DOING BUSINESS IN INDIA 2017

Transcription

1 DOING BUSINESS IN INDIA 2017

2 Editors: Africa: Ridha Hamzaoui, Emily Muyaa, Mei-June Soo Asia-Pacific: Mei-June Soo, Nina Umar, Ying Zhang Caribbean: Priscilla Lachman, Sandy van Thol Europe: Khadija Baggerman, Larisa Gerzova, Adrián Grant Hap, Marjolein Kinds, Ivana Kireta, Magdalena Olejnicka, Andreas Perdelwitz, Marnix Schellekens, Kristina Trouch, Ruxandra Vlasceanu Middle East: Ridha Hamzaoui, Mei-June Soo Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Diana Calderon Manrique, Lydia Ogazón Juárez North America: John Rienstra, Julie Rogers-Glabush IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Tel.: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on IBFD s part. In no event shall IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher.

3 DOING BUSINESS IN ARGENTINA INDIA FEBRUARY JANUARY

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5 DOING BUSINESS IN INDIA 2017 INTRODUCTION This publication has been prepared by the International Bureau of Fiscal Documentation (IBFD) on behalf of BDO Member Firms and their clients and prospective clients. Its aim is to provide the essential background information on the taxation aspects of setting up and running a business in this country. It is of use to anyone who is thinking of establishing a business in this country as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or live permanently in this country. This publication covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. We have endeavoured to include the most important issues, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO Member Firm(s) with which you normally deal. Your adviser will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned at the heading of each chapter. About BDO BDO is an international network of public accounting, tax and advisory firms which perform professional services under the name of BDO. The fee income of the member firms in the BDO network, including the members of their exclusive alliances, was US$7.6 billion in These firms have representation in 158 countries and territories, with over 67,700 people working out of 1,401 offices worldwide. BDO s brand promise is built upon our vision, to be the leader for exceptional client service always, and everywhere. When you choose to work with BDO you quickly discover why we re different from the rest. BDO offers a comprehensive collection of high quality tax services and assets designed to support exceptional performance, and all our tax engagements benefit from the hands-on involvement of experienced professionals, backed by world-class resources. We are agile enough to handle the biggest and the smallest names in the industries we serve, and our relationship-driven culture means that we can provide responsive and personalised advice to all our clients. We work hard to understand our clients businesses and ensure that we match both our service offering and our people to their complex individual needs. We believe that providing our clients with access to experienced professionals who are actively engaged in addressing their tax and business issues is the most reliable way to provide exceptional service, always with a strong focus on trust and transparency. Regardless of your location, size or international ambitions we can provide effective support as you expand into new areas of the world. In an ever-evolving economic environment, businesses need a global network that provides exceptional, bespoke service combined with local knowledge and expertise. BDO is uniquely positioned to serve this demand, providing effective support and a truly global integrated global footprint. 3

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7 DOING BUSINESS IN INDIA 2017 TABLE OF CONTENTS CORPORATE TAXATION... 9 INTRODUCTION CORPORATE INCOME TAX TYPE OF TAX SYSTEM TAXABLE PERSONS Residence TAXABLE INCOME General Exempt income Deductions Depreciation and amortization Reserves and provisions CAPITAL GAINS LOSSES Ordinary losses Capital losses RATES Income and capital gains Withholding taxes on domestic payments INCENTIVES ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings TRANSACTIONS BETWEEN RESIDENT COMPANIES GROUP TREATMENT INTERCOMPANY DIVIDENDS OTHER TAXES ON INCOME DIVIDEND DISTRIBUTION TAX DISTRIBUTION TAX ON BUY-BACK OF UNLISTED SHARES EQUALIZATION LEVY TAXES ON PAYROLL PAYROLL TAX SOCIAL SECURITY CONTRIBUTIONS Pensions Social insurance TAXES ON CAPITAL NET WORTH TAX REAL ESTATE TAX INTERNATIONAL ASPECTS RESIDENT COMPANIES Foreign income and capital gains Foreign losses Foreign capital Double taxation relief NON-RESIDENT COMPANIES Taxes on income and capital gains Taxes on capital Administration WITHHOLDING TAXES ON PAYMENTS TO NON-RESIDENT COMPANIES

8 DOING BUSINESS IN INDIA 2017 TABLE OF CONTENTS Dividends Interest Royalties Other Withholding tax rates chart ANTI-AVOIDANCE GENERAL TRANSFER PRICING THIN CAPITALIZATION CONTROLLED FOREIGN COMPANY SALES TAX AND SERVICE TAX GENERAL Central sales tax Service tax TAXABLE PERSONS Central sales tax Service tax TAXABLE EVENTS Central sales tax Service tax TAXABLE AMOUNT Central sales tax Service tax RATES Central sales tax Service tax EXEMPTIONS Central sales tax Service tax NON-RESIDENTS Central sales tax Service tax MISCELLANEOUS TAXES CAPITAL DUTY TRANSFER TAX Immovable property Shares, bonds and other securities STAMP DUTY CUSTOMS DUTY EXCISE DUTY OTHER TAXES Research and development cess Commodities Transaction Tax INDIVIDUAL TAXATION INTRODUCTION INDIVIDUAL INCOME TAX TAXABLE PERSONS TAXABLE INCOME General Exempt income EMPLOYMENT INCOME Salary Benefits in kind

