Companies in India are taxed on their earnings based on their residency status. A corporation with a resident status in India will be taxed on all its worldwide revenue, whether earned in India or elsewhere, whereas a nonresident company will only be taxed on income received, accumulated, or arising in India.
Corporate income tax
Under the Income Tax Act, 1961, corporate tax is levied on the income earned by companies. Any company registered under the Companies Act, or any foreign company that has its place of effective management in India will be considered a domestic company. All income earned by a domestic company is taxed under the corporate income tax laws. India has among the highest corporate tax rates in the world, but the effective tax liable differs across industry and sector.
Good and Services Tax (GST)
India’s biggest tax reform, the goods and services tax (GST), was implemented on July 1, 2017. GST is a single value-added tax levied on the manufacture, sale, and consumption of goods and services at the national level. The single tax system subsumed all the previously existing federal and state levies with an aim to create a single, uniform market across India.
Different categories of goods and services are taxed differently under GST. The GST Council has provided a four-tier tax structure tied at 5 percent, 12 percent, 18 percent, and 28 percent, with lower rates for essential items and the highest for luxury and de-merits goods.
There are three components to GST in India:
- CGST: Central goods and services tax, levied on an intra-state sale and collected by the central government.
- SGST/UGST: State/union territory goods and services tax, levied on an intra-state sale and collected by the state or union territory government.
- IGST: Integrated goods and services tax, levied on interstate sales and collected by the central government. The IGST is the aggregate of the CGST and SGST; the SGST is appropriated from the state where the supplies are consumed.
Withholding tax in India
Withholding tax (WHT), also called retention tax, is an obligation on the individual (either resident or non-resident) to withhold tax when making payments of a specified nature, such as rent, commission, salary, for professional services, to satisfy contract provisions, etc. – at rates specified in India’s tax regime.
The applicable tax rate is the rate prescribed in the Income Tax Act, 1961 or relevant Double Taxation Avoidance (DTA) Agreement, whichever is lower. Non-residents are liable to pay taxes in India on source income, including:
- Interest, royalties, and fees for technical services paid by a resident
- Salary paid for services rendered in India
- Income arising from a business connection or property in India
Individual income tax
Businesses in India are required to withhold Individual Income Tax (IIT) from an employee’s salary monthly. During the first seven days of each month, employers must deposit the deducted tax from the previous month with the central government.
Employers are required to withhold tax on various payments including rent, interest, dividend, royalty, and service income. In this sense, the compliance requirements for employers are complex in India compared with some other countries. Businesses should actively coordinate with employees to understand the details of supplementary income they are receiving and make the relevant calculations and submission of tax before deducting them from the salary.
Under India’s individual tax regime, different tax rates are assigned to respective income brackets (tax slabs), which is the income earned by a taxable person.
India opened up its economy in 1991 with the implementation of several reform policies encouraging foreign trade and foreign direct investment. This significantly increased transactions between the same group of companies and the transfer price between them began to impact the profits and losses of Indian companies. To address these concerns, India's tax authorities first introduced transfer pricing regulations (TPR) through the Finance Act, 2001, and made it effective from the financial year ending March 2002. These provisions were governed by the Income Tax Act, 1961, and based on the transfer pricing guidelines of the Organization for Economic Co-Operation and Development.
India’s transfer pricing laws are enumerated under sections 92 to 92F of the Indian Income Tax Act, 1961 and cover intra-group cross-border transactions. Rules and regulations prescribe that income arising from international transactions or specified domestic transactions between associated enterprises (AE) should be computed using the arm’s-length price principle. India’s TP regulations provide a detailed statutory framework for the computation of reasonable, fair, and equitable profits and tax in India. The goal is to prevent the shifting of profits by manipulating prices charged or paid in international transactions, thereby eroding India’s tax base.
Remitting profits from India
Prior to investing in India, companies must know how to repatriate their profits from the country. Though sending company profits from India is much simpler than remitting personal income, the procedures to remit money to the parent company depend upon an entity’s investment model.
The rules and procedures for remitting profits vary depending on the type of entity set up in India.
Tax incentives for business
Tax incentives are available to businesses in India depending on the economic activity, industry, location, and size of the firm. Investors become eligible for most of India’s tax breaks and incentives after registering with the Ministry of Corporate Affairs. Tax incentives tied to specific targets – such as hiring over 50 Indian employees – often require additional permissions from related ministries.
India offers tax relief at both the central and state level. Further, additional incentives are available to investors in specific sectors, while India’s special economic zones (SEZs) offer their own comprehensive tax relief. However, not all tax benefits offered in India are mutually inclusive.
Availing the benefits of one incentive may disqualify investors from applying to others. Businesses entering the Indian market should review the country’s tax incentives carefully and ensure their entry plan provides them with the greatest tax relief possible. For tax incentives issued by individual states, the related state’s directorate of industries is usually the body in charge of granting benefits
Audit and compliance in India
The Companies Act, 2013 mandates that certain classes of companies, are required to appoint an auditor to conduct an audit of the functions and activities of the company. India’s company law prescribes four different kinds of audits for companies, namely internal audit, statutory audit, cost audit, and secretarial audit.
Further, the Income Tax Act lays down the provisions for Tax Audit. The Tax Audit evaluates whether an individual or company has accurately filed income tax returns for an assessment year and ensure proper maintenance and correctness of books of accounts and certifications of the same by a tax auditor.
Here we examine each type of audit, what classes of companies are required to conduct it, and penalty for non-compliance.
Accounting standards in India
Accounting standards are policy documents published by expert accounting bodies or by the government or other regulatory bodies covering aspects of recognition, measurement, treatment, presentation, and disclosure of accounting transactions in financial statements. Accounting standards are applicable to each enterprise based on their classification. Enterprises are classified and labeled as Level I, Level II and Level III companies.
Ind AS 115, India's latest accounting standard, went into effect on April 1, 2018, the first day of the country's new fiscal year. The Ind AS 115 lays down the principles to be applied by an entity in order to report useful information to users of financial statements. These principles include the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.