Corporate Tax Guide: India
The information is valid for the entire country except where indicated. For example, in the case of Malaysia, Labuan is part of Malaysia but has a special tax regime, so this is noted.
The corporate tax rate shown is the typical corporate tax rate that a domestic corporation owned by non-resident persons would pay. The tax rate does not include withholding tax on dividends, but does include a distribution tax shown separately if applicable. Certain countries have a low corporate tax rate, but charge an additional tax when a dividend is distributed. Because this tax is paid by the corporation, and not deducted from the amount of the dividend itself, it is not a dividend withholding tax. As a result, it typically cannot be reduced by an international tax treaty.
|Taxation year in India is the Financial Year (‘FY’) i.e., from 1 April to 31 March.|
The basis of taxation for a corporation will typically be one of:
|Domestic companies: global income will be taxed.|
Foreign companies: if they are tax resident in India, then global income will be taxed. If these are non-resident in India, then only income received in India and Indian-sourced income will be taxed.
A foreign company is considered as resident in India if its Place of Effective Management (POEM) is in India. POEM is to be determined based on certain parameters as specified.
Where non-resident corporation carries on business in a country, business profits may be subject to corporate tax. In addition, a branch profits tax may apply in lieu of dividend withholding tax. This branch profits tax applies to the after tax profits, typically at a fixed percentage. An international tax treaty may reduce the rate of branch profits tax, typically to the rate provided for dividend withholding.
|Income of branch of a foreign company is subject to tax at 40% plus surcharge and education cess as applicable to a Foreign Company (mentioned in 3. above).|
The common forms of business entity are noted. In addition, the entities which are flow through entities for U.S. tax purposes are indicated.
|Private and public limited company, One Person Company, Partnership Firm, Limited Liability Partnership, Sole Proprietorship, Association of Persons, Trust, Branch office or Liaison office or Project office of a foreign company.|
Capital gains may be fully taxed, partially taxed or not at all. In certain countries, an exemption, called the participation exemption, will apply to exempt from tax a capital gain from disposition of a substantial holding of shares of a subsidiary. Where a participation exemption is applicable, it is noted together with a summary of the main conditions.
|Listed equity shares, equity oriented funds, zero coupon bonds: considered as short-term capital asset if held up to 12 months and long-term capital asset if held for more than 12 months. |
Unlisted equity shares and immovable property: considered as short-term capital asset if held up to 24 months and long-term capital asset if held for more than 24 months.
Bonds, debentures, non-equity mutual funds: considered as short-term capital asset if held up to 36 months and long-term capital asset if held for more than 36 months.
Other assets: considered as short-term capital asset if held up to 36 months and long-term capital asset if held for more than 36 months.
Capital gains tax rates depend upon the period of holding of the capital asset and the residential status of taxpayer.
Long-term capital gains on transfer of equity oriented funds and zero coupon bonds exempt if Securities Transaction Tax (STT) is paid on the sale of shares.
Long-term capital gains on transfer of equity shares exempt if STT is paid on purchase (on or after 1 October 2004) as well as on sale of shares.
Indexation benefit to compute cost of acquisition and cost of improvement is available in certain cases.
Certain countries allow group taxation, otherwise known as consolidated tax filing. Here the tax returns of a group of corporations in the country may be combined together, which can be useful. If group taxation is permitted, it is noted along with the main conditions.
Countries offer various kinds of special exemptions and incentives. Examples are a reduced tax rate, a tax holiday, a tax credit on the purchase of equipment, special accelerated deductions for deprecation, incentives for R&D, and various others. Here the major items are noted.
|Reduced tax rate: 25% for companies whose turnover or gross receipts for FY 2015-16 does not exceed INR 500 million (~USD 7.5 million), subject to certain conditions specified. |
Many countries have thin capitalization rules which limit or deny the deduction of interest expense in certain circumstances. For example, if debt exceeds three times equity, a proportionate amount of interest expense may not be deductible. Limitations take various forms, restricting the interest expense deduction to a percentage of profit, deeming the debt to be equity and the interest to be a payment of dividends, and various other rules which may blend of these principles. Where a country has thin capitalization rules, they are briefly described.
