Corporate tax in India

Summary

Domestic Company Income Tax Rate (%) 30 (a)
Capital Gains Tax Rate (%) 20 (a) (b)
Branch Tax Rate (%) 40 (a) (c)
Withholding Tax (%)
Dividends 0
Interest
Paid to Domestic Companies 10 (d) (e)
Paid to Foreign Companies 20 (a) (d) (e) (f) (g)
Royalties from Patents, Know-how, etc. 10 (a) (d) (g) (h)
Technical Services Fees 10 (a) (d) (g) (h)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 8 (.i)

(a)   The rates are subject to an additional levy consisting of a surcharge and a cess. They are increased by the following surcharges on such taxes:

  • Domestic companies with net income exceeding INR100 million: 12%
  • Foreign companies with net income exceeding INR100 million: 5%
  • Domestic companies with net income exceeding INR10 million: 7%
  • Foreign companies with net income exceeding INR10 million: 2%

No surcharge is payable if the net income does not exceed INR10 million. The tax payable (inclusive of the surcharge, as applicable) is further increased by a cess levied at 3% of the tax payable. The withholding tax rates are in­creased by a surcharge for payments exceeding INR10 million made to for­eign companies and a cess (see above).

b) See Section B.

c) For exceptions to this basic rate, see Section B.

d) A Permanent Account Number (PAN) is a unique identity number assigned to a taxpayer in India on registration with the India tax authorities. If an in­come recipient fails to furnish its PAN, tax must be withheld at the higher of the rate specified in the relevant provision of the Income Tax Act and 20%.

e) Interest paid by business trusts is subject to a withholding tax at a rate of 10% for payments to residents and 5% for payments to nonresidents (including foreign companies) plus applicable surcharge and cess (See Section E).

f) This rate applies to interest on monies borrowed, or debts incurred, in foreign currency. Withholding tax at a rate of 5% (plus a surcharge of 2% or 5%, as applicable, and a 3% cess) is imposed on interest payments to nonresidents (including foreign companies) with respect to the following:

  • Infrastructure debt funds
  • Borrowings made by an Indian company in foreign currency by way of loans between 1 July 2012 and 1 July 2017, infrastructure bonds issued between 1 July 2012 and 1 July 2017 or long-term bonds issued between 1 October 2014 and 1 July 2017, subject to prescribed conditions (for long-term bonds, the lower withholding rate would not be affected if the recipient does not furnish a PAN; see footnote [d] above)
  • Rupee-denominated bonds of an Indian company or a government security issued to a foreign institutional investor or a qualified foreign investor, with respect to interest payable between 1 June 2013 and 1 June 2017
  • Interest received from units of business trusts in India

Other interest is taxed at a rate of 40% (plus the surcharge of 2% or 5%, as applicable, and the 3% cess).

g) If a recipient of income is located in a Notified Jurisdictional Area (NJA), tax must be withheld at the higher of the rate specified in the relevant provision of the Income Tax Act and 30%. Cyprus has been notified as an NJA (for further details, see Section E).

h) The 10% rate (plus the 2% or 5% surcharge, as applicable, and the 3% cess) applies to royalties and technical services fees paid to foreign companies by Indian enterprises. However, if the royalties or technical services fees paid under the agreement are effectively connected to a permanent establishment or fixed place of the nonresident recipient in India, the payments are taxed on a net income basis at a rate of 40% (plus the 2% or 5% surcharge, as appli­cable, and the 3% cess).

i) Unabsorbed depreciation may be carried forward indefinitely to offset taxable profits in subsequent years.

Taxes on corporate income and gains

Corporate income tax. A domestic company is defined for tax purposes as a company incorporated in India. The definition also in cludes a company incorporated outside India (foreign compa­ny) if the company has made certain arrangements for declara­tion and payment of a dividend in India. The tax rates in India are specified with reference to a domestic company. As a result, it is possible for a foreign company to be taxed at rates applicable to a domestic company if it has made the necessary arrangements for the declaration and payment of a dividend in India.

A company resident in India is subject to tax on its worldwide income, unless the income is specifically exempt. A company not resident in India is subject to Indian tax on Indian-source income and on income received in India. Depending on the circumstances, certain income may be deemed to be Indian-source income.

Companies incorporated in India are resident in India for tax purposes, as are companies incorporated outside India, if their place of effective management in that year is in India. As a result, if the place of effective management of a foreign company is in India, it is subject to tax in India on its worldwide income. If such a foreign company also qualifies as a domestic company (see above), the tax rates applicable to a domestic company apply.

Rates of corporate tax. Domestic companies are subject to tax at a basic rate of 30%. In addition, a 7% or 12% surcharge (for details regarding the surcharge, see footnote [a] in Section A) and a 3% cess are imposed on the income tax of such companies. Long-term capital gains are taxed at special rates (see Capital gains).

For foreign companies, the net income is taxed at 40% plus the 2% or 5% surcharge, as applicable, and the 3% cess. A rate of 10% plus the 2% or 5% surcharge and the 3% cess applies to royalties and technical services fees paid to foreign companies if the royalty or technical services fees agreement is approved by the central government or if it is in accordance with the Industrial Policy. A rate of 20% (plus the 2% or 5% surcharge and the 3% cess) applies to gross interest from foreign-currency loans or from units of a mutual fund. A lower rate of 5% (plus the 5%/2% surcharge and the 3% cess) applies to gross interest from foreign-currency borrowings raised by Indian companies or business trusts by way of loans between 1 July 2012 and 1 July 2017, long­term infrastructure bonds issued between 1 July 2012 and 1 July 2017 or long-term bonds issued between 1 October 2014 and 1 July 2017, subject to prescribed conditions. A lower rate of 5% (plus the 5%/2% surcharge and the 3% cess) also applies to in­terest payable between 1 June 2013 and 1 July 2017 on rupee-denominated bonds issued by Indian companies and government securities, subject to prescribed conditions. A lower rate of 5% (plus the 5%/2% surcharge and the 3% cess) applies to interest received from units of business trusts in India (see Section E).

