India

General Information

Country Name: Republic of India
Currency: Indian Rupee (INR, ₹)
Primary Tax Authority: Central Board of Direct Taxes (CBDT) & Central Board of Indirect Taxes and Customs (CBIC)

Key Legislation:

Constitution of India: Articles 265-289 cover taxation powers, emphasizing “no tax shall be levied or collected except by the authority of law.”
Income Tax Act, 1961: Governs the levy, administration, and collection of income tax on individuals and corporations.
Goods and Services Tax (GST) Act, 2017: Regulates the indirect tax on goods and services, replacing previous indirect taxes such as excise duty, VAT, and service tax.
Finance Act: Annually modifies various tax provisions, including rates and exemptions.
Wealth Tax Act (repealed in 2015): Previously taxed the net wealth of individuals, companies, and Hindu Undivided Families (HUFs).
Taxation Laws (Amendment) Act, 2021: Addresses taxation of indirect transfers, particularly with respect to retroactive tax issues.
Central Goods and Services Tax (CGST) Act: Governs the application of GST across India except for a few states.

Tax Authority and Collection Competence

Fiscal Authority Allocation:
India has a quasi-federal tax system, where taxation powers are shared between the central government and the states.

Taxes Collected by Central Authorities:

Income Tax (including Corporate Tax)
GST (Central GST – CGST)
Customs Duties
Excise Duty (now largely subsumed under GST but still applies to petroleum and alcohol products)
Securities Transaction Tax (STT)

Taxes Collected by State Authorities:

State GST (SGST)
Stamp Duty
Property Tax (levied by municipalities)
Professional Tax (levied by some states)
Vehicle Tax (road tax collected by states)

Revenue Sharing Mechanisms:
GST is shared between the central and state governments. Revenue sharing formulas are defined by the Constitution and the GST Council, which ensures equal distribution of GST revenues across states.

Corporate Income Tax (CIT)

Standard CIT Rate:

For domestic companies: 22% (effective tax rate ~25.17% including surcharge and cess).
For new manufacturing companies: 15% (effective tax rate ~17.16%).
For foreign companies: 40% (effective tax rate ~43.68%).

Minimum Alternate Tax (MAT):
Companies with substantial book profits but low or no taxable income must pay MAT at 15% on book profits.

Taxable Income Definition:
Worldwide income of resident companies is subject to tax, while non-resident companies are taxed only on Indian-sourced income.

Deductible Expenses:
Operating expenses, depreciation, and interest (subject to thin capitalization rules). R&D expenses receive additional deductions.

Loss Carryforwards/Carrybacks:
Losses can be carried forward for eight years. No carryback is allowed.

Tax Incentives:
India offers tax holidays for special economic zones (SEZs), infrastructure, and startup ventures. Specific deductions for R&D and renewable energy projects also exist.

Value-Added Tax (VAT)/Goods and Services Tax (GST)

Standard GST Rate: 18%
Reduced Rates: 5%, 12%, 28% (applicable to different categories of goods and services)
Exemptions: Healthcare, education, and essential goods such as basic food items.

Scope of GST:
Applies to most goods and services supplied within India. Exports are zero-rated, and imports are subject to IGST (Integrated GST).

GST Treatment of Cross-Border Transactions:
Exports are zero-rated, while imports incur IGST. Services consumed outside India are not subject to GST.

Personal Income Tax (PIT)

PIT Rates:

Progressive tax rates from 5% to 30%.
Income below ₹2.5 lakh (~€3,000) is exempt.
30% rate applies to income exceeding ₹10 lakh (~€12,000).
Surcharges of 10% to 37% apply on income exceeding ₹50 lakh (~€60,000).

Taxable Income Thresholds:

The basic exemption limit for individuals under 60 is ₹2.5 lakh.
Additional deductions are available for senior citizens.

Deductions and Exemptions:

Standard deductions for salaried individuals.
Deductions for contributions to retirement savings, life insurance premiums, housing loan interest, and medical expenses under various sections of the Income Tax Act (e.g., Section 80C, 80D).

Treatment of Foreign Income:
India uses a residence-based taxation system. Residents are taxed on their global income, but relief is available under Double Tax Avoidance Agreements (DTAA).

Special Rules for Expatriates:
Non-resident Indians (NRIs) are taxed only on Indian-sourced income, with certain allowances for expenses like housing and relocation.

Additional Mandatory Contributions

Overview:
In India, mandatory social security contributions, such as the Employee Provident Fund (EPF), are applicable to salaried employees, alongside income tax.

Contribution Rates:

Employee Provident Fund (EPF): 12% of salary contributed by both employee and employer.
Employee State Insurance (ESI): 0.75% of salary from employees and 3.25% from employers (applies to those earning below ₹21,000 per month).
Gratuity Contributions: Payable by employers for employees who have worked for five years or more.

Contribution Thresholds:
Contributions to EPF are mandatory for employees earning up to ₹15,000 per month, but higher earners can voluntarily participate.

Employer and Employee Contributions:
Contributions are shared equally between employers and employees for EPF and ESI.

Withholding Taxes

Dividends: 10% withholding tax (domestic), reduced under DTAs.
Interest: 5% withholding tax on foreign loans, 10% on domestic interest payments.
Royalties and Fees for Technical Services: 10% withholding tax for non-residents.

Transfer Pricing Rules

Documentation Requirements:
India follows OECD guidelines for related-party transactions.
Arm’s Length Principle:
Transactions must be conducted at market value between related entities.

Penalties for Non-Compliance:
Penalties up to 2% of the transaction value can apply for failure to maintain adequate documentation.

Special Tax Regimes

Special Economic Zones (SEZs):
Income tax holidays for businesses operating in SEZs.
Incentives for Startups:
Tax holidays and specific deductions under the Startup India initiative.

Other Taxes

Stamp Duty:
Imposed on real estate transactions and certain financial documents. Rates vary by state.

Capital Gains Tax:

Short-term gains: 15% for listed securities held for less than 12 months.
Long-term gains: 10% for listed securities held for more than 12 months (exempt up to ₹1 lakh).
Gains from real estate are taxed at 20% with indexation benefits.

Inheritance Tax: None.
Gift Tax: Gifts exceeding ₹50,000 are taxable under the recipient’s income.

Double Taxation Agreements (DTAs)

Key Partner Countries:
India has DTA agreements with over 90 countries, including the US, UK, Germany, and France.

Reduced Withholding Tax Rates:
Dividends, interest, and royalties benefit from reduced rates under DTA agreements.

Local Taxes

Property Tax:
Administered by local authorities, with rates varying by state.

Compliance and Reporting

Corporate Tax Filing Deadlines:
The deadline for corporate income tax returns is typically October 31 of the following year, with extensions available in some cases.

GST Filing Requirements:
Monthly or quarterly GST returns must be filed, along with an annual return.

Penalties for Late Filing/Non-Compliance:
Interest and penalties apply for late payments or non-compliance with GST or income tax filings.

Recent Developments

Recent Tax Law Changes:

India introduced a new personal income tax regime with lower rates but without deductions for those who opt for it.
The “Faceless Assessment Scheme” was introduced to eliminate personal interaction between taxpayers and tax authorities, streamlining the tax assessment process.
Amendments were made to address retrospective taxation on indirect transfers, particularly impacting foreign investors.

Upcoming Reforms:
India is considering further simplifications in corporate taxation and reducing the compliance burden on MSMEs (Micro, Small, and Medium Enterprises). Efforts to promote digitization in tax administration are also ongoing.

Global Tax Initiatives:
India has been an active participant in the OECD BEPS project and supports a global minimum tax under the G20 framework.

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