|
India has a well developed tax structure, with the authority to levy taxes divided between the Central government and the State governments. The Central government levies direct taxes such as personal income tax and corporate tax, and indirect taxes like customs duties, excise duties and central sales tax. The states are empowered to levy state sales tax apart from various other local taxes like entry tax, octroi, etc. In the wake of economic reforms, the tax system has undergone tremendous reform in the past six years. The tax rates have been rationalised and compare favourably with most other countries. Further, tax laws have been simplified to ensure better compliance.
The table below gives a list of the major direct and indirect tax laws and authorities responsible for administering these laws.
* Gifts made after 1.10.98 shall not be treated as gift for the purpose of the Gift Tax Act, 1958.
Tax year and rate The tax year runs from April 1 to March 31. The current rates of taxation (as a percentage of net income) are as follows:
Corporate Residency An entity incorporated in India or having its entire management and control in India is a resident and is taxed on its world-wide income. A non-resident corporation (foreign company) is taxed only on income derived in India from Indian operations, or in certain cases, on income that is deemed to arise in India. Minimum Alternative Tax (MAT) The Finance Act, 1996 introduced the concept of MAT. Under this provision, a company, whose taxable profits are less than 30 per cent of its book profits (profits calculated under the Companies Act, 1956),will have to pay tax on 30 per cent of the book profits at the tax rates in force, as MAT. However, the provisions are not applicable for certain infrastructure projects. The provisions also do not apply to industrial undertakings located in industrially backward states of district, for the years it avails of 100 per cent deduction under Section 80 IA. The Finance Act, 1997 has, moreover, excluded export profits from its purview and introduced a facility to carry forward taxes paid by way of MAT, for setting off against corporate income tax liability over the following five years. Dividends Distribution Tax Dividend income from domestic companies is exempt from tax in the hands of the recipient. In lieu thereof, a 10 per cent tax has been levied on the amount of dividend distributed by domestic companies, in addition to the regular corporate income tax. Calculation of Taxable Income/Gain In arriving at taxable income, outlays incurred wholly and exclusively for business purposes are deductible. Certain expenses are specifically disallowed, or their quantum of deduction is restricted. Depreciation is calculated on the declining-balance method at varying rates and is available for a full year. Depreciation is restricted to 50 per cent if the actual use of the asset is for less than 180 days in the year of acquisition. A company could also earn income under the following heads:
Taxable income is calculated according to the provision for each head of income and then aggregated to determine the total taxable income. Business loss Business losses can be carried forward for eight years. No carryback relief is available. Consolidation/set off of intercompany losses is not permitted. Withholding tax The domestic law provides for the withholding of tax from certain payments including interest, salaries paid to employees, professional fee, payments to contractors. Moreover, taxes have to be withheld from all payments made to non-residents at rates specified under the domestic law or under an applicable tax treaty, whichever is lower. Withholding tax rates on payments to non-residents under the Income Tax Act are as follows:
Residency Taxation of individuals is determined by their residential status. An individual is a "resident" if he stays in India in a tax year (April 1 to March 31)either:
An individual is "ordinarily resident" in the tax year if he has been resident in India for 9 of the preceding 10 years and, in addition, has been in India for a total of 730 days or more in the past 7 years. Individuals not satisfying these conditions are "not ordinarily resident" in India. Determination of taxable income Remuneration for work done in India is taxable irrespective of the place of receipt. Remuneration includes salaries and wages, pensions, fees, commissions, profits in lieu of or in addition to salary, advance salary and perquisites. Taxable payments include all allowances, deferred compensation and tax equalisation payments. Perquisites are taxed beneficially. Capital gains Capital gains on transfer of capital assets situated in India are taxable. Capital gains on assets held for over three years (one years for shares) and certain specified securities are taxed as long-term capital gains. While calculating taxable long term capital gain, the cost of acquisition and improvement are linked to a cost inflation index, with exception. Thereafter the indexed cost of acquisition is deducted from the sale consideration received to arrive at the capital gain. Short-term capital gains are taxed at rates applicable to normal income and at 30 per cent for foreign institutional investors.
