Scan this QR code with your smartphone to visit: www.india-briefing.com/news 3 7 9 Issue 18 • January 2013 From Dezan Shira & Associates India’s Taxes for Foreign-invested Entities Inside This Issue: An Overview of India’s Taxes on Business In this article, we give a brief overview of India’s major taxes and duties on business, as well as double taxation avoidance agreements. Individual Income Tax Rates and Deductions Individual income tax (IIT) payments are determined by income source, residency, amount, and other factors India’s Tax Reforms in 2013 The Indian Government has tabled a measure of reforms to be introduced to create a more favorable environment for foreign investment.
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www.india-briefing.com/news
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7
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Issue 18 • January 2013
From Dezan Shira & Associates
India’s Taxes for Foreign-investedEntities
Inside This Issue:
An Overview of India’s Taxes on BusinessIn this article, we give a brief overview of India’s major taxes and duties on business, as well as double taxation avoidance agreements.
Individual Income Tax Rates and DeductionsIndividual income tax (IIT ) payments are determined by income source, residency, amount, and other factors
India’s Tax Reforms in 2013The Indian Government has tabled a measure of reforms to be introduced to create a more favorable environment for foreign investment.
2 - INDIA BRIEFING | 2013
The year 2012 was eventful in India with the ongoing debate and implementation on foreign direct
investment (FDI) in multi-brand retail and of course the controversy about retrospective tax amendments.
Specifically, the decision of former finance minister, Pranab Mukherjee, to amend tax laws retrospectively
connected to the Vodafone case caused worry among foreign investors about ad hoc changes to India’s tax
regime. A committee headed by tax expert Parthasarthy Shome was pulled in to advise. In a statement in
early December, Finance Minister P Chidarmbaram said the government would soon announce changes
in the tax framework to bring about clarity on the retrospective taxation of indirect transfers.
This tax amendment controversy creates an excellent opportunity to provide an overview of the relevant
taxes for foreign-invested entities, including the most important points for 2013 – goods and service tax
(GST) reform, proposed tax revisions under the 2013-14 Budget, the entry into force of several double
taxation agreements (DTAAs), and new General Anti-avoidance Rules (GAAR).
We begin with an overview of India’s taxes on business, which includes a section on India’s double taxation
avoidance agreements, and then discuss individual income tax rates and deductions. Finally, we discuss
India’s tax reforms in 2013, including an article by Chandrahas Choudhury, New Delhi correspondent for
Bloomberg View, “Can India Tax Itself to Prosperity?”
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. For further details or to contact the firm, please email [email protected], visitwww.dezshira.com to download the company brochure.
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Issue 18 • January 2013
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Advance Corporate Income Tax (ACT) Payment Schedule
2013 2014
Apr May Jun Jul Aug Sep Nov Dec Jan Feb Mar
July 1515% ACT
Sept 1545% ACT
Dec 1575% ACT
Mar 15100% ACT
* On estimated income, culumative percentage
Previously, there were large number of companies who had book
profits as per their profit and loss account, but were not paying
any tax because their income computed as per provisions of the
Income Tax Act was either nil or negative. To tax such companies,
minimum alternative tax (MAT) is levied on companies for which
income tax payable on the taxable income according to normal
provisions of the Income Tax Act is less than 18% of the adjusted
book profits. MAT is levied at 18.5% on book profits, plus surcharges
and education fee (cess).
In this article, we give a brief overview of India’s major taxes and duties on business, including Corporate Income Tax, Dividend
Distribution Tax, Minimum Alternative Tax, Value-Added Tax, Central Sales Tax, Goods And Service Tax, Customs Duty, Excise Duty
(CENVAT) Service Tax, Capital Gains Tax, Wealth Tax, and Withholding Tax.
The central and state governments provide various tax incentives for foreign investors establishing companies in India, including
indirect and direct tax incentives, reductions in indirect taxes (sales tax and tax depreciation allowance), tax deduction for the first ten years
of operation of new industrial units in specific areas, and special tax provisions for 100% export-oriented operations. Special economic
zones offer additional important benefits and tax reductions.
