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Taxation
General
Indian taxes can be broadly classified into direct and
indirect taxes. Direct taxes cover income tax and corporate tax.
Personal income tax Income tax is levied on:
- income from salary
- income from house property
- profits and gains of business or profession
- capital gains
- income from other sources, including dividends, interest income and other income not covered under of any of the first four above.
Corporate taxes
The tax year runs from 1 April to 31 March. The current
rates of taxation (as a percentage of net income) are as follows:
- domestic companies – 30 percent (for the assessment year 2009/10)
- foreign companies – 40 percent (for the assessment year 2009/10).
A surcharge is payable on income tax where the total taxable
income exceeds Rs10 million at the rate of 10 percent for domestic companies
and 2.5 percent for foreign companies.
Additionally, an education levy of 2 percent and a secondary
higher education levy of 1 percent on the amount of tax and surcharge are also
payable.
Corporate residency
An entity incorporated in India or having its entire
management and control in India is a resident and is taxed on its worldwide
income. A non-resident corporation (foreign company) is taxed only on income
received or deemed to be received in India from Indian operations, or income
that is accruing or arising in India or deemed to accrue or arise in India
(subject to treaty benefits wherever available).
For individuals, women, persons over age 65, if the income
exceeds Rs1 million, surcharge on income tax at the rate of 10 percent is
applicable. In addition, an education levy of 2 percent and a secondary higher
education levy of 1 percent on the amount of tax and surcharge are payable. A
deduction of up to a maximum of Rs100,000 is available on taxable income on
investment, made in certain specified savings schemes.
Withholding tax
Withholding tax is payable on certain payments, including
interest, salaries paid to employees, professional fees, payments to
contractors, commissions, winnings from games, lotteries, horse races, etc.
Responsibility for the deduction of withholding tax is fixed on the person
responsible for making the payment. The rate of withholding tax applicable to
non-residents varies depending on the nature of the income.
Capital gains tax
Capital gains arising from the transfer of capital assets
situated in India are taxable. Capital assets include all kinds of property
except stock-in-trade, raw materials and consumables used in business or
professions, personal effects (except jewelry), agricultural land and notified
gold bonds.
Profits gained from the transfer of long-term capital assets
are taxed as long-term capital gains. Long-term capital gains are defined as
capital gains on assets held for over three years (one year for listed shares
and certain specified securities). Profits gained from the transfer of
short-term capital assets (that is, assets that do not qualify as long-term
capital assets) are referred to as short-term capital gains.
Income from other
sources
Income from other sources includes interest income,
dividends and other income. This is a residual category in the heads of income.
Income under this head is taxed at normal rates as applicable for individuals,
companies and firms. However, the following incomes in the case of
non-residents are taxed at special rates on a gross basis:
- Dividends other than dividends on which dividend distribution tax has been paid – 20%
- Interest received on loans given in foreign currency to Indian concern or government of India – 20%
- Income in respect of units purchased in foreign currency of specified mutual fund/UTI – 10%
Income from royalties
and technical fees in case of non-residents
Any income derived in the form of royalties or technical
fees by non-residents in India is taxed at a concessional rate of 10 percent.
However, where a non-resident has a permanent establishment in India and the
royalty or fees for technical services is effectively connected with the
permanent establishment, the non-resident may be taxed at 40 percent plus
surcharge and education cess.
Repatriation of
profits
Before foreign companies can repatriate profits, the Income
Tax Department must be satisfied that they have paid tax owing and issued a
no-objection certificate. Applications require a certificate from a chartered
accountant stating that all tax obligations have been fulfilled.
Repatriation of
earnings
Dividends declared and paid by domestic companies are exempt
from tax in the hands of their shareholders. However, the company is liable to
pay dividend distribution tax of 15 percent (plus applicable surcharge and
levies) on such dividends.
Advance rulings
A system of advance rulings is currently available to
non-residents and specified residents. This scheme enables the applicant to
obtain in advance a ruling on issues which could arise in determining their tax
liability. Advance rulings are pronounced by an authority known as the
Authority for Advance Rulings. The ruling is binding on the relevant income tax
authorities and the applicant in respect of the specific transaction.
Double tax treaties
India has double tax avoidance agreements with over 60
counties, including Australia. Non-residents can be taxed under the double tax
treaty or the domestic law, whichever they choose.
If no double tax agreement exists, a resident company can
claim a foreign tax credit for the foreign tax paid by it. The amount of credit
granted is the lower of the Indian tax payable on the income that is subject to
double taxation and the foreign tax discharged.
Transfer pricing
India has introduced comprehensive transfer-pricing
regulations, effective from 1 April 2001, with the objective of preventing
multinational companies from manipulating prices in intra-group transactions
such that profits are not shifted outside India. Under the transfer pricing
regulations, income and expenses (including interest payments) with respect to
international transactions between two or more associated enterprises (including
permanent establishments) must be at arm’s length prices.
Indirect taxes
Excise duty
Excise duty is a tax applicable on the manufacture of goods
within the country. The term “manufacture” has been interpreted to mean
bringing into existence new articles having a distinct name, character, use and
marketability. Basic excise duty is levied at a uniform rate of 8 per
Customs duty
Customs duty is levied on the import of goods into India. It
comprises basic customs duty, additional customs duty and special additional
customs duty. The peak rate of basic customs duty is now 10 percent. The
primary basis for valuation of goods is the transaction value.
Service tax
Service tax is levied on certain identifiable taxable
services provided in India by specified service providers, currently applicable
to over 111 services. The service tax rate is currently 10.36 percent (which
is inclusive of education levies and secondary and higher education levies
charged, on the service tax). Generally the liability to deposit tax is on the
service provider. Where the service provider is a non-resident or person
outside India, the liability to pay service tax is on the service recipient.
Central sales tax
Levied on sale of movable goods, this tax is imposed by the
central government if the goods are sold interstate. The collection and
administration of central sales tax is the responsibility of state governments.
Interstate sales tax is currently at the rate of 2 percent. However, movement
of goods between the states as stock transfers from factory to depots are not
liable for levy of central sales tax.
Value-added tax
Value-added tax (VAT) on sales was introduced at the state level in April 2003 and replaces the existing sales tax. Most Indian states have now adopted the VAT system. While internationally VAT is implemented such that it replaces all indirect taxes except customs duty, in India, VAT replaces local sales tax only. Since VAT was implemented at the state level, central sales tax and all other indirect taxes such as customs, excise, service tax, etc, continue as before.
Value-added tax (VAT) on sales was introduced at the state level in April 2003 and replaces the existing sales tax. Most Indian states have now adopted the VAT system. While internationally VAT is implemented such that it replaces all indirect taxes except customs duty, in India, VAT replaces local sales tax only. Since VAT was implemented at the state level, central sales tax and all other indirect taxes such as customs, excise, service tax, etc, continue as before.