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India has a federal level tax structure governed by the provisions of the
Income Tax Act, 1961. It has an extensive set-up of agreements with over 90
countries across the world to prevent double taxation of income. As a result
of economic reforms, the taxation system has undergone tremendous
changes in the past ten years. The tax rates have been rationalized and
compared favorably with many other countries. Further, over the period of
time, the tax laws have also been simplified to ensure better compliances.
The brief review of Indian taxation system is given below:
Scope of Income
A resident in India is liable to tax on its worldwide income irrespective
of the source of income
A non-resident in India is liable to tax on income received or deemed to
be received in India or any income accruing or arising or deemed to be
accruing or arising in India.
Scheme of taxation
Taxation of a person depends upon its legal status (a person being an
individual, firm, company, etc.) and residential status.
Indian tax system recognizes an entity level taxation.
I. Direct Tax
Corporate income-tax
For Indian income tax purposes, a corporation income comprises income
from business or property, capital gains realized on any disposition of
corporations capital assets and residual income arising from non-business
Income.
Corporate tax Rates applicable for the financial year 2009-2010 are
as follows:
MAT
Minimum alternate tax or MAT is a tax levied on firms/ companies those are
making abundant profits as well as distributing dividend to its shareholders
who leveraging on the features of the Indian taxation system do not
contribute towards the government's taxation kitty. As corporates with their
excellent tax planning and capitalizing on the available deductions,
exemptions and incentives under the Income tax law tend to contribute
insignificantly towards the governments tax kitty. MAT was introduced for the
first time in the 1988. It was felt that due to various concessions provided in
Tax Laws big corporate groups become zero tax companies. Therefore, to
counter this, as system of MAT was introduced. Thus, for such corporates a
minimal tax amounting to some fixed % of book profits i.e. profits according
to accounting records is charged as minimal alternative tax (MAT).
This provision specifically states that Tax payable for any assessment year by
any corporate entity cannot be less than a certain percentage (mat rate) of
the Book Profit. In other words if the Income Tax payable by a company on its
total income as computed under the Income Tax Act is less than a certain
percentage (mat rate) of the book profits, then such book profit shall be
deemed total income of the entity with tax payable on rate specified under
income tax act .A company may also be required to pay tax even during tax
holiday period.
DDT
Dividend distribution tax is the tax levied by the Indian Government on
companies according to the dividend paid to a company's investors. DDT is
levied at the rate of 16.995 percent on the amount of dividend declared,
distributed or paid by an Indian company. DDT is payable in addition to
regular corporate income tax.
FBT
The taxation of perquisites or fringe benefits (mostly non cash benefits)
provided by an employer to his employees, in addition to the cash salary or
wages paid is fringe benefit tax. Any benefits or perks that employees
(current or past) get as a result of their employment are to be taxed, but in
this case its in the hands of the employer.
This includes
Employer's contributions
a superannuation fund).
Employee stock option plans (ESOPs) have also been brought under
fringe benefits tax from the fiscal year 200708.
to
an
approved retirement
plan (called
Fiscal regime
There is a special mechanism for taxation of income of companies which
have entered into a Production Sharing Contract (PSC) with the Government
of India for undertaking exploration and production activities.
As per these provisions, taxable profits of a tax payer, who has entered
into a PSC with the Government for participation in the business of
prospecting, exploration or production of mineral oil, to be determined
in accordance with the special provisions contained in the PSC.
The provisions of the domestic tax law are deemed to be modified to
that extent.
Land areas payable at the rate of 12.5% for crude oil and 10% for
natural gas and coal bed methane
Shallow water offshore areas payable at the rate of 10% for crude
oil and natural gas
Deepwater offshore areas (beyond 400m isobath) payable at the
rate of
5% for the first 7 years of commercial production and thereafter at a
rate of
10% for crude oil and natural gas
Capital allowances
Accelerated depreciation
Depreciation is calculated using the declining-balance method and is allowed
on a class of assets. For field operations carried out by mineral oil concerns,
the depreciation rate is 60% for specified assets while the generic rate of
depreciation on the written-down basis is 15% (majority of the assets fall
within the generic rate). Further, additional depreciation of 20% is available
on the actual cost of new machinery or plant in the first year.
Allowance for investment in new plant and machinery
In addition to depreciation and/or additional depreciation, deduction at the
rate of 15% is available on the actual cost of new plant or machinery
acquired and installed during the period 1 April 2013 to 31 March 2015,
subject to the fulfillment of certain conditions
Tax Holiday
One hundred percent tax holiday available in respect of profits earned
from production of mineral oils.
Tax holiday is available for seven consecutive years from the year of
commencement of commercial production.
However, companies availing deduction under these provisions would
still be liable to pay MAT on 'book profits'.
Carry forward losses
Business losses can be carried forward and set off against business income
for eight consecutive years, provided the income tax return for the year of
loss is filed on time. For closely held corporations, a 51% continuity-ofownership test must also be satisfied.
Unabsorbed depreciation can be carried forward indefinitely
Deductibility of Site Restoration Expenses
A special deduction is available for provisions made for site restoration
expenses if the amount is deposited in a designated bank account. The
deduction is the lower of the following amounts:
The amount deposited in a separate bank account or site restoration
account
Twenty percent of the profits of the business of the relevant financial year.
Withholding taxes
The following withholding tax (WHT) rates apply to payments made to
domestic
and foreign companies in India
* The rates are to be further enhanced by the surcharge and education levy
** Dividends paid by domestic companies are exempt from tax in the hands
of the recipient. Domestic companies are required to pay dividend
distribution tax (DDT) at 16.995% on dividends paid by them
*** The rate of 20% generally applies to interest from foreign currency loans.
Subject to fulfillment of certain conditions, a lower rate of 5% applies on
interest payable for foreign currency loans. Other interest is subject to tax at
the rate of 40% (plus applicable surcharge and education levy)
**** Subject to treaty benefits. If a permanent establishment is constituted in
India, the lower WHT rate depends on profitability
Taxation of service providers
Applicability
Special tax regime for non-resident service providers engaged in the
business of providing services or facilities or supplying plant and
machinery on hire in connection with prospecting for, or extraction or
production of, mineral oils.
Mechanism
10 percent of the gross receipts deemed to be business income
resulting in an effective tax rate of 4.223 percent of gross revenues
(rate as applicable for financial year 2009-2010).
Option to claim lower profits, subject to following conditions:
- Keep/maintain books/documents
- Get accounts tax audited