|Deduction for interest expenses paid/payable by an entity to its Associated Enterprises will be restricted to 30% of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Carry forward of such disallowed interest expense will be allowed for eight FYs immediately succeeding the relevant FY.|
Many countries have transfer pricing rules. They very often follow the OECD guidelines and the arms length principle. Some countries have specific rules which apply in certain cases. In addition, some countries allow for a selection of the most appropriate transfer pricing methodology in the circumstances, while other countries follow a hierarchy of methods, with the CUP method (comparable uncontrolled price) often ranking first. The transfer pricing rules are briefly explained.
|Five methods prescribed to compute arm’s length price: Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Profit Split Method, Transactional Net Margin Method. |
Prescribed documents and information relating to international transactions are required to be maintained, including preparation of Master file, Local file and Country-by-Country reporting by the specified taxpayer.
Report from an accountant on international transactions is to be submitted along with the return of income.
The determination of arm’s length price in case of certain eligible international transactions shall, at the option of the taxpayer, be subject to Safe Harbour rules. The transfer price contained in the Safe Harbour rules shall be applicable for five years beginning from FY 2012-13. The taxpayer has the flexibility to elect the years to be governed by the Safe Harbour rules within the five year period.
Advance Pricing Agreement mechanism is in place for timely resolution of transfer pricing disputes.
11. CFC Rules
Many countries tax passive income earned in controlled foreign corporations (CFC’s) on an imputation basis while active income is not taxed. Such CFC rules are usually complex and vary significantly in what is considered passive income, and how foreign tax paid is taken into account. Some countries approach CFC rules on the basis of whether or not the foreign corporation is resident in a low tax jurisdiction or a tax haven. This may be done through a black list of countries.
The general overview of CFC rules is described in simple terms.
Profits repatriated by way of dividends from a subsidiary to a parent company are typically taxed in one of three ways:
|Dividend Distribution Tax (DDT) is payable by a domestic company at 15% plus surcharge at 12% of tax and education cess at 3% of tax and surcharge, on dividends declared/distributed/paid. DDT is required to be grossed up. |
Dividend will be exempt in the hands of recipient if DDT has been paid by the company. However, dividends received/receivable exceeding INR 1 million (~USD 15,000) in aggregate will be taxable at 10% in the hands of all resident taxpayers, except domestic companies and certain approved trusts and funds established wholly for charitable or religious purposes.
Most countries allow a foreign tax credit based on a formula, typically net foreign income over the net income times taxes payable. This limits the foreign tax credit to roughly the domestic tax otherwise applicable to the foreign income. There are numerous variations and technical rules in the details of foreign tax credit calculations. Where a foreign tax credit is allowed, the general principles are described.
|Foreign tax credit can be availed to the extent of tax payable in India on income from the same source of income. No credit will be available if the amount of foreign tax paid is under dispute.|
Losses typically can be carried forwards for a period of years, and sometimes can be carried back. Losses may be segregated into capital losses and non capital losses.
It is not practical to list all of the tax treaties which a country has in a simple guide like this. Accordingly, a link is provided in each case to the tax treaties.
Some countries have entered into Tax Information Exchange Agreements (TIEA).
Treaties are more and more containing provisions that limit benefits (LOB provisions).
Withholding tax rates vary considerably from treaty to treaty, and countries may have domestic exemptions applicable in certain circumstances (for example copyright royalties, interest paid to arm’s length persons, etc.). A table shows the typical rates but cannot adequately summarize all of the details. The applicable treaty should be consulted.
*The above rates shall be increased by surcharge and education cess, as applicable.
Permanent Account Number (PAN) is a unique number allotted to each taxpayer by the tax authorities. Quoting of PAN is mandatory in the income tax return and other correspondence with the tax authorities as well as while undertaking certain transactions.
In the absence of PAN, higher withholding tax would be applicable. However, in the case of a non-resident payee, the Tax Residency Certificate and Unique Identification Number can be obtained to avoid the higher withholding tax rate in the absence of PAN.
17. Taxation Year
Some countries allow for the selection of year-end while other countries specify a particular year-end which all business entities must have. Normally the taxation year cannot exceed 12 months. Where it can exceed 12 months, this is noted.
|Financial Year (FY): 1 April to 31 March.|
This is the due date for filing a tax return. Where extensions are available, this is noted.
|Due date of filing the income tax return|
19. Tax Instalments
The typical tax instalment requirements are noted.
