CORPORATE TAX

STATUS
TAX RATE STRUCTURE
TAX TREATIES
ASSESSING TAXABLE INCOME
TAX DEPRECIATION RATES
SPECIAL TAX INCENTIVES
CAPITAL GAINS TAX

Introduction

Corporate and personal taxation in India in governed by the Income Tax Act, 1961. The rates of taxes are generally announced annually in the Finance Act passed by the Parliament. The Central Board of Direct Taxes is the apex body for formulation of policies relating to and adminis tration of direct taxes. The tax liabilities vary depending on whether a company or the individual is a resident or non-resident in India and whether the company in a widely-held or a closely-held one. A resident company is one which is incorporated in India, while a non-resident company is one which is incorporated under the laws of a foreign country. A widely-held company is one whose shares are held by public and are listed on a stock exchange in India. India has signed tax treaties with several countries and provision of these treaties override provisions of domestic tax laws. The tax year runs from 1st April to 31st March. Taxes are paid in advance in three installments by 15th September, 15th December and 15th March of the fiscal year. Any balance of tax, including interests for delay in filing returns and defaults in payment of advance tax, must be paid before filing tax returns. For companies tax returns must be filed by 31st December after the end of the tax year; for individuals the last date for filing returns is 30th June following the tax year. Wherever possible taxes are deducted at source for incomes accruing to both companies and individuals. Tax disputes are usually referred in the first instance to Commissioner (Appeals) and the Tribunal. Tax disputes may thereafter go, on appeal, to the High Court and the Supreme Court of India.

Indian tax laws are being reformed to simplify procedures, lower the rates and eliminate multiplicity of taxation.

STATUS

Resident companies are taxed on their domestic and foreign incomes while non-resident companies are taxed only on their Indian incomes.

TAX RATE STRUCTURE

TAXATION OF COMPANIES

The proposed rate structure for taxation on income during Financial Year 1997-98 arising in the hands of companies, both domestic and foreign, is as follows:

===============================================
                            Rate of     Rate of
                            income-tax income tax
                            (percemt)  including 
                                       surcharge
                                       (percent)
===============================================
-  Widely-held Domestic        35          35.00
   Company

-  Closely-held Domestic       35          35.00
   Company

-  Foreign Company

   a) on dividends             20          20

   b) on royalties             20          20

   - approved by the Central
     Government or where  it
     relates  to  a   matter
     included in the  Indus-
     trial Policy

   - not  approved or not in
     accordance with  Indus-
     trial Policy              20           20

   c) on  fees for technical
      services
      
   - approved by the Central
     Government or where  it
     relates  to  a   matter
     included in the  Indus-
     trial Policy              30            30

   - not approved or not  in
     accordance with  Indus-
     trial policy              65             65

   d) on interest on loans     25             25

   e) on income other than 
      dividends,royalties, 
      fees for technical
      services & inte-
      rest on loans            48             48
===============================================

TAX TREATIES

India has comprehensive tax treaties with 40 countries. The provisions of these treaties override provisions of domestic tax laws. Under the tax treaties, withholding tax is leviable at the following rates :

WITHHOLDING TAX RATES UNDER TAX TREATIES
RATES FOR DIVIDENDS, INTEREST, 
ROYALTIES AND TECHNICAL FEES
                                      (in % ) 
------------------------------------------------
Country   Dividend Interest  Royalty   Technical 
                                        Fees
-------------------------------------------------
Austria   Not (S)   Not (S)  Not (S)   Exempt,    
          Mentioned Menti-   Mentioned except     
                    oned               onamo-     
                                       unts(net)  
                                       attribut-  
                                       able to    
                                       activities 
                                       performed  
                                       in the     
                                       state.     

