International Tax: India Overview

International Tax: India Overview In conjunction with Leading Edge Alliance Partner Dezan Shira & Associates February 2013

Boston 888-KLR-8557

www.KahnLitwin.com Newport Providence Waltham [email protected]

2013 International Tax Guide: India Foreign Investment plays an important role in every economy. This applies to US companies investing in the Asian markets, and foreign domiciled companies investing into the United States. We understand that every business has a unique set of facts and circumstances that trigger specific tax obligations. That said, understanding the tax year and corporate tax filing requirements is a key starting point when doing business in India. I.

About India As the world largest democracy, India has a population of more than 1 billion, spread over 3.29 million square kilometers. The country’s enduring institutions are rooted in the principles of democracy and justice. It is a union of 28 Federal States and 7 centrally administered union territories. India is equally known for its varied customs and even more diverse traditions. The country represents different faiths and has been the origin of many different belief systems worldwide, including Hinduism, Buddhism, Jainism and Sikhism. The official language of India is Hindi, while English is the official secondary language. However, there are several hundred spoken languages 22 of which are official.

II.

Corporate Income Tax Domestic companies (companies formed in India including subsidiary units with parent companies in foreign countries), including limited liability partnerships, pay a 30% corporate income tax rate in India. Foreign companies in India are taxable at 40%. Foreign companies with contractual work in India will be subject to income tax of 40% on net income earned from contact. What is a foreign company? A company is defined as foreign if it is registered outside of India. Normally a company is liable to pay tax on the income computed in accordance with the provisions of the Income Tax Act. However, previously, there were a large number of companies who had book profits as per their profit and loss account, but were not paying any tax because their income computed as per provisions of the Income Tax Act was neither nil, negative or insignificant. In such cases, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying an income tax. These companies are popularly known as zero tax companies. To tax such companies, Minimum Alternative Tax (MAT) is levied on companies that assess at 18.5% of the adjusted book profits. This is only in the case of those companies where the income tax payable on the taxable income according to normal provisions of the Income Tax Act is less than 18.5% of the adjusted book profits.

Corporate Tax Rates

Domestic 30%

Foreign 40%

III.

Value-Added Tax (VAT) and Goods and Service Tax Value-added tax (VAT) is imposed on only goods, not services in India. VAT is applied at each stage of sale and a credit mechanism keeps track of VAT paid. Every business is required to undertake VAT registration, but businesses with less than INR500,000 turnover are exempt from VAT. Key points about VAT in India: 1. There are four tiers of VAT, covering 550 items Value-Added Tax Essential commodity, bullion and precious stones

Industrial inputs, capital goods and items of mass consumption including medicine, drugs, agriculture and industrial inputs, capital and declared goods.

All other items

1%

4%

12%

Rate

2. Higher VAT rates vary from state to state for the following: a. Petroleum products b. Tobacco c. Liquor 3. VAT is implemented at the state level which means there is no national VAT Act and each state has their own regulations. 4. VAT reporting is either monthly or quarterly, depending on the state. 5. Goods manufactured in India are also subject to excise duty (central VAT) on the value of goods sold or the maximum retail price of the goods sold, depending on the type of product. a. Generally this rate = 12% (this varies greatly depending on the good). NOTE: The government of India is currently finalizing negotiations for a comprehensive indirect tax reform which is expected to be implemented in April 2013.

IV.

Withholding Tax When Indian companies repatriate dividends to their overseas parent companies, they are subject to 15% dividend distribution tax, unless otherwise stipulated under a double taxation avoidance agreement (DTAA).

V.

Individual Income Taxes Individual income taxes in India are paid to the central government on personal income. It is the direct tax paid on income by an individual or a company/firm within a given financial year. The Indian Income Tax Department is governed by the Central Board for Direct Taxes and is part of the department of Revenue under the Ministry of Finance.