Income from business and profession computed on presumptive basis: 100% by 15 March of the FY.
For all other cases: tax to be paid in four installments (i.e., 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March of the relevant FY).
Failure/shortfall in the payment of advance tax will attract interest at 12% p.a.
20. Payment of Tax
This is the date when the corporate tax owing for the year must be paid. It may be different from the tax return filing due date.
|Self assessment tax (if applicable) in addition to advance tax and withholding tax to be paid before the due date of filing the income tax return.|
This is the period after which the tax department cannot in normal circumstances reassess a taxation year. It is sometimes referenced to the end of the taxation year and sometimes to the date of the first assessment of that taxation year.
|Appeals or applications may be filed after the expiry of the prescribed period if the applicant is able to satisfy the court that it had sufficient cause for not filing the appeal or the application within such time.|
If a country has exchange controls, this is noted, together with the main requirements.
|Regulations exist for foreign exchange transactions and foreign investment is permitted in most sectors, subject to caps in certain cases. Current account transactions are permitted unless there is a specific prohibition.|
A VAT tax system typically provides that the supply of goods and services is classified as taxable, tax exempt, or zero rated. Where a business is engaged in an activity which is taxable, it must charge VAT on its revenue, and can claim a refund of VAT on its expenditures. Where the activity is exempt, it does not charge VAT on its revenue, and cannot claim back VAT paid. Where the entity is engaged in activities which are zero rated (typically agriculture, food services and exports), then it can claim back VAT which it has paid on its expenditures, and does not charge VAT on its revenue.
If a country has a typical VAT system, this is noted. If a country has no VAT system but a sales tax system, this is indicated. Some countries may have a mixture, and taxes may apply at different levels (federal and state for example).
|Basis of taxation|
Value Added Tax (VAT) is levied on sale of goods within the State. Each State/Union Territory has framed legislation for levy of VAT on sale of goods within the State.
Central Sales Tax (CST) is levied on interstate sale (sale occasioning movement of goods from one State to another). CST is levied under the Central Act. However, collection and administration of CST has been entrusted to the respective State Government of the State from which the movement of goods commenced.
VAT operates on a credit mechanism. Accordingly, VAT paid on inputs and capital goods is eligible to be set off against output VAT liability of the seller. However, VAT paid in one State is not eligible to be set off against VAT liability in the other State. Similarly, CST paid on purchases is not eligible to be set off against output VAT liability and, hence, is a cost to the buyer.
Effective rate of VAT varies from 4% to 15%; actual rate of VAT depends upon the classification of goods under the respective State VAT legislation.
CST, equivalent to the rate prevailing in the originating State, is levied on interstate sale of goods. Concessional rate of CST of 2% is applicable subject to obtaining of declaration in Form C from the buyer of the goods.
Special exemptions and incentives
Sale of goods in the course of import into, or export out of, India is not exigible to VAT or CST.
Stamp duty, or land transfer tax, can apply on such things as the transfer of shares, land, or the issuance of bonds or debentures. This is described together with the applicable rates.
|Specified instruments and transfer of shares and specified property are subject to Stamp duty, the rate of which depends on the property transferred and varies from State to State.|
25. Capital Tax
If capital tax is payable, this is described. Capital tax may apply in specialized industries, such as banking and insurance, even if a country does not generally apply a capital tax to corporations.
26. Other Taxes
Where significant, other taxes are noted.
|I. Direct Taxes|
A) Gift Tax, etc.
Gift Tax / Wealth Tax / Estate Duty / Inheritance Tax is not applicable in India. However, in certain cases, receipt of amounts exceeding INR 50,000 (~USD 750) or receipt of specified movable or immovable property without consideration or for inadequate consideration (as defined) is taxable at normal tax rates as applicable to the taxpayer.
II. Indirect Taxes
B) Customs Duty
Customs duty is levied on the import of goods into India and is payable by the importer of the goods.
Customs duty rates
Duty has to be self assessed by the importer and is payable on or before clearance of goods from Customs station.
Period of limitation for demand of duty
Where the import of goods is from any related person, the importer is required to declare the nature of the relationship and the assessment of duty is subject to scrutiny by the Special Valuation Branch (SVB) of the Customs with a view to ascertain that the relationship has not influenced the import price.