Australia 15 (B)    15 (S)   10/15/20  No separate
                                (B)    provision 

Bangla
desh      10,15 (B) 10 (B)   10 (B)     --

Brazil    15 (B)    15 (B)   15/25 (B) No separate  
                                       provision 

Belgium   15 (B)    15 (B)   30 (B)    30 (B)

Canada    15,15 (B) 15 (B)   20 (B)    20 (B)

Czechos-
lovakia   25,25 (B) 15 (B)   30 (B)    30 (B)

Denmark   15,25(B)  10,15(B) 20 (B)    20 (B)

FRG       15 (B)    10,15(B) Not (B)   20 (B)
                             Mentioned

Finland   15,25 (B) 15 (S)   30 (B)    30 (B)   

France    Not (B)   Not (B)  Not (B)   Exempt,   
          Mentioned Mentione Mentioned except    
                                       onamo-    
                                       unts(net) 
                                       attribut- 
                                       able to   
                                       activities
                                       rformed 
                                       in the    
                                       state.

Great                                            
Britain   15 (B)    10,15 (B 30 (B)    30 (B)

Greece    Not (S)   Not (S)  Not (S)   No separate 
          Mentioned Mentione Mentioned provision  

Hungary   15 (B)    15 (B)   40 (B)    20 (B)

Indon-
esia      10,15 (B) 10 (B)   15 (B)    No separate 
                                       provision        

Italy     Not (B)   Not (B)  Not (B)   No separate 
          Mentioned Mentione Mentioned provision        

Japan     15 (B)    10,15(B) 20 (B)    20 (B)

Kenya     15 (B)    15 (B)   20 (B)    17.5 (B)

Korea     15,20 (B) 10,15(B) 15 (B)    15 (B)

Libya     Not (S)   Not (S)  Not (S)   No separate 
          Mentioned Mentione Mentioned provision        

Malaysia  Not (S)   Not (S)  Not (S)   No separate 
          Mentioned Mentione Mentioned provision        

Mauritius 5,15(B)   Not (B)  15 (B)    No separate 
                   Mentioned           provision        

Nepal     10,15 (B) 15,10(B) 15 (B)    No separate 
                                       provision        

Nether
lands     15 (B)    10,15(B) 20 (B)    20 (B)

New 
Zealand   20 (B)    15 (B)   30 (B)    30 (B)

Poland    15 (B)    15 (B)   22.5 (B)  22.5 (B)

Norway    15,25 (B) 15 (B)   20 (B)    20 (B)

Rumania   15,20 (B) 15 (B)   22.5 (B)  22.5 (B)

Singapore Not (S)   Not (S)  Not (S)   No separate 
          Mentioned Mentione Mentioned provision        

Sri Lanka 15 (B)    10 (B)   10 (B)    No separate 
                                       provision        

Sweden    15,25 (B) 15,10(B) 20 (B)    20 (B)

Syria     Not (R)   7.5 (B)  10 (B)    No separate 
          Mentioned                    provision        

Tanzania  10,15 (B) 12.5 (B) 20 (B)    20 (B)

Thailand  15,20 (B) 10,25(B) 15 (B)    No separate 
                                       provision        

United 
Arab      Not (S)   Not (S)  Not (S)   No separate 
Republic  Mentioned Mentione Mentioned provision        

USA       15,25 (B) 10,15(B) 20,15 (S) 20,15 (S)

USSR      15 (B)    15 (B)   15,20 (B) 20 (B)

UAE       15 (B)    15 (B)   22.5 (B)  22.5 (B)

Zambia    5,15 (B)  10 (B)   10 (B)    10 (B)

-------------------------------------------------

Note: The alphabet in the bracket indicate the status with regard to the right of the state to tax

(B) - Both
(S) - Source
(R) - Residence

ASSESSING TAXABLE INCOME

In ascertaining taxable income, all expenditure incurred for business purposes are deductible. This includes interest on borrowings paid in the financial year and depreciation on fixed assets. Certain expenses are specifically disallowed or their quantum of deduction is restricted. These include :

  • Entertainment expenses;
  • Interest, royalties, technical service fees, commission or any other amounts paid to non-residents without deduction of applicable taxes;
  • Provisions for expenses not actually incurred, and;
  • Indirect general and administrative costs of a foreign head office in excess of 5% of taxable income (before depreciation).

Depreciation is normally calculated on the declining balance method at varying rates and is available for a full year, irrespective of the actual period of use of the asset in the year of the acquisition of the asset. Depreciation is allowed at half the normal rate, if the as set is used for less than 180 days in that year. No depreciation is available in the year of the sale of the asset.

