Accountancy in India

>> Taxation in India

Direct taxes

Income tax

Income tax in India is governed by the provisions of domestic law i.e. Income Tax Act, 1961 and various international treaties (Double Taxation Avoidance Agreements) agreed upon and entered into by the Government of India with various countries.

Tax is levied in India on a financial year basis, i.e. incomes earned/received in a particular financial year are taxed in the immediately following financial year. A financial year commences on the April 1 of a year and ends on the 31st March of the immediately following year.

Taxation for individuals

The tax rate for individuals is determined based on a progressive slab which currently stands as under:

Income Levels (INR) Income Tax
0 – 250,000 nil
250,000 – 500,000 5% in excess of 250,000
500,000 – 1,000,000 12,500 + 20% in excess of 250,000
1,000,000 upwards 1,12,500 + 30% in excess of 1,000,000

An additional surcharge of 10% of the total tax liability will be applicable where the total income exceeds 5 million INR but does not exceed 10 million INR, and 12% where the total income exceeds 10 million INR, subject to applicable marginal relief. Marginal relief of 2,500 INR will be available provided the earnings during the previous year exceeds 2,50,000 INR but does not exceed 3,50,000 INR.

The first INR 300,000 is exempt for resident senior citizens (aged 60 or over, but under 80), and INR 500,000 is exempt for very senior citizens (at least 80 years of age); for all others, the first INR 250,000 is exempt. A tax rebate up to INR 5,000 is allowed for individuals with taxable income of up to INR 500,000.

Taxation for partnership firms and LLPs

Both partnership firms and LLPs are taxed alike, at a flat rate of 30% on net business income, i.e. total receipts less expenditure. An additional surcharge of 12% of tax shall be applicable where the income exceeds 10 million INR, subject to marginal relief.

Interest and remuneration paid to partners are tax deductible expenses, if paid within the prescribed range. Any amount paid over the prescribed range is disallowed and taxed in the hands of Firm/ LLP at 30%.

Share in profit/loss is tax exempt in the hands of partners. Remuneration/interest to the extent allowed as tax deductible expense to the Firm/LLP is taxed in the hands of the individual partners, as per slab rate system.

Corporate taxation

Company Income Range  (up to INR 10 million) Income Range (INR 10 million to 100 million) Income Range  (above INR 100 million)
Domestic Company 30.90% 33.063% 34.608%
Foreign Company 41.20% 42.024% 43.26%

For the purposes of determining applicable tax rates in India, the companies are classified as domestic companies (those incorporated in India) and foreign companies (those incorporated outside India). The currently applicable effective tax rates (inclusive of applicable surcharge and cesses) are as follows:

A minimum alternate tax is payable at the rate of 18.5% (plus applicable surcharge and cess) on the adjusted book profits of corporations whose tax liability is less than 18.5% of their book profits. Such tax can be carried forward for 15 years.

Dividend distributed by a corporation is subject to “Dividend Distribution Tax” of 17.304%, payable by the corporation. Such dividends are not taxed in the hands of the shareholders.

Transfer pricing

Comprehensive transfer pricing regulations (TRPs) have been introduced effective from April 1, 2001 with the objective of preventing MNCs from manipulating prices in intra group transactions such that the profits are not shifted outside India.

Under TPRs, International transactions between two or more associated enterprises (Including Permanent establishment) must be at arm’s length prices (ALP). These regulations also apply to cost-sharing arrangements.

Stringent penalties have been prescribed for non-compliance with the procedural requirements and for understatements  of profits.

Effective from April 1, 2012, TPR’s have also been extended to certain specified domestic intra-group transactions.

Most systems allow use of transfer pricing multiple methods, where such methods are appropriate and are supported by reliable data, to test related party prices. “Most appropriate method” can be defined as a method:

  1. Which is best suited to facts and circumstances of Transactions.
  2. Which is most reliable measure of an arm’s length price. Among the commonly used methods are:
    • Comparable uncontrolled prices
    • Cost plus – Resale price or mark up
    • Profitability based methods.

Advance pricing agreement

Measures allowing Advance Pricing

Agreements (APAs) are effective from July 2012. Under these measures, the tax administration may enter into an APA with any person undertaking an international transaction. APAs are binding on the taxpayer and the tax authorities (provided there is no change in law and facts) and are valid for a maximum period of five consecutive years. The APA scheme provides for a “rollback” mechanism,  which is subject to prescribed conditions and procedures.

Country-by-country reporting, master file, and local file

The Income Tax Act provides a specific regime with respect to Country-by-Country Reporting (CbCR), the Master File, and the

Local File in line with OECD’s final report on

Base Erosion Profit Shifting (BEPS) Action

Plan 13. The reporting provisions apply

for the 2016-17 fiscal year if consolidated revenue of an international group in the prior year (that is, the 2015-16 fiscal year) exceeds the prescribed limit.

Notified jurisdictional area

The Income Tax Act contains a “tool box” to deal with transactions with entities located in non-cooperative countries or jurisdictions that do not exchange information with India. The government of India is empowered to notify such jurisdiction as a Notified Jurisdiction

Area (NJA). The government discourages transactions by taxpayers in India with persons located in an NJA by providing onerous tax consequences on such transactions.

2017 budget highlights

  • Secondary Adjustments: A tax payer shall make a secondary adjustment where the primary adjustment to transfer price is made in the following situations:
    • Suo motu by the tax payer in the return of the income.
    • By the assessing officer during proceedings and has been accepted by the tax payer.
    • Adjustments determined by an advance pricing agreement entered into by the tax payer.
  • Introduction of thin capitalisation rules: Excluding banking and insurance companies, an Indian company, or a PE in India being a borrower, pays interest exceeding 10 million INR in respect of any borrowings in excess of 30% of cash profits or EBIT of the previous year, whichever is less, shall not be allowed as a deduction. However, the same can be carried forward for 8 years and allowed as a deduction in subsequent years.

