29 June 2018
Tax Considerations in India
Taxes in India are levied by both the central government and the state governments, while there are additional taxes charged by local and municipal authorities, with direct and indirect taxation schemes administered by different government units. Notably, the indirect tax regime in India has undergone a drastic change to become less cumbersome in the wake of the introduction of the Goods and Service Tax (GST) in July 2017.
For foreign-owned subsidiary companies and other FDI entities operating in India, the main form of tax of concern is income tax, which is administered by the Central Board of Direct Taxes (CBDT), a unit of the Income Tax Department under the Ministry of Finance of the central government. There are many laws governing taxation in India and the main ones are listed below:
India is ranked 119th out of 190 economies in the World Bank’s Doing Business 2018 report on the ease of paying taxes. In the past few years, India has introduced many administrative reforms to ease the burden of tax compliance and cut short the time required for preparing and paying Corporate Income Tax (CIT). These include the rollout of the Income Computation and Disclosure Standards (ICDS), enhancement of electronic filing and payment systems, and data gathering automation linked to modern enterprise resources planning (ERP) software. In 2016, the time to comply with CIT was 25 hours, down considerably from 45 hours in 2015.
Evidently, results of the World Bank’s Doing Business 2018 report have yet to reflect the impact of the GST reform in relation to the time for complying with consumption tax payments and removal of VAT elements under the old regime. Prior to the change, India had a very complex indirect tax structure with multiple central and state levies, including excise duties on manufacture, inter-state and intra-state sale of goods and service taxes, value-added tax, which were administered by different central and state government units.
With GST reform, major forms of indirect taxes have been subsumed except Customs Duty, with the multiple levy of tax on goods and services abolished in to enhance efficiency in manufacturing, distribution and service provision. With GST, all supplies of goods and services in India are now subject to Central GST and State GST, and supplies between branches of the same entity in two different states in India will also attract GST. A supplier with an annual turnover of up to Rs.2 million (about US$30,000) in a fiscal year is exempt from GST and is dispensed with GST registration.
As a recapitulation to what is discussed under Section 2 “Establishing a Presence in India”, Wholly Owned Subsidiary Companies (WOSC), Joint Ventures (JV) and Limited Liability Partnership (LLP) are treated as Indian domestic or resident company for the purpose of all Indian laws and regulations, whereas Liaison Offices (LO), Branch Offices (BO) or Project Offices (PO) are considered foreign or non-resident companies set up to operate within India. A company is considered resident in India if it is incorporated in India or its place of effective management is in India. The same is applied to LLP.
A resident company is liable for income tax on its global income, including capital gains. In comparison, a non-resident entity is liable for income arising or accruing in, or received in India; income that is deemed to arise or accrue in India may include income arising from a business connection, property, asset or any other source of income in India; capital gains from the transfer of capital assets in India; interest, royalties and technical service fees paid by the Indian government or an Indian resident or non-resident. The scope of royalties under Indian laws covers payments for computer software, and transmissions through satellite-based payments.
Regarding capital gains, the tax rates vary with the type of assets, period of holding and resident status. Shot-term capital gains are normally taxed at CIT on assets held for not more than 36 months and in the case of equity shares, 12 months. There is a preferential rate of 15% for listed shares and securities, and 0% exemptions also exist in certain cases. In contrast, long-term capital gains are basically taxed between 10% and 20%, though exemptions are also available.
In India, tax rates vary between resident and non-resident entities. The standard CIT for domestic companies is 30%, on top of the surcharge and cess. Apart from reforming indirect taxes, the Modi government is committed to reducing the headline CIT over a period of four years from 30% to 25%.
The government further clarified that Minimum Alternate Tax (MAT) would not be applied to foreign companies. Under Section 115JB of the Income Tax Act 1961, every company in India, resident or non-resident, is obliged to pay MAT. The MAT rule was introduced to ensure that no taxpayer with considerable income in India ends up avoiding tax liability because of credits, deductions and exclusions, with MAT levied in the event of a company’s tax liability being found less than 18.5% of its adjusted book profit.
In India, there is an obligation on the part of a resident or non-resident payer to withhold tax on payments to non-residents if and where such payments are chargeable to tax in the country. The Withholding Tax (WHT) rates vary with the nature of payment, tax residency of the recipient and availability of tax treaty benefits. Any recipient of income from India needs a Permanent Account Number (PAN) if the income received is subject to WHT under India’s tax laws. Where PAN is absent, the Indian payer will have to withhold tax at 20% or higher.
India and Hong Kong signed a Double Taxation Avoidance Agreement (DTAA) in March 2018 after agreeing to a framework in November 2017. Under this DTAA, more than 1,500 Indian companies and businesses with a presence in Hong Kong will be given protection against double taxation, as well as Hong Kong-based companies providing services in India. In short, any Indian tax paid by Hong Kong companies will be allowed as a credit against the tax payable in Hong Kong on the same profits, subject to the tax law provisions of Hong Kong. Similarly, the tax paid by Indian companies in Hong Kong will be allowed as a deduction from the tax payable on the same income in India.
An overview of the major types of taxes levied in India is provided in the table below.
|Tax||Resident Company||Non-resident Comany|
|Corporate Income Tax (CIT)||Taxed on global Income, for the tax year running from 1 April of a year to 31 March of the subsequent year|
25%, plus the Surcharge and Cess, for certain domestic companies engaged in manufacture or production, or having a business turnover of up to Rs.500mn (about US$7.5mn)
30%, plus the Surcharge and Cess, for other resident companies
|Taxed on income accruing, arising or received in India during the tax year from 1 April of a year to 31 March of the subsequent year|
40%, plus the Surcharge and Cess
|Surcharge||7% for resident companies with taxable income exceeding Rs.10mn (US$0.15mn) and up to Rs.100mn (US$1.5mn)|
12% for resident companies with taxable income exceeding Rs.100mn (US$1.5mn)
|Minimum Alternate Tax (MAT)||18.5%, plus the Surcharge and Cess, for companies||10% to 25% (depending on the type of transaction)|
|Alternate Minimum Tax (AMT)||18.5%, plus the Surcharge and Cess, for persons other than companies|
|Capital Gain Tax (CGT)||20%-40%, plus the Surcharge and Cess, with possible exemptions||10%-40%, plus the Surcharge and Cess, with possible exemptions|
|Withholding Tax (WHT)||0% for dividends|
10%, for royalty and fees on technical services
10%, for interest on foreign currency loans
10%, for any other income
|0% for dividends|
10%, for royalty and fees on technical services
20%, for interest on foreign currency loans
30%, for any other income
|Dividend Distribution Tax (DDT)||15%, plus the Surcharge and Cess|
|Goods and Services Tax (GST)||0%-28% (a four-slab structure of 5%, 12%, 18% and 28% with certain items granted exemption or zero-rated)||0%-28%, (a four-slab structure of 5%, 12%, 18% and 28% with certain items granted exemption or zero-rated)|
|Customs Duty||10% (median rate), plus Cess; IGST levied for GST goods , and additional duty levied on non-GST goods||10% (median rate), plus Cess; IGST levied for GST goods , and additional duty levied on non-GST goods|