Indian taxation system has undergone reforms during the last decade resulting in better compliance, and ease of tax payment.
In India the Income Tax Act is administered by the Central Board of Direct Taxes (CBDT) which operates under the aegis of the Finance Ministry of the central government.
The Indian tax year runs from 1 April of a year to 31 March of the subsequent year. Companies (except those which are required to submit a transfer pricing accountant’s report with respect to international transactions or specified domestic transactions) are required to file their tax return by 30 September following the end of the tax year. Companies which are required to submit a transfer pricing accountant’s report are required to file their tax return by 30 November following the end of the tax year.
A resident company is taxed on worldwide income whereas a non-resident is taxed only on income that is received in India, or that accrues or arises, or is deemed to accrue or arise, in India. Income deemed to accrue or arise in India includes income accruing or arising, whether directly or indirectly, through or from (a) any business connection in India, (b) any property in India, (c) any asset or source of income in India, (d) transfer of a capital asset in India. It also includes income in the nature of interest, royalties and fee for technical services, which are taxed on source rule basis. In computing taxable business income, expenditure incurred wholly and exclusively for the purpose of business is allowed as deduction subject to computational provisions.
The taxation of a non- resident in India would be subject to any favourable provisions under a tax treaty, which India has entered with foreign countries. India has entered into Double Taxation Avoidance Agreements (‘DTAs’) with around 92 countries including the UK.
TAX RATES IN INDIA
The tax rate applicable to domestic company and foreign company are different and are further increased with applicable surcharge (at 2 % to 10 %) and cess (at 3 %) depending upon the level of income. Companies are liable to pay minimum alternate tax (MAT) if the tax liability (before surcharge and education cess) is less than 18.5 % of their adjusted book profits (subject to prescribed adjustments). In such cases, a MAT is levied on the adjusted book profits. The corporate tax rates for the tax year 2015-16 under normal provisions and MAT regime are as follows:
|COMPANY||INCOME > INR 100 MN||INCOME > INR 10 |
MN < INR 100MN
|INCOME < 1NR 10 MN|
|Tax rate||MAT||Tax rate||MAT||Tax rate||MAT|
|Domestic Indian |
The new government has committed that the headline corporate tax rate will be reduced to 25% from current rate of 30%, over a period of four years. Further, it has also been clarified that MAT provisions will not apply to foreign companies/FIIs/FPIs. However, in cases where the foreign company has a place of business or Permanent Establishment in India, the MAT provisions may apply.
SOURCE RULE BASED TAXATION IN INDIA
The tax law also provides for source rule basis of taxation for certain incomes (i.e. royalties and fee for technical services), in case of non-residents. The tax rate for such income has recently been reduced to 10% from 25% (plus applicable surcharge & cess), subject to any beneficial treatment under the treaty. The scope of Royalty under the domestic tax law covers payments for computer software, and transmissions through satellite based payments. However, the tax payer could still rely upon the definition of Royalty under the respective tax treaty as in the absence of any change under treaty, as it would be more restrictive and favourable to the tax payer.
TRANSFER PRICING IN INDIA
International transactions between associated enterprises need to adhere to Transfer Pricing (TP) regulations. Certain domestic transactions have also been brought within TP regulations. India has a significant cases of disputes involving TP issues, with Indian tax authorities adopting aggressive stands and conducting audits. With the introduction of APA regime, advancement in discussions on Mutual Agreement Procedures and clarifications on various issues by the new government, the TP issues are being resolved lately.
DIVIDEND DISTRIBUTION TAX (DDT) IN INDIA
Currently dividend distributions by Indian companies are subjected to DDT at an effective rate of 20.36% on the net distribution made to the foreign parent. The tax is payable by the Indian company. However, dividends are exempt from Indian tax in the hands of the recipient.
India has elaborate withholding tax provisions and there is an obligation on a payer (either resident or non-resident) to withhold tax on payments to non-residents, if such payments are chargeable to tax in India. The withholding tax rate depends on the nature of payment, the tax residency of the recipient and the availability of tax treaty benefits.
