Dttl Tax Indiahighlights 2014

8/10/2019 Dttl Tax Indiahighlights 2014

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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 permitted unless specificallyprohibited. The central bank monitors capitalaccount transactions. Full foreign investmentis permitted in most industries, while sector-

specific caps have been set for foreigninvestment in certain industries, such asbasic and cellular telecommunicationsservices, banking, insurance and retail trade.Foreign direct investment (FDI) in limitedliability partnerships (LLPs) is allowed withspecific approval of the government for LLPsoperating in sectors/activities where 100%FDI is otherwise allowed under the“automatic route,” and subject to otherspecified conditions. FDI up to 49% by one ormore nonresident entities is permitted insingle-brand product retail trading under theautomatic route. FDI exceeding 49% may beallowed under the approval route, subject tothe fulfilment of certain conditions.

Accounting principles/financialstatements – Accounting standards issuedby the Institute of Chartered Accountants ofIndia, which largely are 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 office 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. Indian-source incomemay include capital gains arising from thetransfer of any share or interest in a companyor entity registered or incorporated outside

India if the share or interest directly orindirectly derives its substantial value fromassets located in India. Foreign-sourceincome derived by a resident company issubject to corporation tax in the same way asIndian 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 resulting

from 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 an effectiverate of 16.995%. Dividends subject to DDTare 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 financial

year 2013-2014, dividends received by anIndian company from specified foreigncompanies (companies in which the Indiancompany holds 26% or more of equityshares) are subject to tax at a reduced baserate of 15% on a gross basis. A surchargeand cess also are imposed.

Dividends paid by a domestic company thatare liable to DDT may be reduced by theamount of dividends received from adomestic subsidiary company during thefinancial year, if the subsidiary has paid DDT.

As from 1 June 2013, the reduction in

dividends liable to DDT is extended todividends received from a foreign subsidiarycompany, provided tax is payable on suchdividend income by the domestic company atthe reduced base rate of 15%.

Capital gains – The tax treatment dependson whether gains are long or short term.Gains are long term if the asset is held formore 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 is

subject to the securities transaction tax(STT). Where such gains are not subject tothe STT, a 10% tax applies (without benefit ofan 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 the benefit ofan inflation adjustment). Short-term gains onlisted shares and specified securities, which

are 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.

An unlisted domestic company is liable to payan additional tax of 20% on incomedistributed to a shareholder on account of abuyback of the company’s shares. Thedistributed income is the amount ofconsideration paid by the company on thebuyback of shares, reduced by the amountreceived by the company on account of theissue of the shares. The shareholders will not

be charged for any income arising from thebuyback of shares.

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 surcharge and cess, thehighest effective rate is 33.99% for domesticcompanies and 43.26% for foreigncompanies.

Surtax – A 5% surcharge applies to domesticcompanies if income exceeds INR 10 million(2% for foreign companies); a 10% surchargeapplies if income exceeds INR 100 million

International tax

India Highlights 2014



(5% for foreign companies). An additional 3%cess is payable in all cases.

Alternative minimum tax – A Minimum Alternative 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 theirbook profits. A credit is available for MAT

paid against tax payable on normal income;the credit may be carried forward for offsetagainst income tax payable in the following10 years.

Any person other than a corporation(including an LLP) is liable to an alternativeminimum tax (AMT) at 18.5% (plus anyapplicable surcharge and 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 certain

deductions claimed in computing the totalincome, including the tax holiday claimed byunits in a Special Economic Zone (SEZ). Thebase for computation of AMT fornoncorporate taxpayers is thus different thanthat for computing MAT in the case ofcorporations. A tax credit will be allowed forthe AMT paid against tax payable on normalincome. The tax credit may be carriedforward up to 10 years, as in the case ofcompanies.

Foreign tax credit – Foreign tax paid maybe credited against Indian tax on the same

profits, but the credit is limited to the amountof Indian tax payable on the foreign income.

Participation exemption – No

Holding company regime – No

Incentives – A deduction is available (up to200%) in respect of capital and revenueexpenditure on scientific research conductedin-house by specified industries and forpayments made to specified organizations forscientific research.

A deduction is available for 15% of the costof new plant or machinery acquired and

installed from 1 April 2013 to 31 March 2015if the aggregate cost exceeds INR 1 billion, inaddition to the normal depreciationallowance.

A deduction of 150% of expenditure incurredon a notified agricultural extension project orskill development project is available.