CARRY FORWARD

In the absence of adequate profits unabsorbed depreciation can be carried forward and set off against profits of the next assessment year, without any time limit. Further, unabsorbed business loss of any year can be carried forward and set off against the profits of a subsequent year, subject to a limit of eight years.

TAX DEPRECIATION RATES

Tax depreciation rates applicable for the accounting year ending March 1996 are given in the table below :

----------------------------------------------
  Blocks of Assets         Depreciation Rates 
                                  (%) 
----------------------------------------------
                         
  Buildings

  Dwelling units with plinth  
  area  not exceeding
  80 square meters and hotels     20
  Mainly residential               5
  Others                          10
  Purely temporary structures    100

  Machinery and Equipment
  General                         25
  Special

  Motorcars,  other than those 
  used in a  business of
  hire, acquired after 
   April 1, 1990                  20

  Airplanes, air  engines;  
  specified moulds; air  and
  water pollution control 
  equipment; solid waste control
  equipment; motor buses;  motor
  trucks; motor taxis used in a 
  business of hire                40

  Specified  energy-saving/
  renewable energy devices;
  specified machinery  
  used in mines and quarries,
  mineral oil concerns, salt and
  sugar works, iron and steel 
  industries, glassworks, etc.   100

Furniture and Fittings

  General                         10
  Special furniture and 
  fittings  used in hotels,
  cinemas, etc.                   15

Ships

  Oceangoing ships, 
  including dredgers, etc., 
  and speedboats                   20

  Inland water vessels             10

----------------------------------------------

Notes

1. Depreciation is calculated on the opening written-down value of the block of assets plus the additions to the block less the sale proceeds/ scrap value of selections from the block.

2. Depreciation at 100% is allowed in respect of machinery and equipment the unit cost of which does not exceed Rs. 5,000.

3. No depreciation is allowed in respect of motorcars manufactured outside India, unless they are rental cars for tourists or where such motorcars are used outside India for the purposes of business.

4. No depreciation is allowed on plant and machinery if actual cost is otherwise allowed as a deduction in one or more years under an agreement entered into with the Central Government for prospecting, etc. of mineral, oil.

SPECIAL TAX INCENTIVES

The Government offers a wide range of concessions to investors in India to promote industrial growth and exports. The important concessions include :

  • Deduction of preliminary and preoperative expenses in setting up a project.

  • Complete tax exemption for profits from exports.

  • Full or part exemption of foreign exchange earnings on construction projects, hotels and tourism related services, royalties, commissions, etc.

  • Five year tax holidays within the first eight years of commercial operations for 100% EOUs and units in FTZs.

  • Tax exemption for income from export of computer software or technical services.

  • Deduction of 30% of gross total income for 10 years for new industrial undertakings established by companies.

  • Deduction of capital research and development expenditure.

  • Tax holiday for profits from new power projects for first five years of operation.

  • Five year tax holiday for entrepreneurs who builds maintains and operate infrastructure facilities in areas of highways, expressways, new bridges, airports, ports, and rapid mass transport system.

CAPITAL GAINS TAX

Capital gains on transfer of capital assets situated in India and shares in Indian companies are taxed as incomes.

Long term capital gains are said to arise on transfer of assets held for over three years (one year for shares). Gains on transfer of assets held for shorter periods are treated as short term capital gains.

  
  The rates applicable are as follows :

================================================
                         Basic Rate          
   Description  --------------------------------
                Long Term      Short Term    
================================================

Companies           20%  Normal Income Tax Rates
Individuals         20%  Normal Income Tax Rates
NRIs                10%
FII                 10%            30%         
================================================

The expenditure incurred on transfer of assets and the cost of acquisition of the asset and cost of improvement thereof are deductible from sales realization for computing gains.

For Non-Residents, capital gains are computed in the original currency of acquisition to protect them against currency fluctuations.

Capital losses can be carried forward for eight years and can be set off only against capital gains.

The capital gains tax rate arising on transfer of seurites in the case of non resident Indians has been made at par with FIIs and so the rate is reduced from 20 percent to 10 percent as per the 1997-98 budget.

Source: Doing Business with India
Last Update: July 31, 1998


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