The Government offers a wide range of incentives to investors in India to promote industrial growth and development. The important concessions, amongst others, are: For Infrastructure:
Power:
Telecom:
Setting up industrial parks:
Industries in specific regions:
Incentives for exports:
Zones
Other Incentives:
Wealth Tax Wealth tax is levied only in respect of specified non-productive assets, such as residential houses, urban land, jewellery, bullion, motor cars, aircraft, boats and yachts. Productive assets, such as shares' securities, bonds, investments in mutual funds, bank deposits, etc. are exempt from wealth tax. One residential house is exempt from wealth tax. Foreign nationals are exempt from wealth tax on assets held outside India. Net wealth exceeding Rs 1,500,000 is taxable at a flat rate of 1 per cent. Interest Tax Interest tax is levied on banks and certain companies at 2 per cent of the aggregate interest earned on loans and advances made in India, including bill discounting income. Interest tax is not leviable on loans and advances to expatriates.
Sales Tax Sales tax is levied by the Central and State Governments on interstate sales and intra state sales respectively. Sales tax is generally a single point tax. The subsequent sale of a product without further processing is usually exempt from sales tax. Sales tax is also levied on works contracts in most states. There are variations from state to state, both in the value of contracts subject to tax and in the tax rate. There is no sales tax on services and sales in the course of import and export. Works Contract Tax Tax levied on the transfer of property in goods in the course of execution of a works contract is commonly referred to as works contract tax. The term 'works contract' is generally used to mean a contract for executing works, i.e. a contract which, in addition to the services rendered, involves the transfer of property in goods. Excise Duty Excise duty is a tax on production, and is levied on the manufacture of goods within the country. Excise duties are governed by the Central Excise Act, 1994, and the Central Excise Tariff Act, 1985 The Excise laws provide for a Modified Value Added Tax Scheme ('MODVAT') which limits the cascading effect of duty incidence on a number of excisable goods that are used as inputs for other excisable goods. Under the scheme, MODVAT credit can be claimed on the purchase of raw materials and capital goods on which excise duty or the additional duty of customs has been paid This MODVAT credit can be used to set off excise duty payable on subsequent manufacture of goods. All manufacturers of excisable goods are required to register under the Central Excise Rules 1944. The registration is valid as long as production activity continues and no renewals are necessary. Excise duty rates have been rationalised towards an average rate of 18 per cent. Customs Duty A downward trend in customs duty rates has been seen over the last three years. The maximum rate of customs duty has been reduced to 40 per cent. The levy and the rate of customs duty is as per the Customs Act, 1962 ('the Customs Act'), and the Customs Tariff Act, 1975 ('the Tariff Act'), respectively. As per the Tariff Act, customs duty on imports consists of:
Additional customs duty is equivalent to the excise duty that would have been payable if the goods were manufactured in India. The rates of basic duty are specified under the Tariff Act for each item and vary according to the description of the said goods. Such duty rates could be reduced and items be exempted by the Finance Ministry. Valuation of goods for assessment of duty is done in accordance with the Valuation Rules formulated on the GATT principles. Service Tax Service tax at the rate of 5 per cent is levied on, amongst others, telephone, insurance (other than life insurance), share brokerage services, consulting engineers, architects, managing consultants, real estate agents, marketing research agencies, clearing and forwarding agents.
Tax treaties signed by India with various countries are mainly based on the Organisation of Economic Co-operation and Development (OECD) Model. Tax treaties override domestic tax laws with an option to adopt the treaty or the domestic tax law, whichever is more beneficial. This results in a relatively lower tax cost for foreign companies doing business in India. Specifically, income like interest, royalty and fees for technical services are taxed at lower rates than those applicable under the domestic law. These treaties generally provide for complete exemption of profits from operation of ships and aircraft in international traffic. Tax rates under some tax treaties signed by India are given below:
* Withholding tax is on net fees
|
News | Culture | Economy | Sports | Tourism | Polity | Magazine | Info
Media | Science & Tech. | Social Issues | Foreign Relations | States
What's New | Search | Home