Overview of Indian Tax system July 2017
Overview of Indian taxes
Tax legislation in India Overview Central Government State Government Taxes Direct Tax Indirect Tax Other Taxes Corporate Tax Individual Tax Customs Duty GST Withholding Tax Property Tax Stamp Duty Taxes on fuel, liquor 2017. Deloitte AP ICE, Ltd. 3
Corporate tax Overview Residents taxed on global income and non residents taxed on income accrued/ received in India Business losses can be carried forward for eight years - no time limit for carry forward of depreciation Thin capitalization rules under tax law - Interest expense claim restricted to 30% of EBITDA Indian entities and foreign entities having a base in India (exempt under certain situations), liable to 18.5% MAT plus surcharge and cess Most internal reorganizations exempt subject to conditions Wide Treaty network/ Advance Rulings/ Extensive Withholding tax regime Indian entities liable to dividend distribution tax (~20% considering grossing-up) Tax holidays available for exports from notified areas and manufacturing activities in specified backward regions Transfer pricing regime requiring extensive documentation and reporting 2017. Deloitte AP ICE, Ltd. 4
Corporate tax Key income-tax rates under domestic tax law Particulars Rates (%) Corporate tax rate - Domestic company 30.9 / 33.06 / 34.61 In case turnover is less than INR 5 crores in FY 14-15 29.87/ 31.96/ 33.45 In case turnover is less than INR 50 crores in FY 15-16 25.75/ 27.55/ 28.84 New manufacturing companies (including R & D relating to manufacturing) set up on or after March 01, 2016 (at the option, subject to not claiming certain specified deductions/claims) 25.75/ 27.55/ 28.84 DDT applicable to Domestic company (considering grossing-up)* 17.65 (effective rate 20.36%) Effective tax rate for Foreign company 41.2 / 42.02 / 43.26 Minimum alternative tax (MAT) for Domestic Company 19.05 / 20.39 / 21.34 Withholding tax on interest on eligible foreign debt and long-term infra bonds 5.15 /5.25 / 5.41 Capital gains tax on sales of listed shares of Indian company through stock exchange* [long term if held for more than 12 months] Capital gains tax on sale of unlisted shares of Indian company (by non resident)* [long term if held for more than 24 months] NIL (long term) / 15 (short term) 10 (long term) / 40 (short term) Tax on buy back of its own shares by the Indian Company* 20 (from 1 June 2013) Royalty/Technical Service Fees* Corporate tax rate to reduce to 25% in coming years * Rates exclusive of surcharge and education cess which will apply as applicable 10 (under domestic tax law; subject to treaty benefit) 2017. Deloitte AP ICE, Ltd. 5
Transfer Pricing Key legislative framework Indian TP legislation framework enacted in 2001 broadly based on OECD Guidelines Comprehensive legislation including: Mandatory compliance to maintain contemporaneous documentation Annual filing of information form on inter-company transactions Associated penalty clauses for non-compliances Covers Specified Domestic Transactions (in some cases) as well as deemed international transactions Rampant litigation at the lower level tax authorities with significant adjustments Indian judicial rulings are in the form of speaking orders and in line with globally accepted principles Indian position aligned to BEPS reports for most issues Increasingly, clients are focusing on APAs as a means of getting certainty and dispute resolution Typical areas of controversy Advertising & Marketing expenses Marketing & sales support services Cross border services Cost recharges Royalties Arms Length Margin (3% threshold) Choice of Comparables Location savings 152 APAs entered into out of 815 applications filed till 31 March 2017 [as per India s APA Annual Report issued on 1 May 2017] 2017. Deloitte AP ICE, Ltd. 6
Indirect tax Goods and service tax (GST) Overview Tax on supply of goods or services or both - alcohol, electricity, real estate and five major petroleum products are outside GST Destination based consumption tax Shift of taxable event from manufacture/ sale/ provision of service to supply of goods or services Central GST (taxes subsumed) Central Excise Duty/Additional Excise Duty Additional Customs Duty/Special Additional Duty* Service tax Central Sales Tax Surcharge/Cess * Imports are subject to IGST which would be sum of CGST and SGST Integration of Central levies, State levies and local levies Seamless credit across entire supply chain and across all the States GST rates for supply of goods and services - 5%, 12%, 18% and 28%; Exports are zero rated GST Compliance driven by IT platform (GSTN) and to be extremely robust strong requirement for ERP / IT preparedness State GST (taxes subsumed) VAT/Sales Tax Entry Tax /Purchase Tax Luxury Tax / Entertainment Tax* Taxes on Lottery/ Betting & gambling Local Body Tax/ Octroi *other than tax levied by the local bodies One of the most radical economic reforms in India introduced from 01 July, 2017 2017. Deloitte AP ICE, Ltd. 7