A deduction is available for capitalexpenditure (other than expenditure incurredon the acquisition of land, goodwill orfinancial instruments) incurred by specifiedbusinesses, including expenditure for setting

up and operating cold chain facilities orwarehousing for the storage of agriculturalproduce; laying and operating cross-countrynatural gas or crude or petroleum oil pipelinenetworks for distribution, including storagefacilities that are an integral part of suchnetworks; developing and building approvedaffordable housing projects; producing

fertilizer in India, etc. A similar deduction alsois available in respect of expenses incurredby businesses for setting up and operating aninland container depot, a container freightstation and other specific facilities.

Undertakings set up in SEZs are exemptfrom tax on their export profits subject tocompliance with other conditions. Other taxholidays are available based on industry andregion.

Withholding tax:

Dividends – Dividends are not subject to

withholding tax. However, the companypaying the dividends is subject to DDT at aneffective rate of 16.995%.

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.

Interest paid to a nonresident on debtincurred under a loan agreement or by way ofthe issue of long-term infrastructure bonds byan Indian company in foreign currency issubject to a 5% withholding tax, plus theapplicable surcharge and cess, if the loanagreement is approved by the centralgovernment and the funds are borrowedbetween 1 July 2012 and 30 June 2015. The5% withholding tax (plus applicablesurcharge and cess) also is applicable oninterest payable on a rupee-denominatedbond of an Indian company and agovernment security subscribed by a foreign

institutional investor or a qualified foreigninvestor if such interest is paid between 1June 2013 and 31 May 2015.

If the nonresident does not have aPermanent Account Number (PAN), i.e. a taxregistration number, tax must be withheld atthe applicable tax treaty rate or 20%,whichever is higher.

Royalties – Royalties paid to a nonresidentare subject to a 25% withholding tax, plus theapplicable surcharge and cess. The rate maybe reduced under a tax treaty.

If a treaty applies, but the nonresident doesnot have a PAN, tax must be withheld at theapplicable tax treaty rate or 20%, whicheveris higher.

Technical service fees – Technical servicesfees paid to a nonresident are subject to a25% withholding tax, plus the applicablesurcharge and cess. The rate may be

reduced under a tax treaty.

If a treaty applies, but the nonresident doesnot have a PAN, tax must be withheld at theapplicable tax treaty rate or 20%, whicheveris higher.

Branch remittance tax – No

Other taxes on corporations:

Capital duty – No

Payroll tax – The employer is responsible forwithholding tax on salary income.

Real property tax – No, but see "Stamp

duty," 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 yearof service (up to a maximum of INR 1

million).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 – No

Other – A 1% wealth tax applies on theaggregate value exceeding INR 3 million ofnonproductive assets such as land; buildingsnot used as factories; commercial propertynot used for a business or a profession;offices or residential accommodation foremployees earning over INR 500,000 perannum; certain precious metals; cars, aircraftand yachts; and cash exceeding INR 50,000.

Anti-avoidance rules:

Transfer pricing – The transfer pricingregime is influenced by OECD norms,although the penalty provisions in India are



stringent compared to those in othercountries. The definition of “associatedenterprise” extends beyond a shareholding ormanagement relationship, as it includessome deeming clauses. The taxpayer isrequired to maintain certain information anddocuments and provide a certificate (in aprescribed format) from a practicing

chartered accountant that sets out the detailsof associated enterprises, internationaltransactions, etc., along with the methodsused 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 a

taxpayer that benefits from a tax holiday, thebenefit will be denied to the extent of theadjustment. The allowable variation incomputing 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).

The scope of the transfer pricing provisionscovers “specified domestic transactions” ifthe aggregate value of the transactions

exceeds INR 50 million in a year. Specifieddomestic transactions include payments torelated parties, the inter-unit transfer ofgoods 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 underIndia’s transfer pricing rules.

Advance pricing agreement rules arepossible.

Thin capitalization – No

Controlled foreign companies – No

Other – To discourage transactions withpersons located in jurisdictions that do noteffectively exchange information with India,transactions with persons situated in certain

jurisdictions designated by the governmentwill be subject to the Indian transfer pricingrules and income paid to persons in thedesignated jurisdictions will be subject to aminimum withholding tax of 30%.