An Overview of India’s Taxes on Business
1. Corporate Income Tax
Corporate income tax is levied against profits and income under
the provisions of the Income Tax Act. Corporate income tax must be
paid by all types of foreign-invested entities, except for liaison offices,
which are not permitted to earn income. Foreign and domestic
companies are subject to different corporate income tax rates. A
company is considered a foreign company if its core management
(i.e. where key decisions on management are made) is located
outside of India for the duration of the year.
Corporate income tax must be paid in increments throughout
the year according to the advance corporate tax (ACT) payment
schedule.
Corporate Income Tax Rates*Domestic Companies 30% plus education fee (cess) of 3%Foreign Companies 40% plus education fee (cess) of 3%*surcharge may be applicable if total income is in excess of INR10,000,000
2. Dividend Distribution Tax
Dividend distribution tax (DDT) is levied against the distributing Indian company, not its shareholders, at 16.22% on dividends.
3. Minimum Alternative Tax
4 - INDIA BRIEFING | 2013
An Overview of India’s Taxes on Business
The tax rate on capital gains in India varies based on the type of asset
(shares, property, debt instruments), the length of time the investor
has held the asset, and whether the transactions have taken place
on a recognized stock exchange in India. When the income from
a sale is classified as business income under Indian law, it will be
taxable in India, but only if such income accrues or arises in India
or is attributable to a “business connection” in India. The rate of tax
applicable to the business income of non-residents is higher than
the rate applicable to domestic entities: approximately 42%.
Equities held for more than one year, other assets held for more
than three years, and real estate are considered long-term capital
and generally taxed at a basic rate of 20%. Short-term capital gains
(securities held for less than one year, three years for other assets) are
taxed at the normal corporate income tax rate, which is usually 30%.
Relief from certain types of capital gains is often sought through
double taxation avoidance agreements.
4. Value-added Tax, Central Sales Tax, and Goods and Service Tax
At time of writing, Indian states impose a Value-added Tax (VAT) on
most types of goods at a standard rate of 12.5%, with lower rates
of 4% and 1%. There is no VAT on imports into India and exports
are zero-rated. Businesses with less than Rs500,000 turnover are
exempt from VAT.
Central Sales Tax applies to goods traded interstate. If registered
dealers buy and sell goods for the purpose of trading, for
manufacturing inputs, or for specified activities, 2% sales tax applies.
The government plans to introduce Goods and Service Tax to replace
Central Sales Tax (CST), with planned implementation in April 2013.
The dual GST model would come with two tax rates: one that will
be charged uniformly across the states and another by the central
government. Legislation is still being shaped, but it is likely that
virtually all goods and services will be included, with minimum
exemptions including alcohol, tobacco and petroleum products.
5. Customs Duty
Customs Duty is applied to certain goods being imported into and
being exported from India. For most goods, customs duty rates
are up to 10% on the transaction value of imports or exports. An
education fee of 2% is levied on the aggregate of the customs duty
on imported goods.
The rate of customs duty depends on classification under the
Customs Tariff Act, which is aligned with the World Customs
Organization’s Harmonized Commodity Description and Coding
System of Tariff Nomenclature (HSN).
6. CENVAT (Excise Duty)
Central Value-added Tax (CENVAT) is levied on the manufacturing or
production of moveable goods at rates according to classification
in the Central Excise Tariff Act. Most products attract excise duties
at a rate of 10%, with the peak at 12%.
7. Service Tax
Those providing taxable services are liable to pay Service Tax, which is
levied at 12.36%. Small service providers are exempted from Service
Tax where value of taxable service does not exceed Rs1,000,000 in
the previous financial year. In October 2012, CBEC (Central Board
of Excise and Customs), the governing authority of Service Tax,
changed the service tax return filling from half yearly to quarterly.
8. Capital Gains Tax
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2013 | INDIA BRIEFING - 5
An Overview of India’s Taxes on Business
9. Wealth Tax
Wealth tax is charged annually at a rate of 1% on individuals and companies with over INR3 million in non-productive assets.
The Income Tax Act provides for deduction of tax at source on
payments. These provisions are also applicable in case of payment
made to non-residents. The person responsible for payments to
non-resident should deduct tax at source at the time of payment or
at the time of credit of the sum to the account of the non-resident.
Withholding tax rates for payments made to non-residents are
determined by the Finance Act passed by the Parliament.
