dttl tax highlight 201mcn kcnmcn kcnmcn kcnmcn kcnmcn kcnmcn kcn3 india

7/27/2019 Dttl Tax Highlight 201mcn kcnmcn kcnmcn kcnmcn kcnmcn kcnmcn kcn3 India

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Investment basics:

Currency – Indian Rupee (INR)Foreign exchange control – There is asimplified regulatory regime for foreignexchange transactions and liberalized capitalaccount transactions. Current accounttransactions are fully permitted unlessspecifically prohibited. The central bankmonitors capital account transactions. Fullforeign investment is permitted in most

industries, while sector-specific caps havebeen set for foreign investment in certainindustries, such as basic and cellular telecommunications services, banking,insurance and retail trade. Foreign directinvestment (FDI) in limited liabilitypartnerships (LLPs) will be allowed withspecific approval of the government for LLPsoperating in sectors/activities where 100%FDI is otherwise allowed under the“automatic route,” and subject to other specified conditions. FDI up to 100% ispermitted in single-brand product retailtrading by one nonresident entity under theapproval route subject to the fulfilment of certain conditions.Accounting principles/financialstatements – Accounting Standards issuedby the Institute of Chartered Accountants of India, which are largely based on IAS, apply.Financial statements must be preparedannually.Principal business entities – These are thepublic/private limited liability company,partnership, limited liability partnership, soleproprietorship, representative and branch of

a foreign corporation.Corporate taxation:

Residence – A corporation is resident if it isincorporated in India or wholly managed andcontrolled in India.Basis – Residents are taxed on worldwideincome; nonresidents are taxed only onIndian-source income. Foreign-sourceincome derived by a resident company issubject to corporation tax in the same way as

Indian income. A branch of a foreigncorporation is taxed as a foreign corporation.Taxable income – Corporation tax isimposed on a company’s profits, whichconsist of business/trading income, passiveincome and capital gains. Income resultingfrom the indirect transfer of assets located inIndia is included. Normal business expenses,as well as other specified items, may bededucted in computing taxable income.

Taxation of dividends – Dividends paid by adomestic company are subject to theDividend Distribution Tax (DDT) at aneffective rate of 16.22%. Dividends subject toDDT are exempt from tax in the hands of therecipient. Dividends received from a foreigncompany are subject to corporation tax, but acredit for withholding tax generally isavailable for foreign tax paid. For financialyear 2012-2013, dividends received by anIndian company from specified foreigncompanies (companies in which the Indiancompany holds 26% or more of equityshares) is subject to tax at a reduced baserate of 15%. A surcharge and cess also areimposed.Capital gains – The tax treatment dependson whether the gains are long or short term.Gains are long term if the asset is held for more than three years (one year in the caseof shares and specified securities). Long-term gains on listed shares and specifiedsecurities are exempt if the transaction issubject to the Securities Transaction Tax(STT). Where such gains are not subject tothe STT, a 10% tax applies (without benefit of an inflation adjustment). As from financialyear 2012-2013, the applicable tax rate onlong-term capital gains derived by anonresident from the sale of unlistedsecurities is 10%. Gains on other long-termassets are taxed at 20% (with benefit of aninflation adjustment). Short-term gains onlisted shares and specified securities, whichare subject to the STT, are taxed at 15%, andgains from other short-term assets are taxedat the normal tax rates. A surcharge and cessalso are imposed.

Losses – Business losses and capital lossesmay be carried forward for eight years, withshort-term losses offsetting capital gains onboth long and short-term assets, and long-term losses offsetting only long-term gains.Other than unabsorbed depreciation (whichmay be carried forward indefinitely), lossesmay be carried forward only if the tax returnis filed by the due date. Unabsorbeddepreciation may be offset against anyincome whereas business losses may be

