India: Tax system

Tax Rate For Foreign Companies

A resident company is taxed on its worldwide income. A non-resident company is taxed only on its Indian-sourced income.
Non-resident companies and branches of foreign companies are taxed at a rate of 40% instead of 30%, plus a health and education cess and a surcharge depending on the turnover value (consult the corporate income rates section for further details).

An equalization levy of 6% on the amount of consideration in excess of INR 100,000 for specified services received by a non-resident without a permanent establishment in India must be withheld by a resident payer or a non-resident payer with a PE in India.

Capital Gains Taxation

Tax treatment varies on long-term (assets held for more than 3 years, listed shares and certain securities held for more than 1 year, unquoted shares and real estate held for more than two years) and short-term capital gains. Long-term gains on listed shares and securities are taxed at 10% (with no inflation adjustment) or exempt for the first INR 100,000 if subject to the securities transaction tax (STT). Long-term gains obtained by a non-resident on unquoted shares are also taxed at 10% (with no inflation or exchange rate adjustment). Long-term gains on other types of assets are taxed at 20% with an inflation adjustment (plus the surcharge and health and education cess). Short-term gains are taxed at ordinary tax rates or at 15% if subject to the STT (a surcharge and an education cess apply to these gains).

Main Allowable Deductions and Tax Credits

In general, expenses are deductible if they are incurred wholly and exclusively for business or professional purposes, not in the nature of a personal expense, and if they are not capital in nature.
Allowable deductions include wages and salaries, bonuses and commissions, rent, repairs, insurance, royalty payments, certain taxes (sales, municipal, road, property and expenditure taxes, customs duties), interest, lease payments, depreciation, expenditure for materials and scientific research, etc. One-fifth of start-up expenditure is allowed as a yearly deduction, over a period of five years. Bad debts can be allowed as a tax-deductible write-off if they have been written off as irrecoverable.
Any charitable contribution made by a company to any charity is allowed as a tax-deductible expense (conditions apply), in a range from 50% to 100% of the charitable contribution, depending upon the nature of the charity. No deduction shall be allowed in respect of contributions made in cash exceeding INR 2,000. If a business has opted for the reduced rate of tax of 22% under the new tax regime, it is not allowed to claim deductions of charitable contributions (from FY 2020-21 onwards).
Losses can be carried forward and set off against income from the subsequent year (business and capital losses for 8 years), while carrybacks are not allowed.

Various incentives are provided for companies carrying out specific business activities in India, for example:

• A 10-year tax holiday on 100% profits for developing, operating or maintaining infrastructure, power or network and distribution facilities
• A 7-year tax holiday on 100% profits for qualifying production of mineral oil and natural gas
• A 10-year tax holiday on 100% profits for developing a Special Economic Zone (SEZ)
• A 5-year tax holiday on 100% profits for operating and maintaining hospitals in rural areas
• A 5-year tax holiday on 100% profits plus a 5-year tax holiday on 50% profits from export from a new undertaking, satisfying prescribed conditions and set up in an SEZ (available if the activities started before 30 June 2020)
• A tax exemption of up to 100%for financial contributions to research institutes (restricted to certain industries)
• A concessionary tax rate of 10% (plus surcharge and cess) on income by way of royalty in respect of a patent developed and registered in India by a resident in India ("Patent Box regime").

Other Corporate Taxes

Indian companies distributing or declaring dividends are liable to pay DDT (dividend distribution tax) at 15%. This rate is required to be grossed up; consequently, the effective rate of DDT is 20.36%. However, the Finance Act 2020 has abolished the DDT with effect from 1 April 2020, hence dividends distributed after that date will be taxable in the hands of shareholders (20% for dividends paid to non-residents; at the normal tax rates applicable to the shareholders for dividends paid to residents).

A securities transaction tax is applicable to transactions involving the purchase/sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange, or the purchase/sale of a unit of an equity-oriented fund to any mutual fund. The rates vary from 0.001% to 0.125%, depending upon the type of securities.