Withholding Tax Rates*Interest 20% Dividends 0%Royalties 10%Technical Services 10%, plus applicable surcharge and
education cessAny other Services• Individuals• Companies/Corporate
30% of net income40% of net income
*The above rates are general and in respect of the countries with which India
does not have a Double Taxation Avoidance Agreement (DTAA).
10. Withholding Tax
ASSOCHAM Tax Proposals for 2013-2014 National Budget
The Associated Chambers of Commerce and Industry of India (ASSOCHAM) 2013-2014 pre-Budget memorandum, released in December
2012, called upon the government to make a number of tax cuts. “The Indian industry is facing competitive disadvantages due to
complex multi-layered tax indirect tax structure having cascading effect on cost, high compliance cost and prolonged tax litigation,”
the pre-Budget memorandum stated.
Tax proposals in the memorandum included:
• Bringing the effective rate of corporate tax down from 32.45% to 25%.
• Reversing recent increases to service tax rates from the current 12% rate, back to the 8% rate in place two years ago, with revenue
loss offset by higher customs duty rates. By increasing customs rates, the government can protect the domestic industry from unfair
competition from countries like China, the press release stated.
• Increasing the exemption threshold for personal income tax to INR300,000 (US$5,500), to improve tax compliance rates, and boost
consumer consumption and savings.
• Industry-specific adjustments:
Addressing the tax treatment of the synthetic fiber industry, which attracts an excise duty rate of 12%, up from 4% in 2008, while
cotton fiber is exempt from excise duties.
Introducing a concessionary 2% service tax to support the construction services industry and partially offset the revocation of
the service tax credit that was in place prior to April, 2011.
Exempting the domestic repairs, maintenance and overhaul services sector from service tax to encourage foreign direct investment
in the aviation sector.
Removing the additional levy of tax by way of surcharge and education cesses on corporate assesses and education cess on
non-corporate assesses. The surcharges, including the education cess, were levied as a temporary measure.
For assistance with taxes in India, including tax planning, compliance and advisory, please contact Dezan Shira & Associates by emailing
Individual income tax (IIT) is the direct tax paid on personal income by an individual or a company to the central government. The
Indian Income Tax department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue
under the Ministry of Finance. In this article, we discuss income source and residency, income tax payment, the definition of salary,
income tax rates and tax deductions at source.
Income Source and ResidencyPersonal taxation in India depends on the income source and a person’s residential status, which is determined by the length of time spent
in India. Residential statuses include: resident and ordinarily resident (ROR), resident but not ordinarily resident (RNOR) or non-resident (NR).
Income Tax Act Residency Definitions
Under the Income Tax Act, an individual (non-Indian citizen or non-resident Indian) is said to be resident in India in any previous year, if he:
• is in India in that year for a period or periods amounting in all to 182 days or more; or
• having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India
for a period or periods amounting in all to 60 days or more in that year.
A person is said to be “not ordinarily resident” in India in any previous year if such person is an individual who has been a non-resident
in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in
India for a period of, or periods amounting in all to, 729 days or less.
Salary income is liable for personal income tax in India if the services are rendered in India, regardless of where the salary is received. RORs
are also taxed on other types of income worldwide, while RNORs and NRs are only taxed on other income when that income is received
or accrues/arises in India.
Income Tax PaymentAccording to the Income Tax Act, it is the obligation of the employer to withhold personal income taxes from the salary paid to an employee,
and deposit these taxes with the Indian revenue authorities. This applies to Indian employers and foreign employers, for domestic and
expatriate staff. Personal income tax is governed by the Central Board for Direct Taxes (CBDT), part of the Department of Revenue under
the Ministry of Finance.
A Permanent Account Number (PAN) is a 10-digit alphanumeric code, printed on an identification card, for the reference of the Income Tax
Department. Companies are required to obtain a PAN during the establishment process in order to file an income tax return, to manage
any correspondence with the Income Tax Department, and to submit challans for tax payment.
Definition of SalarySalary is defined by the Income Tax Act to include wages; pensions and annuities; gratuities; advance of salary; any fee, commission,
perquisites (e.g. the value of rent on accommodation provided by the employer) or profits in lieu of or in addition to salary or wages; any
encashment of leave salary; or any amount of credit to the provident fund of an employee to the extent that it is taxable.
Salary also generally includes what is known as a “dearness allowance;” a type of allowance provided for the higher cost of living in particular
cities or states. While this allowance is most important for government employees, certain private companies also offer it at their own
discretion.