offset only against business profits.Rate – The rate is 30% for domesticcompanies and 40% for foreign companiesand branches of foreign companies. Takinginto account the surtax and cess, the highesteffective rate is 32.445% for domesticcompanies and 42.024% for foreigncompanies.Surtax – A 5% surcharge applies to domesticcompanies (2% for foreign companies) if income exceeds INR 10 million. An additiona3% cess is payable in all cases.Alternative minimum tax – A Minimum Alternate Tax (MAT) is imposed at 18.5%(plus any applicable surcharge and cess) onthe adjusted book profits of corporationswhose tax liability is less than 18.5% of their book profits. A credit is available for MATpaid against tax payable on normal income;the credit may be carried forward for offsetagainst income tax payable in the following10 years. A limited liability partnership is liable to analternative minimum tax (AMT) at 19.06%(i.e.18.5% plus the 3% education cess) of theadjusted total income where the normalincome tax payable is less than the AMTpayable. The adjusted total income will bethe total income before giving effect to the AMT provisions as increased by certaindeductions claimed in computing the totalincome, including the tax holiday claimed byunits in a Special Economic Zone (SEZ). Thebase for computation of AMT for LLPs is thusdifferent than that for computing AMT in thecase of companies. A tax credit will beallowed for the AMT paid against tax payableon normal income. The tax credit may be

International tax

India Highlights 2013



carried forward up to 10 years as in the caseof companies.Foreign tax credit – Foreign tax paid maybe credited against Indian tax on the sameprofits, but the credit is limited to the amountof Indian tax payable on the foreign income.Participation exemption – No

Holding company regime – NoIncentives – A deduction is available (up to200%) in respect of capital and revenueexpenditure on scientific research conductedin-house by specified industries and for payments made to specified organizations for scientific research. As from financial year 2012-2013, adeduction of 150% of expenditure incurred ona notified agricultural extension project or skilldevelopment project is available. A deduction is available for capitalexpenditure (other than expenditure incurredon the acquisition of land, goodwill or financial instruments) incurred by specifiedbusinesses, including for setting up andoperating cold chain facilities, warehousingfor the storage of agricultural produce andlaying and operating cross-country naturalgas or crude or petroleum oil pipelinenetworks for distribution, including storagefacilities that are an integral part of suchnetworks, developing and building approvedaffordable housing projects, the production of fertilizer in India, etc.Undertakings set up in special economiczones are exempt from tax on their exportprofits subject to compliance with other conditions. Other tax holidays are availablebased on industry and region.

Withholding tax:

Dividends – Dividends are not subject towithholding tax. However, the companypaying the dividends is subject to DDT at aneffective rate of 16.22%.Interest – Interest paid to a nonresidentgenerally is subject to a 20% withholding tax,plus the applicable surcharge and cess. Therate may be reduced under a tax treaty.Interest paid to a nonresident on aninfrastructure debt fund set up in accordancewith guidelines to be prescribed by thegovernment is subject to a 5% withholdingtax, plus the applicable surcharge and cess. As from 1 July, 2012, interest paid to anonresident on debt incurred under a loanagreement or by way of the issue of long-term infrastructure bonds by an Indiancompany in foreign currency is subject to a

5% withholding tax, plus the applicablesurcharge and cess, if the loan agreement isapproved by the central government and thefunds are borrowed between 1 July 2012 and30 June 2015.If the nonresident does not have aPermanent Account Number (PAN), i.e. a taxregistration number, tax must be withheld atthe applicable rate or 20%, whichever ishigher.Royalties – Royalties paid to a nonresidentare subject to a 10% withholding tax, plus theapplicable surcharge and cess. The rate maybe reduced under a tax treaty.If the nonresident does not have a PAN, taxmust be withheld at the applicable rate or 20%, whichever is higher.Technical service fees – Technical servicesfees paid to a nonresident are subject to a10% withholding tax, plus the applicable

surcharge and cess. The rate may bereduced under a tax treaty.If the nonresident does not have a PAN, taxmust be withheld at the applicable rate or 20%, whichever is higher.Branch remittance tax – No

Other taxes on corporations:

Capital duty – NoPayroll tax – The employer is responsible for withholding tax on salary income.Real property tax – No, but see "Stampduty," below.Social security – The employer generallycontributes 12% of eligible wages per monthto the Provident Fund. From the employer’scontribution, 8.33% of the wages (up to INR6,500) are applied to the pension fund, withthe balance paid to the Provident Fund. Theemployer also must pay a gratuity to workerswho have rendered continuous service for atleast five years at the time of retirement,resignation, superannuation, etc., at the rateof 15 days’ wages for every completed year of service (up to a maximum of INR 1million).Stamp duty – Financial instruments, realproperty and other specified transactions inIndia attract stamp duties that are leviedunder the Indian Stamp Act and the stampacts of the various states (with rates varyingsignificantly by state).Transfer tax – NoOther – A 1% wealth tax applies on theaggregate value exceeding INR 3 million of nonproductive assets such as land; buildingsnot used as factories; commercial property

not used for a business or a profession;offices or residential accommodation for employees earning over INR 500,000 per annum; certain precious metals; and cars,aircraft and yachts.