If a nonresident with a permanent establishment or fixed place of business in India enters into a royalty or technical services fees agreement and if the royalties or fees paid under the agreement are effectively connected to such permanent establishment or fixed place, the payments are taxed on a net income basis at a rate of 40% plus the 2% or 5% surcharge and the 3% cess.

Tax incentives. Subject to prescribed conditions, the following tax exemptions and deductions are available to companies with respect to business carried on in India:

  • A 10-year tax holiday equal to 100% of the taxable profits is available to undertakings or enterprises engaged in the fol­lowing:

— Developing or operating and maintaining or developing, operating and maintaining infrastructure facilities (roads, toll roads, bridges, rail systems, highway projects including housing or other activities that are integral parts of the high­way projects, water supply projects, water treatment sys­tems, irrigation projects, sanitation and sewerage systems, solid waste management systems, ports, airports, inland waterways, inland ports or navigational channels in the sea)

— Generation or generation and distribution of power if the company begins to generate power at any time during the period of 1 April 1993 through 31 March 2017

— Starting transmission or distribution by laying a network of new transmission or distribution lines at any time during the period of 1 April 1999 through 31 March 2017

— Undertaking substantial renovation and modernization (at

least 50% increase in book value of plant and machinery)

of an existing network of transmission or distribution lines

during the period of 1 April 2004 through 31 March 2017 The company may choose any 10 consecutive years within the first 15 years (10 out of 20 years in certain circumstances) for the period of the tax holiday. Such tax holiday is not available to an undertaking or enterprise that is transferred in an amalgamation or demerger.

  • A 10-year tax holiday equal to 100% of profits and gains de – rived by an undertaking or enterprise from the business of devel­oping a Special Economic Zone (SEZ) notified (through an official publication by the government of India), subject to cer­tain conditions.
  • A 10-year tax holiday equal to 100% of taxable profits for the first 5 years and 30% of taxable profits for the next 5 years from the business of processing, preserving and packaging of fruits or vegetables or from the integrated business of handling, stor­ing and transporting food grains. A similar tax holiday is avail­able with respect to profits from the business of processing, pre serving and packaging of meat and meat products, poultry or marine or dairy products.
  • A 15-year tax holiday with respect to profits derived from ex­port activities by units that begin to manufacture or produce ar­ticles or things or provide services in SEZs. For the first 5 years of the tax holiday, a tax deduction equal to 100% of the profits derived from the export of articles, things or services provided is available. For the following 5 years, a tax deduction equal to 50% of the profits is available. For the next 5 years, the avail­ability of the deduction is contingent on the allocation of the profits to a specified reserve and the use of such amounts in the prescribed manner. The deduction is capped at 50% of the prof­its allocated to the reserve.
  • A 10-year tax deduction equal to 100% of profits derived from an undertaking that begins the manufacturing or production of specified goods or carries on specified business in northeastern states before 1 April 2017. This deduction is also available if an undertaking manufacturing the specified goods undertakes a substantial expansion that involves an increase in investment in plant and machinery by at least 25% of the book value of plant and machinery (computed before depreciation).
  • A 5-year tax holiday equal to 100% of the profits from the busi­ness of collecting and processing or treating of biodegradable waste for either of the following purposes:

— Generating power or producing biofertilizers, biopesticides or other biological agents

— Producing biogas or making pellets or briquettes for fuel or organic manure

  • Accelerated deduction of capital expenditure (other than expen­diture on the acquisition of land, goodwill or financial instru­ments) incurred, wholly and exclusively for certain specified

businesses in the year of the incurrence of such expense. Ex­pense incurred before the commencement of business is allowed as a deduction on the commencement of the specified business. The following are the specified businesses:

— Setting up and operating a cold chain facility or setting up and operating a warehousing facility for storage of agricul­tural produce

— Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution including storage facilities that are an integral part of such network

— Building and operating in India a new hotel with a two-star or above category, as classified by the central government

— Building and operating in India a new hospital with at least 100 beds for patients

— Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the government

— Developing and building a housing project under a scheme for affordable housing framed by the central or state gov­ernment in accordance with the prescribed guidelines

— Producing fertilizers in a new plant or newly installed capacity in an existing plant

— Setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act

— Setting up and operating a warehousing facility for storage of sugar

— Beekeeping and production of honey and beeswax

— Laying and operating a slurry pipeline for the transportation of iron ore

— Setting up and operating a semiconductor wafer fabrication manufacturing unit notified by the Central Board of Direct Taxes in accordance with prescribed guidelines

The deduction mentioned above is increased to 1.5 times the amount of capital expenditure (other than expenditure on the acquisition of land, goodwill or financial instruments) incurred by the following businesses:

— Setting up and operating a cold chain facility

— Setting up and operating a warehousing facility for the stor­age of agricultural produce

— Building and operating a hospital with a least 100 beds for patients

— Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the government

— Production of fertilizer in India

  • Weighted deduction at a rate of 150% on expenditure on agri­culture extension projects and on specified sums expended on skill development projects.

Minimum alternative tax. The minimum alternative tax (MAT) applies to a company if the tax payable by the company on its total income, as computed under the Income Tax Act, is less than 18.5% of its book profit. It is levied at a rate of 18.5% of book profit, plus applicable surcharge and cess (the surcharge, as ap­plicable, is imposed at a rate of 7% or 12% for domestic compa­nies and 2% or 5% for foreign companies, and the cess is im­posed at a rate of 3%). MAT is levied on companies only and does not apply to firms or other persons, which are separately subject to an alternative minimum tax of 18.5% (plus applicable sur­charge and cess). In computing book profit for MAT purposes, certain positive and negative adjustments must be made to the net profit shown in the books of account.

