TAXATION INTRODUCTION

Transcription

1 TAXATION INTRODUCTION India has a complex tax structure and levy ranges from taxes and duties on corporate income, personal income, manufacturing, sale of goods, works contract, rendition of services, import of goods and equipments to name a few. The main taxes/duties levied by the Union Government are: Income Tax including Personal Income Tax and Corporate Income Tax (except tax on agricultural income, which the State Governments can levy) Customs Duty, Countervailing Duty, on the import of goods Central Excise/ Central Value Added Tax (CENVAT) Central Sales Tax dealing with inter-state sales Service Tax charged on certain services Research & Development Cess, imposed on almost any overseas technical fees/consultancy/ royalty or know-how fee, by whatever nomenclature called, as long as it involves any `transfer of technology' in any remote form Wealth Tax Tax on dividends The main taxes/duties levied by the State Governments are: Income Tax on agricultural income Sales Tax/Value Added Tax Stamp Duty Land Revenue (levy on land used for agricultural/non-agricultural purposes),and Tax on Professions & Callings Tax on works contract The main taxes/duties levied by the Local Bodies are: Property Tax - levy tax on properties (buildings, etc.) User Charges for utilities like water supply, drainage, etc Octroi/Entry Tax (tax on entry of goods for use/consumption within areas of the Local Bodies) Tax on Markets 1

2 TAX RATES The Finance Minister of India presented the Annual Budget for the Financial Year on July 6, 2009, which received the assent of the President on August 19, (Please note that the tax rates are subject to changes from time to time either through the annual budget of the Government of India / State Governments and/or through appropriate statutory notifications). The current rates are given below: TAXES/DUTIES LEVIED BY THE UNION GOVERNMENT: Corporate and Personal Income Tax (IT) Tax on income is levied under the Income Tax Act, 1961 (ITA). Current Corporate IT Rates IT rates applicable to entities having taxable income of MORE than INR 10 million for the previous year commencing from April 01, 2009: - Domestic Companies % [30% basic tax plus surcharge of 10% on IT and Education Cess (EC) of 3% of the basic tax and surcharge] - Foreign Companies (including Branch/Project office) % [40% basic tax plus surcharge of 2.5% and EC -3% of the basic tax and surcharge] - Partnership Firms including LLP 30.9% [30% and EC -3% of the basic tax. No surcharge will be levied] Tax rates applicable to entities having taxable income of LESS than INR 10 million for the year commencing from April 01, 2009: - Domestic Companies % [30% basic tax and EC -3% of the basic tax] - Foreign Companies (including Branch / Project office) % [40% basic tax and EC -3% of the basic tax] - Partnership Firms including LLP 30.9% [30% basic tax and EC -3% of the basic tax] Current Personal IT Rates In case of Individuals, the 1st INR 160,000 is exempt from taxation. The income beyond INR 160,000 is taxed as follows: - INR 160,000 to INR 300,000-10%. - INR 300,000 to INR 500,000-20%. - Above INR 500,000-30%. - on tax. The exemption limit for women taxpayers is INR 190,000 and for senior citizens is INR 240,000. 2

3 Residential Status The residential status of individual/taxable entity is very relevant and has to be checked for each year. the broad parameters for deciding the residential status are: - Individual- An individual can be a resident and ordinarily resident or resident but not ordinarily resident or non-resident. - An Individual is said to be resident in India if either of the following conditions is satisfied: - he has been in India for a period of 182 days or more during the previous year, or - he has been in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year. - If he does not satisfy any of the above conditions then he is treated as a nonresident. - Resident and Ordinarily Resident If an individual has been in India - for atleast two years out of ten previous years immediately preceding the relevant previous year; and - he has been in India for a period of 730 days or more during the seven years immediately preceding the relevant previous year. - If either of the above conditions for Resident and Ordinarily Resident is not satisfied then the individual is a resident but not ordinarily resident. - Company- In case of Company, - An Indian company is always resident in India. - A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. Implication of residential status on IT - Resident and Ordinarily Resident - In case of a person resident in India both Indian income and foreign income are taxable. - Resident but not ordinarily resident In case of a person resident but not ordinarily resident income generated in India from business whether partly or fully controlled from India is taxable but income from business set up and controlled wholly outside India is not taxable. - Non-resident- In case of non-resident Indian income is taxable but the foreign income is not taxable. Therefore, generally, if the control and management of a foreign company is situated wholly out side India the foreign Income is not taxable. For non-resident, Indian Income would mean income accrued or received in India. 3