Anti-avoidance rules:

Transfer pricing – The transfer pricing

regime is influenced by OECD norms,although the penalty provisions in India arestringent compared to those in other countries. The definition of associatedenterprise extends beyond a shareholding or management relationship, as it includessome deeming clauses. The taxpayer isrequired to maintain certain information anddocuments and provide a certificate (in aprescribed format) from a practicingchartered accountant that sets out the detailsof associated enterprises, internationaltransactions, etc., along with the methods

used to determine an arm’s length price. Thecertificate must be submitted by the due datefor filing the annual tax return for companiesrequired to submit such a certificate, i.e. 30November.Where the application of the arm’s lengthprice would reduce the income chargeable totax in India or increase a loss, no adjustmentwill be made to the income or loss. If atransfer pricing adjustment is made on ataxpayer that benefits from a tax holiday, thebenefit will be denied to the extent of theadjustment. The allowable variation in

computing the arm’s length price will be asnotified by the government. (See “Other,”below, for application of the transfer pricingrules for transactions involving jurisdictionsthat do not effectively exchange informationwith India and for application of the generalanti-avoidance rule). As from financial year 2012-2013, the scopeof the transfer pricing provisions is extendedto cover “specified domestic transactions” if the aggregate value of the transactionexceeds INR 50 million in a year. Specifieddomestic transactions include payments torelated parties, the inter-unit transfer of goods or services, transactions of profit-linked tax holiday units with other parties andany other transaction that may be notified.The pricing of these transactions must bedetermined with regard to arm’s lengthprinciples using methods prescribed under India’s transfer pricing rules. Advance pricing agreement rules apply asfrom 1 July 2012.Thin capitalization – NoControlled foreign companies – No



Other – To discourage transactions withpersons located in jurisdictions that do noteffectively exchange information with India,the government will designate such jurisdictions, with the effect that transactionswith persons situated in those jurisdictionswill be subject to the Indian transfer pricingrules and income paid to persons in the

designated jurisdiction will be subject to aminimum withholding tax of 30%. A general anti-avoidance rule will apply asfrom financial year 2013-2014. Under theserules, an arrangement entered into by ataxpayer may be declared as animpermissible avoidance arrangement if itsmain purpose, or one of the main purposes,is to obtain a tax benefit and other prescribedconditions (e.g. lack of commercialsubstance, etc.) are satisfied.Disclosure requirements – A nonresidentwith a liaison office in India is required toprepare on its activities and submit it to theIndian tax officer within 60 days from the endof the financial year.

Administration and compliance:

Tax year – The tax year is the fiscal year (1 April to 31 March).Consolidated returns – Consolidatedreturns are not permitted; each companymust file a separate return.Filing requirements – Taxes on income in afiscal year usually are paid in the next fiscalyear (“assessment” year). Companies mustsubmit a final return by 30 September (30November for companies required to file acertificate on international transactions (see“Transfer pricing,” above)) of the assessmentyear, stating income, expenses, taxes paidand taxes due for the preceding tax year.Returns for noncorporate taxpayers that arerequired by law to have their accountsaudited also are due on 30 September. Allother taxpayers must submit a return by 31July. Taxpayers claiming tax holidays or carrying forward tax losses must file their returns on or before the due date.

Companies must make foru advancepayments of their income tax liabilities duringthe accounting year on: 15 June (15% of totaltax payable), 15 September (45% of total taxpayable), 15 December (75% of total taxpayable) and 15 March (100% of total taxpayable).Penalties – Penalties apply for failure to filea return and certificate of internationaltransactions, failure to comply withwithholding tax obligations and concealmentof income.

Rulings – The Authority for Advance Rulingsissues rulings on the tax consequences of transactions or proposed transactions withnonresidents. Rulings are binding on theapplicant and the tax authorities for thespecific transaction(s).