The net profit as per the profit-and-loss account is increased by the following key items:

  • Amount of income tax (including dividend distribution tax, any interest charged under the Income Tax Act, surcharge and cess) paid or payable and the provision for such tax
  • Amount carried to any reserves
  • Amount allocated to provisions for liabilities other than ascer­tained liabilities
  • Amount allocated to provision for losses of subsidiary compa­nies
  • Amount of dividend paid or proposed
  • Amount of expenditure related to exempt income
  • Amount of depreciation
  • Amount of deferred tax and the provision for such tax, if deb­ited to the profit-and-loss account
  • Amounts set aside as a provision for diminution in the value of any asset
  • Amount in revaluation reserve relating to a revalued asset on retirement of the asset
  • Expenditure related to a share of the income of an association of persons that is not taxable
  • Expenditure of a foreign company related to capital gains on specified securities, interest, royalties or fees for technical ser­vices, in certain specified circumstances
  • Notional loss on the transfer of shares of a special-purpose vehicle to a business trust in exchange for units allotted by the trust, notional loss resulting from any change in the carrying amounts of such units or loss on the transfer of such units

The net profit is decreased by the following key items:

  • Amount withdrawn from any reserves or provisions if such amount is credited in the profit-and-loss account
  • Amount of losses carried forward (excluding depreciation) or un absorbed depreciation, whichever is less, according to the books of account
  • Profits of “sick” industrial companies, which are companies that have accumulated losses equal to or exceeding their net worth at the end of a financial year and are declared to be sick by the Board for Industrial and Financial Reconstruction
  • Income that is exempt from tax
  • Amount of depreciation debited to the profit-and-loss account excluding depreciation on account of revaluation of assets
  • Amount of deferred tax, if any such amount is credited to the profit-and-loss account
  • Amount withdrawn from revaluation reserve and credited to the profit-and-loss account, to the extent that it does not exceed depreciation of the revalued assets
  • Share in the income of an association of persons that is not tax­able
  • Capital gains on certain specified securities, interest, royalties or fees for technical services of a foreign company in specified circumstances
  • Notional gain on the transfer of shares of a special-purpose vehicle to a business trust in exchange for units allotted by the trust, notional gain resulting from any change in the carrying amount of such units or gain on the transfer of such units

MAT paid by companies can be carried forward and set off against income tax payable in subsequent years under the normal provi­sions of the Income Tax Act for a period of 10 years. The maxi­mum amount that can be set off against regular income tax is equal to the difference between the tax payable on the total income as computed under the Income Tax Act and the tax that would have been payable under the MAT provisions for that year.

MAT does not apply to income from life insurance businesses.

A report in a prescribed form that certifies the amount of book profits must be obtained from a chartered accountant.

Capital gains

General. The Income Tax Act prescribes special tax rates for the taxation of capital gains. Gains derived from “transfers” of “capi­tal assets” are subject to tax as capital gains and are deemed to be income in the year of the transfer.

“Transfer” and “capital asset” are broadly defined in the Income Tax Act. In addition, shares or interests in foreign entities are deem ed to be capital assets located in India if they derive, directly or indirectly, their value substantially from assets located in India. Gains derived from the transfer of such deemed capital assets are deemed to be income in the year of transfer.

The tax rate at which capital gains are taxable in India depends on whether the capital asset transferred is a short-term capital asset or a long-term capital asset. A short-term capital asset is defined as a capital asset that is held for less than 36 months immediately before the date of its transfer. However, if the capital asset is a security (other than a unit) listed on a recognized stock exchange in India, a unit of an equity-oriented mutual fund or a specified zero-coupon bond, a 12-month period replaces the 36-month pe­riod. A capital asset that is not a short-term capital asset is a long­term capital asset.

Capital gains on specified transactions on which Securities Trans­action Tax has been paid. Long-term capital gains derived from the transfer of equity shares, units of an equity-oriented fund or units of a business trust on a recognized stock exchange in India are exempt from tax if Securities Transaction Tax (STT) has been paid on the transaction. For further details regarding STT, see Section D.

Short-term capital gains derived from the transfer of equity shares in a company, units of an equity-oriented fund or units of a busi­ness trust on a recognized stock exchange in India are taxable at a reduced rate of 15% plus the surcharge, as applicable, and the cess, if STT has been paid on the transaction.

The tax regime described above applies to all types of taxpayers, including Foreign Institutional Investors (FIIs).

Sales of unlisted equity shares that are included in an initial public offer are also subject to STT and are eligible for the aforementioned reduced rates with respect to long-term or short-term capital gains.

Capital gains on transactions on which STT has not been paid. For sales of shares and units of mutual funds that have not been subject to STT and for capital gains derived from the transfer of a capital asset that is not a specified security, the following are the capital gains tax rates (excluding the applicable surcharge and cess).

Type of taxpayer Short-term capital gains rate (%) (a) Long-term capital gains rate (%) (a)
Domestic companies 30 20 (b)
FIIs 30 10
Nonresidents other than FIIs 40 20 (b) (c)

a) The above rates are subject to a surcharge and cess. The surcharge is levied at a rate of 7% for domestic companies and at a rate of 2% for foreign com­panies if the net income of the company exceeds INR10 million. The sur­charge rate is increased to 12% for domestic companies and 5% for foreign companies if net income exceeds INR100 million. The rate of the cess is 3%.

b) A concessional rate of 10% (plus surcharge and cess) applies in certain cases, such as the transfer of listed securities, listed units of mutual funds or zero-coupon bonds, subject to certain conditions.

c) Gains derived from the transfer of unlisted securities are taxable at a rate of 10%, without the benefit of protection from foreign currency fluctuation and indexation for inflation on the computation of such gains (see discussion below).

Computational provisions. For assets that were acquired on or before 1 April 1981, the market value on that date may be substi­tuted for actual cost in calculating gains. The acquisition cost is indexed for inflation. However, no inflation adjustment is allowed for bonds and debentures. For the purpose of calculating capital gains, the acquisition cost of bonus shares is deemed to be zero. Nonresident companies compute capital gains on shares and de-ben tures in the currency used to purchase such assets, and conse­quently they are protected from taxation on fluctuations in the value of the Indian rupee. As a result, the benefit of indexation is not available to nonresident companies with respect to the compu­tation of capital gains on shares. If the consideration is not ascer­tainable or determinable for a transfer, the fair market value of the asset transferred is deemed to be the full value of consideration.

Slump sales, demergers and amalgamations. Special rules apply to “slump sales,” “demergers” and “amalgamations” (for a descrip­tion of amalgamations, see Section C).