Any recipient of income from India needs a Permanent Account Number (PAN) (find out how to get a PAN here) if the income received is subject to tax withholding under Indian domestic tax law. In the absence of PAN, the Indian payer is obliged to withhold tax at 20% or higher, in line with domestic tax law.
The focus on withholding taxes has increased over the years and the tax law provides for significant adverse consequences for non-withholding such as disallowing a tax deduction for the expense, recovery of taxes, and interest and penalty. Substantial tax litigation has occurred in recent years on issues relating to withholding tax.
TAX TREATY PROVISIONS IN INDIA
A non-resident has a right to enforce treaty provisions if they are more beneficial than domestic tax law. In order to enforce treaty provisions, it is mandatory to provide a tax residency certificate along with such other information, as may be prescribed.
CAPITAL GAINS IN INDIA
Capital gains are currently taxed based on the type of assets and their period of holding. Short term capital gains are taxed at normal corporate tax rates and it applies on assets held for not more than 36 months (12 months in case of shares). Long-term capital gains are taxed at 10%/20% (plus applicable surcharge and education cess). There are preferential rates for listed shares and securities ranging from Nil to 15% (plus applicable surcharge and education cess) depending on period of holding. India also has provisions to tax indirect transfer of shares. Therefore, any transfer of asset/ interest in a company which derives its value substantially from assets located in India, would be chargeable to tax as Capital Gains. The substantial threshold has recently been defined to restrict the application of indirect transfers.
BRANCH REPATRIATION IN INDIA
There is no tax on remittance of profits by a branch of a non-resident company to its Head Office, although such provisions are proposed to be introduced under the DTC.
GIFT TAX AND WEALTH TAX IN INDIA
There is no Gift tax in India although anti avoidance provisions apply for certain transfers without adequate consideration. Wealth tax at 1% was applicable till last year but has now been abolished.
ADVANCE RULINGS AND ADVANCE PRICING AGREEMENT (APA) IN INDIA
A non-resident can obtain an advance ruling on a proposed transaction to attain reasonable certainty on taxation treatment of such transaction. These rulings are generally binding on tax payers as well as Indian tax authorities. Separately, provisions relating to APAs have also been introduced with a view to resolving potential taxation disputes in a cooperative manner. The APA once entered and agreed with the Indian tax authorities would remain valid for a maximum period of five years from the year of APA agreement. Further roll back rules have been recently introduced which allows the APA agreement to apply for 4 years going back.
GENERAL ANTI AVOIDANCE RULES (GAAR) IN INDIA
GAAR provisions are proposed to be introduced from financial year 2017-18 onwards. Investments made before 1 April 2017, to be grandfathered. These provisions empower the Indian tax authorities to declare an arrangement entered into by a tax payer to be an ‘Impermissible Avoidance Agreement’ (IAA). The onus to prove that a transaction is not IAA, is on the tax payer. The consequence would be denial of tax benefit under the domestic tax law or under the treaty.
LIMITED LIABILITY PARTNERSHIPS (LLPS) IN INDIA
An LLP is taxed like a partnership entity in India at the rate of 30.9% (34.61% if income exceeds INR 10 million). Tax liability under Alternate minimum tax (AMT) along the lines of the MAT regime is also applied. LLPs are not subject to dividend distribution tax or any other distribution tax and thus have a clear tax advantage over a company in that context.
TAX INCENTIVES/ DEDUCTIONS IN INDIA
Special Economic Zones (SEZs) have been set up throughout the country in order to promote a competitive environment and industrial progress. Developers and occupiers of SEZs enjoy substantial long term tax holidays and concessions which are worth exploring when establishing an operation in India although these may be phased out under the DTC.
New undertakings carrying specified activities within certain designated sectors (like infrastructure, power and energy) can also enjoy certain tax deductions on profits, for a period up to 10 years, depending on the sector and project. New undertakings located in specified North-eastern states of India are also entitled to certain tax incentives/ deductions. Companies are advised to consult the scheme relevant to their sector for information on eligibility, time period and tax exemption schedule.