9 TABLE OF CONTENTS DOING BUSINESS IN INDIA Pension income Directors remuneration BUSINESS AND PROFESSIONAL INCOME INVESTMENT INCOME CAPITAL GAINS PERSONAL DEDUCTIONS, ALLOWANCES AND CREDITS Deductions Allowances Credits LOSSES Ordinary losses Capital losses RATES Income and capital gains Withholding taxes ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings OTHER TAXES ON INCOME STATE PROFESSIONAL TAX OTHER SOCIAL SECURITY CONTRIBUTIONS EMPLOYED Pensions Social insurance SELF-EMPLOYED TAXES ON CAPITAL NET WEALTH TAX REAL ESTATE TAX INHERITANCE AND GIFT TAXES TAXABLE PERSONS TAXABLE BASE PERSONAL ALLOWANCES RATES DOUBLE TAXATION RELIEF INTERNATIONAL ASPECTS RESIDENT INDIVIDUALS Foreign income and capital gains Foreign capital Double taxation relief EXPATRIATE INDIVIDUALS Inward expatriates Outward expatriates NON-RESIDENT INDIVIDUALS Taxes on income and capital gains Taxes on capital Inheritance and gift taxes Administration KEY FEATURES

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11 CORPORATE TAXATION DOING BUSINESS IN INDIA 2017 INDIA This chapter is based on information available up to 1 February Introduction Companies are subject to income tax on corporate profits. Capital gains are included in the computation of taxable income and not subject to a separate tax. India does not have a central value added tax regime in the traditional sense, but a central sales tax and a state-based value added tax are imposed, in addition to service tax that is generally only payable on the provision of services. The Minister of Finance has proposed to introduce a new law on goods and services tax combining all indirect taxes into one. However, it is yet to be passed by the House of Parliament. Until then, primary indirect taxes such as service tax, excise duty and customs duty apply under the respective regulations. The primary law governing taxation at Union level is the Income Tax Act 1961 (ITA). Union (central) direct taxes are administered by the Department of Revenue in the Ministry of Finance through the Central Board of Direct Taxes (CBDT). Social security contributions are required to be made by employers in respect of their employees to the Employees Provident Fund and the Employees State Insurance Corp. The currency is the Indian rupee (INR). 1. Corporate Income Tax 1.1. Type of tax system India currently operates a classical system of taxation, whereby profits are first taxed at the corporate level, and no credit is granted at the shareholder level. However, a dividend distribution tax is paid by Indian companies on their distributions, and these distributions are exempt for the shareholders (except for individuals receiving dividends of more than INR 1 million). There is no specific participation exemption Taxable persons Corporate income tax is imposed on companies, which are defined as: Indian companies, i.e. companies formed and registered under Indian law and registered in India, and any institutions, associations or bodies declared by the CBDT to be companies with their registered or principal office in India; bodies corporate incorporated outside India; and institutions, associations or bodies, whether or not incorporated or Indian, declared by the CBDT to be companies. A domestic company is an Indian company or any other company which has made prescribed arrangements for the declaration and payment of dividends in India out of income subject to tax in India. Companies incorporated outside India which do not make the prescribed arrangements are foreign companies. This survey is restricted to Indian companies as well as foreign-incorporated entities of a similar description, whether resident or non-resident. These entities will be referred to as companies. 9