C) Excise Duty
Excise duty rates
Ad valorem Excise duty rate at 12.5%; actual rate of duty varies based on the classification of goods manufactured under the Central Excise Tariff Act, 1985.
Basis of taxation
Excise duty is leviable on the manufacture of goods in India and is payable by the manufacturer of goods at the time of removal of goods from the factory of production.
Special exemptions and incentives
Duty has to be self assessed by the manufacturer and is payable at the time of removal of goods from the factory of production.
Excise duty operates on a credit mechanism. Excise duty paid on inputs and capital goods and Service tax paid on input services are eligible to be set off against output liability on removal of manufactured goods.
Period of limitation for demand of duty
Service tax rate
Effective rate of Service tax is 15% (Basic 14%, Swachh Bharat Cess 0.5% and Krishi Kalyan Cess 0.5%). Service tax means tax leviable under Chapter V of the Finance Act, 1994 (“Finance Act”). Chapter V of the Finance Act extends to the whole of India except the State of Jammu and Kashmir.
Basis of taxation
Service tax is levied on the provision of taxable service and is payable by the provider of the service.
Service has been defined as any activity carried out by a person for another for a consideration, and includes declared services but excludes services covered under the negative list of services or, by virtue of notification, services are specifically exempt from the levy of Service tax.
In the case of services such as renting of a vehicle, security services, works contract services, and services provided by a person located outside India and received by a person located in India, the liability to pay Service tax is on the person receiving such services in India (Reverse Charge Mechanism).
Service tax operates on a credit mechanism. Accordingly, Service tax paid on input services shall be eligible to be set off against output Service tax liability of the service provider.
Special exemptions and incentives
The Central Government has issued a mega exemption notification containing a list of services on which no Service tax is payable.
An exporter of service has an option to export service (determined as per the Place of Provision of Services Rules, 2012) without payment of Service tax.
Subject to the fulfillment of prescribed conditions, a unit in SEZ or a developer of SEZ has been granted ab initio exemption to procure services without payment of duty or to claim refund of duty paid on input services.
Payment of service tax
Typically, Service tax is payable at the time of completion of service (determined as per the Point of Taxation of Services Rules, 2011). However, in case the service receiver has received any amount in advance, prior to the provision of service, Service tax thereon is payable at the time of receipt of such advance.
Period of limitation for demand of duty
The Constitution (101st Amendment) Act received Presidential assent on 8 September 2016. This Act paves the way for the introduction of Goods and Services Tax (GST) by making special provision with respect to goods and services tax. Efforts are being made to implement GST with effect from 1 July 2017. Once implemented, GST shall subsume almost all indirect taxes currently levied by the Central and the State Governments, except Customs duty.
GST shall be a dual levy to be levied concurrently by the Central Government and the State Governments on the common tax base. Thus, on intra state supply of goods or services, the Central Government shall levy Central GST (CGST) and State Government shall levy State GST (SGST) on the same transaction. Further, an Integrated Goods and Service Tax (IGST), equivalent to the sum total of CGST and SGST, shall be levied on interstate supply of goods and services.
GST shall operate on a credit mechanism. Thus, CGST paid on inward supply shall be eligible to be set off against CGST on outward supply, SGST paid on inward supply shall be eligible to be set off against SGST on outward supply, and IGST paid on inward supply shall be eligible to be set off against IGST or CGST or SGST payable on outward supply, in the same order.
It is proposed to have a four-tier rate of GST structure ranging from 5% to 28%. GST rate on supply of goods: 6% for essential items, 12% and18% as standard rate and 28% for white goods, with a proposed ceiling of 40%, and all those items on which the current rate of incidence varies from 30% to 31%. In addition to GST, a cess is also proposed to be levied on tobacco, luxury cars and watches, etc.
Currently, specified petroleum products (petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel) and alcohol for human consumption have been kept outside the purview of GST. However, on recommendations of the Goods and Services Tax Council, specified petroleum products are proposed to be included within GST from a date to be notified.
The GST rate on supply of service is yet to be finalised.
III. Other Taxes and Levies
F) Equalisation Levy
Equalisation levy is payable at 6% of gross consideration for services relating to online advertisement or provision of digital advertising space or any related facility or service, where the consideration for such services is received or receivable by a non-resident from a resident or from a non-resident having a Permanent Establishment in India.
