Overview of Indian Tax systemJuly 2017
Overview of Indian taxes
© 2017. Deloitte AP ICE, Ltd. 3
Tax legislation in IndiaOverview
Taxes
Central Government
StateGovernment
Direct Tax
Indirect Tax
Other Taxes
Corporate Tax
IndividualTax
Withholding Tax
Customs Duty
GST
StampDuty
Taxes on fuel, liquor
Property Tax
© 2017. Deloitte AP ICE, Ltd. 4
Corporate taxOverview
Residents taxed on global income and non
residents taxed on income accrued/ received in India
Indian entities and foreign entities having a base in India (exempt
under certain situations), liable to 18.5% MAT plus
surcharge and cess
Indian entities liable to dividend distribution tax
(~20% considering grossing-up)
Tax holidays available for exports from
notified areas and manufacturing activities in specified backward
regions
Most internal reorganizations exempt subject to conditions
Business losses can be carried forward for
eight years - no time limit for carry forward
of depreciation
Thin capitalization rules under tax law - Interest
expense claimrestricted to 30% of
EBITDA
Wide Treaty network/ Advance Rulings/
Extensive Withholding tax regime
Transfer pricing regime requiring extensive documentation and
reporting
© 2017. Deloitte AP ICE, Ltd. 5
Corporate taxKey income-tax rates under domestic tax law
Particulars Rates (%)
Corporate tax rate - Domestic company 30.9 / 33.06 / 34.61
• In case turnover is less than INR 5 crores in FY 14-15 29.87/ 31.96/ 33.45
• In case turnover is less than INR 50 crores in FY 15-16 25.75/ 27.55/ 28.84
• New manufacturing companies (including R & D relating to manufacturing) set up on or after March 01, 2016 (at the option, subject to not claiming certain specified deductions/claims)
25.75/ 27.55/ 28.84
DDT applicable to Domestic company (considering grossing-up)* 17.65 (effective rate 20.36%)
Effective tax rate for Foreign company 41.2 / 42.02 / 43.26
Minimum alternative tax (MAT) for Domestic Company 19.05 / 20.39 / 21.34
Withholding tax on interest on eligible foreign debt and long-term infra bonds 5.15 /5.25 / 5.41
Capital gains tax on sales of listed shares of Indian company through stock exchange* [long term if held for more than 12 months]
NIL (long term) /15 (short term)
Capital gains tax on sale of unlisted shares of Indian company (by non resident)* [long term if held for more than 24 months]
10 (long term) /40 (short term)
Tax on buy back of its own shares by the Indian Company* 20 (from 1 June 2013)
Royalty/Technical Service Fees* 10 (under domestic tax law; subject to treaty benefit)
Corporate tax rate to reduce to 25% in coming years
* Rates exclusive of surcharge and education cess which will apply as applicable
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• Indian TP legislation framework enacted in 2001 –
broadly based on OECD Guidelines
• Comprehensive legislation including:
– Mandatory compliance to maintain “contemporaneous documentation”
– Annual filing of “information form” on inter-company transactions
– Associated penalty clauses for non-compliances
• Covers Specified Domestic Transactions (in some cases)
as well as deemed international transactions
• Rampant litigation at the lower level tax authorities with
significant adjustments
• Indian judicial rulings are in the form of speaking orders
and in line with globally accepted principles
• Indian position aligned to BEPS reports for most issues
• Increasingly, clients are focusing on APAs as a means of
getting certainty and dispute resolution
Transfer PricingKey legislative framework
• Advertising & Marketing expenses
• Marketing & sales support services
• Cross border services
• Cost recharges
• Royalties
• Arms Length Margin (3% threshold)
• Choice of Comparables
• Location savings
Typical areas of controversy
152 APAsentered into out of
815 applicationsfiled till 31 March 2017
[as per India’s APA Annual Report issued
on 1 May 2017]
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Tax on supply of goods or services or both -alcohol, electricity, real estate and five major petroleum products are outside GST
Destination based consumption tax
Shift of taxable event from manufacture/ sale/ provision of service to supply of goods or services
Integration of Central levies, State levies and local levies
Seamless credit across entire supply chain and across all the States
State GST (taxes subsumed)
VAT/Sales Tax
Entry Tax /Purchase Tax
Luxury Tax / Entertainment Tax*
Taxes on Lottery/ Betting & gambling
Local Body Tax/ Octroi*other than tax levied by the local bodies
* Imports are subject to IGST which would be sum of CGST and SGST
Central GST (taxes subsumed)
Central Excise Duty/Additional Excise Duty
Additional Customs Duty/Special Additional Duty*
Service tax
Central Sales Tax
Surcharge/Cess
GST rates for supply of goods and services -5%, 12%, 18% and 28%; Exports are zero rated
One of the most radical economic reforms in India – introduced
from 01 July, 2017
GST Compliance driven by IT platform (GSTN) and to be extremely robust – strong requirement for ERP / IT preparedness
Indirect taxGoods and service tax (GST) – Overview
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Indirect taxGoods and service tax (GST) – Key areas to watch out for
- Minimum business disruption, maximum
compliance
- Revamping P2P, O2C and R2R business processes
ERP/Biz. process changes
- Impact of GST on business transactions and
associated increase/decrease in cost and
working capital
Impact on cost/working
capital
- Requirement of multi state registration- Use Govt. approved service providers for filing of
returns
Compliance
- Seamless transfer of input tax credits
- Applicability of GST or existing taxes on certain