12 DOING BUSINESS IN INDIA 2017 CORPORATE TAXATION A partnership is a separate taxable person. If it is evidenced by an instrument that specifies the profit shares of the partners, it is taxed at the corporate rate. Otherwise, the income of the partnership is subject to tax at the marginal rates applicable to individual partners. An entity registered as a limited liability partnership (LLP) is treated as a partnership firm for tax purposes, although it is a body corporate by nature. However, a foreign LLP, being in the nature of a body corporate incorporated outside India, is classified as a non-resident company for tax purposes Residence With effect from the financial year starting 1 April 2016, a company is a resident in India in a previous year if it is an Indian company or its place of effective management, in that year, is in India. The term place of effective management (POEM) means the place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made. On 24 January 2017, the CBDT issued Final Guidelines on the determination of POEM vide Circular 6/2017. This Circular includes illustrations differentiating shareholders control, management control and routine decisions in respect of the POEM Taxable income General Resident companies are subject to income tax on their worldwide income, including capital gains. Corporate income is divided into the following heads: income from a business or profession; capital gains; and income from other sources. The heads of income are mutually exclusive; income that is specifically chargeable under one head cannot be charged under another head. Different assessability and deductibility rules apply to each head of income. The resulting net chargeable amounts for each head are aggregated to arrive at total income. The deduction of certain allowances (such as for losses and donations) from total income results in taxable total income, to which the applicable tax rates are applied. Income from a business is calculated in accordance with the method of accounting regularly employed by the taxpayer. The CBDT issued Notification 32/2015 of 31 March 2015 notifying guidelines, known as the Income Computation and Disclosure Standards (ICDS), on the computation of taxable income and disclosures required in relation to the same. The ICDS came into force on 1 April The implementation of the ICDS was deferred by 1 year to assessment year 2017/18 (financial year 2016/17), but the notification to this effect was yet to be issued. The CBDT rescinded the above Notification 32/2015 and issued a new Notification 86-87/2016 dated 29 September 2016 whereby it notifies the ICDS to be followed by all assessees (other than an individual or a Hindu undivided family) following the mercan- 10

13 CORPORATE TAXATION DOING BUSINESS IN INDIA 2017 tile system of accounting. This notification is applicable from financial year 2016/17. Further, the CBDT issued Notification 88/2016 to amend the tax audit report (Form no. 3CD) to provide for ICDS. The ICDS are applicable for the computation of income chargeable under the heading profits and gains of business or profession or income from other sources and not for the purpose of bookkeeping. In the case of a conflict between the provisions of the ITA and the ICDS, the provisions of the ITA will prevail. Certain income is subject to tax on a presumptive basis, whereby tax is imposed at a specified rate on the business receipts of a business. The tax collected is final, with no deductions or allowances allowed against that income. Presumptive taxation applies to specified businesses including civil construction companies, retail businesses, certain transportation businesses and non-resident shipping or air transportation businesses Exempt income Domestic dividends are exempt if the payer has paid dividend distribution tax, except for resident individual shareholders receiving dividends in excess of INR 1 million (see section 3.1.). Agricultural income is generally exempt from income tax; however, special rules apply, such as with regard to income that is partly agricultural income and partly business income. Subject to specified conditions, income of charitable or religious institutions, trusts, foundations, etc. is exempt from tax if applied to charitable or religious purposes. Income other than business income of a venture capital company or fund registered with the Securities and Exchange Board of India (other than a hedge fund) is exempt from income tax (with no sector restrictions) and such income would be subject to tax directly in the hands of the investor, in the same manner as if they had invested directly. Specific types of income may also be exempt from tax, as determined by tax law and regulations Deductions In general, expenditure is deductible if it is: of a revenue nature rather than of a capital nature; laid out or expended wholly and exclusively for the purposes of the business of the taxpayer; laid out and expended during the relevant previous year; not incurred in respect of personal and private expenses of the taxpayer; and a particular type of expenditure that cannot be specifically disallowed or restricted by the tax legislation, or covered by provisions relating to specifically permitted deductions. Specified deductions are available in respect of scientific research, payments for intellectual property, bad debts, employee salaries and benefits, cost of current repairs and premiums paid for insurance on business assets, etc. Additional deductions 11

14 DOING BUSINESS IN INDIA 2017 CORPORATE TAXATION of up to 200% of actual outlay may be allowed for research expenses. The weighted deductions for expenses on scientific research will be phased out (from up to 200% to 150% from 1 April 2017 and to 100% from 1 April 2020). No deduction is allowed for capital expenditures and dividends (e.g. expenses incurred in relation to raising equity). Also, no deduction is allowed for expenses on purposes prohibited by law or incurred in relation to income not subject to tax. Any expenditure incurred on activities related to corporate social responsibility is not deemed to be an expenditure incurred for the purposes of business or profession (with effect from 1 April 2015). Non-deductible expenses include taxes paid on the profits of a business or profession, wealth tax (see section 5.1.), securities transaction tax (see section ), employer s contributions to a provident fund or superannuation/gratuity fund under certain circumstances, and various payments (salaries, interest, royalties, technical service fees, etc.) from which tax has not been withheld. The tax authorities can disallow the deduction of excessive payments to relatives, directors, etc. Dividends are not deductible, but interest and royalties are generally deductible when incurred for business purposes. Valuation of inventory No specific valuation method is prescribed (except for the ICDS II on inventories; see section ), but the Commissioner is empowered to reject a chosen method if it does not reflect the true profit. The LIFO and base stock methods are specifically disallowed. A bona fide change in methods is allowed. The ICDS II makes a deviation from Indian GAAP to bring tax certainty and reduce litigation. Notable deviations in the ICDS II are as follows: in case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether the business is discontinued or not, the inventory on the date of dissolution will be valued at the net realizable value; and the opening value of inventory is (i) the cost of inventory available, if any, on the day of commencement of the business if the business had commenced during the previous year, or (ii) the value of inventory as on the close of the immediately preceding year, in any other case Depreciation and amortization Tangible and intangible assets are depreciated using the declining-balance method at specified rates ranging from 5% for certain types of buildings to 100% for environmental protection equipment. Certain capital expenditures, e.g. feasibility studies, can be deducted over 5 years. Intangible assets are also eligible for depreciation at the rate of 25% after Taxpayers engaged in the business of generation, distribution or transmission of power are eligible for an additional initial depreciation of 20% on investments made in new machinery or plant. A manufacturing company which acquires new plant or machinery can also claim an additional depreciation of 20% of the cost of such new plant and machinery. The additional depreciation is restricted to 50% (i.e. 10%), if the new plant or machinery is used 12