8 - INDIA BRIEFING | 2013
Individual Income Tax Rates and Deductions
Selected Tax Deductions at Source 2012-13Act Nature of payment Cut-off Amount Rate*
194 C 1 Contracts INR30,000 2
194 C2 Sub-contracts/Advertisements INR30,000 2
194 D Insurance Commission INR20,000 10
194 I Rent (land & building) INR180,000 10
194 I Rent (P & M, Equipment, furniture & fittings)
INR180,000 2
194 J Professional/Technical charges/Royalty and Non-compete fees
INR30,000 10
194 LA Compensation on acquisition of immovable property
INR200,000 10
*Non-Hindu family business
For income to be treated as salary, the following conditions must be fulfilled:
• There must be an employer-employee relationship between the payer and receiver of income;
• Salary income must be real and there must an intention to pay and receive salary; and
• Salary may be from more than one employer and may be received not just from the present employer but also from a prospective
employer and in some cases even from a former employer, as is sometimes the case for pensions.
Salary can be charged in the year received or in the year earned, whichever is earlier, i.e. if the salary has been received first, then it will be
taxable in the year of receipt.
Allowances are categories of expenditures in India that are not taxable, provided they match certain specifications and do not exceed a
certain amount. They are given, among other things, for house rent, transport, medical care, meal coupons, leave-time travel and education.
Other taxes that may apply to an individual include capital gains tax and wealth tax.
A tax deduction is a changeable amount that can be
subtracted, or deducted, from assessee’s gross income,
lowering the amount of tax paid. All entities in India
(including foreign representative offices and Indian setups
like wholly owned subsidiaries) are required to make tax
deductions at source on employees’ salaries on behalf of
the Income Tax Department.
The payment and compliance schedule is as follows:
• Payment
7th of the next month;
April 30 for the month of March
• Quarterly returns
15th of the next month from the end of the quarter
• Issue of Certificate
30th of the next month;
for salaried certificates, by May 30
Tax Deductions at Source
Individual Income Tax Rates 2013-2014Assessment Rate General Women Senior citizen Individuals above the
age of 80 years2013-14 Nil 0 to 200,000 No separate slab 0 to 250,000 Up to 500,000
10% 200,001 to 500,000 250,001 to 500,000
20% 500,001 to 1,000,000 500,001 to 1,000,000 500,001 to 1,000,000
Many of the authors of op-eds or academic papers on the subject of the GST have quoted from the ancient Indian thinker Kautilya’s text on statecraft, the Arthashastra, and especially his observation that “all undertakings [of the state] are dependent first on the treasury.”
With which countries does India have pending tax treaties?
In 2013, a number of new tax treaties will come into force for India, including agreements with Estonia, Lithuania, and
Nepal. Several tax treaties are still pending, including the protocol to the existing treaty with the United Kingdom that
was signed in October 2012, but has yet to come into force. This protocol altered the provisions relating to information
exchange, and further enables tax authorities to exchange banking information irrespective of domestic interests.
Pending Tax TreatiesDates Tax Rate
Estonia The 2011 treaty entered into force June 20, 2012 and will apply in India from April 1, 2013 (January 1, 2013 in Estonia).
10% on interest and royalties
Ethiopia A tax treaty was signed on May 25, 2011, but is not yet in force. 10% on interest, royalties, technical services fees
Lithuania A tax treaty entered into force July 10, 2012 and will apply in India from April 1, 2013 (January 1, 2013 in Lithuania).
10% on interest, royalties, technical services fees
Malaysia India and Malaysia signed a tax treaty on May 9, 2012 that will replace the existing treaty, but the new treaty is not yet in force.
10% on interest and royalties
Nepal The 2011 treaty between India and Nepal entered into force on March 16, 2012 and applies in India as from April 1, 2013 (July 16, 2013 in Nepal), replacing the current treaty.
10% on interest and 15% on royalties (lower 10% domestic rate applies)
United Kingdom
India and the U.K. signed a protocol to the existing tax treaty on October 30, 2012, but the protocol is not yet in force.
No changes are made to the withholding tax on interest or royalties
Uruguay India and Uruguay signed a tax treaty on September 8, 2011, but it is not yet in force.
10% on interest and royalties
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