on 100% profits for operating and maintaining hospitals in rural areas;

For more information, refer to the EY guide on corporate tax.

Other Corporate Taxes
A Minimum Alternate Tax (MAT) is imposed at 18.5% of adjusted book profit on companies.

Effective rates, including surcharge and cess, (i) for domestic companies are 19.06% (where total income is below INR 10 million), 20.39% (where income is between INR 10 and 100 million) or 21.34% (where income is above INR 100 million); and (ii) for foreign companies are 19.06% (where total income is below INR 10 million), 19.44% (where income is between INR 10 and 100 million) or 20.01% (where income is above INR 100 million).

Other taxes include a 40% withholding contractor’s tax and a 1% purchase tax for non-agricultural immovable property above INR 5 million.

Other Domestic Resources
Consult Doing Business Website, to obtain a summary of the taxes and mandatory contributions.

Country Comparison For Corporate Taxation

India South Asia United States Germany
Number of Payments of Taxes per Year 33.0 31.3 10.6 9.0
Time Taken For Administrative Formalities (Hours) 243.0 299.0 175.0 218.0
Total Share of Taxes (% of Profit) 60.6 38.9 43.9 48.8

Source: Doing Business – 2016.

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action. **** The Greater the Index, the Higher the Level of Investor Protection.

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Accounting Rules

Accounting System

Accounting Standards
Indian Accounting Standards (IAS) are based on the statements issued by the Institute Of Chartered Accountants of India (ICAI).
Accounting Regulation Bodies
Institute of Chartered Accounts of India
Accounting Law
– Income Tax Act;
– Indian Companies Act;
– Regulations from Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI).
Difference Between National and International Standards (IAS/IFRS)
India is entering the arena of international accounting standards (IAS).
Accounting News
Accounting news in India

Accounting Practices

Tax Year
The fiscal year begins on 1 April and ends on the 31 March of the next year.
Accounting Reports
‘Balance Sheet’ and ‘Profit & Loss’ report.
Publication Requirements
The “balance sheet” and ‘profit and loss account’ need to be published every fiscal year.

Accountancy Profession

In order to become a certified accountant, one needs to become member of ‘The Institute of Chartered Accountants of India (ICAI)’ by passing a 3-tire examination conducted by ICAI. The qualified accountant is then named “Chartered Accountant (CA)”.
Professional Accountancy Bodies
ICAI, Institute of Chartered Accounts of India
Member of the International Federation of Accountants (IFAC)
Member of Other Federation of Accountants
Member of the Confederation of Asian and Pacific Accountants (CAPA)
Audit Bodies
Companies have to seek a statutory auditor to conduct an annual audit of the financial health of their organization. For more information, consult the Auditor Association and The Institute of Cost and Works Accountants of India (ICWAI)

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Consumption Taxes

Nature of the Tax
Value Added Tax (VAT) and sales tax, depending on the state. A nationwide Goods and Services Tax (GST) with a comprehensive rate of 16% is expected to be launched in 2017.
Standard Rate
12.5% to 15% depending on the origin state
Reduced Tax Rate
Reduced rates of 5% and 1% apply in most states to the sale of agricultural and industrial inputs, capital goods and medicines, precious metals etc.
Exclusion From Taxation
Exports from India are TAX exempt and exporters can apply for a refund of input tax.
Method of Calculation, Declaration and Settlement
All Indian states have moved to a VAT regime with specific rates and thresholds varying across states. Generally, businesses with annual turnover over INR 500,000 must register for VAT, and returns and payments are due monthly or quarterly, depending on the amount. For details consult the Income Tax Department.
Other Consumption Taxes
A securities transfer tax is imposed on listed shares and securities in India at varying rates. A transactions tax applies to qualifying transactions such as any sum of money received by an individual in excess of INR 50,000 without consideration.The central government imposes a customs duty at a 10% basic rate, aggregating to 28.85% with additional duties and the education cess. It also imposes a Central Sales Tax (CST) of 2% on the interstate movement of goods, collected at the point of origin. A Sales Tax of 14% (including cess) is levied on the value of all services that are excluded from the negative or exempt list, and an excise duty of 12.36% (including cess) is levied on the production or manufacture of goods in India. An R&D cess of 5% applies to imports of technology. The central goverment is looking to integrate these multiple taxes into a comprehensive GST regime on 1 April 2017.

Stamp duties and real estate taxes are imposed by municipal authorities and vary across states.

For more details, consult the Deloitte guide.

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Individual Taxes

Tax Base For Residents and Non-Residents
Resident taxpayers (physically present for 182 days in a given year, or 60 days in a given year and more than 364 days in the preceding 4 years) as well as resident but not ordinarily resident taxpayers (nonresident for 9 out of 10 preceding years or stayed in India for 729 days or less in the preceding 7 years) are taxed on worldwide income, while nonresident taxpayers are taxed on Indian-sourced income only. Nonresident Indian nationals may opt to be taxed at a flat rate of 20% on gross investment income from Indian-source foreign-currency assets.

Tax Rate

Taxation Income (INR) Progressive Tax Rate up to 30%
Less than 250,000 0% (exempt from income tax and the 3% education cess; exemption limit raised to INR 300,000 for resident senior citizens with ages 60-80 and INR 500,000 for ages above 80)
250,001 – 500,000 10% (effective rate of 10.3% with cess)
500,001 – 1,000,000 20% (effective rate of 20.6% with cess)
1,000,001 and above 30% (effective rate of 30.9% with cess)
Above 10,000,000 One-time surcharge of 12% of total tax payable (effective rate of 34.6% with cess)
Allowable Deductions and Tax Credits
Deductions are allowed for contributions to life insurance, recognized provident funds, national savings certificates, the national savings scheme, income from certain mutual funds and dividends, certain educational expenses up to INR 150,000, mortgage interest up to INR 200,000, investment infrastructure bonds up to INR 20,000, health insurance premiums up to INR 15,000, health insurance premiums paid for dependent parents up to INR 15,000 and more.
Special Expatriate Tax Regime
No special treatment as remuneration for foreign expatriates working in India is deemed to be earned as salary in Indian territory. However, foreigners who visit India on short-term business trips can claim an exemption under domestic tax law or a relevant tax treaty.
Capital Tax Rate
Wealth tax abolished on 1 Apr 2015. No inheritance tax. Real estate tax varies by state.

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Double Taxation Treaties

Countries With Whom a Double Taxation Treaty Have Been Signed: Treaties signed with countries for avoidance of double taxation
Withholding Taxes
No withholding tax applies on dividends since dividends declared by an Indian company are tax free for all shareholders.Royalties/Fees for Technical Services (FTS) paid to anyone not residing in India are subject to a basic gross withholding tax rate of 10 percent. Yet, this is subject to several conditions. Taking into account the applicable surcharge, the effective withholding tax rate is either 10.30 or 10.51 or 10.82 percent in the case of a foreign company. The effective withholding tax rate is either 10.30 or 11.54 percent in case of other taxable entities, including individuals.

Interest paid to anyone not residing in India is subject to various withholding tax rates, depending on certain conditions. The basic gross rate of withholding tax on interest on a foreign currency loan, paid by an Indian holding company to a non-resident is 20 percent which, with applicable surcharge and education cess, results in a withholding tax rate of either 20.60 or 21.01 or 22.63 percent in the case of a foreign company.