15 CORPORATE TAXATION DOING BUSINESS IN INDIA 2017 for less than 180 days during a year, but with effect from 1 April 2016, the balance of 50% of the additional depreciation can be claimed in the immediately succeeding financial year. As per the Finance Act 2016, accelerated depreciation between 80%-100% in respect of a certain block of assets will be restricted to 40% from 1 April The proposed new rate is applicable to all assets falling in the relevant block of assets. Further, vide Notification 103/2016 dated 7 November 2016, newly incorporated domestic companies that are engaged in manufacturing activities and claiming the benefit of a concessional corporate tax rate of 25% (section 115BA of the ITA), will not be able to claim a depreciation rate of more than 40% on any block of assets. Depreciation is not applied to each individual asset but to blocks of assets, i.e. depreciation is computed on the aggregate written-down value of assets having the same rate of depreciation within a class of assets. Depreciation is compulsory, but unabsorbed deductions for depreciation expense can be carried forward indefinitely to be offset against future business income Reserves and provisions Reserves and provisions are generally not deductible. However, banks and insurance companies may be eligible for a limited deduction for reserves Capital gains There is no separate tax on capital gains, which are under a separate head of income subject to income tax (see section ). Broadly, gains from a disposal of capital assets are subject to tax. The tax treatment depends on the type of asset and the period the asset was held. A gain is long-term if the underlying asset was held for at least 3 years (1 year for listed shares as well as equity-oriented units and zero-coupon bonds and 2 years for unlisted shares). The cost of assets resulting in long-term capital gains is indexed (increased) in accordance with the official inflation index. Some long-term capital gains may be exempt if reinvested in specified assets or sectors. A special regime may apply to assets acquired before specific dates. Short-term capital gains arising upon the transfer of listed equity shares, units of equity-oriented mutual funds or units of a business trust, on which securities transaction tax has been paid, are taxed at a rate of 15%. The rate applicable to long-term capital gains derived by domestic companies is 20% (section 112(1)(b)(ii) of the ITA). Long-term capital gains arising from the sale of certain listed securities on which the securities transaction tax has been paid are exempt from further tax (section 10(38) of the ITA). The tax on long-term capital gains arising from the sale of listed securities on which the securities transaction tax has not been paid is as follows: if the indexation benefit has been claimed: 20%; and if the indexation benefit has not been claimed: 10%. The indexation benefits are claimed at the option of the taxpayer. The surcharge and education cess and secondary and higher education cess also apply (see section ). 13

16 DOING BUSINESS IN INDIA 2017 CORPORATE TAXATION 1.5. Losses Ordinary losses Losses incurred under a head of income are set off, first against income from any other source under that head, and then against income of any other head for the same year. Unutilized losses cannot be carried forward, except if they are business or capital losses (see section ). Unutilized business losses can be carried forward for up to 8 years and set off against future business income. A continuity of majority ownership (51%) test must be satisfied by closely-held companies to be able to carry forward losses. Speculative losses may only be set off against profits of other speculative businesses in the current or the following 4 years. Business losses and unutilized depreciation can be transferred to an amalgamated company, subject to a number of conditions, including the amalgamated company maintaining at least 75% of the book value of the fixed assets of the amalgamating company, for at least 5 years. Losses may not be carried back Capital losses Short-term capital losses can be set off against both short-term and long-term capital gains made in the same year. Long-term capital losses cannot be set off against shortterm capital gains. Any excess of capital losses can be carried forward for up to 8 years and set off against future capital gains. However, carried forward long-term capital losses can only be set off against future long-term capital gains. A loss is long-term if the underlying asset was held for at least 3 years (1 year for shares as well as certain units and bonds and 2 years for unlisted shares). Losses may not be carried back Rates Income and capital gains Domestic companies are subject to income tax at 30%, unless the presumptive tax rate applies. Finance Act 2016 provides for the following concessional corporate tax rates for certain domestic companies: 29% for small domestic companies engaged in manufacturing, trading or services, having a turnover of less than INR 50 million; 25% for domestic companies engaged in manufacturing or production, and research in relation to or distribution of the articles or things manufactured or produced by these companies (set up after 1 March 2016), that have not claimed any other tax incentives as specified; 10% for domestic companies earning royalty income from patents developed and registered in India. A 7% surcharge is applicable to resident companies on the tax liability if net income exceeds INR 10 million but is less than INR 100 million, and a surcharge of 12% is applicable if net income exceeds INR 100 million (the surcharge was 5% and 10% respectively prior to assessment year 2016/17). An education cess (EC) of 2% and a secondary and 14