A “slump sale” is the transfer of an undertaking for a lump-sum consideration without assigning values to the individual assets and liabilities. The profits derived from such sales are taxed as long-term capital gains if the transferred undertaking has been held for more than 36 months.

Capital gains on a slump sale equal the difference between lump-sum consideration and the net worth of the undertaking. For purposes of computing capital gains, the net worth of the under­taking equals the difference between the value of the total assets (the sum of the tax-depreciated value of assets that are deprecia­ble for income tax purposes and the book value of other assets) of the undertaking or division and the book value of liabilities of such undertaking or division.

With respect to companies, a “demerger” is the transfer of an under­taking by one company (demerged company) to another company (resulting company) pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956, provided that certain conditions are satisfied. Subject to certain conditions, the transfer of capital assets in a demerger is not considered to be a transfer subject to capital gains tax if the resulting company is an Indian company.

In a demerger, the shareholders of the demerged company are issued shares in the resulting company in proportion to their existing shareholdings in the demerged company based on a pre­determined share-issue ratio. This issuance of shares by the result­ing company to the shareholders of the demerged company is exempt from capital gains tax.

In the case of a demerger of a foreign company, the provisions of Sections 391 to 394 of the Companies Act, 1956 do not apply. In such case, a transfer of shares in an Indian company, or shares in a foreign company that derives its value substantially from assets located in India, by the demerged foreign company to the result­ing foreign company is exempt from capital gains tax if the fol­lowing conditions are satisfied:

  • Shareholders holding at least 75% in value of the shares in the demerged foreign company continue to remain shareholders of the resulting foreign company.
  • Such transfer does not attract capital gains tax in the country of incorporation of the demerged foreign company.

Like demergers, if certain conditions are satisfied, transfers of capital assets in amalgamations are not considered to be transfers subject to capital gains tax, provided the amalgamated company is an Indian company.

In an amalgamation, shareholders of the amalgamating company are usually issued shares in the amalgamated company in exchange for their existing shareholding in the amalgamating company based on a predetermined share-exchange ratio. Such exchange of shares is exempt from capital gains tax if the following condi­tions are satisfied:

  • The transfer is made in consideration of the allotment of shares in the amalgamated company (unless the shareholder itself is the amalgamated company).
  • The amalgamated company is an Indian company.

A transfer of shares in an Indian company or shares in a foreign company that derives its value substantially from assets located in India, in an amalgamation of two foreign companies, is exempt from capital gains tax if the following conditions are satisfied:

  • At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company.
  • Such transfer does not attract capital gains tax in the country of incorporation of the amalgamating foreign companies.

Depreciable assets. To compute capital gains on sales of assets on which depreciation has been allowed, the sales proceeds of the assets are deducted from the declining-balance value of the class­es of assets (including additions during the year) of which the assets form a part. If the sales proceeds exceed the declining-balance value, the excess is treated as short-term capital gain. Otherwise, no capital gain results from sales of such assets even if the sales proceeds for a particular asset are greater than the cost of the asset.

Non-depreciable assets. For non-depreciable assets, such as land, gains are computed in accordance with the rules described below.

If the asset is held for 36 months or more, the capital gain is con­sidered a long-term capital gain, which equals the net sale consid­eration less the indexed cost of acquisition. The gain on an asset held for less than 36 months is considered a short-term capital gain, which equals the sale consideration less the acquisition cost. For listed shares, listed securities, equity-oriented units of mutual funds and zero-coupon bonds, a 12-month period replaces the 36-month period.

The transfer of a capital asset by a parent company to its wholly owned Indian subsidiary or the transfer of a capital asset by a whol­ly owned subsidiary to its Indian parent company is exempt from capital gains tax, subject to the fulfillment of certain conditions.

Administration. The Indian fiscal year runs from 1 April to 31 March. All companies must file tax returns by 30 September or 30 November (for companies undertaking international trans­actions; see the discussion of transfer pricing in Section E). Tax is payable in ad vance on 15 June, 15 September, 15 December and 15 March. Any balance of tax due must be paid on or before the date of filing the return. The carryforward of losses for a fis­cal year is not allowed if a return is filed late.

A nonresident with a liaison office in India is required to submit a statement in the prescribed form within 60 days after the end of the fiscal year.

Income computation and disclosure standards. The government of India has notified 10 income computation and disclosure stan­dards (ICDS), which are effective for the 2015-16 fiscal year and future years. The ICDS provides a set of rules for computing taxable income under the headings, “profits and gains of business or profession” and “income from other sources” of the Income Tax Act. This applies to all taxpayers following the mercantile system of accounting.

ICDS do not affect the maintenance of books of accounts. Con­sequently, they do not affect the MAT computation.

Withholding taxes. Payments to resident companies are subject to the following withholding taxes:

Type of payment Rate (%) (a)
Dividends 0
Interest 10 (b)
Commissions from sales of lottery tickets 10
Other specified commissions 10
Payments to contractors 2
Rent 2/10 (c)
Income from lotteries and horse races 30
Professional and technical service fees 10
Royalties 10
Payments of compensation to residents for the compulsory acquisition of certain
immovable property
10
Payment of consideration for transfer of
immovable property
1

a) If an income recipient fails to furnish its PAN, tax must be withheld at the higher of the rate specified in the relevant provision of the Income Tax Act and 20%.

b) See footnote (e) in Section A.

c) The withholding tax rate for rental payments is 10%. For equipment rental, the rate is 2%.

Payments to nonresident companies are subject to the following withholding taxes.

Type of payment Rate (%) (a) (b) (c)
Dividends 0
Interest on foreign-currency loans 20 (d)
Royalties and technical services fees 10 (e)
Rent 40
Income from lotteries and horse races 30
Long-term capital gains other than exempt gains 20
Other income 40

a) The 2% or 5% surcharge (applicable to payments made to foreign companies exceeding INR10 million or INR100 million, respectively) and the 3% cess are imposed on the above withholding taxes.

b) If the income recipient fails to furnish a PAN to the payer, tax must be with­held at the higher of the following rates:

  •  Rate specified in the relevant provision of the Income Tax Act
  •  Tax treaty rate
  •  20%

c) If the recipient of income is located in an NJA, tax must be withheld at the higher of the rate specified in the relevant provision of the Income Tax Act and 30%. Cyprus has been notified as an NJA, effective from 1 November 2013 (see Section E).

d) See footnotes (e) and (f) in Section A.

e) See footnote (h) in Section A.

