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.
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Central Government Tax
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State Government Tax
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Direct Tax
Imposed on individuals, corporate entities and cannot be transferred
to others
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Income Tax
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Stamp Duty and Registration
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Property Tax
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Indirect Tax
Imposed on goods and services and collected by intermediaries selling
goods or services
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Custom duty
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Central Goods and Service Tax
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Integrated GST
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State Goods and Service Tax
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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)
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Tax Rate
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Income (in INR)
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Nil
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Upto INR 250,000
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5%
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INR 250,001 – INR 500,000
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20%
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INR 500,001 – INR 1,000,000
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30%
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Above INR 1,000,000
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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
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Advance Tax Payment
Schedule and Deadline
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Due Date
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Advance Tax Payable
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On or before 15th June
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15% of Advance Tax
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On or before 15th September
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45% of Advance Tax
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On or before 15th December
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75% of Advance Tax
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On or before 15th March
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100% of Advance Tax
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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.