A property tax is levied by the governing authority of the jurisdiction in which the property is located, with rates varying from city to city. Stamp duties apply to all legal property transactions, with different rates being set by each state.

Social contributions paid by the employer amount to 12% of the employee's salary (8.33% are allocated to the Employees’ Pension Fund, capped at INR 15,000/month for Indian employees). A reduced tax rate can apply to individual and Hindu Undivided Family (HUF) taxpayers.

From 1 April 2020, an equalisation levy of 2% applies on the consideration from e-commerce supply and services made or provided by an e-commerce operator without a PE in India, and whose sales, turnover, or gross receipts from the e-commerce supply and services are at least INR 20 million during the tax year. The sale of goods or provision of services by an e-commerce operator to an e-commerce participant is subject to a 1% withholding tax.
An equalisation levy of 6% on the amount of consideration in excess of INR 100,000 applies with regard to specified services (e.g. online advertising, the provision of digital advertising space, and other related facilities or services) received by a nonresident without a permanent establishment in India. The levy must be withheld by a resident payer or a non-resident payer with a permanent establishment in the country.

The Finance Act 2022 included measures to incorporate Virtual Digital Assets (VDAs) such as cryptocurrencies, NFTs, and other similar assets into the tax system. Under these provisions, profits earned from the sale of VDAs will be subject to a 30% tax rate, with no allowance for deductions other than the acquisition cost. Additionally, any losses incurred from the sale of VDAs cannot be offset against other income in the current or future years.

When Indian companies repurchase shares from their shareholders, they must pay an extra tax calculated as 20% of the difference between the consideration paid for the buyback and the original issue price of the shares, plus a 12% surcharge and a 4% health and education cess.

Other Domestic Resources

Income Tax Department

Country Comparison For Corporate Taxation

Source: The World Bank - Doing Business, Latest data available.

Accounting System

Accounting Standards

Accounting standards issued by the Institute of Chartered Accountants of India (ICAI), which largely are based substantially and converged with IFRS standards, apply. Financial statements must be prepared annually, in accordance with the accounting standards prescribed under the Companies Act. There are differences between these accounting standards and IFRS.  
India has committed to converge its accounting standards with IFRS (subject to a few carve-outs); these standards are called the Indian Accounting Standards or the Ind AS. For accounting periods commencing on or after 1 April 2016, these standards are mandatory for listed and unlisted companies meeting certain net worth thresholds.

Accounting Regulation Bodies

Institute of Chartered Accounts of India

Accounting Law

- Income Tax Act;
- Indian Companies Act;
- Regulations from Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI).

Difference Between National and International Standards (IAS/IFRS)

India originally intended to converge with IFRSs in a phased approach beginning in 2011, but transition to Ind AS was postponed. In January 2015, the Indian Ministry of Corporate Affairs (MCA) released a revised roadmap that reflects that, in essence, companies with a net worth of Rs. 500 crore or more have to mandatorily follow Indian Accounting Standards (Ind AS), which are largely converged with International Financial Reporting Standards (IFRSs), from 1 April 2016. Corporates having a net worth of less than Rs. 500 crore but are listed, or in the process of getting listed, and companies with a net worth of Rs. 250 crore or more have to follow the new norms from 1 April 2017. For banking, insurance and non-banking finance companies, which were exempt from the general roadmap, a separate one has was drawn up in January 2016 that will see a phased approach with Ind AS adoption beginning from 1 April 2018.

Accounting Practices

Tax Year

The fiscal year begins on 1 April and ends on the 31 March of the following year.

Accounting Reports

'Balance Sheet' and 'Profit & Loss' report.
Companies are required to prepare their financial statements each year, as per the provisions of the Companies Act, and to have them audited by a practicing chartered accountant or a firm of chartered accountants registered with the ICAI. The audited financial statements must be approved by the members in an annual general meeting. All companies are required to file their audited financial statements with the ROC after they have been approved by the members.

Publication Requirements

The "balance sheet" and ‘profit and loss account' need to be published every fiscal year.