Dividends. Dividends paid by domestic companies are exempt from tax in the hands of the recipients. However, domestic com­panies must pay a dividend distribution tax (DDT) at a rate of 20.36% (basic rate of 15% on the gross amount of dividend pay­able plus the 12% surcharge and the 3% cess) on dividends declared, distributed or paid by them. The DDT paid is a nonde­ductible expense.

The amount of dividends (on which DDT is leviable) that are paid by a domestic company can be reduced by the amount of divi­dends received from its subsidiary on which the subsidiary has paid DDT, subject to the satisfaction of prescribed conditions.

Gross dividends received by a domestic company from a speci­fied foreign company (in which it has shareholding 26% or more) are taxable at a concessional rate of 15% (plus applicable sur­charge and cess).

Dividends received by an Indian company from a foreign com­pany in which the Indian company has a shareholding of more than 50% can be set off against subsequent dividends paid by the Indian company to its shareholders on which DDT is payable, subject to conditions.

Buyback tax. The buyback of unlisted shares by an Indian com­pany is subject to buyback tax at a rate of 20% plus surcharge of 12% and cess of 3%, resulting in effective tax rate of 23.07%. The tax is computed on the difference between the price at which shares are bought back and the consideration received by the company for issuance of shares. The amounts received are ex­empt in the hands of the shareholders.

Foreign tax relief. Foreign tax relief for the avoidance of double taxation is governed by tax treaties with several countries. If no such agreements exist, resident companies may claim a foreign tax credit for the foreign tax paid. The amount of the credit is the lower of the Indian tax payable on the income that is taxed twice and the foreign tax paid. Treaty benefits and relief are available only if a nonresident taxpayer obtains a tax-residency certificate indicating that it is resident in a country outside India. This cer­tificate must be issued by the government of that country. In addition to obtaining the certificate, taxpayers must maintain certain prescribed documents and information.

Determination of trading income

General. Business-related expenses are deductible; capital expen­ditures (other than on scientific research in certain cases) and personal expenses may not be deducted. Certain expenses on which taxes are required to be withheld are allowable as deduc­tions only if the required taxes have been withheld and paid to the government. The deductibility of head-office expenses for non­resident companies is limited.

Income derived from operations with respect to mineral oil, and certain other income derived by non residents are taxed on a deemed-profit basis. Under an optional tonnage tax scheme, ship­ping profits derived by Indian shipping companies are taxed on a deemed basis.

Inventories. In determining trading income, inventories may, at the taxpayer’s option, be valued either at cost or the lower of cost or replacement value. The last-in, first-out (LIFO) method is not accepted.

Provisions. Provisions for taxes (other than income tax, dividend distribution tax and wealth tax, which are not deductible expens­es) and duties, bonuses, leave salary and interest on loans from financial institutions and scheduled banks are not deductible on an accrual basis unless payments are made before the due date of filing of the income tax return. If such payments are not made before the due date of filing of the income tax return, a deduction is allowed only in the year of actual payment. General provisions for doubt ful trading debts are not deductible until the bad debt is written off in the accounts, but some relief is available for banks and financial institutions with respect to nonperforming assets. Inter est payable on loans, borrowings or advances that is convert­ed into loans, borrowings or advances may not be claimed as a de duction for tax purposes.

Depreciation allowances. Depreciation is calculated using the declining-balance method and is allowed on classes of assets. Depreciation rates vary according to the class of assets. The fol­lowing are the general rates.

Asset Rate (%)
Plant and machinery 15*
Motor buses, motor lorries and motor taxis
used in a rental business
30
Motor cars other than those used in the
business of running them on hire
15
Buildings 10
Furniture and fittings 10

* Subject to the fulfillment of prescribed conditions, accelerated depreciation equal to 20% of the actual cost is allowed in the first year with respect to plant and machinery (other than ships or aircraft) acquired or installed after 31 March 2005. Accelerated depreciation is allowed at the rate of 35% to an undertaking or manufacturing enterprise set up in notified areas (in the states of Andhra Pradesh, Bihar, Telangana or West Bengal) on or after 1 April 2015 but before 1 April 2020. Additions to plant and machinery that are used for less than 180 days in the year in which they are acquired and placed in service qualify for accelerated depreciation in that year at one-half of the above rates. The balance of accelerated depreciation is allowed in the subsequent year.

Depreciation is also allowed on intangibles, such as know-how, patents, copyrights, trademarks, licenses, franchises or other similar commercial rights. These items are depreciated using the declining-balance method at a rate of 25%.

Special rates apply to certain assets, such as 60% for computers and computer software, 80% for energy-saving devices and 100% for air or water pollution-control equipment. Additions to assets that are used for less than 180 days in the year in which they are acquired and placed in service qualify for depreciation in that year at one-half of the normal rates. On the sale or scrapping of an asset within a class of assets, the declining-balance value of the class of assets is reduced by the sales proceeds (for details con­cerning the capital gains taxation of such a sale, see Section B).

Companies engaged in power generation or in power generation and distribution may elect to use the straight-line method of depre­ciation at specified rates.

Investment allowances. An additional deduction of 15% of the cost of new plant and machinery (other than ships, aircraft, com­puters, computer software and vehicles) is allowed to companies engaged in the business of manufacturing or production of articles or things that acquire and install new plant and machinery be­tween 1 April 2014 and 31 March 2017 if their aggregate expen­diture on such new plant and machinery exceeds INR250 million.

In addition to the above, a further additional deduction of 15% is available to an undertaking set up between 1 April 2015 and 31 March 2020 that is engaged in the business of manufacturing or production of articles or things in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana or West Bengal and that acquires and installs new plant and machinery (other than ships, aircraft, computers, computer software and vehicles) between 1 April 2015 and 31 March 2020.

