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Business Laws

Taxation

Taxation

Introduction

India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), (Sales tax in States where VAT is not yet in force), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.
In last 10-15 years, Indian taxation system has undergone tremendous reforms. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is ongoing in India.
Since April 01, 2005, most of the State Governments in India have replaced sales tax with VAT.

Taxes Levied by Central Government

Direct Taxes
Taxes on Corporate Income

Companies residents in India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income Tax Act, 1961. Non-resident corporations are essentially taxed on the income earned from a business connection in India or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if it?s control and management is situated entirely in India.
Domestic corporations are subject to tax at a basic rate of 35% and a 2.5% surcharge. Foreign corporations have a basic tax rate of 40% and a 2.5% surcharge. In addition, an education cess at the rate of 2% on the tax payable is also charged. Corporates are subject to wealth tax at the rate of 1%, if the net wealth exceeds Rs.1.5 mn.
Domestic corporations have to pay dividend distribution tax at the rate of 12.5%, however, such dividends received are exempt in the hands of recipients.
Corporations also have to pay for Minimum Alternative Tax at 7.5% (plus surcharge and education cess) of book profit as tax, if the tax payable as per regular tax provisions is less than 7.5% of its book profits.

Capital Gains Tax

Tax is payable on capital gains on sale of assets.
Long-term Capital Gains Tax is charged if

  • Capital assets are held for more than three years and

  • In case of shares, securities listed on a recognized stock exchange in India, units of specified mutual funds, the period for holding is one year.

Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain from sale of equity shares or units of mutual funds are exempt from tax.
Short-term capital gains are taxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer of equity shares or units of mutual funds are taxed at a rate of 10%.
Long-term and short-term capital losses are allowed to be carried forward for eight consecutive years. Long-term capital losses may be offset against taxable long-term capital gains and short-term capital losses may be offset against both long term and short-term taxable capital gains.

Personal Income tax

Personal income tax is levied by Central Government and is administered by Central Board of Direct Taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act,.
The rates for personal income tax are as follows :

Table of Income Tax Rates in India for an Individual in (financial year 2005-2006)

Tax % Income (INR)
0% 1 - 100,000
10% 100,001 - 150,000
20% 150,001-250,000
30% 250,001 and above


Rates of Withholding Tax
Current rates for withholding tax for payment to non-residents are :

  • Interest :20%

  • Dividends paid by domestic companies: Nil

  • Royalties :10%

  • Technical Services : 10%

  • Any other services

    • Individuals: 30% of the income

    • Companies: 40% of the net income

The above rates are general and are applicable in respect of countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).

Tax Incentives

Government of India provides tax incentives for :

  • Corporate profit

  • Accelerated depreciation allowance

  • Deductibility of certain expenses subject to certain conditions.

These tax incentives are, subject to specified conditions, available for new investment in

  • Infrastructure,

  • Power distribution,

  • Certain telecom services,

  • Undertakings developing or operating industrial parks or special economic zones,

  • Production or refining of mineral oil,

  • Companies carrying on R&D,

  • Developing housing projects,

  • Undertakings in certain hill states,

  • Handling of food grains,

  • Food processing,

  • Rural hospitals etc.

Double Tax Avoidance Treaty

India has entered into DTAA with 65 countries including the US. In case of countries with which India has Double tax Avoidance Agreement, the tax rates are determined by such agreements. Domestic corporations are granted credit on foreign tax paid by them, while calculating tax liability in India.
In the case of the US, dividends are taxed at 20%, interest income at 15% and royalties at 15%.

Indirect Taxes
Excise Duty

Manufacture of goods in India attracts Excise Duty under the Central Excise Act 1944 and the Central Excise Tariff Act 1985. Herein, the term Manufacture means bringing into existence a new article having a distinct name, character, use and marketability and includes packing, labeling etc.
Most of the products attract excise duties at the rate of 16%. Some products also attract special excise duty/and an additional duty of excise at the rate of 8% above the 16% excise duty. 2% education cess is also applicable on the aggregate of the duties of excise. Excise duty is levied on ad valorem basis or based on the maximum retail price in some cases.
Central Excise duty is administered by the Central Board of Excise and Customs.
Excise Tariffs - Central Excise Tariff Act 2005
Central Excise Manual
The Central Excise Act 1944