17 CORPORATE TAXATION DOING BUSINESS IN INDIA 2017 higher education cess (SHEC) of 1% also apply on the tax payable (including surcharge if applicable), resulting in an effective rate of % if the 7% surcharge is applicable, or % if the 12% surcharge is applicable. See section for the surcharge on foreign companies. If a company s tax liability is below 18.5% of its book profits, the book profits are deemed to be its taxable income and subject to a minimum alternate tax (MAT) of 18.5%, plus surcharge (if applicable) and cess, resulting in an effective rate of 20.38% where the surcharge is 7%, or 21.34% where the surcharge is 12%. MAT is creditable against ordinary tax liability. If MAT paid exceeds the ordinary tax liability, the excess is carried forward for up to 10 years to be used as a credit against future ordinary tax liability. With effect from 1 April 2016, long-term capital gains and short-term capital gains (on which securities transaction tax is paid) arising to foreign institutional investors are excluded from the scope of MAT. Further, any expenditures debited to the profit and loss account corresponding to such income are also added back to the book profit for the purpose of calculating MAT. MAT also does not apply to foreign companies that do not have a permanent establishment in India and, as such, capital gains from the transfer of securities, interest, royalty and fees for technical services accruing or arising to such foreign companies are excluded from the scope of MAT. Similarly, any expenditures debited to the profit loss account corresponding to such income will also be added back to the book profit for the purpose of calculating MAT. See section for presumptive taxation. Short-term capital gains are subject to tax at 30% plus surcharge (if applicable) and cess. Long-term capital gains are subject to tax at 20% plus surcharge and cess. However, long-term capital gains on specified securities are exempt, while short-term gains are taxed at concessionary rates (see section 1.4.). A gain is long-term if the asset was held for at least 3 years (1 year for shares as well as certain units and bonds) Withholding taxes on domestic payments Specific payments made to residents are subject to a non-final withholding tax and some of the main rates are as follows: Income Withholding tax (%) Interest 1 10 Dividends: deemed dividends 10 other dividends 2 0 Royalties, technical services and professional fees 10 Winnings from lotteries, horse races, etc. 30 Payments under a contract to: 3 individuals/hufs 1 others 2 Insurance commissions (effective 1 June 2016) 5 Commission or brokerage fees (effective 1 June 2016) 5 Rent: 4 plant, machinery or equipment 2 land, building or furniture 10 15

18 DOING BUSINESS IN INDIA 2017 CORPORATE TAXATION Income Withholding tax (%) Compensation on compulsory acquisition of certain immoveable property 10 Payment on transfer of certain immovable property other than agriculture land with effect from 1 June Short-term capital gains: 5 up to 31 March after 31 March Long-term capital gains 5 20 Distribution tax on buy-back of shares (not being listed shares) Where the aggregate amount of interest payments during a year does not exceed INR 10,000, the interest is not subject to withholding tax. For interest other than interest on recurring and time deposits, the threshold is INR 5, Domestic dividends are exempt if the payer has paid dividend distribution tax (see section 3.1.). Similarly, a distribution of proceeds on the buy-back of unlisted shares is exempt if the payer has paid distribution tax (see section 3.2.). 3. No withholding is required where the contract payment does not exceed INR 30,000, unless the total amounts paid or payable during a financial year exceed INR 100,000 (previously, INR 75,000). Various exemptions also apply. 4. Other than rent paid to an individual or Hindu Undivided Family. 5. Short-term capital gains from the sale of listed securities at recognised stock exchange are taxed at concessionary rates while other short-term gains are taxed at the normal income tax rates. Long-term capital gains on specified securities are exempt (see section 1.4.). The surcharge (where applicable) and cess (see section ) will apply to the above. See section 6.3. for withholding tax on payments to non-residents Incentives Various tax incentives are available in India which may grant full or partial tax exemption, reduced tax rates, tax rebates, accelerated depreciation or special deductions. The tax incentives apply to a broad range of industries, including export-oriented undertakings, industrial undertakings in free trade zones and technology parks, infrastructure undertakings, hotels and tourism businesses, undertakings in promoted areas, research companies, mineral oil production, cold chain facilities, shipping and air transportation, tea/coffee/rubber industries, news agencies and waste processing businesses. As an example, newly established businesses manufacturing products or providing services in special economic zones may qualify for a number of tax incentives, including a deduction of 100% of profits and gains in the first 5 years, 50% deduction in the following 5 years and 50% deduction for the next 5 years, subject to conditions; longer periods may apply to approved developers. A weighted deduction of 150% is available for expenditure on agricultural extension projects and expenditure on any skill development project notified by the CBDT, on setting up or operating a cold chain facility, warehousing facility for storage of agricultural produce, building and operating a hospital with at least 100 beds and building housing under an affordable housing scheme. The weighted deduction for agricultural extension projects and on skill development projects will be reduced from 150% to 100% from 1 April In addition, tax incentives for various businesses, such as infrastructure facility undertakings, developers of special economic zones and production 16