Relief for losses. Business losses, excluding losses resulting from unabsorbed depreciation of business assets (see below), may be carried forward to be set off against taxable income derived from business in the following eight years, provided the income tax return for the year of loss is filed on time. For closely held corpo­rations, a 51% continuity of ownership test must also be satisfied.

Unabsorbed depreciation may be carried forward indefinitely to be set off against taxable income of subsequent years.

Losses under the heading “Capital Gains” (that is, resulting from transfers of capital assets) may not be set off against other income, but may be carried forward for eight years to be set off against capital gains. Long-term capital losses may be set off against long­term capital gains only.

Amalgamations and demergers. Special rules apply to “amalga­mations” and “demergers” (for a description of a “demerger,” see Section B). With respect to companies, an “amalgamation” is the merger of one or more companies with another company or the merger of two or more companies to form one company (the com­pany or companies that merge are referred to as the “amalgamating company or companies” and the company with which they merge, or which is formed as a result of the merger, is known as the “amalgamated company”) that meet certain specified conditions.

An amalgamated company may claim the benefit of the carryfor-ward of business losses and unabsorbed depreciation of the amal­gamating companies if the following conditions are satisfied:

  • Shareholders holding at least 75% of the shares of the amal­gamating company become shareholders of the amalgamated company.
  • The amalgamating company owns an industrial undertaking, a ship or a hotel.
  • The amalgamating company has been engaged in business for at least three years and incurred the accumulated business loss or unabsorbed depreciation during such period.
  • As of the date of amalgamation, the amalgamating company has continuously held at least 75% of the book value of the fixed assets that it held two years before the date of the amalgamation.
  • At least 75% of the book value of fixed assets acquired from the amalgamating company is held continuously by the amal­gamated company for a period of five years.
  • The amalgamated company continues the business of the amal­gamating company for at least five years from the date of amalgamation.
  • An amalgamated company that acquires an industrial undertak­ing of the amalgamating company through an amalgamation must achieve a level of production that is at least 50% of the “installed capacity” of the undertaking before the end of four years from the date of amalgamation and continue to maintain this minimum level of production until the end of the fifth year from the date of amalgamation. For this purpose, “installed capacity” is the capacity of production existing on the date of amalgamation.
  • Additional specified conditions apply to ensure that the amal­gamation is for genuine business purposes.

In the event of non-compliance with any of the above conditions, any business losses carried forward and unabsorbed depreciation that has been set off by the amalgamated company against its tax­able income is treated as income for the year in which the failure to fulfill any of the above conditions occurs.

Groups of companies. The income tax law does not provide for the consolidation of income or common assessment of groups of companies. Each company, including a wholly owned subsidiary, is assessed separately.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Securities Transaction Tax (STT); payable on
transactions in equity shares, derivatives,
units of an equity-oriented mutual funds
and units of business trusts on a recognized
stock exchange; the tax is imposed on the
value of the transaction and varies according
to the type of transaction
Delivery-based transactions in equity shares
or in units of equity-oriented funds
Buyer
Shares 0.1
Units Nil
Seller
Shares 0.1
Units 0.001
Sale of units of an equity-oriented mutual
funds; tax paid by seller
0.001
Non-delivery-based transactions in equity
shares or in units of an equity-oriented
fund; tax paid by seller
0.025
Sale of derivatives
Sale of option (seller); rate applied to
option premium
0.017
Sale of option when option is exercised
(buyer); rate applied to settlement price
0.125
Sale of futures (seller) 0.01
Sale of unlisted equity shares under offer
for sale to public
0.2
Sale of units of a business trust (delivery-based)
Tax paid by buyer 0.1
Tax paid by seller 0.1
Sale of units of a business trust (non-delivery‑
based); tax paid by seller
0.025
Commodities transaction tax; tax paid by
seller on taxable value on sales of
commodities derivatives
0.01
Central value-added tax (CENVAT), on
goods manufactured in India; levied by
the central government
Various
Customs duty, on goods imported into
India; levied by the central government
Various
Sales tax; generally imposed on sales
of goods; levied either by the central
government (central sales tax) on
interstate sales or the state government
(state sales tax; generally referred to as
“value-added tax”) on intrastate sales
Various
Luxury tax; levied by certain states on
notified items (items officially prescribed
by the relevant authority)
Various
Works contract tax; on goods for which
title is transferred during execution of
work contracts (for example, contracts
for the construction, fabrication or
installation of plant and machinery)
Various
Lease tax on contracts involving transfer
of rights to use goods
Various
Octroi/entry tax; levied by certain
municipalities and states on the entry
of goods into municipal jurisdiction
or state for use, consumption or sale
Various
Research and development cess; imposed on
payments made for the import of technology
5
Stamp duties; levied by each state on
specified documents and transactions,
including property transfers
Various
Social security contributions; paid by the
employer for medical insurance plans for
certain categories of employees and for
minimum retirement benefit plans
Various
Service tax, on provision of services
including imports of services into India;
imposed on all services except those
specified in “negative list,” and certain
exempt services
14

Miscellaneous matters

Foreign-exchange controls. All cross-border transactions with non­residents are subject to foreign-exchange controls contained in the Foreign Exchange Management Act. The rupee is fully convert­ible for trade and current account purposes. Except for certain specified restrictions, foreign currency may be freely purchased for trade and current account purposes. In general, such purchases must be made at the market rate. Capital account transactions are not permitted unless they are specifically allowed and the pre­scribed conditions are satisfied. Cross-border transactions that are specifically allowed include the following:

  • All remittances abroad that require prior approval arrangements, such as joint venture and technical collaboration agreements.
  • The remittance of interest, dividends, service fees and royalties.
  • Repatriation of capital is also freely permitted for investment ap – proved on a repatriable basis. However, for sales of Indian assets, the terms of sale require the approval of the exchange-control authorities, and certain other conditions must be satisfied.

Transfer pricing. The Income Tax Act includes detailed transfer-pricing regulations. Although the guidelines are broadly in line with the principles set out by the Organisation for Economic Co-operation and Development (OECD), key differences exist.