A general anti-avoidance rule wi ll apply asfrom financial year 2015-16. Under this rule,an arrangement entered into by a taxpayermay be declared as an impermissibleavoidance arrangement if its main purpose,or one of its main purposes, is to obtain a taxbenefit and other prescribed conditions (e.g.lack of commercial substance, etc.) are

satisfied.Disclosure requirements – A nonresidentwith a liaison office in India is required toprepare financial statements, annual activitycertificates, etc. on its activities and submitthis information to the Indian tax officer within60 days from the end of 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 company

must 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. All

other taxpayers must submit a return by 31July. Taxpayers claiming tax holidays orcarrying forward tax losses must file theirreturns on or before the due date.

Companies must make four 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 international

transactions, failure to comply withwithholding tax obligations and concealmentof income.

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

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/professioncontrolled/set up in India, or the income isaccrued or first received in India or isdeemed to have accrued or been received inIndia. A nonresident is subject to tax onIndian-source income.

Residence – An individual is resident in Indiaif he/she spends at least 182 days in thecountry in a given year, or at least 60 days ifthe individual has spent at least 365 days inIndia in the preceding four years. For anIndian citizen leaving India for employment oras a member of the crew of an Indian ship,and for an Indian citizen/person of Indianorigin working abroad who visits India whileon vacation, 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 areturn; joint filing is not permitted.

Taxable income – Income from employment,including most employment benefits, is fullytaxable. Profits derived by an individual fromthe carrying on of a trade or profession

generally 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, rental payments, education loans,etc.

Rates – Rates are progressive up to 30%,plus the applicable cess. A 10% surchargeapplies if income exceeds INR 10 million,subject to applicable marginal relief. The firstINR 250,000 is exempt for resident senior

citizens (age 60 or over, but under 80) andINR 500,000 is exempt for very seniorcitizens (80 and older); for all others, the firstINR 200,000 is exempt. A tax rebate up toINR 2,000 is allowed for individuals withtaxable income of up to INR 500,000.

Alternative minimum tax – See “Corporatetaxation.” AMT is not applicable toindividuals, associations of persons andbodies of individuals if their adjusted totalincome does not exceed INR 2 million.



Other taxes on individuals:

Capital duty – No

Stamp duty – Financial instruments andtransactions in India attract stamp duties thatare levied under the Indian Stamp Act andthe stamp acts of the various states (withrates varying significantly by state).

Capital acquisitions tax – NoReal property tax – Each state leviesproperty tax, with rates varying from state tostate.

Inheritance/estate tax – No

Net wealth/net worth tax – A 1% wealth taxapplies on the aggregate value exceedingINR 3 million of nonproductive assets suchas land; buildings not used as factories;commercial property not used for a businessor a profession; offices or residentialaccommodation for employees earning overINR 500,000 per annum; certain preciousmetals; and cars, aircraft and yachts andcash exceeding INR 50,000.

Social security – The employee contributes12% of eligible 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 employerwithholds tax on salary income. All individualtaxpayers are required to file an individual tax

return. Individuals must prepay 100% of thefinal tax due by the end of the fiscal yeareither via withholding at source or by making

advance payments (with interest payable onunderpayments). Returns are due by 31 Julyof the assessment year. Electronic filing oftax returns is mandatory if taxable incomeexceeds INR 500,000; if the individual hasforeign assets (including a financial interest inany entity or signing authority for anyaccount); or if the individual is claiming any

relief of foreign taxes.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. Commodities like liquor and petroleumproducts attract a higher rate in the range of20% to 30%.

The CST rate is 2% against the submissionof specified forms or the applicable local VATrate.

Registration – The turnover limit forcompulsory 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, quarterlyor half yearly, 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 theeducation cess and the secondary and highereducation cess is 12.36%.

Service tax is payable at 12.36%, includingthe education cess and the secondary andhigher education cess, on the provision ofspecified taxable services that are notincluded on the negative list of services. Noservice tax is payable on services that arespecifically exempted (nontaxable services)by notifications issued by the tax authorities.

Source of tax law: Income-tax Act;

Annual Finance Acts; Customs Act; CentralExcise Act; Finance Act, 1994; State VATand Centr al Sales Tax laws

Tax treaties: India has comprehensive taxtreaties with more than 80 countries.

Tax authorities: Income TaxDepartment, Authority for Advance Rulings

International organizations: WTO, ADB (Asian Development Bank), G20,SAARC (South Asian Association forRegional Cooperation)

Deloitte contact

Sunil D. ShahE-mail: [email protected]

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Dttl Tax Indiahighlights 2014