19 CORPORATE TAXATION DOING BUSINESS IN INDIA 2017 of oil and natural gas, will also be phased out. These incentives are available only if the specified activity is commenced before 31 March 2017, and thus, no deduction will be available under the ITA after 1 April The minimum alternate tax (see section ) and dividend distribution tax (see section 3.1.) may apply unless specifically exempted under the ITA Administration Taxable period The assessment year starts on 1 April. Tax is computed on a preceding year basis, i.e. the tax liability for an assessment year is calculated on income earned in the preceding financial or fiscal year Tax returns and assessment A tax return must be filed by 30 September of the assessment year. A company that carries out international transactions must file its tax return by 30 November. Some non-profit companies or other bodies may be required to file their returns by 31 July of the assessment year. Deadlines may be extended by the Commissioner Payment of tax Advance tax is payable in a financial year if tax liability is estimated to be INR 10,000 or more. Companies are required to make four advance payments as follows: 15% of tax payable for the fiscal year by 15 June of the fiscal year; 45% of tax payable (less previous payments) for the fiscal year by 15 September of the fiscal year; 75% of tax payable (less previous payments) for the fiscal year by 15 December of the fiscal year; and 100% of tax payable (less previous payments) for the fiscal year by 15 March of the fiscal year. Any remaining final tax is paid together with the applicable interest on filing the income tax return. Excess tax payments are refunded Rulings Advance rulings may be given on questions of law or fact. An issued ruling is binding on the Commissioner of taxation. 2. Transactions between Resident Companies 2.1. Group treatment No group treatment is available, but asset transfers from a head company to its subsidiary may be exempt from capital gains tax Intercompany dividends Domestic dividends are exempt if the payer has paid dividend distribution tax (see section 3.1.). 17

20 DOING BUSINESS IN INDIA 2017 CORPORATE TAXATION 3. Other Taxes on Income 3.1. Dividend distribution tax The dividend distribution tax (DDT) is a tax on distributed profits. DDT is payable by domestic companies on the amount declared, distributed or paid by way of dividends out of their current or accumulated profits, even if the company has no tax payable. Dividends declared by a holding company (even if a subsidiary of another company) from dividends received from its subsidiary which has paid DDT thereon is not subject to DDT to that extent (Finance Act 2012). The rate of tax is 15%, plus surcharge and education cesses (see section ). However, the calculation of dividend distribution tax is at gross level, whereby the effective tax rate after the surcharge and education cess would be 20.92%. Domestic dividends are exempt from tax in the hands of the shareholder if the payer has paid dividend distribution tax. Otherwise, the dividends are taxable as income of the shareholder at normal rates. However, where a resident individual shareholder receives dividend income exceeding INR 1 million, an additional tax of 10% is levied on the individual shareholder, even when dividend distribution tax has been paid. The tax is levied on the amount in excess of INR 1 million. No credit is available to the distributing company or to the recipient shareholder in respect of dividend distribution tax paid Distribution tax on buy-back of unlisted shares The buy-back distribution tax is a tax on the distribution of proceeds from a buy-back of shares, not being listed shares. This distribution tax is payable by domestic companies on the difference between the buy-back proceeds and the cost of acquisition of the said shares, even if the company has no tax payable. The CBDT, vide Notification 94/2016 dated 17 October 2016, notified the Income Tax Rule 40BB prescribing the manner of determination of the cost of acquisition of shares under a buy-back arrangement. The rate of tax is 20% before the surcharge and education cesses (see section ). The proceeds on a buy-back of shares are exempt from tax in the hands of the shareholder if the payer has paid a buy-back distribution tax Equalization levy From 1 June 2016, an equalization levy is imposed on e-commerce transactions. A resident, or a non-resident with a permanent establishment in India, is obliged to withhold 6% equalization levy from payments made to a non-resident services provider in respect of specified services, such as online advertisements, provision of digital advertising space, or any other facility or service for the purpose of online advertisements or any other notified services, except where the aggregate consideration for the specified service is less than INR 100,000. The payer will not be entitled to a deduction of such specified services payments to non-residents if the equalization levy is not withheld or after withholding it is not deposited with the government by the due date. The levy does not apply if the service provider is a non-resident who has a permanent establishment in India to which the service is effectively connected and such income is attributable. 18

