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| Taxation of Business |
Indian tax laws distinguish between domestic and foreign companies in administering tax rates: |
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Indian Companies are taxed on their worldwide income |
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Foreign companies are taxed only on the income that arises from Indian operations. |
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| Corporate Income Tax Rates |
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Minimum Alternate Tax
Companies that have book profits but are not taxable on account of large deductions and concessions, must pay a Minimum Alternate Tax (MAT) which applies to all companies at a rate of 10% (and surcharge as applicable) of the book profits. However, export oriented units and Infrastructure projects, which have been specifically exempted from income tax, do not have to pay MAT. |
Dividend Distribution Tax
A 14.025% dividend tax is levied on the company on distributed dividends. This dividend is not taxable in the hands of the recipient. |
Capital Gains Taxes
Capital gains are classified into short-term capital gains (not more than12 months for shares/ securities, and not more than 36 months for other assets) and long-term capital gains. |
| Tax on Long term Capital Gains |
| Taxpayer Status |
Flat Tax Rates [%]+Surcharge (SC) |
| Resident individual |
20 |
| Non-resident Indian/ FII |
10 |
| Domestic company and partnership firm |
20 (10% for listed scripts without indexation) |
| Venture capital company |
20 |
| Foreign company and non-residents |
10 |
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| Source: internal compilation |
| For calculating long-term capital gains on shares, deductions are allowed for the cost of acquisition, as well as the cost of conversion (exchange fluctuations) into the currency in which they were purchased originally. Capital gains losses can only be carried forward and set off against capital gains over eight subsequent years. |
Taxation of Branch Offices and Project offices
Branch offices, project offices, and non-resident investors/promoter companies are taxed on their Indian income, when it arises in India or arises out of Indian operations. Indian income includes royalties, technical service fees, dividends, and capital gains on sale of Indian company shares, besides business income originating from branch or project operations.
The tax rate for branch offices is 40%, higher than for Indian companies including 100% subsidiaries of foreign companies.
Liaison offices are not taxable in India, as they are not allowed to undertake any business/commercial activity. |
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Double Tax Avoidance Agreements
Foreign companies are taxed under the withholding provisions of bilateral Double Taxation Avoidance Treaties, which India has signed with many countries, including the Netherlands. The bilateral treaties provide credit for taxes withheld or paid in India that correspond to Indian income tax. The tax credit is limited to the lower of the tax paid abroad and the Indian tax on the foreign company. |
| Expatriate Personal Taxes |
a. Income Tax
Individuals are required to pay tax on remuneration, income from property, professional and business income, capital gains and other sources.
A foreign national in regular employment/service contract in India in a foreign company or in an Indian Company is taxable on his earnings in India, including on income received outside India relating to employment in India. Further, the global income of foreign nationals residing in India for two years or more, will become taxable in India from the third year of their stay in India. |
Individual Income tax structures (effective 1 April, 2007) |
| Income Slab |
Rates of Income Tax |
| Up to Rs.110,000 |
Nil |
| Rs. 1,10,000 – Rs. 1,50,000 |
10% of the total income minus
Rs. 110,000 Plus 3% Education Cess |
| Rs.150,000 – Rs. 250,000 |
Rs 4,000+(20% of total income minus Rs 1,50,000) Plus 3% Education Cess |
| Rs 2,50,000- Rs 10,00,000 |
Rs 24,000+(30% of total income minus Rs 2,50,000) Plus 3% Education Cess |
Above Rs 10,00,000 |
Rs 24,000+(30% of total income minus Rs 10,00,000) Plus 10% Surcharge Plus 3% Education Cess |
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| Source: Internal compilation |
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Income tax liabilities are calculated on the basis of a slab structure, providing for standard deductions, and special tax saving schemes. Deductions include premium paid for insurance, contributions to public provident funds, etc.
For details of available deductions and exemptions, please refer to Income Tax Act or consult an accountant. |
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b. Wealth Tax
Certain non-productive assets like any building or land, jewellery, aircraft, cars, urban land etc., valued beyond Rs. 1.5 million (Euro 25663) are taxable at 1% for the amount exceeding this limit under the wealth tax. |
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c. Gift Tax
No tax is payable by a donor or a donee on any gift made on or after 1.10.1998. Gifts can be made in Indian rupees from any person resident in India to another resident or non-resident. However, gifts through international remittances may be exchanged between blood relatives only. |
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