cut-over period transactions
Transition planning
- Change in contract terms to avoid financial risks
arising due to non-compliance by
suppliers/customer
Contractual changes
- Benefits arising out of increased input tax
credits and reduced tax rates need to be
passed on to customers
Anti-profiteering
Indian Regulatory system
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LLP is now permitted under the Automatic route for sectors where 100% FDI is allowed in an Indian company
Foreign investor
Unincorporated entities
Incorporatedentities
Partnerships
Joint VentureSubsidiaryLiaison Office
Branch Office
Project Office
LimitedLiability
Partnership
Forms of business presence in India
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Exchange Control Regulations
Companies Act
2013
Industrial and Other Laws
SEBI* Regulations
Employment
Related Laws
Direct
Tax
Laws
Indirect Tax
Laws
IndianCompany
Regulatory Compliances
Entry / Exit Regulations - Reporting
Monitoring
Incorporation of Company :
Approx. 1.5 to 2 months timeline
* Securities & Exchange Board of India
Indian Regulatory Overview
Make in India
© 2017. Deloitte AP ICE, Ltd. 13
Focus on ‘Make in India’
National Manufacturing Policy
Increasing manufacturing
sector growth to 12 – 14%
Manufacturing contribution to GDP
at 25% by 2022from 16% now
Increased domestic value addition and technological depth
Enhanced global competitiveness
Sustainability of growth
100 million additional jobs in manufacturing by
2022
Rationalization and simplification of business regulations
• Minimizing approvals and compliance requirements
• Labor law reforms
Government procurement
• Stipulation of local value addition for procurement of equipments by government / government agencies
− Solar energy
− IT hardware, IT based security systems
− Fuel efficient transport equipment
− Equipments for infrastructure sector –power, roads, mining, aviation, shipping, railways
Special focus sectors
• Employment intensive industries like textiles and garments; leather and footwear; gems and jewellery; and food processing
• Capital goods like machine tools; heavy electronic equipment; heavy transport, earth moving and mining equipment; high technology equipment like telecom, power, ICT and electronic hardware
• Strategic industries like aerospace; shipping; IT and electronic hardware; renewable energy; solar, wind etc; defence equipment
• Automotive and Pharmaceutical industries
Industrial training and skill upgradation
• Skill building among minimally educated workforce
• establishment of ITIs in PPP mode
• Specialized skill development through establishment of Polytechnics
Trade policy
• Measures to protect export of products and services from India from border measures
• NMCC to make recommendations on duty structures to protect domestic manufacturing
Technology acquisition and development
• Incentives / schemes to promote new technologies
• Access to technologies through JVs
• Technology Acquisition and Development Fund(TADF) with focus on SMEs
• Incentives for green manufacturing
• Compulsory licensing
• 100% tax holiday for 3 years to start-ups involved in innovation & development of new products
Foreign investment
• Conducive FDI policy environment
• Incentives – tax concessions and subsidies
Small & Medium Enterprises
• Access to finance
− Setting up of a stock exchange for SMEs
− Easier access to bank finance
− SMEs in manufacturing as part of ‘priority sector’ lending
Manufacturing Industry Promotion Board (MIPB) chaired by Union Minister of Commerce & Industry will monitor the implementation of the National Manufacturing Policy
Obje
ctives
Enable
rs
Skill set creation among rural
migrant and urban poor for inclusive
growth
Simple and fast exit mechanisms
• Job loss policy
• Sinking fund
• Asset redeployment
• Exemption from Capital Gains tax
Clustering and aggregation - National Investment Manufacturing Zones (NIMZ)
© 2017. Deloitte AP ICE, Ltd. 14
Focus on ‘Make in India’
− Tumkur, Karnataka
− Chittoor, Andhra Pradesh
− Medak, Telangana
− Prakasam, Andhra Pradesh
− Gulbarga, Karnataka
− Kolar, Karnataka
− Bidar, Karnataka
− Kalinganagar, Jajpur District, Odisha
− Ramanathapuram District, Tamil Nadu
− Auraiya District, Uttar Pradesh
− Jhansi District, Uttar Pradesh
− Ahmedabad-Dholera Investment Region, Gujarat
− Shendra-Bidkin Industrial Park City, Aurangabad, Maharashtra
− Manesar-Bawal Investment Region, Haryana
− Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan
− Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh
− Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh
− Dighi Port Industrial Area, Maharashtra
− Jodhpur-Pali Investment Region, Rajasthan
− Kuhi and Umred Taluka of Nagpur district, Maharashtra
− The NIMZs in Uttar Pradesh, Haryana, Rajasthan, Gujarat, Madhya Pradesh and Maharashtra are aligned to the Delhi – Mumbai Industrial Corridor (DMIC) project – An infrastructure project of USD 90-billion, with financial & technical support from Japan amounting to USD 4.5 billion
− Other Industrial corridors include: Bengaluru – Mumbai Economic Corridor, Amritsar – Kolkata Industrial Corridor, Chennai –Bengaluru Industrial Corridor and Vishakhapatnam – Chennai Industrial Corridor
− Except for Andhra Pradesh, NIMZ in other states could not be started due to unavailability of 50 sq. km. DIPP henceforth relaxed the requirement of land to 10 sq. km
Approved - NIMZs Highlights
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Income-tax –
• 100% deduction for capital expenditure* allowed in year of incurrence
− Sectors such as roads, highway projects, water supply projects, ports, etc. arecovered.
