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Investing in India - a guide to tax laws in India
October, 05th 2011

The Indian economy has been one of the worlds fastest growing economies in recent years, witnessing annual growth of above eight percent for the previous 12 quarters with a Gross Domestic Product of over UDS1 trillion.

Indias abundant supply of low-cost skilled workers has helped it to become a preferred outsourcing destination for a number of information technology and back office services. Due to continuing economic growth and the large domestic consumption, Indian business presence is becoming an integral part of the global strategy for most international business groups. One of the key aspects that companies need to analyze before setting up business in India is its tax laws.

Tax laws in India are fairly complex and comprise of various tax levies; mainly income tax, excise duty (CENVAT), customs duty, service tax, value added tax (VAT) and various other less significant levies. This article provides a brief overview of some of these taxes and identifies some of the tax benefits that may be available.

DIRECT TAXES

Income tax

A tax on income
Applies uniformly across India
Residents are liable to tax on worldwide income
The highest effective tax rate for individuals and domestic companies is 33.99 percent and for foreign companies it is 42.23 percent.
Capital gains are generally taxed at lower rates. The capital gains arising from sale of listed securities held for over 12 months through stock exchanges are exempt from the income tax.
Dividend distribution tax for domestic companies is 16.995 percent.
Companies are liable for a Minimum Alternate Tax (MAT) on book profits of 11.33 percent.
Transactions with associated enterprises are subject to arms length pricing arrangements.
India has Double Tax Avoidance Treaties with over 70 countries including most of the developed and developing countries.
 

Wealth tax

A tax on certain prescribed assets like cars, jewellery, aircrafts, urban land etc.
Applies uniformly across India
The annual tax rate is one percent for net taxable wealth exceeding INR1.5 million or approximately USD36,000.
 

INDIRECT TAXES

 

Centralized value added tax (CENVAT)

Previously known as excise duty
A tax on a large variety of manufactured items (essentially a tax on manufacturing)
Applies uniformly across India
The rate of tax generally varies from zero to 32 percent, with even higher taxes on certain items. However the CENVAT duty is levied at 14 percent on most of the items
Value Added Tax (VAT) mechanism applies to this levy wherein CENVAT credit is allowed against CENVAT payable in respect of certain inputs, input services and capital goods used in manufacturing of Cenvatable items

Service tax

A tax on more than 100 specified services
Applies uniformly across India
The effective rate of tax is 12.36 percent
VAT mechanism applies to this levy wherein the inter-sectoral credit between goods and services is allowed (restricted to CENVAT and Service tax)
Export of services is exempt from tax subject to fulfillment of certain specified conditions
Import of services is liable to service tax under the reverse charge mechanism
 

Value added tax (VAT)

A tax on sale of goods
A state level tax and varies with each state
Tax rate generally varies between zero and
12.5 percent
VAT mechanism applies to this levy wherein VAT paid on purchase of goods can be offset against VAT payable on sale of goods in the relevant state
Government of India is proposing to combine VAT and service tax to form a common Goods and Service Tax (GST) by 2010
 

Customs duty

A tax on imported goods in India
Applies uniformly across India
The peak rate of duty is 10 percent
Certain other levies are added to the basic customs duty, such as countervailing duty (equivalent of CENVAT in India), antidumping duty, and additional duty
VAT mechanism applies to this countervailing duty in respect of certain specified items
 

Other taxes

Other taxes include securities transaction tax (a tax on sale or purchase of specified securities over stock exchanges ranging from 0.017 percent to 0.25 percent), fringe benefits tax (payable by the employer on the fringe benefits provided to employees), stamp duty (payable on specified agreements and legal deeds), and indirect taxes (like octroi) payable to certain city municipal corporations etc.
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