G) Securities Transaction Tax (‘STT’)
STT is applicable on the purchase and sale of equity shares, derivatives, units in an equity oriented fund or units of a business trust, listed on a recognised stock exchange in India.
H) Research & Development Cess
Research & Development Cess of 5%, hitherto levied on import of technology into India, will cease to be levied from 1 April 2017.
Anti-Avoidance Rules take many forms, the most common ones are a general anti-avoidance rule, treaty shopping limitations, the requirement for economic substance (or a business purpose in carrying out transaction) and specific anti-avoidance rules for particular purposes. A very brief overview of the anti-avoidance rules is described.
|GAAR provisions in the domestic tax law will come into effect from 1 April 2017. GAAR provisions will not be applicable to transactions where the tax benefit in the relevant FY does not exceed INR 30 million (~USD 450,000). |
An arrangement is considered as an impermissible avoidance arrangement if the main purpose of the arrangement is to obtain a tax benefit.
The benefit under the tax treaty will be denied if a transaction is considered as an impermissible avoidance arrangement.
In addition to GAAR in the domestic tax law, SAAR (LOB clause) is present in various tax treaties. GAAR provisions in the domestic law may be invoked if SAAR is not sufficient to address a particular situation.
There is a concept of economic substance over form in the domestic tax law.
Where a non-resident person holds shares of a corporation established in the country listed, the capital gain which results may be taxable or not taxable depending on the circumstances and, possibly, the existences of an international tax treaty. The general rules are noted.
|Sale of corporation may or may not be subject to capital gains tax, based on the methodology of transfer e.g. sale of assets, amalgamation, demerger, slump sale, and there are specified provisions for computation of capital gains and tax thereon. In addition, there are provisions for indirect transfer of assets. As per the said provisions, indirect transfer of shares by a non-resident will be taxable in India if the shares derive their value substantially from assets located in India. Certain parameters are specified to determine whether the shares derive their value substantially from assets located in India.|
Where a corporation is acquired through the purchase of shares, sometimes a step up is allowed so that the cost of its assets can be revalued. The main rules are briefly summarized.
|Step up available in case of acquisition of assets by way of slump sale and itemized sale. No step up available in case of amalgamation, demerger or share purchase.|
30. Use of Rulings
In some countries, rulings are commonly used (and sometimes even required). In other countries the system is either unavailable or not commonly used except in special circumstances.
|Authority for Advance rulings: An advance ruling may be obtained by non-residents or by residents in respect of transactions with non-residents.|
Other important aspects of the tax system are noted.
|Income Computation and Disclosure Standards (‘ICDS’) |
With effect from 1 April 2016, income under the head “Profits and Gains of Business or Profession” and “Income from Other Sources” is required to be computed in accordance with ICDS. Currently, 10 Standards have been notified in respect of various aspects such as revenue recognition, valuation of inventories, fixed assets, fluctuations in exchange rates, provisions and contingencies, etc.
Taxes at applicable slab rates are required to be withheld by the employer on salaries paid to employees. Further, taxes at appropriate rates are required to be withheld on payments towards rent, commission, contractual work, interest, dividend, royalty, and fees for technical services.
Quarterly withholding tax returns are required to be filed in respect of taxes withheld on salaries as well as payments to residents and non residents.
Where the total turnover or gross receipts of business exceed INR 10 million (~USD 150,000) or where the gross receipts of profession exceed INR 2.5 million (~USD 37,500), the books of account are required to be audited by an accountant and the accountant’s report is required to be submitted along with the return of income.
Scrutiny audit by tax authorities
Certain income tax returns may be selected for scrutiny audit by the tax authorities, in which case, additional details/documents/explanations may need to be submitted in support of the claims made in the income tax return. Thereafter, the tax authorities will pass an order to determine the total income and final tax liability.
Penalties are levied for non-filing of the income tax return, failure to withhold taxes, failure to get the accounts audited, failure to submit an accountant’s report for international transactions, and misreporting or underreporting of income.
Prosecution provisions exist in case of certain defaults (e.g., where tax is withheld and not paid to the Government).
This material and the information contained herein is of a general nature and is not intended to address specific issues of any person. No person should act on this material or information without appropriate professional advice. JMP Advisors Pvt Ltd shall not be liable for any loss whatsoever sustained by any person who relies on this material or information.