4 IT on Presumptive Profit Basis Certain identified business activities, listed below, carried on by non- residents in India may be taxed on presumptive basis: - Activities connected with the Exploration of Mineral Oil -10% of the total turnover will be taken as profit and taxed without deductions and depreciations. - Shipping profits - 7.5% of the total turnover will be taken as profit and taxed without deductions and depreciations. - Business of Civil Construction - 10% of the total turnover will be taken as profit and taxed without deductions and depreciations. - Royalties and Technical Services Fees -10% of the total turnover will be taken as profit and taxed without deductions and depreciations. Sectoral Tax Holidays & Other Benefits Considering the importance of various industries for the economy, like mining, E&P of Mineral Oils, Power, Information Technology, infrastructure etc., various special provisions are incorporated in the ITA giving special concessions, benefits and tax holidays. Therefore, any person proposing to do business in India in any sector should seek competent legal advice to properly structure their strategies. Minimum Alternative Tax (MAT) MAT is applicable to companies which are making profits however not liable to pay IT because income computed after adjusting the depreciation/ amortization of expenditure etc. is either nil or negative or insignificant. The calculation of MAT plus surcharge and EC is given below: - Domestic company (taxable income more than INR 10 million): % including Surcharge & EC. - Domestic company (taxable income less than INR 10 million): % including EC (Surcharge not applicable) - Foreign Company (taxable income more than INR 10 million): % including Surcharge & EC. - Foreign Company (taxable income less than INR 10 million): %. including EC (Surcharge not applicable) 4

5 Tax on Capital Gains (CGT) CG is the profit arising out of the disposal of a capital asset the difference between the cost of acquisition and sale consideration. Long term CGT (transfer beyond 3 years from the date of acquisition/ for shares and securities more than 1 year) is 20% and short term CGT (transfer within 3 years from the date of acquisition/ for shares and securities within 1 year) is 15% subject to certain conditions and the nature of the asset. Withholding Tax obligation/tax Deductable at Source (TDS) When payments are made on account of contracts, salaries, rent, interest, royalty, commission etc., the companies/ Association of Persons/ partnerships certain specified percentages are to be deducted from the amounts so paid. The deducted amount has to be deposited with the tax authorities in the manner prescribed. There are other obligations like issue of certificate for TDS and filing of quarterly returns. Dividend Distribution Tax (DDT) Dividend declared by an Indian company is taxable in the hands of that company. Total DDT is % [including 15%, surcharge on 10% and (on tax and surcharge)]. Wealth Tax Net wealth on the valuation date is chargeable to wealth tax and only individual and company is chargeable to wealth tax. Net wealth in excess of INR 3 million is chargeable to wealth and surcharge and EC thereon. Valuation date is 31st March immediately proceeding the assessment year. Productive assets like shares, debentures, bank deposits and investments in mutual funds are exempt from wealth tax. The non-productive assets include jewellery, residential house (in case the person has more than one house) bullion, motor cars, aircraft, urban land, etc. are liable for WT. Foreign nationals are exempt from wealth tax on non-indian assets. 5

6 Customs Duty & Countervailing Duty These duties are levied on the import of goods according to the Customs Act, 1962 and the rates prescribed under the Customs Tariff Act, The Tariff is aligned with the internationally recognized Harmonized System of Nomenclature. The Central Government has the power to lower the rate of duty prescribed in the Tariff for any item by issuing a notification in the Official Gazette. The taxable event occurs the moment the goods enter the territorial waters of India. Project Imports Certain duty benefits/concessions are available for the import of certain capital goods, spare & consumables, in relation to, - Industrial Plant; - Irrigation Project; - Power Project; - Mining Project; - Project for the exploration for oil or other minerals; and - Such other projects as the Central Government may, notify. Excise Duty (ED) ED (also, Special Excise Duty and Additional Excise Duty in some cases) is payable on the goods manufactured in India. The rates depend on the product manufactured or produced. ED on most commodities ranges between 0 to 14% proposed Central Value-added Tax (CENVAT) benefits are also available on the goods manufactured or produced in India. CENVAT is applicable to practically all manufactured goods, so as to avoid cascading effect on duty. Service Tax (ST) ST is levied on most of the services availed by a recipient of any service. The lists of assessable services are notified by the GOI from time of time. A service Provider with receipts above INR 1 million is liable to collect and deposit ST. Services received from outside India are also taxable from the recipient of services in India. The current rate applicable is 10% and along with EC the effective rate becomes 10.3%. 6

