Taxation in India

Even more striking than the differences of Employment Law between two countries will probably be the differences in the taxation system. It usually develops naturally and over time and is unique for every country. As again not all possible offshoring-destinations can be examined in detail, the example of India will show that despite some familiarities the system itself is totally different compared to the German or American taxation system.

The tax system in India consists of direct and indirect taxes.

Income Tax

The first part to be looked at is the Direct Personal Tax, also known as Income Tax. This form of taxation in its modern way was introduced in 1860 to overcome financial difficulties. After it has been abolished, reintroduced and amended for several times it became so much complicated that it was totally replaced in 1961. Today it is one of the major sources of revenues for the government. The tax is collected by the Central Government and shared with State Governments based on the recommendations of the Finance Commission. (Gupta 2001, pp. 339-340)

Seen in numbers, personal income tax affects only about 3.5 percent of India´s population. This is because many non-salaried individuals avoid paying taxes by making most of their transactions in cash. In order to at least plug some of the holes in the tax net, the Indian government assigns Personal Account Numbers (PAN) to every individual and also requires people to quote this number when making transactions like banking and stock-exchanges. (Personal Taxes 2010, p. 73)

Residency:
For tax purposes, a resident of India is someone who spends at least 182 days in India in a given year or if he spent 60 days in India plus 365 days the year before. Another important term to be defined is the one of a NOR, which means a “not ordinarily resident”. This person has not been a resident of India in nine out of the ten preceding years or who spent 729 days or less during the preceding seven years. (Personal Taxes 2010, pp.73-74)

Determination of Taxable Income:
Residents are taxed on their worldwide income, whereas NOR do only have to pay taxes on what they have earned outside India. An exception of that rule is when the money he earned abroad is derived from a business controlled out of India. Non residents on the contrary are only forced to pay income taxes on income sourced in India if it comes from “interest, royalty and fees for technical services paid by an Indian resident, salaries paid for services rendered in India [;] and income that arises from any business connection or property in India”. (Personal Taxes 2010, p. 74)

Taxable income in general includes salary, allowances and perquisites. Deductions are possible for example for reasonable business expenses and for a couple of more reasons like medical insurance premiums, repayments of loans for higher education, deductions for physically handicapped taxpayers and so forth. (Personal Taxes 2010, pp. 74-75)

Personal Taxation System:
The figure below shows the taxation system as existing at the moment: (Personal Taxes 2010, p. 75)
India has three personal tax brackets: If the resident earns less than Rs150.000, he doesn´t have to pay any tax at all. This exemption limit was raised for women to Rs180.000 and for senior citizens to Rs225.000. Starting at Rs150.001 to Rs300.000 he will have to pay ten percent of the amount higher than Rs150.000, 20 percent on the amount higher than Rs300.000 and 30 percent of the amount higher than Rs500.000. If a person earns more than one million Rs, he has to pay ten additional percent on the amount exceeding one million Rs.

Capital Taxes for Individuals:
A tax on long-term capital gain is levied as high as 20 percent of the amount earned whereas short term capital gains are treated as income. (Taxation 2009, pp. 182-183) Some so called listed securities are exempt from this tax as well as the tax is only levied on non-productive assets such as houses, cars, yachts, boats and aircrafts. This means that a house being owned for residential or commercial purposes is exempt from wealth tax. (Personal Taxes 2010, p. 75)


Corporation Tax

The second part to be looked at is the Corporation Tax. This means a tax levied on the income of national and foreign corporate companies and was introduced in 1965. It is based on a company´s net income. Exemptions from this tax are granted for religious, charitable, scientific and other non-profit organizations. (Gupta 2001, p. 340)

Taxable income:
Taxes are to be paid on gross worldwide income less allowable deductions. These deductions can be made for:
materials, wages, salaries, reasonable bonuses and commissions, rent (presumed rent if the building is owner occupied), repairs, insurance, royalty payments, interest, dividends, lease payments, certain taxes (sales, municipal, road, property and expenditure taxes and also custom duties), depreciation, expenditure for scientific research, and contributions to scientific research associations and professional fees for tax services (Corporate Taxes 2009, p. 67)

Depreciation in India is usually calculated by using the declining-balance method and is based on actual cost. That means purchase price plus capital additions and installation expenses. (Corporate Taxes 2009, p. 69)

Tax rates:
A tax rate of 30 percent applies to domestic companies plus a ten percent surcharge is to be paid if the earnings are across-the-board-incomes. Foreign companies have to pay a rate of 40 percent plus a two-percent across-the-board-surcharge. Additionally a surcharge-fee of three percent has to be paid for education. (Corporate Taxes 2009, p. 65). This means in general that the main corporate tax sums up to about 42 percent for foreign companies. (Taxation 2011, p. 182) Domestic companies pay at average 33.99 percent of their income for corporate taxes, as long as there is no across the border income.

Additionally to this income tax all companies have to pay a one percent wealth tax on the aggregate value of specified assets whose amount exceeds Rs1.5 million. (Corporate Taxes 2009, p. 66)

Schedule for Paying Taxes:
Indian´s fiscal year starts on April 1st and ends on March 31st and is applicable to all companies. Taxes for one fiscal year are usually to be paid in the following year. (Corporate Taxes 2009, pp. 69-70)

Capital Taxes for Companies:
Every company has to pay one percent as wealth tax on the aggregate value exceeding Rs1.5million of non productive assets. These are assets like land, buildings that are not used as factories, offices, precious materials like gold and silver, cars and so forth.
If the company sells securities at the stock exchange, it has to pay 15 percent of taxes on these short-term capital gains. ((Corporate Taxes 2009, p. 70) On distributed dividends another additional 15 percent have to be paid to the government.

Double Tax Treaties:
India has double-taxation agreements in force with 75 countries that cover all kinds of income. The two most famous agreements have been made with Mauritius and Cyprus. As companies based in Mauritius are exempt from payment of capital gains tax in India, much foreign investment in property or shares has been routed through this country. (Corporate Taxes 2009, p. 73)

Indirect Taxes

The last part of taxes to be looked at are the Indirect Taxes. (Corporate Taxes 2009, p. 75)
First there is the so called Customs Duty that is levied on imports and exports and is about ten percent in general with a surcharge of four percent to special goods such as petroleum products and precious metals.
Second there exists the so called Service Tax. It was only introduced in 1998 and is as high as about 10.3 percent. This kind of tax becomes more and more important for India´s government.
Third is the Excise Duty that is better known as Value-Added-Tax (VAT). It applies to various goods and services at a standard rate of 12.5 percent. Lower rates of four percent apply to agricultural goods, industrial goods and pharmaceuticals as well as one percent applies to gold and silver. (Taxation 2011, p. 183)

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