Accountancy Profession

Accountants

In order to become a certified accountant, one needs to become member of ‘The Institute of Chartered Accountants of India (ICAI)' by passing a 3-tier examination conducted by ICAI. The qualified accountant is then named "Chartered Accountant (CA)".

Professional Accountancy Bodies

ICAI, Institute of Chartered Accounts of India

Member of the International Federation of Accountants (IFAC)

Yes

Member of Other Federation of Accountants

Member of the Confederation of Asian and Pacific Accountants (CAPA)

Audit Bodies

Companies have to seek a statutory auditor to conduct an annual audit of the financial health of their organization. For more information, consult the Institute of Internal Auditors-India and The Institute of Chartered Accountants of India (ICAI)

Allowable Deductions and Tax Credits

When calculating the taxable salary income, a deduction of INR 50,000 is provided. Deductions are allowed for contributions to life insurance; recognised provident funds; national savings certificates; the national savings scheme; income from certain mutual funds and dividends; certain educational expenses; life insurance premium on the life of self, spouse, or any child (up to INR 150,000); health insurance premiums, including those paid for dependent parents. In case of partial withdrawal from the National Pension Scheme by employees, 25% of their own contribution is exempt from tax in the year of withdrawal.

Individuals can claim a deduction for interest paid on a loan taken for the purpose of their higher education or of their relative.

On donation of a certain amount to specifically approved funds, charitable institutions, etc., an individual can claim a deduction of 50% to 100% of the amount donated, subject to certain legal restrictions. Deduction for funds or charitable institutions in excess of INR 2,000 can to be allowed only when the donation is not made in cash.
Expenses relating to business income are deductible.

Following the introduction of the new optional personal tax regime, individuals who opt for such regime renounce to certain deductions or exemptions, including house rent allowance; leave travel allowance; allowance under section 10(14) of the Income-tax Act (with some exceptions); standard deduction of INR 50,000 and deduction for professional tax; exemption of free food and beverages through vouchers provided by the employer; deduction of interest payment on housing loans for self-occupied property and restrictions on set-off of loss from let out property; relocation allowance; helper allowance; children education allowance; all Chapter VIA deductions of the Income-tax Act available for expenditure by way of employee’s contribution to provident fund, insurance premium, donations, medical premium, etc., except employer’s contribution to a notified pension scheme, such as National Pension Scheme (NPS). For further information, click here.

Special Expatriate Tax Regime

No special exemptions or deductions, as remuneration for foreign expatriates working in India, is deemed to be earned as salary in Indian territory. However, foreigners who visit India on short-term business trips can claim an exemption under domestic tax law or a relevant tax treaty.

A foreign worker who is a citizen of a country with which India has signed a social security agreement is not required to contribute to the social security system if he/she is contributing to his/her home country’s social security, either as a citizen or resident, and enjoys the status of "detached worker" for the period, and according to the terms, specified in the relevant agreement.

Dividend income to a non-resident received on or after 1 April 2020 would be subject to tax in the hands of the shareholder at the rate of 20% unless a lower rate applies due to a tax treaty.

Capital Tax Rate

The wealth tax was abolished on 1 Apr 2015. No inheritance tax is levied in India. Real estate tax varies by state. Generally, capital gains from the disposal of capital assets are liable to tax in the tax year in which such assets are sold or transferred.

Any sum of money aggregating to INR 50,000 or more received during the relevant tax year without consideration from any person not being a relative is subject to income tax in the hands of the recipient.
Employees (including foreign nationals) working with an establishment in India that employs 20 or more people are liable to contribute towards the provident fund at the fixed rate of 12% of salary.

When purchasing or selling equity shares, derivatives, or equity-oriented funds through a recognized stock exchange, or buying or selling a unit of an equity-oriented fund to a mutual fund, a securities transaction tax (STT) is imposed. The applicable STT rate differs for each type of instrument, whether it is a delivery-based or non-delivery-based transaction.