India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), (Sales tax in States where VAT is not yet in force), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.
In last 10-15 years, Indian taxation system has undergone tremendousreforms. The tax rates have been rationalized and tax laws have beensimplified resulting in better compliance, ease of tax payment andbetter enforcement. The process of rationalization of taxadministration is ongoing in India.
Since April 01, 2005, most of the State Governments in India have replaced sales tax with VAT.
Taxes Levied by Central Government
Direct Taxes
• Tax on Corporate Income
• Capital Gains Tax
• Personal Income Tax
• Tax Incentives
• Double Taxation Avoidance Treaty
Indirect Taxes
• Excise Duty
• Customs Duty
• Service Tax
• Securities Transaction Tax
Taxes Levied by State Governments and Local Bodies
• Sales Tax/VAT
• Other Taxes
Direct Taxes
Taxes on Corporate Income
Companies residents in India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income Tax Act. Non-resident corporations are essentially taxed on the income earned from a business connection in India or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and management is situated entirely in India.
Domestic corporations are subject to tax at a basic rate of 35% and a 2.5% surcharge. Foreign corporations have a basic tax rate of 40% and a 2.5% surcharge. In addition, an education cess at the rate of 2% on the tax payable is also charged. Corporates are subject to wealth tax at the rate of 1%, if the net wealth exceeds Rs.1.5 mn ( appox. $ 33333).
Domestic corporations have to pay dividend distribution tax at the rate of 12.5%, however, such dividends received are exempt in the hands of recipients.
Corporations also have to pay for Minimum Alternative Tax at 7.5% (plus surcharge and education cess) of book profit as tax, if the tax payable as per regular tax provisions is less than 7.5% of its book profits.
Following measures were taken in the union budget 2007-08
Surcharge on income tax on all firms and companies with a taxable income of Rs.1 crore or less to be removed.
A five year income tax holiday for two, three or four star hotels and for convention centres with a seating capacity of not less than 3,000; they should be completed and begin operations in National Capital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar during April 1, 2007 to March 31, 2010.
Concession under section 35(2AB) to be extended for five more years until March 31, 2012.
Tax holiday to undertakings in Jammu & Kashmir to be extended for another five years up to March 31, 2012.
Minimum Alternate Tax (MAT) to be extended to income in respect of which deduction is claimed under sections 10A and 10B; deduction under section 36(1) (viii) to be restricted to 20% of profits each year.
Rate of dividend distribution tax to be raised from 12.5% to 15% on dividends distributed by companies; and to 25% on dividends paid by money market mutual funds and liquid mutual funds to all investors.
Expenditure on free samples and on displays to be excluded from the scope of Fringe Benefit Tax (FBT); ESOPs to be brought under FBT.
An additional cess of 1% on all taxes to be levied to fund secondary education and higher education and the expansion of capacity by 54% for reservation for socially and educationally backward classes.
http://indiabudget.nic.in/ub2007-08/high.htm
For further details please visit the web site of Income Tax Department at
http://www.incometaxindia.gov.in/
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Capital Gains Tax
Tax is payable on capital gains on sale of assets.
Long-term Capital Gains Tax is charged if
• Capital assets are held for more than three years and
• In case of shares, securities listed on a recognized stock exchange in India, units of specified mutual funds, the period for holding is one year.
Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain from sale of equity shares or units of mutual funds are exempt from tax.
Short-term capital gains are taxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer of equity shares or units of mutual funds are taxed at a rate of 10%.
Long-term and short-term capital losses are allowed to be carried forward for eight consecutive years. Long-term capital losses may be offset against taxable long-term capital gains and short-term capital losses may be offset against both long term and short-term taxable capital gains.
For further details please visit the web site of Income Tax Department at
http://www.incometaxindia.gov.in/
Personal Income tax
Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act. The rates for personal income tax are as follows:-
Income range (Rupee) Tax Rate (%)
0-100,000 Nil
1,00,000-1,50,000 10
1,50,000-2,50,000 20
2,50,000 and above 30
Surcharges of 10% on total tax is levied if income exceeds Rs. 8,50,000
Recent budget initiatives in this regard are as follows:
Threshold limit of exemption in the case of all assessees to be increased by Rs.10,000 thus giving every assessee a relief of Rs.1,000; in the case of a woman assessee, threshold limit to be increased from Rs.135,000 to Rs.145,000 and in case of a senior citizen from Rs.185,000 to Rs.195,000 giving him or her a relief of Rs.2,000; deduction in respect of medical insurance premium under section 80D to be increased to a maximum of Rs.15,000 and, in case of a senior citizen, a maximum of Rs.20,000.
Rates of Withholding Tax
Current rates for withholding tax for payment to non-residents are:-
(i) Interest 20%
(ii) Dividends Dividends paid by domestic companies: Nil
(iii) Royalties 10%
(iv) Technical Services 10%
(v) Any other services Individuals: 30% of the income
Companies: 40% of the net income
The above rates are general and are applicable in respect of countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).