Heads of income

Income from employment

Resident employees are taxed on salary income, regardless of where it was earned.

In general, most elements of compensation are taxable in India. Bonus paid at the commencement or completion of employment is included in taxable salary income. Specified allowances are either tax exempt or included in the taxable income at a lower value, subject  to certain conditions

Business income

Business Income is taxed on a net basis i.e. receipts minus expenses, to be determined in accordance with the books of accounts maintained by the taxpayer.

Non-resident companies having a Permanent Establishment in India are under a mandatory requirement to maintain books of accounts and offer income for tax on a net basis.

Capital gains

Gains, if any arising from the alienation of a capital asset, are liable for tax at a flat rate of 10/20%, depending upon the nature of asset. Capital assets are generally classified as long term and short term, depending upon their period of holding. Gains from long term capital assets are taxed at 20%, after allowing the benefit of indexation, whereas gains from short term assets are taxed at 10%.

Income from house property

Any income arising out of letting of house property by way of rent shall be liable to tax. Such income will be added to the gross income when computing the tax liability.

Any interest paid on a loan can be claimed as a deduction provided certain conditions are met. Further, a statutory deduction equal to 30% of the annual value will be available.

Income from other sources

Income from other sources is a residual head of income. Any item of income Chargeable to tax but does not fall within the ambit of other four heads of income shall be included under this head.

Carry forward and set off of losses

The Indian Income Tax Act gives detailed provisions for the carry forward and set off of losses under each head of income. Set off within the head is generally permitted with few restrictions, while inter-head

set off has tighter constraints to be observed. A loss is generally permitted to be carried forward for a period of 4-8 years, depending upon the nature of head it pertains to.

General anti avoidance rules (GAAR)

General Anti Avoidance Rule (GAAR), effective from 1st April 2017, is an anti-tax avoidance rule, framed by the Department of Revenue under the Ministry of Finance that has been introduced in the Income Tax Act to address aggressive tax planning and codify the doctrine of “Substance over Form”.

Indirect taxes

Promoting the ‘One Nation One Tax’ Agenda, the Central government approved GST bill that came into effect on 1st July 2017, scrapping the previous Central and state taxes.

Customs duty

Customs duty is a duty that is levied on goods that are imported into India and exported from India. Customs duty is levied by the Central Government.

Basic customs duty (BCD)

The rates of basic customs duty for each item are specified under the Customs Tariff Act, 1975, and are dependent on the classification of the goods determined under the Customs Tariff Act, which is aligned with the Harmonized System of Nomenclature (“HSN”) provided by the World Customs Organization. The median rate of basic customs duty on most non- agricultural products is 10%.

Basic customs duty shall continue to be charged on the import bills under GST.

Additional duty of customs in lieu of central excise duty (CVD)

CVD ceased to exist from 1st July 2017.

Additional duty of customs in lieu of sales tax/vat (SAD)

SAD ceased to exist from 1st July 2017.

Central excise duty, service tax, central sales tax, and value added tax

These have all ceased to exist from  1st July 2017.

Goods and service tax (GST)

Introduced as The Constitution (One

Hundred and First Amendment) Act 2017, GST is an indirect tax that came into effect on 1st July 2017, replacing the multiple taxes levied by the centre and the states, as mentioned above.

The regime

A single and comprehensive tax, GST is a consumption based tax levied on goods and services consumed.

Unlike under the previous regime, goods and services are not distinguished from each other and are taxable at a single rate. All the goods and services falling under the purview of GST have been taxed under four heads of rates identified under GST- 0%, 5%, 12%, 18% and 28%. However, a special rate of 0.25% and 3% has been prescribed for rough precious and semi- precious stones, and gold respectively.

GST is divided into three parts:

  • Central Goods and Service Tax (CGST)
  • State Goods and Service Tax (SGST)
  • Integrated Goods and Service Tax

(IGST)

Taxes subsumed under GST

At the Central level:

  • Central Excise duty
  • Duties of Excise

(Medicinal and Toilet Preparations)

  • Additional Duties of Customs

(commonly known as CVD)

  • Special Additional Duty of Customs

(SAD)

  • Service Tax

At the State level:

  • State VAT
  • Central Sales Tax
  • Luxury Tax, Entry Tax (all forms)

Taxation

GST is levied on all transactions such as sale, transfer, purchase, barter, lease, or import of goods and/or services.

Intra-State Transactions shall be subject to GST levied by both the Central

Government and the State Government.

For inter-state transactions and imported goods or services, an Integrated GST (IGST) is levied by the Central Government.

For intra-state transactions and imported goods or services, a State GST (SGST)/ Central GST (CGST) is levied by the Central and State Governments.

Input tax credit

Any registered taxable person can claim credit of input tax paid provided they satisfy certain conditions.

Credit of input tax paid on Non-taxable supplies, Exempt Supplies and Nil rated supplies shall not be available. Any unutilised credit available under the previous regime can be carried forward and be utilised for paying taxes on output supplies under GST.

Utilisation of input tax credit

Credit of: Allowed for payment of:
IGST CGST SGST
IGST
CGST
SGST

Latest version updated 13th October 2017

Country Breakdown

1.3

Billion

Population

Indian Rupee

Currency

$ 2.26

Trillion

GDP

3.287

Million

km2