21 CORPORATE TAXATION DOING BUSINESS IN INDIA Taxes on Payroll 4.1. Payroll tax There is no payroll tax Social security contributions Pensions Employers with at least 20 employees are required to contribute 12% of gross salaries to the Employees Provident Fund (EPF). The contributions are mandatory with regard to employees who earn up to INR 15,000 per month, while employees who exceed this threshold may opt not to contribute to the scheme. The employer also must pay an administrative charge of 1.1% of the employee s salary towards the EPF scheme, in addition to the 12% contribution. A contribution of 0.5% is also made to the Employees Deposit-Linked Insurance Scheme, plus an administrative charge of 0.01% of the employee s salary. International workers International workers are required to contribute to the Employees Provident Fund and employee pension schemes. International worker is defined as: an Indian employee having worked, or going to work in a foreign country; and an employee, other than an Indian employee and not holding an Indian passport, who is working for an establishment in India to which the Employees Provident Fund Act 1952 applies. Where there is a social security agreement between the foreign country and India, the inbound/outbound employees may remain on their country of origin s social security scheme. Indian employers who are registered with the Employees Provident Fund Organisation are required to provide details of their international workers via a prescribed form. If an establishment does not employ any international workers, the form must still be filed to reflect that no such workers are employed. Voluntary New Pension Scheme From 1 May 2009, a New Pension Scheme (NPS) is extended to all Indian citizens (resident and non-resident) between the ages of 18 and 55 years on a voluntary basis. The NPS is a scheme based on defined contributions by members and matching contributions from employers, and is not applicable to individuals covered by the Provident Fund Act. The New Pension Scheme is voluntary for self-employed individuals, private companies and the unorganized sector, and there will be no contribution from the government in respect of individuals who are not government employees. The minimum contribution is INR 6,000 per year. Employees must make at least four contributions in a year and the minimum amount per contribution is INR Social insurance With regard to industrial workers, employers are required to contribute 4.75% of gross salary to the Employees State Insurance Corp. for the provision of health insurance. The contribution base is capped at a monthly gross salary of INR 10,000 per month. The contributions are deductible by employers, subject to certain specified guidelines. 19

22 DOING BUSINESS IN INDIA 2017 CORPORATE TAXATION 5. Taxes on Capital 5.1. Net worth tax Wealth tax is abolished with effect from 1 April 2015 (Finance Act 2015). Previously, companies were required to pay wealth tax of 1% on the aggregate value of specified assets, net of debts incurred in relation to those assets, exceeding INR 3 million. Specified assets included certain types of landed property and cash in hand exceeding INR 50,000 which were not recorded in the books of account Real estate tax Owners of real estate may be subject to a state real estate tax or duty. The rates vary among states. 6. International Aspects 6.1. Resident companies See section 1.2. for residence rules Foreign income and capital gains Resident companies are subject to income tax on their worldwide income, including capital gains. The tax treatment of foreign income is generally the same as for Indiasourced income (see sections 1.3. to 1.8.). Dividends received by a domestic company from its foreign subsidiary (with a specified shareholding of 26% and more) are taxed at the rate of 15%, plus applicable surcharge and cess (see section ) Foreign losses There are no specific rules for foreign losses. Foreign losses are deductible in calculating taxable income (see section 1.5.) Foreign capital There is no tax on foreign capital Double taxation relief An ordinary tax credit is granted, both unilaterally and under tax treaties, for tax paid on foreign income. Foreign income tax for the purposes of a credit includes excess profits tax, business profits tax and local taxes on income. The credit is granted on an overall basis, but limited to the lower of the average Indian tax rate, or the average foreign tax rate. The average tax rate is the rate resulting from the division of the tax amount by the income base on which the tax arises. The CBDT issued Notification 54/2016 of 27 June 2016, which provides rules for the computation and claiming of foreign tax credits. Amongst many conditions, the rules state that foreign tax credits must be computed separately for each source of income arising from a particular country. Where the provisions of the ITA are more favourable than the provisions under a tax treaty, the provisions of the ITA apply. The Finance Act 2012 inserted a requirement for a non-resident to submit a tax residency certificate, as well as the necessary and sufficient details as required under Notification 39/2012 of 17 September 2012 and Notification 57/2013 of 1 August 2013, in order to claim the benefits under a tax treaty. See section for a list of tax treaties in force. 20