For further details please visit the web site of Income Tax Department at
http://www.incometaxindia.gov.in/
Tax Incentives
Government of India provides tax incentives for:-
• Corporate profit
• Accelerated depreciation allowance
• Deductibility of certain expenses subject to certain conditions.
These tax incentives are, subject to specified conditions, available for new investment in
• Infrastructure,
• Power distribution,
• Certain telecom services,
• Undertakings developing or operating industrial parks or special economic zones,
• Production or refining of mineral oil,
• Companies carrying on R&D,
• Developing housing projects,
• Undertakings in certain hill states,
• Handling of food grains,
• Food processing,
• Rural hospitals etc.
For further details please visit the web site of Income Tax Department at
http://www.incometaxindia.gov.in/
Double Tax Avoidance Treaty
India has entered into DTAA with 65 countries including the US. In case of countries with which India has Double tax Avoidance Agreement, the tax rates are determined by such agreements. Domestic corporations are granted credit on foreign tax paid by them, while calculating tax liability in India.
In the case of the US, dividends are taxed at 20%, interest income at 15% and royalties at 15%.
For further details please visit the web site of Income Tax Department at
http://www.taxmann.com/TaxmannDit/IntTax/Dtaa.aspx
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Indirect Taxes
Excise Duty
Manufacture of goods in India attracts Excise Duty under the Central Excise act 1944 and the Central Excise Tariff Act 1985. Herein, the term Manufacture means bringing into existence a new article having a distinct name, character, use and marketability and includes packing, labeling etc.
Most of the products attract excise duties at the rate of 16%. Some products also attract special excise duty/and an additional duty of excise at the rate of 8% above the 16% excise duty. 2% education cess is also applicable on the aggregate of the duties of excise. Excise duty is levied on ad valorem basis or based on the maximum retail price in some cases.
Recent budget initiatives in this regard are as follows:
Reduction in ad valorem component of excise duty on petrol and diesel from 8% to 6%.
Relief to deserving cases especially job creating sectors: exemption limit for small scale industry (SSI) to be raised from Rs.1 crore to Rs.1.5 crore; to encourage food processing sector, biscuits whose retail sale price does not exceed Rs.50 per kilogram and all kinds of food mixes including instant mixes to be fully exempt; reduction in duty on umbrellas and parts of
footwear from 16% to 8%; on plywood from 16% to 8%; biodiesel to be fully exempt.
To provide access to pure drinking water, water purification devices operating on specified membrane based technologies and domestic water filters not using electricity to be fully exempt; exemption on pipes used for carrying water from a water supply plant to a storage facility to be extended to all pipes of diameter exceeding 200 mm used in water supply systems.
Reduction in the rate of duty from Rs.400 per metric tonne to Rs.350 per metric tonne on cement sold in retail at not more than Rs.190 per bag; rate of Rs.600 per metric tonne on cement that has a higher MRP.
Specific rates of duty on cigarettes to be increased by about 5%; duty (excluding cess) on biris to be raised from Rs.7 to Rs.11 per thousand for non-machine made biris and from Rs.17 to Rs.24 per thousand for machine made biris; duty on pan masala not containing tobacco to be reduced from 66% to 45%; withdrawal of exemption for pan masala containing tobacco and other tobacco products given to units in the North Eastern States.
Central Excise duty is administered by the Central Board of Excise and Customs. For further information, please visit their website at http://www.cbec.gov.in/
Excise Tariffs – Central Excise Tariff Act 2005
http://www.cbec.gov.in/excise/cx-tariff0708/cxt0708-idx.htm
Central Excise Manual http://www.cbec.gov.in/excise/cx-manual/manual/index1.htm
The Central Excise Act 1944 http://www.cbec.gov.in/excise/cx-act/cx-act-idx.htm
FAQ http://www.cbec.gov.in/faq.htm
Customs Duty
The levy and the rate of customs duty in India are governed by the Customs Act 1962 and the Customs Tariff Act 1975. Imported goods in India attract basic customs duty, additional customs duty and education cess. The rates of basic customs duty are specified under the Tariff Act. The peak rate of basic customs duty has been reduced to 15% for industrial goods. Additional customs duty is equivalent to the excise duty payable on similar goods manufactured in India. Education cess at 2% is leviable on the aggregate of customs duty on imported goods. Customs duty is calculated on the transaction value of the goods.
Rates of customs duty for goods imported from countries with whom India has entered into free trade agreements such as Thailand, Sri Lanka, BIMSTEC, south Asian countries and MERCOSUR countries are provided on the website of CBEC.
Customs duties in India are administrated by Central Board of Excise and Customs under Ministry of Finance.
Recent budget initiatives in this regard are as follows:
Customs duties:
Reduction in peak rate for non-agricultural products from 12.5% to 10%.
Reduction in duty on most chemicals and plastics from 12.5% to 7.5%; on seconds and defectives of steel from 20% to 10%.
All coking coal irrespective of ash content to be fully exempt.
Reduction in duty on polyester fibres and yarns from 10% to 7.5% and on raw-materials such as DMT, PTA and MEG from 10% to 7.5%; on cut and polished diamonds from 5% to 3%; on rough synthetic stones from 12.5% to 5%; and on unworked corals from 30% to 10%.