7 Central Sales Tax (CST) CST is applicable in inter-state sale of goods. The current rate of CST is 2%. There is a proposal to substitute CST with Goods and Services Tax by April 1, Research and Development Cess (R&D Cess) R&D Cess is levied under the Research and Development Cess Act, 1986, at the current rate of 5% on the import of technology into India. R&D Cess is payable by the importer on payments made for such imports. Technology means any special or technical knowledge or any special service required for any purpose by an Industrial concern under any foreign collaboration including designs, drawings, publications and technical personnel. Education Cess (EC) EC is levied on the taxes and duties imposed by the GOI as a surcharge on all taxes and 3%. TAXES/DUTIES LEVIED BY THE STATE GOVERNMENTS Local Sales Tax (LST) / Value Added Tax (VAT) LST/ VAT are levied by States in which the sale of goods takes place, which may vary from 1% to 20%. Every state has its own LST/ VAT laws, rates and classification of goods Also the transaction involving application of labour and material to be used is taxed under VAT/LST as works contract, although the same may be chargeable to Service Tax also. Stamp Duty The stamp duty is payable on specified transactions under the Indian Stamp Act, 1899 (ISA) as amended/ modified by the State governments. The stamp duty is payable when a deed/ document/ instrument, like bill of exchange, bill of lading, letter of credit, transfer of shares, mortgage, lease, agreements, conveyance deed and many more, as specified in the ISA, is executed. The amount of duty largely depends on the amount involved in a transaction, the document executed and the State in which it is executed or operated. 7

8 Local Area Development Tax / Octroi / Entry Tax These taxes are levied by certain States for the development of the local areas where the business is taking place or carried on. These taxes are levied and collected on the entry of specified goods, into any local area for consumption, use or sale therein. Different rates are applicable for different areas, classes of goods and categories of persons. OTHER STATE GOVERNMENT TAXES/ LOCAL BODIES TAXES IT on agricultural income, State Excise (mainly duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment like movies and performances. Tax on Professions & Callings. Property Tax - levy tax on properties (buildings, etc.), User Charges for utilities like water supply, drainage, etc. and Tax on local Markets. OBLIGATIONS UNDER VARIOUS TAX LAWS There are time bound/periodical obligations under various tax laws, which include: Obtaining permanent account numbers and similar registrations. Deposit of tax in advance. Withholding tax, issuing certificate of withholding and deposit obligations. Filing of monthly/ quarterly/ annual returns as prescribed by the relevant law. DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) There are DTAAs between India and many foreign countries, which will have a role to play in the ultimate tax liability. Foreign income of a person generally becomes liable to tax in two countries the country in which the income is earned and the country in which the person is resident. Double taxation of such income is avoided by means of DTAA. Where the income accrues or arises in a country with which no agreement exists, unilateral tax relief is provided on the doubly taxed income under the provisions of ITA. 8

9 TRANSFER PRICING Transfer pricing regulations were introduced to battle the tendency of multinationals to park profits in low tax regimes. The regulations allow the IT authorities to determine the arm s length price in respect of international transactions between related enterprises. These regulations are the current hot favourite of the tax administration in India and the adjustments made in respect of the value of international transactions have assumed significant importance in tax administration in India. Transfer Pricing issues are dealt with in cases of Customs Duty and IT under separate rules. ADVANCE RULINGS For non-residents, there are special provisions under ITA, Central Excise Act and Customs Act, to apply for advance ruling by the Authority for Advance Ruling. This will help, in advance, in the determination of certain tax issues, in relation to any transaction which such non-resident has undertaken or proposes to undertake OO