23 CORPORATE TAXATION DOING BUSINESS IN INDIA Non-resident companies A non-resident company is a company that is not a resident of India (see section 6.1.) Taxes on income and capital gains Generally, non-residents are assessed on income derived from a permanent establishment in India or from a business connection with India, or income sourced in India. Permanent establishments are allowed a limited deduction for the administrative expenses of their head office, subject to a limit of 5% of income for the year. The treaty definition of a permanent establishment applies if there is a tax treaty, otherwise income of a non-resident from a business connection with India is subject to tax. The concept of a business connection is broader than a permanent establishment and includes, for example, the granting to a resident of a license to exploit an asset belonging to a non-resident. In general, non-resident companies and branches are taxed at 40%, plus a 2% surcharge (if net income exceeds INR 10 million but is less than INR 100 million) or a 5% surcharge (if net income exceeds 100 million) and education cesses of 2% and 1% (see section ), resulting in an effective rate of % (where surcharge is 2%) and 43.26% (where surcharge is 5%). If a company s tax liability is below 18.5% of its book profits, the book profits are deemed to be its taxable income and subject to a MAT of 19.43% (including a surcharge of 2% and 3% education cesses) or 20% (including a surcharge of 5% and 3% education cess), except where it does not have a permanent establishment in India. Generally, gains derived by a non-resident from the alienation of assets situated in India are liable to tax in India. All types of capital gains may be taxable in the hands of a non-resident with a permanent establishment in India, including capital gains on shares in resident companies. The tax authorities have also attempted to tax capital gains arising on the transfer of shares of a foreign holding company of an Indian subsidiary, on the basis that such transfer involves an indirect change in the controlling interest of the Indian subsidiary. As a consequence of the Vodafone case, amendments were introduced in the Finance Act 2012 whereby any transfer of shares or interest in an offshore company, where such a share or interest derives its value (directly or indirectly) substantially from Indian assets, would be brought under the Indian tax net (see further section 7.1.). In such a situation, the capital gains arising on such transfer would be taxable in India to the extent of the proportionate value of the shares deemed to be situated in India. The CBDT issued Notification 55/2016 of 28 June 2016 for determining the manner of computation of the fair market value of assets held by a foreign company and of assets situated in India. For non-resident persons, long-term capital gains arising from the sale of unlisted securities are taxed at 20% if the indexation benefit has been claimed and at 10% if the indexation benefit has not been claimed. A special presumptive taxation applies to non-residents carrying on shipping or air transport, turnkey projects or an equipment-letting business, whereby a specified rate between 5% and 10% is applied to total receipts. A deemed tax of 10% of payments is levied on payments for prospecting or extracting mineral oil, constructing plant and machinery for approved projects by non-residents. The tax may be final at the option of the non-resident. 21

24 DOING BUSINESS IN INDIA 2017 CORPORATE TAXATION Taxes on capital Non-residents may be subject to state real estate tax/duty on their property located in India (see section 5.) Administration If income received is subject to final withholding tax and the tax is properly withheld, there should be no filing requirements (see section 6.3.). Otherwise, the requirements for non-residents to file tax returns are the same as for residents. See section 1.8. for tax compliance and administration Withholding taxes on payments to non-resident companies Withholding taxes on payments to residents also apply to non-residents (see section ), plus a 2% surcharge (where net income exceeds INR 10 million but is less than INR 100 million) or a 5% surcharge (where net income exceeds INR 100 million) and education cesses of 2% and 1%. In addition, tax is required to be withheld from any sum receivable by a non-resident which is subject to tax in India, other than some interest and salary payments. If a non-resident has not obtained a tax registration number (Permanent Account Number, PAN), the applicable withholding tax rate is the highest of the following: the domestic tax rate; the beneficial rate provided for in the tax treaty or the domestic legislation; or 20%. The provision does not apply in respect of payments of interest on long-term bonds to a non-resident by an Indian company or a business trust. The higher withholding tax rate of 20% is also not applicable to payments of royalties, fees for technical services, capital gains, interest, made to non-residents who do not have a permanent account number registered with the tax authorities, provided the non-resident furnishes the prescribed details and documents to the payer (such as a tax residency certificate and tax identification number issued by the government in the country of residence). The obligation to withhold tax from payments to a non-resident is applicable to all persons including a non-resident, irrespective of whether the non-resident payer has a residence, business connection or other presence in India Dividends Dividends are exempt if the payer has paid dividend distribution tax (see section 3.1.) Interest Interest paid to non-residents on amounts borrowed in foreign currency is subject to withholding tax at 20% (effective rate of 21.01% where surcharge is 2%, or 21.63% where surcharge is 5%). The tax is effectively a final tax, as no deductions are allowed. Further, interest income of non-residents from an infrastructure debt fund or received from resident companies on borrowings made in foreign currency under a loan agreement or an issue of long-term bonds between 1 July 2012 and 1 July 2017 is taxed at a lower rate of 5%, provided various conditions are satisfied (section 194LC of the ITA). The Finance Act 2013 with effect from 1 June 2013 extended the concessional rate of withholding tax on interest payments to Foreign Institutional Investors (FIIs) and Qualified Institutional Investors (QFIs) on investments in government securities and rupee 22