Dredgers to be fully exempt from import duty.
To augment irrigation facilities and processing of agricultural products, reduction in duty on drip irrigation systems, agricultural sprinklers and
food processing machinery from 7.5% to 5%.
Reduction in general rate of import duty on medical equipment to 7.5%.
To make edible oils more affordable, crude and refined edible oils to be exempt from additional CV duty of 4%; reduction in duty on sunflower oil, both crude and refined, by 15 percentage points.
Reduction in duty on pet foods from 30% to 20%; on watch dials and movements and umbrella parts from 12.5% to 5%; to promote research and development, concessional rate of 5% duty to be extended to all research institutions registered with the Directorate of Scientific and Industrial Research; reduction in duty from 7.5% to 5% on 15 specified machinery for pharmaceutical and biotechnology sector.
Duty of 3% (WTO bound rate) to be levied on all private import of aircraft including helicopters; such import to also attract countervailing duty and
additional customs duty.
Duty of Rs.300 per metric tonne to be levied on export of iron ores and concentrates and Rs.2,000 per metric tonne on export of chrome ores and concentrates.
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Schedule of Customs duties- The Customs Tariff Act 2005 http://www.cbec.gov.in/customs/cst-0708/cst-main.htm
Website of Central Board of Excise and Customs http://www.cbec.gov.in/
The Customs Act 1962 http://www.cbec.gov.in/customs/cs-act/cs-act-idx.htm
Customs Manual http://www.cbec.gov.in/customs/cs-manual/manual_idx.htm
Baggage Rules 1998 http://www.cbec.gov.in/customs/cs-act/formatted-htmls/cs-rulef.htm
FAQ http://www.cbec.gov.in/faq.htm
Service Tax
Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified taxable services provided in India by specified service providers. Service tax on taxable services rendered in India are exempt, if payment for such services is received in convertible foreign exchange in India and the same is not repatriated outside India. The Cenvat Credit Rules allow a service provider to avail and utilize the credit of additional duty of customs/excise duty for payment of service tax. Credit is also provided on payment of service tax on input services for the discharge of output service tax liability.
Recent budget initiatives in this regard are as follows:
Exemption limit for small service providers to be raised from Rs.400,000
to Rs.800,000.
Extension of service tax to: services outsourced for mining of mineral, oil or gas; renting of immovable property for use in commerce or business (residential properties, vacant land used for agriculture and similar purposes, and land for sports, entertainment and parking purposes & immovable property for educational or religious purposes to be excluded); development
and supply of content for use in telecom and advertising purposes; asset management services provided by individuals; design services; services involved in execution of a works contract with an optional composition scheme under which tax will be levied at only 2% of the total value of works contract.
Exemption to: Services provided by Resident Welfare Associations to their members who contribute Rs.3000 or less per month for services rendered, services provided by technology business incubators, their incubatees whose annual business turnover does not exceed Rs.50 lakhs to be exempt for first three years; clinical trial of new drugs to make India a preferred destination for drug testing.
Department of Telecommunications to constitute a committee to study the present structure of levies on telecom industry.
Website of Central Board of Excise and Customs relating to Service Tax http://www.servicetax.gov.in/
FAQ http://www.cbec.gov.in/faq.htm
Securities Transaction Tax
Transactions in equity shares, derivatives and units of equity-oriented funds entered in a recognized stock exchange attract Securities Transaction Tax at the following rate:-
• Delivery base transactions in equity shares or buyer and seller
each units of an equity-oriented fund – 0.075%
• Sale of units of an equity-oriented fund to the seller mutual fund – 0.15%
• Non delivery base transactions in the above – 0.015%
• Derivatives (futures and options) seller – 0.01%
For further details please visit the web site of Income Tax Department at http://www.incometaxindia.gov.in/
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Sales Tax Acts of various State Governments and Central Sales Act governed the application of Sales Tax/VAT.
Sales Tax/VAT
Sales tax is levied on the sale of movable goods. Most of the Indian States have replaced Sales tax with a new Value Added Tax (VAT) from April 01, 2005. VAT is imposed on goods only and not services and it has replaced sales tax. Other indirect taxes such as excise duty, service tax etc., are not replaced by VAT. VAT is implemented at the State level by State Governments. VAT is applied on each stage of sale with a mechanism of credit for the input VAT paid. There are four slabs of VAT:-
• 0% for essential commodities
• 1% on bullion and precious stones
• 4% on industrial inputs and capital goods and items of mass consumption
• All other items 12.5%
• Petroleum products, tobacco, liquor etc., attract higher VAT rates that vary from State to State
A Central Sales Tax at the rate of 4% is also levied on inter-State sales and would be eliminated gradually.
Municipal/Local Taxes
• Octori/entry tax: – Some municipal jurisdictions levy octori/entry tax on entry of goods
Other State Taxes
• Stamp duty on transfer of assets
• Property/building tax levied by local bodies
• Agriculture income tax levied by State Governments on income from plantations
• Luxury tax levied by certain State Government on specified goods