Under these regulations, income and expenses, including interest payments, with respect to international transactions between two or more associated enterprises (including permanent establish­ments) must be determined using arm’s-length prices. The trans­fer-pricing regulations also apply to, among other transactions, cost-sharing arrangements, certain capital-financing transac­tions, business restructurings or reorganizations and dealings in intangibles.

The transfer-pricing regulations contain definitions of var­ious terms, including “associated enterprise,” “arm’s-length price,” “en terprise,” “international transaction” and “permanent establishment.” It specifies methods for determining the arm’s-length price. The following are the specified methods:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost-plus method
  • Profit split method
  • Transactional net margin method
  • Any other method that takes into account the price that has been charged or paid or would have been charged or paid, in the same or a similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts

The CBDT has issued regulations for applying these methods to determine arm’s-length prices. In addition, the CBDT has issued safe-harbor rules indicating the circumstances in which tax offi­cers accept transfer prices declared by taxpayers. The safe harbor rules for determining transfer prices apply for five years begin­ning with the 2012-13 fiscal year.

The transfer-pricing regulations require each person entering into an international transaction to maintain prescribed documents and information regarding a transaction. Each person entering into an international transaction must arrange for an accountant to pre­pare a report and furnish it to the Tax Officer by the due date for filing the corporate tax return, which is 30 November in such circumstances.

A tax officer may make an adjustment with respect to an interna­tional transaction, if the officer determines that certain condi­tions exist, including any of the following:

  • The price is not at arm’s length.
  • The prescribed documents and information have not been maintained.
  • The information or data on the basis of which the price was determined is not reliable.
  • Information or documents requested by the Tax Officer have not been furnished.

Stringent penalties (up to 2% of the transaction value) are impos­ed for non-compliance with the procedural requirements and for understatement of profits.

Measures allowing Advance Pricing Agreements (APAs) are ef­fective from July 2012. Under these measures, the tax administra­tion may enter into an APA with any person undertaking an inter­national transaction. APAs are binding on the taxpayer and the tax authorities (provided no change in law and facts) and are valid for a maximum period of five consecutive years. The APA scheme provides for a “rollback” mechanism, which is subject to pre­scribed conditions and procedures. Under the “rollback” mecha­nism, an APA covering a future period may also be applied to international transactions entered into by a taxpayer during the periods (not exceeding four years) preceding the first year for which the APA is applicable.

Transfer-pricing measures have been applied to certain domestic transactions between related parties and transactions involving tax-holiday units.

Debt-to-equity rules. India does not currently impose mandatory capitalization rules. However, banks and financial corporations must comply with capital adequacy norms. In addition, foreign-exchange regulations prescribe that the debt-to-equity ratio should not exceed 4:1 in the case of borrowings beyond a certain limit from certain nonresident lenders.

General Anti-avoidance Rules. The Income Tax Act includes General Anti-avoidance Rules (GAAR), which will be effective from 1 April 2017. The GAAR are broad rules that are designed to deal with aggressive tax planning. Wide discretion is provided to the tax authorities to invalidate an arrangement, including the disregarding of the application of tax treaties, if an arrangement is treated as an “impermissible avoidance arrangement.”

Notified Jurisdictional Area. The Income Tax Act contains a “tool box” to deal with transactions with entities located in noncoop­erative countries or jurisdictions that do not exchange informa­tion with India. The government of India is empowered to notify such jurisdiction as a Notified Jurisdiction Area (NJA). The government discourages transactions by taxpayers in India with persons located in an NJA by providing onerous tax consequenc­es with respect to such transactions. The consequences include applicability of transfer-pricing regulations, additional disclosure and compliance requirements, disallowance of deductions in some circumstances and higher withholding tax rates on transac­tions with a person located in an NJA. Presently, only Cyprus is notified as an NJA, effective from 1 November 2013.

Business trusts. The Income Tax Act contains a specific taxation regime for the taxability of income from business trusts (real estate investment trusts and infrastructure investment trusts). This is a new category of investment vehicles for acquiring control or interests in Indian special-purpose vehicles for investments in the real estate or infrastructure sector. Units of business trusts can be listed on recognized stock exchange and can be subscribed by residents and nonresident investors (including foreign companies). Business trusts can also avail themselves of external commercial borrowings from nonresident investors (including foreign compa­nies). Business trusts are granted pass-through status for purposes of taxation. Distributions of dividend income from business trusts are exempt in the hands of investors. For further details, see foot­note (e) in Section A and Rates of corporate tax and Capital gains in Section B.

Treaty withholding tax rates

Under the Income Tax Act, Indian companies are required to pay DDT (see Section B) at an effective tax rate of nearly 20.36% (base rate of 15% on gross amount plus a surcharge of 12% and an education cess of 3%) on dividends declared, distributed or paid by it. Such dividends are exempt from tax in the hands of the recipients. Accordingly, the relevant treaty rates for dividends are not captured in the table below.

Tax rates specified under the Income Tax Act are increased by a surcharge and cess. See footnote (a) and (c) below for tax rates under the Income Tax Act on outbound payments of interest and royalties, respectively. In general, if the relevant treaty specifies the same or lower rate for withholding, these treaty rates, which are more beneficial for the nonresident recipient, may be applied. In addition, these tax rates need not be increased by the surcharge and cess. To claim treaty benefits, the nonresident recipient must obtain a Tax Residency Certificate indicating that it is a resident of that country or specified territory. This certificate is issued by the government of such country or territory. The nonresident re­cipient is also required to provide certain information and docu­ments to substantiate its eligibility to claim treaty benefits.

The following table presents the treaty rates on outbound pay­ments of interest and royalties to jurisdictions that have entered into tax treaties with India.

