In this article, we outline the key tax responsibilities for both Domestic and Foreign companies operating in India with regards to the following areas:
- Corporate Income Tax
- Value-Added Tax ( VAT )
- Goods & Service Tax ( GST )
- Withholding Tax
Corporate Income Tax : Corporate income tax for domestic companies (including limited liability partnerships) is 30 percent, while foreign companies in India are taxable at 40 percent. Foreign companies with contractual work in India will be subject to income tax of 40 percent on net income earned from the contract.
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.
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 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 either nil, negative or insignificant. In such cases, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any 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 percent 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 percent of the adjusted book profits.
VAT (Value-added Tax) and GST (Goods & Service Tax) : 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. Every business is required to undertake VAT registration, but businesses with less than INR. 500,000 turnover are exempt from VAT. India permits VAT refunds against all categories of goods and services upon export.
VAT is applied on each stage of sale with a mechanism of credit to keep track of the VAT paid. There are four tiers of VAT, covering 550 items :
- 1 percent for essential commodity, bullion and precious stones;
- 4 percent on industrial inputs, capital goods and items of mass consumption including medicine, drugs, agricultural and industrial inputs, capital and declared goods; and
- 12.5 percent all other items.
In addition, petroleum products, tobacco, liquor, etc., attract higher VAT rates that vary from state to state.
The VAT is implemented at the state level. There is no common, national VAT Act; each state has their own VAT regulations, some of which have undergone recent VAT reforms. VAT reporting is either monthly or quarterly, depending on the state. Every business is required to register their VAT, although businesses with less than INR. 500,000 turnover are exempt from payment.
Currently, 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 products manufactured. The general rate is 12 percent, with the rates for other goods varying greatly. The government of India is currently finalizing negotiations for a comprehensive indirect tax reform, which will introduce the new goods and service tax (GST). The tax will replace current VAT once implemented in April 2013.
The dual GST model would come with two tax rates: one that will be charged uniformly across the states and another by the central government. Legislation is still being shaped, but it is likely that virtually all goods and services will be included, with minimum exemptions including alcohol, tobacco and petroleum products.
Until the introduction of the GST, a service tax is also in operation. This is charged at a rate of 10 percent with 3 percent education cess on the value of total tax. Taxable services, which are listed in the Finance Act, are largely liable to be paid by the service provider. Some service taxes are liable to be paid by the recipient of the service (an advisor can assist in identifying these cases).
Withholding Tax : When Indian companies repatriate dividends to their overseas parent companies, they are subject to 15 percent dividend distribution tax, unless otherwise stipulated under a double taxation avoidance agreement.