Direct and Indirect Taxation in India: An Overview

The tax year of India starts from 1 April every year and ends on 31 March of the next year. It is mandatory for taxpayers to have a Permanent Account Number (PAN). subsequently, companies have to fill their tax returns by 31 September. The central government of the country has the right to levy, collect and direct income tax in the country. The Income Tax is levied under the Income Tax Act of 1961 and certain rules and procedures have to be followed that are administered by the Central Board of Direct Taxes, that comes under the Central Finance Ministry. Only a company that is an Indian enterprise is considered a resident of India. A resident company is taxed on its income earned globally while a non resident company is only taxed on income that arises from India or is received in India.

An LLP is also considered to be a resident of India unless the entire management and administration process is located outside India for an entire year. The Corporate Tax rate also varies according to the status of the company. While for foreign company, the tax rate is 40%, it is 30% for an LLP and 25% – 30% for a domestic company. The income of a company on which tax is levied is carefully computed and is divided into different categories for the ease. The first category is income from profits and gains from business professions, others include income from capital gains, house property and other sources. Every company has to be keep a book of accounts and in case the turnover exceed 10 million during the year, it has to be audited by an accountant.

On the Written Down Value of assets, taxpayers are allowed depreciation. The rates of depreciation generally vary from 10% to 60%. For non resident taxpayers also demanding reduction, it is made but is restricted to an amount equal to 5% of adjusted total income of the taxpayer and real expenditure on the head office in India. There is usually no deduction from the rental income except for two exceptional cases wherein there is standard deduction of 30%or deduction of interest paid on loan for such property. Capital assets are any property regardless of connection to business or profession but excludes certain held by taxpayers for their personal use. There is no gift tax liability in India, however there are certain provisions for taxability of gifts. Indian companies are required to pay DDT at 15%.

There are other considerations for for taxation when it comes to non residents. There conditions include TRC or Tax Residency Certificate that has to be provided by non residents to eligible to receive the benefits. The provisions made under GAAR or General Anti-Avoidance Rule are also applicable. There is also 10% tax on the income from royalty of resident patentees considering the patents developed and researched in India.

The residential status of foreigners coming to India becomes important when it comes to computing the relevant tax according to their stay in the country during the tax year or other ways that affect it. There are certain conditions like presence in India for 182 days or more that individuals have to fulfill in order to be considered as tax residents. If individuals do not satisfy these laid down conditions then they are categorised as non residents of the country for that particular tax year and if they do not satisfy conditions like being a non-resident for 9 to 10 tax years or being physically present in India for 729 days or less than that, then they qualify as Residents and Ordinarily Resident for that particular tax year otherwise they are  treated as Residents but not Ordinarily Residents.

There is a scope of taxation under each category as per the Indian law. For a non resident Indian the scope of taxation is limited to income arising or accruing in India while for an ROR the global income is considered. At the same, for a Resident but not Ordinarily Resident the income arising from business controlled in India is considered. Irrespective of where the payment is received, employment generated income is also taxable in India. Some services like cost of meal or laundry expenses are fully taxable while hotel accommodation is taxable at 24%. The issues related to taxation depend upon the tax authorities’ views and circumstances therefore it is advisable to always look for professional advice. Also at the end of each year, a tax return is required to be filed with the Income Tax Authorities in a specific format.

There are other matters that include valid visas for foreign nationals coming to India and the requirement of registration with Foreigners’ Regional Registration Officer (FRRO) that also issues residential permits on submission of required documents. The payment of salaries outside India and social security are also some issues that need to be kept in mind. There have been new acts launched by the government, that along with the existing ones would ensure proper taxation. One of such acts is the Blank Money Act of 2015 that covers all people who are residents on India and undisclosed assets and foreign income are supposed to be taxed at 30%. The government has also made it mandatory to state the Aadhaar Card Number for filing income tax returns or keep a PAN card active. It serves as an identity card and is based on an individual’s biometric data.

Before the introduction of GST (Goods and Services Tax), there were numerous indirect taxes applicable in the country. Despite their several disadvantages and the management problem they caused, these taxes continued to be in place for a very long time. After the introduction of GST on 1 July, the traditional way of looking at taxes in India has changed. The government has specified several slabs for GST rates and companies need to register themselves or obtain a registration from every state that they supply goods to. There are certain exceptions and specifications for this too. GST has brought in numerous benefits and one of the most prominent ones being an ITC regime. It can be utilised to pay for output GST liability. Other than this, small taxpayers have also been given the benefit of compliance scheme. Along with generally the supplier to bear the liability of paying the tax, in certain transactions like import of services, the recipient is also liable to pay the tax. Stamp duty is also imposed by government on insurance policies, contracts affecting transfer of shares and debentures.

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