Customs Duty

The levy and the rate of customs duty in India are governed by the Customs Act 1962 and the Customs Tariff Act 1975. Imported goods in India attract basic customs duty, additional customs duty and education cess. The rates of basic customs duty are specified under the Tariff Act. The peak rate of basic customs duty has been reduced to 15% for industrial goods. Additional customs duty is equivalent to the excise duty payable on similar goods manufactured in India. Education cess at 2% is leviable on the aggregate of customs duty on imported goods. Customs duty is calculated on the transaction value of the goods.
Rates of customs duty for goods imported from countries with whom India has entered into free trade agreements such as Thailand, Sri Lanka, BIMSTEC, south Asian countries and MERCOSUR countries are provided on the website of CBEC.
Customs duties in India are administered by Central Board of Excise and Customs under Ministry of Finance.
Schedule of Customs duties- The Customs Tariff Act 2005
The Customs Act 1962
Customs Manual
Baggage Rules 1998

Service Tax

Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified taxable services provided in India by specified service providers. Service tax on taxable services rendered in India are exempt, if payment for such services is received in convertible foreign exchange in India and the same is not repatriated outside India. The Cenvat Credit Rules allow a service provider to avail and utilize the credit of additional duty of customs/excise duty for payment of service tax. Credit is also provided on payment of service tax on input services for the discharge of output service tax liability.

Securities Transaction Tax

Transactions in equity shares, derivatives and units of equity-oriented funds entered in a recognized stock exchange attract Securities Transaction Tax at the following rate :

  • Delivery base transactions in equity shares or buyer and seller each units of an equity-oriented fund - 0.075%

  • Sale of units of an equity-oriented fund to the seller mutual fund - 0.15%

  • Non delivery base transactions in the above - 0.015%

  • Derivatives (futures and options) seller - 0.01%

Sales Tax Acts of various State Governments and Central Sales Act governed the application of Sales Tax/VAT.

Sales Tax/VAT

Sales tax is levied on the sale of movable goods. Most of the Indian States have replaced Sales tax with a new Value Added Tax (VAT) from April 01, 2005. VAT is imposed on goods only and not services and it has replaced sales tax. Other indirect taxes such as excise duty, service tax etc., are not replaced by VAT. VAT is implemented at the State level by State Governments. VAT is applied on each stage of sale with a mechanism of credit for the input VAT paid. There are four slabs of VAT :

  • 0% for essential commodities

  • 1% on bullion and precious stones

  • 4% on industrial inputs and capital goods and items of mass consumption

  • All other items 12.5%

  • Petroleum products, tobacco, liquor etc., attract higher VAT rates that vary from State to State

A Central Sales Tax at the rate of 2% is also levied on inter-State sales and would be eliminated gradually.

Municipal/Local Taxes

Octori/entry tax : - Some municipal jurisdictions levy octori/entry tax on entry of goods.

Other State Taxes

  • Stamp duty on transfer of assets

  • Property/building tax levied by local bodies

  • Agriculture income tax levied by State Governments on income from plantations

  • Luxury tax levied by certain State Government on specified goods

Central Sales Tax Act 1956 74
Cess and Other Taxes on Minerals (Validation) Act 1992 16
Companies (Profits) Surtax Act 1964 07
Customs Act 1962 52
Customs Duties and Cesses (Conversion to Metric Units) Act 1960 40
Customs Tariff Act 1975 51
Expenditure-tax Act 1987 35
Foreign Aircraft (Exemption from Taxes and Duties on Fuel and Lubricants) 2002 36
Gift-tax Act 1958 18
Hotel-Receipts Tax Act 1980 54
Income-tax Act 1961 43
Interest-tax Act 1974 45
Municipal Taxation Act 1881 11
National Tax Tribunal Act 2005 49
Professions Tax Limitation (Amendment and Validation) Act 1949 61
Provisional Collection of Taxes Act 1931 16
Sales Tax Laws Validation Act 1956 07
Voluntary Surrender of Salaries (Exemption from Taxation) Act 1961 46
Wealth-tax Act 1957 27

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