India Tax & Business Guide - Deloitte

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Basic facts
Population 1.1bn Inflation 6.2% (2006)
Main languages Hindi, English GDP per head US$843
Currency Indian rupee (INR) GDP growth 9.4% (2006)
Economic communities WTO
GDP sources 17.5% agriculture, 27.9% industry, 54.6% services
Political environment

India is a parliamentary federal republic, with 28 states and seven federally administered union territories.

The United Progressive Alliance, a multi-party coalition led by the Indian National Congress, is in government and is headed by the prime minister, Manmohan Singh.
Foreign trade and investment
Exports US$123.2bn (2006) Imports US$184.4bn (2006)

Main export markets: The US, China, the UAE, Hong Kong and the UK.

Major exports: Textiles, gems and jewellery, engineering goods, and chemicals and related products.

Foreign investment and technology collaboration are welcomed, and the country is expanding the number of industries in which investment approval is automatic, requiring only a report to the Reserve Bank of India (the central bank).
Business and financing
Business forms Limited company; Unlimited company

The limited company is the most widely used form.

India permits 100% foreign equity in most industries with either automatic or government approval. Where there are sector-specific caps, proposals for stakes up to those caps are automatically approved, with a few exceptions.

Government-owned development banks and financial institutions are the main sources of finance.
Labour environment
Unemployment rate 7.6% (2006)* Minimum wage Varies
*Economist Intelligence Unit estimate.

The government sets distinct minimum wages for many types of scheduled employment, ranging from INR 25 to INR 134 per day. Minimum wages in India are not enforced.

With some exceptions, India has company unions rather than trade unions.

Wages and fringe benefits vary by industry, company size and region. Wages have two components: the basic salary and the dearness allowance, which is linked to the cost-of-living index.

Employers contribute 10Ò12% of salary to the Provident Fund. Employers contribute 4.75% and employees 1.75% of their wages to the state insurance scheme.

Expatriate employment in manufacturing industries is generally limited to technical and specialised personnel.
Taxation
Corporate tax
Main rate Effective rate of 41.82% for foreign companies

Resident companies are taxed on worldwide income; non-resident companies are taxed only on Indian-source income. A company is considered resident if it is incorporated in India, or if its management and control are in India. Taxes on income in one fiscal year are usually paid in the next fiscal year (Ïassessment yearÓ).

Domestic companies are taxed at a rate of 30%, along with a 10% surcharge where total income exceeds INR 10m. In addition, a 2% education cess and a 1% secondary and higher education cess on all taxes are levied. The effective rate for resident companies is thus 30.99% where income is less than or equal to INR 10m or 33.99% where income exceeds INR 10m. Non-resident companies and branches of foreign companies are taxed at a rate of 40%, plus a surcharge of 2.5%, where total income exceeds INR 10m, and the 3% cess, bringing the effective rate to 41.2% where income is less than or equal to INR 10m or 42.23% where income exceeds INR 10m.

A minimum alternative tax (MAT) is also imposed on corporations. If a companyÌs tax liability is less than 10% of book profits, the book profits are deemed to be total income and are charged to tax at 10%, plus the applicable surcharge and cess; thus the effective MAT rate for a domestic company is 10.3% for total income up to INR 10m, and 11.33% for total income exceeding INR 10m (rates comprise the base rate of 10%, plus the applicable surcharge of 10% and the 3% cess). For non-resident companies, the effective MAT rate is 10.3% for total income up to INR 10m, and 10.5575% for total income exceeding INR 10m (rates comprise the base rate of 10%, plus the applicable surcharge of 2.5% and the 3% cess).
Individual tax
Progressive rates up to 30%

Resident individuals are generally taxed on their worldwide income. Individuals who are resident but not ordinarily resident are taxed only on Indian-source income or foreign income of a business or profession controlled from India. An individual is resident if present for more than 182 days in an income year or if present for a total of 365 days in the previous four years, and at least 60 days in the relevant income year. The individual is resident but not ordinarily resident if the person is resident in the relevant year but has not been resident for nine of the previous ten years, or has not been present for 730 days or more in the previous seven years.

Tax is charged at progressive rates up to 30%. A 10% surcharge applies to individuals with income exceeding INR 1m and the 3% cess is levied on all direct and indirect taxes.
Capital gains
Short-term gains taxed as income

Short-term capital gains, taxed as income, are defined as gains on assets held for less than three years, or less than one year in the case of listed securities. Long-term gains of companies and individuals are taxed at 20%, plus the surcharge and 3% cess. Long-term gains on listed securities are, however, exempt; short-term gains on listed securities are taxed at concessionary ratesÛthat is, a rate of 10% (plus the surcharge and 3% cess). Gains on the sale of certain capital assets are exempt if the proceeds are invested in certain specified assets.
Indirect tax
Standard rate 12.5% Lower rates 4% and 1%

A value-added tax (VAT) applies at the state level since April 1st 2005. The system applies to approximately 550 categories of goods. The standard rate is 12.5%, with lower rates of 4% and 1%. The 4% rate applies to agricultural and industrial inputs, capital goods and medicines. The 1% rate applies to gold and silver ornaments. A refund of input tax is available for exporters. The individual states also impose VAT at a rate of 4%.

Registration is compulsory for businesses with an annual turnover of INR 500,000.
Tax administration and compliance
Tax year Individuals: year to March 31st; Companies: accounting year

Tax is charged on a preceding-year basis, with tax for the assessment year calculated on the basis of the income of the preceding year (Ïincome yearÓ). Companies must file a return by October of the assessment year. Companies must pay four quarterly advance payments of income tax during the Ïincome yearÓ. A final payment, if required, is payable on assessment.

Employment income is taxable by withholding.
Additional tax information
Withholding taxes Dividends 0%, Interest 20%, Royalties 10% (for agreements entered after June 1st 2005)
Tax treaties India has concluded more than 70 tax treaties.
Dividends Dividends are not taxable but the paying company is liable to a dividend distribution tax.
Revenue protection There is transfer-pricing legislation but no anti-haven (CFC) rules.
Groups There is no provision for group taxation.
Incentives Infrastructure; tourism; software export; new industrial undertakings; scientific research; agro-processing; special economic zones (SEZs).
Other taxes Dividend distribution tax, Excise tax, Import duties, Minimum alternative tax, Research and development cess, Service tax, Stamp duty, State sales taxes, Wealth tax, Fringe benefits tax, Banking cash transaction tax.