Individual Income Tax (IIT) in India is based on resident-status and the source of the income. Residents are taxed on their global income whereas non-residents are only taxed on their income that is sourced, received, or accrued in India. Work done in India, regardless of the employer’s international status, will be taxed. As residency determines the tax rate, it is important to understand how resident status is itself determined. This is not wildly complicated, just intricate. The tax filing due date is July 31st, any failure in filing the taxes will attract an interest rate of 1% per month. The interest rate will increase for default in the payment of advance tax. The chart below outlines the individual income tax rates in India. Individual Income Taxes Annual taxable income (INR)

Annual taxable income (US$) (US$1= 55.57 INR)

Individual Income Tax Rate (IIT Rate)

For resident women (who are below 60 yrs on the last day of the previous year) Up to 190,000

Up to 3,419.11

0% 10% (total income - INR Above 190,000 to 500,000 Above 3,419.11 to 8,997.66 190,000) INR 31,000 + 20% (of total Above 500,000 to 800,000 Above 8,997.66 to 14,396.26 income minus INR 500,000) INR 91,000 + 30% of (total Above 800,000 Above 14,396.26 income minus INR 800,000) For resident women (who are below 60 years on the last day of the previous year but no more than 80 years on the last day of the previous year) Up to 250,000

Up to 4,498.33

Above 250,000 to 500,000

Above to 8,997.66

Above 500,000 to 800,000

Above 8,997.66 to 14,396.26

Above 800,000

Above 14,396.26

0% 10% (total income - INR Above 250,000 to 500,000 Above 4498.33 to 8,997.66 250,000) INR 25,000 + 20% (of total Above 500,000 to 800,000 Above 8,997.66 to 14,396.26 income minus INR 500,000) INR 85,000 + 30% of (total Above 800,000 Above 14,396.26 income minus INR 800,000) For resident super senior (who is 80 years or more at any time during the previous year) 0% 20% (total income - INR 500,000) INR 60,000 + 30% (of total income minus INR 800,000)

For any other individuals Up to 180,000

Up to 3,239.16

Above 180,000 to 500,000

Above 3,239.16 to 8,997.66

Above 500,000 to 800,000

Above 8,997.66 to 14,396.26

Above 800,000

Above 14,396.26

0% 10% (total income - INR 180,000) INR 32,000 + 20% (of total income minus INR 500,000) INR 92,000 + 30% of (total income minus INR 800,000)

VI.

Key Taxation Deadlines in India The following are the key tax deadlines in India: Date

VII.

Deadline

March 31st

Fiscal Year End

July 31st September 31st

Personal Income Tax Filing Corporate Tax Filing

General Anti Avoidance Rules (GAAR) GAAR has been poorly received in India due to the somewhat more stringent versions of this rule issued by the Government between 2009-2012, as well as the perceived lack of adequate consultation with stakeholders even though there was some accommodation of stakeholder’ concerns. As India opens up its economy, it has to make its administrative processes, in particular its tax administration, internationally comparable. Without that, invoking modern and benchmarked control instruments are likely to be misinterpreted and misused, counteracting the objectives of equity and revenue productivity from taxation. As of January 14, 2013, the Indian Government postponed the GAAR implementation until 2016 and has accepted major recommendations from the Shome Committee.

VIII.

Double Taxation Avoidance Agreement (DTAA) In a recent ruling, the Indian High Court ruled that to the extent an Indian taxpayer pays “trade tax” in a country like Germany, that tax is covered under the DTAA and the taxapayer can claim a benefit. This becomes important for hybrid entities in India, to ensure they can take the DTAA benefit. There are a number of ways in which you can structure your global activities, depending upon your business model. What is key, is choosing a structure that is compatible with the way the group anticipates operating in the specific countries. That said, there will be tax consequences from a US and local country perspective. If you have questions regarding international tax rates or specific business related tax matters and would like to discuss further please contact Neelu Mehrotra, Principal or any member of the International Tax Services Group. KLR is a premier provider of international tax services to middle market companies and works with both foreign-based companies moving to the U.S. market as well as domestic companies that do business around the world. The KLR International Tax group is available to assist clients with any tax issues pertaining to either inbound or outbound tax issues, both from a corporate perspective as well as for multinational families. Those issues may include the IRS’ Voluntary Disclosure Program, planning for intellectual property transfers, transfer pricing, export incentives, and global restructuring projects.

Sources: Leading Edge Alliance – KLR is an active member of the Leading Edge Alliance, an international professional association of over a hundred independently-owned accounting and consulting firms. The Leading Edge Alliance enables KLR to access the resources of multibillion dollar global professional services organization, providing additional industry expertise, professional training and education, and peer-to-peer networking opportunities nationally and globally, around the corner and around the world. Dezan Shira & Associates, Inc. is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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