Tax Rates in India
As the Global Financial Crisis rumbles on, with certain reduced growth rates on the horizon for Europe and the United States, multinationals are looking elsewhere to achieve their business goals. Asia, a region riddled with wars and ineffective economic policies for much of the past century, has finally stepped into the front line of global trade and commerce. Here we look at the taxes most applicable to foreign businesses and individuals in India, i.e., corporate income tax, value-added tax, goods and service tax, standard tax on dividends and individual income tax. These rates are based on domestic laws and do not take into consideration reductions or exemptions provided by double tax treaties.
Corporate Income Tax
Corporate income tax for domestic companies, including Limited Liability Partnerships (LLPs), is 30 percent, while foreign companies in India are taxable at 40 percent. A company is considered a foreign company if it is registered outside of India. Companies formed in India are considered domestic companies, including subsidiary units with parent companies in foreign countries.
Foreign companies with contractual work in India will be subject to income tax of 40 percent on net income earned from the contract.
Value-added tax (VAT) in India is imposed only on goods, not on services. VAT is applied at each stage of sale and a credit mechanism keeps track of VAT paid.
There are four tiers of VAT, covering 550 items:
Essential commodities: 1%
Gold or silver bullion and precious stones: 1%
Industrial inputs, capital goods and items of mass consumption including medicine, drugs, agricultural and industrial inputs, capital and declared goods: 4%
All other products, including petroleum products, tobacco, liquor, etc. (These items may attract higher VAT rates that vary from state to state). Sugar, textile and tobacco products are exempt from VAT for one year: 12.5%
Every business is required to undertake VAT registration, but businesses with less than INR500,000 turnover are exempt from VAT. India permits VAT refunds against all categories of goods and services upon export.
When Indian companies repatriate dividends to their overseas parent companies, they are subject to 15 percent dividend distribution tax.
Where foreign subsidiaries repatriate dividends to an Indian company, the dividend rate is currently 30 percent, but is expected to be reduced to 15 percent in the future.
Individual Income Tax
India imposes different sets of progressive tax rates depending on gender and age group, with each group having a different exemption amount. These rates range from 10-30 percent.
Individual income tax (IIT) calculation in India is also based on resident status and source of the income. An individual will be deemed a resident in India in any previous year if he/she meets any of the following two conditions:
(a) He/she is in India in that year for a period or periods aggregating to 182 days or more, or
(b) Within the four years proceeding that year, he/she has been in India for a period or periods aggregating to 365 days or more, and has been in India for 60 days or more in that year.
Whereas residents are taxed on their global income, non-residents are only taxed on income that is sourced, received or accrued in India. Work done in India, regardless of the employer’s residence status, will be taxed.
Dividend income is exempt from tax in India.
Dezan Shira & Associates is a specialized foreign direct investment practice, providing business and legal advisory, tax, accounting, payroll and due diligence service to multinationals investing in the emerging markets of Asia. Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 170 business advisory and tax professionals. For information or advice on establishing business operations in India, please contact Dezan Shira & Associates at firstname.lastname@example.org or visit www.dezshira.com.