Article posted by Adam Pollard, for UK India Business Council
17 May 2012

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India intends to introduce a new Direct Tax Code (DTC) from 1 April 2012, a year later than originally planned. If enacted, this Bill will replace the Income Tax Act. It aims to simplify the mainstream corporate tax system, phase out various export incentives and introduce a number of anti-avoidance measures.

The tax year in India runs from 1 April to 31 March. The current tax rates are as follows:

Company Taxable income exceeds INR 10 m Other cases
Domestic Indian company 33.22% 30.90%
Foreign company with an Indian branch 42.23% 41.20%

Where there are accounting profits but no taxable profits, a minimum alternative tax (MAT) is levied on the adjusted book profits at the following rates:

Company Taxable income exceeds INR 10 m Other cases
Domestic Indian company 19.93% 18.54%
Foreign company with an Indian branch 19% 18.54%

Currently India does not have any tax grouping system and therefore each Indian company is assessed to tax separately.

Dividend distribution tax

Dividend distributions made by Indian companies are subjected to dividend distribution tax at an effective rate of 16.609%. The tax is payable by the Indian company. Dividends are exempt from Indian tax in the hands of the recipient.

Withholding tax

Many payments by an Indian company to a nonresident are generally subject to Indian withholding tax. For example, royalties and fees for technical services (FTS) or interest on loans are subject to withholding tax at a rate of 10% to 42.23%. The withholding tax rate depends on the nature of payment, tax residence of the recipient and the availability of double tax treaty benefits.

From 1 April 2010, any recipient of income from India needs a Permanent Account Number (PAN) if the income received is subject to tax withholding under Indian domestic tax law. In the absence of PAN, the Indian payer is obliged to withhold tax at the higher of: – Tax rates specified in the Indian domestic tax law/rates in force – 20 per cent

Capital gains

Capital gains are currently taxed, even in the hands of non-residents, based on the type of assets and their period of holding. Assets held for not more than 36 months (12 months in case of shares) are taxed at 42.23%, Long-term capital gains are taxed at 21.12% but there are preferential rates for listed shares and securities ranging from Nil to 15.83%.

Cash and profit repatriation

Profit repatriation is possible, provided all formalities are considered and due taxes are paid. There are various options for repatriating cash and profits such as dividends, payment of consultancy fees, capital reductions or payment of interest on loans, which have different Indian tax implications.

One of the most common pitfalls experienced by foreign investors is failing to notify the Reserve Bank of India of their investments. This creates complications for them later on when attempting to repatriate investments out of India. For example, there remain significant restrictions on loans from overseas parent companies (External Commercial Borrowings). Businesses should therefore check the rules carefully.

In addition to direct taxes, there are a host of other taxes such as customs duty, excise duty, VAT, service tax (proposed to be replaced by Goods and Service Tax), stamp duties, Securities Transaction Tax and wealth tax.

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Article posted by Adam Pollard, for UK India Business Council
17 May 2012

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to contact this user