Indirect tax Goods and service tax (GST) Key areas to watch out for ERP/Biz. process changes - Minimum business disruption, maximum compliance - Revamping P2P, O2C and R2R business processes Transition planning - Seamless transfer of input tax credits - Applicability of GST or existing taxes on certain cut-over period transactions Impact on cost/working capital - Impact of GST on business transactions and associated increase/decrease in cost and working capital Contractual changes - Change in contract terms to avoid financial risks arising due to non-compliance by suppliers/customer Compliance Anti-profiteering - Requirement of multi state registration - Use Govt. approved service providers for filing of returns - Benefits arising out of increased input tax credits and reduced tax rates need to be passed on to customers 2017. Deloitte AP ICE, Ltd. 8
Indian Regulatory system
Forms of business presence in India Foreign investor Unincorporated entities Incorporated entities Partnerships Liaison Office Branch Office Project Office Subsidiary Joint Venture Limited Liability Partnership LLP is now permitted under the Automatic route for sectors where 100% FDI is allowed in an Indian company 2017. Deloitte AP ICE, Ltd. 10
Indian Regulatory Overview Exchange Control Regulations Indirect Tax Laws Entry / Exit Regulations - Reporting Companies Act 2013 Direct Tax Laws Monitoring Indian Company Regulatory Compliances Incorporation of Company : Approx. 1.5 to 2 months timeline Employment Related Laws Industrial and Other Laws * Securities & Exchange Board of India SEBI* Regulations 2017. Deloitte AP ICE, Ltd. 11
Make in India
Enablers Objectives Focus on Make in India National Manufacturing Policy Increasing manufacturing sector growth to 12 14% Manufacturing contribution to GDP at 25% by 2022 from 16% now 100 million additional jobs in manufacturing by 2022 Skill set creation among rural migrant and urban poor for inclusive growth Increased domestic value addition and technological depth Enhanced global competitiveness Sustainability of growth Rationalization and simplification of business regulations Minimizing approvals and compliance requirements Labor law reforms Simple and fast exit mechanisms Job loss policy Sinking fund Asset redeployment Exemption from Capital Gains tax Trade policy Measures to protect export of products and services from India from border measures NMCC to make recommendations on duty structures to protect domestic manufacturing Foreign investment Conducive FDI policy environment Incentives tax concessions and subsidies Technology acquisition and development Incentives / schemes to promote new technologies Access to technologies through JVs Technology Acquisition and Development Fund(TADF) with focus on SMEs Incentives for green manufacturing Compulsory licensing 100% tax holiday for 3 years to start-ups involved in innovation & development of new products Special focus sectors Employment intensive industries like textiles and garments; leather and footwear; gems and jewellery; and food processing Capital goods like machine tools; heavy electronic equipment; heavy transport, earth moving and mining equipment; high technology equipment like telecom, power, ICT and electronic hardware Strategic industries like aerospace; shipping; IT and electronic hardware; renewable energy; solar, wind etc; defence equipment Automotive and Pharmaceutical industries Industrial training and skill upgradation Skill building among minimally educated workforce establishment of ITIs in PPP mode Specialized skill development through establishment of Polytechnics Small & Medium Enterprises Access to finance Setting up of a stock exchange for SMEs Easier access to bank finance SMEs in manufacturing as part of priority sector lending Government procurement Stipulation of local value addition for procurement of equipments by government / government agencies Solar energy IT hardware, IT based security systems Fuel efficient transport equipment Equipments for infrastructure sector power, roads, mining, aviation, shipping, railways Clustering and aggregation - National Investment Manufacturing Zones (NIMZ) Manufacturing Industry Promotion Board (MIPB) chaired by Union Minister of Commerce & Industry will monitor the implementation of the National Manufacturing Policy 2017. Deloitte AP ICE, Ltd. 13