− Power sector not covered.
• 100% deduction of profits for approved housing projects*
− Housing projects approved before 31 March 2019 are eligible
− Minimum alternate tax applicable (tax credit available for set-off)
*Subject to fulfilment of specified conditions
Indirect taxes –
• Increased ability to take input credits under the GST regime
• Lower GST rate of 5% has been prescribed for renewable sector (average rate of 18%prescribed for other sectors)
Key Incentives available in Indiafor Infrastructure companies
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Nature of benefit Taxpayer category Sunset date
Additional depreciation @ 20% on new P&M acquired and installed (part of overall 100% depreciation)
Manufacturing & power generation sectors
No sunset date
Additional depreciation @ 35% on new P&M acquired and installed (part of overall 100% depreciation)
Manufacturing sector in backward areas*
31.3.2020
Investment allowance @ 15% if actual cost of new P&M acquired and installed > Rs. 25 Cr in a FY
Manufacturing sector 31.3.2018
Investment allowance @ 15% if new P&M acquired and installed after 31.3.2015
Manufacturing sector in backward areas*
31.3.2020
Weighted Deduction of expenditure (except land &building) on notified “skill development projects”
Manufacturing and other specified sectors
150% till 31.03.2020; 100% after 31.3.2020.
Deduction for 3 years at the rate of 30% of additional wages paid to the new regular workmen employee
All taxpayers No sunset date
Weighted deduction of expenditure incurred on scientific research – effective reduction in tax cost.
All taxpayers150% till 31.03.2020; 100% after 31.3.2020.
Key Incentives available in IndiaOther tax and fiscal
* Andhra Pradesh, Telangana, West Bengal and Bihar
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• An SEZ is defined to mean a specifically delineated duty free enclave and is deemed to be a foreignterritory for the purposes of trade operations, duties and tariffs
• A SEZ unit needs to have a positive net foreign exchange earning i.e. primarily Export earnings
• Income-tax - Business income earned from exports by SEZ unit is eligible for income tax benefits
• However, profits of SEZ unit are subject to MAT regime, MAT Tax available as a credit to be offsetagainst regular tax over the next 15 years
• Indirect taxes – Upfront exemption from customs duty and GST available (subject to conditions).
100% of export profits are exempt
Year 1 - 5
These Income-tax benefits are available to units which commence eligible activities
on or before 31 March, 2020
50% of export profits are exempt
Year 6 - 10
Lower of 50% of export profits or amount
transferred to special reserve
Year 11 - 15
Key Incentives available in IndiaOther tax and fiscal
Dispute resolution routes
© 2017. Deloitte AP ICE, Ltd. 19
Dispute resolution Process
• Robust Judiciary Process for resolving direct and indirect tax issues.
• Amendment to Arbitration Act to streamline institutional dispute resolution arrangements
in infrastructure
• Indian Supreme Court final decision maker
• Tax Payer as well as Tax Authorities have a fair chance of appealing to Higher authorities.
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Income tax - Dispute resolution routes Time frame and other alternatives
Tax return/
TP filing
TP/ Tax Audit
CIT (Appeals)*
Dispute Resolution
Panel
TribunalHigh Court
Supreme Court
(A) Can simultaneously follow MAP**
9 months
Varies, normally 2 yearsTo be
completed by November 30
33/45 months from the end of financial year which is under TP/ Tax Audit
Conducted by independent judiciary
Conducted by members of the Indian revenue
(B) Other alternatives – Authority of Advance Ruling (AAR), Advance Pricing Agreement (APA) or Safe Harbour Rules (SHR)
Cumulatively may take 8 years
* CIT(Appeals) – Commission of Income-tax (Appeals)** MAP – Mutual Agreement Procedure
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