The Indian Tax System

The taxation system in India is very well structured. Taxes in India are both imposed by Central Government and State Government and some minor taxes by the local authorities. Income Tax comes under the ambit of Direct Tax, Goods and Service Tax (GST) and Customs Duty are the Indirect taxes all levied by Central Government. GST is dual and both Central and State Government impose it. State Governments have the power to levy other taxes like Stamp & registration tax, municipal tax, profession tax, and other such taxes. The Indian tax year extends from 1 April of a year to 31st March of the subsequent year. A corporation’s tax year also ends on the same.

	Central Government Tax	State Government Tax
Direct Tax Imposed on individuals, corporate entities and cannot be transferred to others	·         Income Tax	·         Stamp Duty and Registration ·         Property Tax
Indirect Tax Imposed on goods and services and collected by intermediaries selling goods or services	·         Custom duty ·         Central Goods and Service Tax ·         Integrated GST	·         State Goods and Service Tax

Earlier the nature of the taxation system was quite complex and there were multiple taxes to be paid, which was a big barrier to ease of doing business. But over the last few years, the Central and many State Governments decided to undertake various policy reforms and process simplification. The objective of such reforms was to ease the compliances, broaden the tax base, digitize the system, and eliminate the multiplicity of taxes. This led to India’s meteoric rise to the top 100 in the World Bank’s Ease of Doing Business ranking, India’s current position is 63 in 2019. 

Now let us discuss the various taxes in a nutshell

Income Tax for Individuals

Tax incidence for individuals depends on his residential status, which is defined on the physical presence in India as per the Income Tax Act. An individual is deemed to be resident in India in any previous year if he is in India for a period of 182 days or more during the previous year. In general, all income received or accrued in India is subject to tax. Types of Income that are subject to tax in India are – Employment Income, Income from House Property, Self-employment and business income, Taxation of Employee-Provided Stock Options(ESOPs), Capital Gains on Assets and Income from Other sources like investments and lotteries. Tax rate for AY 2020-21 (i.e. FY 2019-20)

Tax Rate	Income (in INR)
Nil	Upto INR 250,000
5%	INR 250,001 – INR 500,000
20%	INR 500,001 – INR 1,000,000
30%	Above INR 1,000,000

Corporate Tax 

Tax incidence for corporations depends on the residential status of the company, i.e., whether the company has been incorporated in India or its place of effective management lies in India. For taxation, a corporation income comprises – income from house property, income from the business, capital gains realised on any disposition of the Corporation’s capital asset and residual income arising from non-business activities.

The deductions from the above-mentioned incomes are as follows –

• A standard deduction for repairs in case of house property income,
• For business income standard deductions are allowed such as business-related expenses, provisions for duties and taxes, bonuses, leave salary and interest on specified loans are deductible on an accrual basis,
• Interest for loans taken for business purpose are allowed

 Tax rate for AY 2020-21 (i.e. FY 2019-20)

• Domestic companies

• Turnover in FY 2017-18 < INR 4000mn : 25%
• Turnover > INR 4000mn in FY 2017-18 : 30%
• Surcharge 7%-12% depending on the income
• Cess of 4% is applied to the total surcharge and tax payable
• Foreign companies: 40%
• Surcharge 2%-5% depending on the income
• Cess of 4% is applied to the total surcharge and tax payable

Tax Incentives

There are many such deductions and incentives across the income tax act, but some of the prominent ones certainly help the businesses to derive maximum tax benefits out of investments.

• Investment Allowance, where the incentive is offered to business to encourage capital investment in backward areas from which they can deduct a specified percentage of capital costs, in addition to normal depreciation, from taxable income.
• Units which will set up in International Financial Service Centre (IFSC) will get multiple tax concessions like in capital gain, dividend distribution tax and minimum alternate tax is 9% instead of 15% elsewhere.
• If any corporation employs new workmen with a salary of less than equal to Rs.25000/- per month, the entity shall be eligible for a deduction of 30% of such wages for three years subject to fulfilment of some prescribed conditions.
• Farm producer companies can avail 100% deduction of profits for 5 years subject to some conditions.
• The tax incentive is also granted to startups where they are given tax holiday for consecutive three years (from initial seven years) in respect to 100% of their profits, including fast-tracking of patent applications with a rebate of 80 % on application fees.

Minimum Alternate Tax (MAT)

Companies try to minimise giving taxes by taking advantage of depreciation, deductions, exemptions, etc from the government. So the Government imposes a Minimum Alternate Tax as an advance tax on these companies.