  Dividends

%

Interest (a)(b)

%

Approved royalties (c)(d)

%

Albania 0 10 10
Armenia 0 10 10
Australia 0 15 15
Austria 0 10 10
Bangladesh 0 10 10
Belarus 0 10 15
Belgium 0 15 10 (e)(f)
Bhutan 0 10 10
Botswana 0 10 10
Brazil 0 15 15 (t)
Bulgaria 0 15 20
Canada 0 15 15
China 0 10 10
Colombia 0 10 10
Croatia (k) 0 10 10
Cyprus (h) 0 10/30 15/30
Czech Republic 0 10 10
Czechoslovakia (h) 0 15 30
Denmark 0 15 20
Egypt 0 20 10
Estonia 0 10 10
Ethiopia 0 10 10
Fiji 0 10 10
Finland 0 10 (e) 10 (e)
France 0 10 (e)(f) 10 (e)(f)
Georgia 0 10 10
Germany 0 10 10
Greece 0 20 10
Hungary 0 10 (e) 10 (e)
Iceland 0 10 10
Indonesia (m) 0 10 15
Ireland 0 10 10
Israel 0 10 (e) 10 (e)
Italy 0 15 20
Japan 0 10 10
Jordan 0 10 20
Kazakhstan 0 10 (e) 10 (e)
Kenya 0 15 20
Korea (South) (l) 0 15 15
Kuwait 0 10 10
Kyrgyzstan 0 10 15

 

       
 
Latvia 0 10 10
Libya 0 20 10
Lithuania 0 10 10
Luxembourg 0 10 10
Malaysia 0 10 10
Malta (i) 0 10 10
Mauritius 0 20 15
Mexico 0 10 10
Mongolia 0 15 15
Montenegro 0 10 10
Morocco 0 10 10
Mozambique 0 10 10
Myanmar 0 10 10
Namibia 0 10 10
Nepal 0 10 15 (e)
Netherlands 0 10 (e)(f) 10 (e)(f)
New Zealand 0 10 10
Norway 0 10 10
Oman 0 10 15
Philippines 0 15 15
Poland 0 10 15
Portugal 0 10 10
Qatar 0 10 10
Romania 0 10 10
Russian Federation 0 10 10
Saudi Arabia 0 10 10
Serbia 0 10 10
Singapore 0 15 10
Slovenia 0 10 10
South Africa 0 10 10
Spain 0 15 20 (e)
Sri Lanka 0 10 10
Sudan 0 10 10
Sweden 0 10 (e) 10 (e)
Switzerland 0 10 (e) 10 (e)
Syria 0 10 10
Taiwan 0 10 10
Tajikistan 0 10 10
Tanzania 0 10 10
Thailand (g) 0 10 10
Trinidad and Tobago 0 10 10
Turkey 0 15 15
Turkmenistan 0 10 10
Uganda 0 10 10
Ukraine 0 10 10
       
United Arab Emirates 0 12.5 10
United Kingdom 0 15 15
United States 0 15 15
Uruguay 0 10 10
Uzbekistan 0 10 10
Vietnam 0 10 10
Zambia 0 10 10
Non-treaty countries 0 20 (a) 10 (c)

a) A 20% rate applies if the relevant tax treaty provides for unlimited taxation rights for the source country on interest income. Under the Income Tax Act, the 20% rate applies with respect to interest on monies borrowed or debts incurred in foreign currency by an Indian concern or the government. If the recipient is a foreign company, this rate is increased by a surcharge of 2% (when the aggregate income exceeds INR10 million) or 5% (when the aggre­gate income exceeds INR100 million) and is further increased by an educa­tion cess of 3% (on income tax and surcharge). A special reduced rate of 5% applies under certain specified circumstances (see footnote [e] in Section A). In other cases, depending on whether the recipient is a corporate entity, a tax rate of 30% or 40% applies. These tax rates are increased the applicable sur­charge and cess.

b) A reduced rate of 0% to 10% generally applies under a tax treaty if interest payments are made to local authorities, political subdivisions, the govern­ment, banks, financial institutions or similar organizations. A reduced rate may also apply if the lender holds a certain threshold of capital in the bor­rower. The text of the relevant tax treaty needs to be examined.

c) Under the Income Tax Act, a 10% rate applies if the relevant tax treaty pro­vides for unlimited rights for the source country to tax royalties (the rate is increased by the surcharge and cess) and if the payment is made by the gov­ernment of India or an Indian concern. In other cases, as mentioned in foot­note (a) above, a tax rate of 30% or 40% applies. These rates are increased by the applicable surcharge and cess.

d) The rate provided under the relevant tax treaty applies to royalties not effec­tively connected with a permanent establishment in India. Also, in some of India’s tax treaties, such as with Australia, Canada, Spain, the United King­dom and the United States, a separate rate of 10% is specified for equipment royalties. Similarly, under India’s tax treaty with Bulgaria, a 15% rate applies to copyright royalties other than cinematographic films or films and tapes used for radio or television broadcasting. In addition, many of India’s tax trea­ties also provide for withholding tax rates for technical services fees. In most cases, the rates applicable to royalties also apply to the technical services fees. The text of the relevant tax treaty needs to be examined to determine the rel­evant scope and rate.

e) A more restrictive scope of the definition of royalties or interest and/or a reduced rate may be available under the most-favored-nation clause in the relevant tax treaty.

f) A reduced rate of 10% applies in the event of notifications issued by the gov­ernment of India that give effect to the most-favored-nation clauses in these tax treaties.

g) A revised tax treaty with Thailand was signed on 29 June 2015 and entered into force on 13 October 2015. The revised treaty is effective in India from 1 April 2016.

h) This treaty applies to the Slovak Republic.

i) A revised tax treaty was signed with Malta on 8 April 2013 and took effect in India on 1 April 2015.

j) On 1 November 2013, the government of India notified Cyprus as an NJA (see Section E). Accordingly, the withholding tax rate for any payment made to a person located in Cyprus is the higher of 30% and the rate prescribed under the Income Tax Act.

k) The tax treaty with Croatia, which was signed on 12 February 2014, will be effective in India from 1 April 2016.

l) A revised tax treaty with Korea (South) was signed on 18 May 2015. The government of India has not yet issued the notification for making the treaty effective.

m) A revised tax treaty with Indonesia was signed on 27 July 2012. The gov­ernment of India has not yet issued the notification for making the treaty effective.

In addition to the treaties listed in the table above, India has a signed tax treaty with Macedonia for which the effective date has not yet been notified. Under the treaty, the withholding tax rate for both interest and royalties will be 10%.