Personal taxation:

Basis – A resident of India normally is taxedon worldwide income. A person not ordinarilyresident generally does not pay tax onincome earned outside India unless it isderived from a business controlled in India, or the income is accrued or first received inIndia or is deemed to have accrued in India. A nonresident is subject to tax on Indian-source income.Residence – An individual is resident in Indiaif he/she spends at least 182 days in thecountry in a given year, or 60 days if theindividual has spent at least 365 days in India

in the preceding four years. For an Indiancitizen leaving India for employment or as amember of the crew of an Indian ship, and for an Indian citizen/person of Indian originworking abroad who visits India while onvacation, the threshold is 182 days in thegiven year instead of 60 days. An individualis “not ordinarily resident” if he/she has notbeen a resident in nine out of the 10preceding years or has been in India for lessthan 730 days during the preceding sevenyears.Filing status – Each taxpayer must file a

return; joint filing is not permitted.Taxable income – Income from employment,including most employment benefits, is fullytaxable. Profits derived from the carrying onby an individual of a trade or professiongenerally are taxed in the same way asprofits derived by companies.Capital gains – See "Corporate taxation."Deductions and allowances – Deductionsare granted for medical expenses andinsurance, retirement annuities, mortgageinterest, education loans, etc.

Rates – Rates are progressive up to 30%,plus the applicable cess. The first INR250,000 is exempt for resident senior citizens(age 60 or over, but under 80), INR 500,000for very senior citizens (80 and older) and, for nonseniors, the first INR 200,000 is exempt.

Other taxes on individuals:

Capital duty – NoStamp duty – Financial instruments andtransactions in India attract stamp duties thatare levied under the Indian Stamp Act and

the stamp acts of the various states (withrates varying significantly by state).Capital acquisitions tax – NoReal property tax – NoInheritance/estate tax – NoNet wealth/net worth tax – A 1% wealth taxapplies on the aggregate value exceeding

INR 3 million of nonproductive assets suchas land; buildings not used as factories;commercial property not used for business or a profession; offices or residentialaccommodation for employees earning over INR 500,000 per annum; certain preciousmetals; and cars, aircraft and yachts.Social security – The employee contributes10%-12% of wages per month to theProvident Fund.

Administration and compliance:

Tax year – The tax year is the fiscal year (1

April to 31 March).Filing and payment – The employer withholds tax on salary income. All individuataxpayers (except salaried individuals withincome not exceeding INR 500,000, subjectto fulfilling other conditions) are required tofile an individual tax return. Individuals mustprepay 100% of the final tax due by the endof the fiscal year either via withholding atsource or by making advance payments (withinterest payable on underpayments). Returnsare due by 31 July of the assessment year.Penalties – Penalties apply for failure to filea return, failure to comply with withholdingtax obligations and concealment of income.

Value added tax:

Taxable transactions – All Indian statesimpose a “consumption-type destination-based VAT,” driven by the invoice tax creditmethod on the sale of most types of movablegoods and specified intangible goods (barringa few exempt goods), the list of which variesfrom state to state.Sales involving the movement of goods fromone state to another are governed by theCentral Sales Tax (CST). Rates – The VAT rate has two components:a general rate of 4% to 5% and a residualrate of 12% to 15% that varies from state tostate.The CST rate is 2% against the submissionof specified forms or the applicable local VATrate.Registration – The turnover limit for compulsory registration for businesses is INR500,000, although this may vary by state.



State VAT laws also specify monetaryamounts of sales and/or purchases requiredfor registration.Filing and payment – VAT returns must befiled and payments made monthly or quarterly, based on the tax liability.Other – A central excise duty is levied on themanufacture of excisable goods in India. Thepeak rate of central excise duty, including the education cess and the secondary and higher education cess is 12.36%.

Service tax is payable at 12.36%, includingthe education cess and the secondary andhigher education cess on the provision of specified taxable services in India.Source of tax law : Income-tax Act; Annual Finance Acts; Customs Act; CentralExcise Act; Finance Act, 1994; State VATand Central Sales Tax lawsTax treaties : India has comprehensive taxtreaties with more than 80 countries.

Tax authorities : Income TaxDepartment, Authority for Advance RulingsInternational organizations: WTO, ADB (Asian Development Bank), G20,SAARC (South Asian Association for Regional Cooperation)

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Sunil D ShahE-mail: [email protected]

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dttl tax highlight 201mcn kcnmcn kcnmcn kcnmcn kcnmcn kcnmcn kcn3 india

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