The amount of tax paid is higher of the two – the tax liability computed under general provisions or MAT which is charged at 15% (from FY 2019-20) of book profit which is Net Profit as per Profit and Loss statement, as per MAT Provision

In case MAT Liability exceeds Normal Tax, such excess is available as a credit – to be offset in the next 15 years when Normal Tax exceeds MAT

General anti-avoidance rule (GAAR)

GAAR is an anti-avoidance rule framed to identify and restrict arrangements and transactions that are specifically incurred with a motive of tax evasion. It applies to only impermissible avoidance arrangement and monetary threshold of tax benefit is Rs. 3 crores or more.    

Taxation for LLPs

Tax incidence of Limited Liability Partnership depends on the residential status of LLP, i.e., whether the control and management of its affairs are situated wholly or partially in India. When LLP distributes its profits to partners, they are not taxed in the hands of the LLP or its partners. Repatriation of capital contribution (upon dissolution) is permissible without any thresholds and is not subject to any additional taxes. Whereas for any Company formed in India(wholly-owned subsidiary or Joint Venture), profit repatriation by way of a dividend is subject to Dividend Distribution Tax (DDT)in the hands of the company.

Withholding Tax

The Central Government is liable and empowered to levy and collect withholding tax. Tax is charged based on the income of the person and is deducted by payers for to the payment in form of Salary, Work Contract, Commission, Rent, Interest, Professional Services, Technical Services, etc.

 It is required for a foreign company to obtain a Permanent Account Number (PAN). The foreign company has to furnish its PAN to the payer in India. If the company fails to furnish the PAN or does not have a PAN then withholding tax will be charged as in relevant section or 20% whichever is higher.

Advance tax

Advance tax is payable in a case where the amount of tax payable in respect of such financial year is Rs. 10,000 or more. It applies to all persons whether Individual, HUF, Firms, LLP, Company, AOP, BOI. Non-residents are also required to deposit advance tax. If there is a shortfall in the payment of advance tax, on the final assessment by the assessee at the time of filing its income tax return, interest shall be payable on the unpaid amount of advance tax.

  Advance Tax Payment Schedule and Deadline

  

Advance Tax Payment Schedule and Deadline
Due Date	Advance Tax Payable
On or before 15th June	15% of Advance Tax
On or before 15th September	45% of Advance Tax
On or before 15th December	75% of Advance Tax
On or before 15th March	100% of Advance Tax

 Transfer Pricing

In India, Transfer Pricing provisions are applicable only in case of an international or specified domestic transaction between associated enterprises. Arm’s length transaction is one negotiated by related parties, each one acting in its interest and it is the basis for a fair market value determination.

India, like Australia and Mexico, has adopted safe harbour rules that are consistent with arm’s length standard. Assesses engaged in contract research and development services relating to manufacturing and export of core auto components apart from generic pharmaceutical drugs and those who have made intra-groups loans or provided corporate guarantee may also opt for safe harbour subject to specified conditions.

Accordingly, India adopted a three-tiered approach by envisaging a master file, a local file and a country-by-country report. This is a landmark development and fulfils a long-felt need of the tax administrations particularly, of the developing countries for access to the required information for transfer pricing analysis.

Goods and Service Tax

Goods and Services Tax (GST) is one of the biggest reform in India’s history. It is a comprehensive, multistage, destination-based tax: comprehensive because it has subsumed almost all the indirect taxes except few; multi-staged as it is imposed at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer and as a destination-based tax, as it is collected from point of consumption and not point of origin like previous taxes. Now, there is only single tax i.e. GST and it has made the dream of One Nation, One Tax feasible.

Compliance and Exemptions

GST registration is mandatory for those businesses whose turnover is more than 40 lakh rupees and in some states, the limit of exemption is 20 lakhs rupees, w.e.f. 1 April 2019. Non-compliance in case of registration or payment may also lead to imprisonment.

Some types of supplies are exempted like - Exports, Supplies made to SEZ or SEZ Developers, salt, grains, jaggery, fresh milk, fresh fruits, curd, bread. Alcohol for human consumption and petrol do not come under the purview of GST law.

Customs Duty

Customs Duties are charged almost universally on every good which are imported into a country and some exports from the country. The rates of customs duties are either specific or on ad valorem basis, that is it is based on the value of goods. Basic customs duty, Additional custom duty, Protective duty, Anti-dumping duty are some types of import customs duty.

Upcoming reforms will further make India more attractive to Foreign Investors and Collaborators, one of the major is the new Direct tax Code that is set to replace six-decade-old Income Tax Act, it would leave more money in hands of the Individual taxpayers, further reduce the tax burden on corporations and aim at a uniform rate of 25% across the board, might come up with special set of incentive and provisions for start-ups, make tax litigation process simpler and less ambiguous. The Goods and Services Tax (GST) has been another milestone, and it is still evolving and has started to settle down well. The shift from clumsy to a digital system has given impetus to new businesses in ease of setup and operations. A New India is in the making and it is time to reap the maximum benefits of this robust economy.