Focus on Make in India Approved - NIMZs Highlights Ahmedabad-Dholera Investment Region, Gujarat Shendra-Bidkin Industrial Park City, Aurangabad, Maharashtra Manesar-Bawal Investment Region, Haryana Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh Dighi Port Industrial Area, Maharashtra Jodhpur-Pali Investment Region, Rajasthan Kuhi and Umred Taluka of Nagpur district, Maharashtra Tumkur, Karnataka Chittoor, Andhra Pradesh Medak, Telangana Prakasam, Andhra Pradesh Gulbarga, Karnataka Kolar, Karnataka Bidar, Karnataka Kalinganagar, Jajpur District, Odisha Ramanathapuram District, Tamil Nadu Auraiya District, Uttar Pradesh Jhansi District, Uttar Pradesh The NIMZs in Uttar Pradesh, Haryana, Rajasthan, Gujarat, Madhya Pradesh and Maharashtra are aligned to the Delhi Mumbai Industrial Corridor (DMIC) project An infrastructure project of USD 90-billion, with financial & technical support from Japan amounting to USD 4.5 billion Other Industrial corridors include: Bengaluru Mumbai Economic Corridor, Amritsar Kolkata Industrial Corridor, Chennai Bengaluru Industrial Corridor and Vishakhapatnam Chennai Industrial Corridor Except for Andhra Pradesh, NIMZ in other states could not be started due to unavailability of 50 sq. km. DIPP henceforth relaxed the requirement of land to 10 sq. km 2017. Deloitte AP ICE, Ltd. 14
Key Incentives available in India for Infrastructure companies Income-tax 100% deduction for capital expenditure* allowed in year of incurrence Sectors such as roads, highway projects, water supply projects, ports, etc. are covered. Power sector not covered. 100% deduction of profits for approved housing projects* Housing projects approved before 31 March 2019 are eligible Minimum alternate tax applicable (tax credit available for set-off) *Subject to fulfilment of specified conditions Indirect taxes Increased ability to take input credits under the GST regime Lower GST rate of 5% has been prescribed for renewable sector (average rate of 18% prescribed for other sectors) 2017. Deloitte AP ICE, Ltd. 15
Key Incentives available in India Other tax and fiscal Nature of benefit Taxpayer category Sunset date Additional depreciation @ 20% on new P&M acquired and installed (part of overall 100% depreciation) Additional depreciation @ 35% on new P&M acquired and installed (part of overall 100% depreciation) Manufacturing & power generation sectors Manufacturing sector in backward areas* No sunset date 31.3.2020 Investment allowance @ 15% if actual cost of new P&M acquired and installed > Rs. 25 Cr in a FY Manufacturing sector 31.3.2018 Investment allowance @ 15% if new P&M acquired and installed after 31.3.2015 Weighted Deduction of expenditure (except land & building) on notified skill development projects Deduction for 3 years at the rate of 30% of additional wages paid to the new regular workmen employee Manufacturing sector in backward areas* Manufacturing and other specified sectors All taxpayers 31.3.2020 150% till 31.03.2020; 100% after 31.3.2020. No sunset date Weighted deduction of expenditure incurred on scientific research effective reduction in tax cost. All taxpayers 150% till 31.03.2020; 100% after 31.3.2020. * Andhra Pradesh, Telangana, West Bengal and Bihar 2017. Deloitte AP ICE, Ltd. 16
Key Incentives available in India Other tax and fiscal An SEZ is defined to mean a specifically delineated duty free enclave and is deemed to be a foreign territory for the purposes of trade operations, duties and tariffs A SEZ unit needs to have a positive net foreign exchange earning i.e. primarily Export earnings Income-tax - Business income earned from exports by SEZ unit is eligible for income tax benefits Year 1-5 Year 6-10 Year 11-15 100% of export profits are exempt 50% of export profits are exempt Lower of 50% of export profits or amount transferred to special reserve However, profits of SEZ unit are subject to MAT regime, MAT Tax available as a credit to be offset against regular tax over the next 15 years Indirect taxes Upfront exemption from customs duty and GST available (subject to conditions). These Income-tax benefits are available to units which commence eligible activities on or before 31 March, 2020 2017. Deloitte AP ICE, Ltd. 17
Dispute resolution routes
Dispute resolution Process Robust Judiciary Process for resolving direct and indirect tax issues. Amendment to Arbitration Act to streamline institutional dispute resolution arrangements in infrastructure Indian Supreme Court final decision maker Tax Payer as well as Tax Authorities have a fair chance of appealing to Higher authorities. 2017. Deloitte AP ICE, Ltd. 19
Income tax - Dispute resolution routes Time frame and other alternatives Conducted by members of the Indian revenue To be completed by November 30 Tax return/ TP filing TP/ Tax Audit 33/45 months from the end of financial year which is under TP/ Tax Audit Varies, normally 2 years CIT (Appeals)* Dispute Resolution Panel 9 months Conducted by independent judiciary Tribunal High Court Cumulatively may take 8 years (A) Can simultaneously follow MAP** Supreme Court (B) * CIT(Appeals) Commission of Income-tax (Appeals) ** MAP Mutual Agreement Procedure Other alternatives Authority of Advance Ruling (AAR), Advance Pricing Agreement (APA) or Safe Harbour Rules (SHR) 2017. Deloitte AP ICE, Ltd. 20
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