India: Tax (4th edition)

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in the India.

It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.

This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-4th-edition/

  1. How often is tax law amended and what are the processes for such amendments?

    Amendments to the Indian Income tax Act (“IT Act”) are made by the Government of India by introducing a Finance Bill before the Parliament annually which once approved has to receive the assent of the President of India.

    Further, wherever provided under the provisions of IT Act, the Central Board of Direct Taxes (“CBDT”), Ministry of Finance, can issue notification for the purpose of implementation of existing provisions and issue Circulars, to provide clarification or remove difficulties in the administration of taxation laws.

  2. What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?

    Generally, a taxpayer is required to maintain the books of accounts for a period of 7 financial years (“FY”) (1st April to 31st March) following the relevant FY or until completion of the tax dispute, whichever is later. While non-residents having no taxable presence in India are generally not required to maintain books of account, but they are required to maintain tax records such as tax returns, transfer pricing reports, etc.

    In terms of filing requirements, return reporting the details of income earned during the FY is to be filed annually (including transfer pricing compliances as applicable) whereas return for taxes withheld as applicable is to be filed quarterly.

    In case of cross border transactions, certain transaction specific compliances (such as filings with respect to transactions triggering direct or indirect transfer of Indian assets) are also required to be undertaken.

    Separately, an Indian company is required to file its accounts annually/quarterly with the registrar of companies under company law. The branch office / project office / liaison office of a foreign company is required to file accounts with registrar of companies annually.

  3. Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?

    In India, CBDT is the apex body for administering the income tax law in India which assigns the cases on the basis of jurisdiction. Under CBDT, there are various tax authorities in the hierarchical order. A taxpayer is assessed to tax by the jurisdictional tax officer who is at the lowest level of hierarchy.

    The time taken in resolving the issues depends on its complexity and the stakes involved. For e.g, if the jurisdictional officer undertakes a scrutiny assessment of the taxpayer then generally it takes around 2-3 years to resolve the issue at jurisdictional officer level. Needless to mention, if the issue is disputed and an appeal is filed by the taxpayer then the issue would take long to finally get resolved (see our responses in Query 4).

    However, if it is related to standard issues such as issuance of refund it may be resolved relatively faster. Further, the Government of India has also introduced an online platform wherein taxpayers can lodge their request / issue / grievance being standard or administrative in nature which is then taken up by the relevant authority. It is worthwhile to note that officers have been instructed to resolve the request / issue / grievance lodged on this online platform to be resolved on priority basis and in our practical experience, time taken generally for turnaround is 30 days.

    In case of genuine difficulty/ambiguity etc, taxpayers can write to CBDT seeking clarifications, etc. Time to time, CBDT does issue circulars/clarification on important subject of taxation where they clarify position of the Government of India. Circulars issued by CBDT are binding on tax authorities but not on taxpayers.

  4. Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?

    Any tax dispute can be appealed before the appellate authorities which are independent of the tax authority in the following order:

    • Commissioner of Income Tax (Appeals) [“CIT(A)”] / Dispute Resolution Panel (“DRP”)
    • Income Tax Appellate Tribunal (“ITAT”)
    • High Court (“HC”)
    • Supreme Court of India (“SC”)

    While there are recommendatory timelines provided to dispose an appeal, due to the backlog of cases pending at various levels, proceedings tend to take longer time for disposal (except for DRP where it is mandatory to dispose of the objections raised by the taxpayers within 9 months). For a matter to be adjudicated by Commissioner of Income Tax (Appeals), it may take around 1-2 years. From CIT(A) to ITAT, it may take 1-3 years, from ITAT to HC and from HC to SC, it depends on various aspects such as question of law involved, functioning of tax bench in the Court, available dates, etc.

    However, it needs to be noted that the Government has been taking various steps to cut down unnecessary tax litigation such as tax authorities to file appeal provided the disputed tax amount involved exceeds the specified threshold, issuing Circulars clarifying its position on issue being litigated widely and withdrawing appeals, instructing tax officers to file appeal only after considering merits of the case.

    Separately, income tax law also provides for a mechanism to obtain an advance ruling from the Authority for Advance Rulings (“AAR”) in India which has been instrumental in providing certainty/clarity on Indian tax position to residents/non-residents who does business in India, invest in India or earn income from India. Income-tax laws provide that AAR should provide its rulings within 6 months from the date of filing of the application; though in practice time taken is generally more given that lots of applications have been filed and there is a fair amount of pendency before the AAR.

  5. Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?

    IT Act requires a taxpayer to estimate its tax liability for entire FY in advance and pay tax in advance on quarterly basis within the statutory due dates outlined below:

    Due date

    Amount of advance tax to be paid

    15th June of relevant FY

    15% of total estimated tax liability

    15th September of relevant FY

    45% of total estimated tax liability

    15th December of relevant FY

    75% of total estimated tax liability

    15th March of relevant FY

    100% of total estimated tax liability

    Further, where on payments received by a taxpayer, the payer has deducted tax at source (“TDS”) and deposited the same with the Government of India, the taxpayer can claim credit of such amount. The balance tax, if any, after adjusting advance tax and TDS is to be paid by way of self-assessment tax along with applicable interest prior to filing the annual return of income.

    For the disputed tax amount, the taxpayer can either make entire payment or obtain a ‘stay’ on disputed tax demand by depositing 20% down payment where it has filed an appeal before the CIT(A). In case the matter is eventually ruled in favour of the taxpayer, the tax paid in dispute would be refunded along with interest at 0.5% per month or part of the month. However, where the matter is ruled against the taxpayer, the taxpayer would be required to pay the outstanding tax along with the interest at 1% per month or part of the month.

  6. Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public register of beneficial ownership?

    The data of a taxpayer is not available to general public and is kept as confidential. However, the tax authorities can share the data, to the extent necessary, with other Government agencies for effective administration of concerned laws. Further, while personal data is exempt from disclosure under the Right to Information Act, 2005 as well, generic data such as number of appeals pending before appellate authorities could be disclosed to the applicant. Also, where an order is passed by ITAT, HC or SC or AAR, the same is generally published in public domain unless an exception is made at the request of the taxpayer.

    India has signed a multilateral agreement on 3 June 2015, to automatically exchange information based on Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters under the Common Reporting Standard (CRS)

  7. What are the tests for residence of the main business structures (including transparent entities)?

    An Indian company is treated as resident based on its incorporation in India whereas a foreign company is treated as resident where its ‘place of effective management’ (“POEM”), in the relevant FY, is in India.

    A partnership firm, limited liability partnership and association of persons are treated as Indian resident where their control and management is situated in India (wholly or partly).

  8. Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?

    Yes, cross-border transactions such as determination of a foreign entity that has a taxable presence in India (akin to a Permanent Establishment in India) and related party transactions subject to the transfer pricing regulations, have been the focus of the tax authorities. For the cross border related party transactions, a taxpayer has to undertake a transfer pricing benchmarking analysis to determine arm’s length price (“ALP”) in accordance with the prescribed method and to file a transfer pricing report.

    Recently, as a measure to prevent BEPS, India has introduced additional group reporting requirements in the form of Country by Country reporting and Master file reporting for entities crossing the specified threshold, to report the intra-group transactions in greater detail.

  9. Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?

    While India do not have a CFC regime, it has the concept of POEM for foreign entities being controlled from India in which case the foreign entity is a treated as an Indian resident and its global income is taxed in India. Further, Thin Cap regime has been introduced which caps the yearly interest deduction to 30% of the EBITDA of the borrowing entity.

    India does have an exhaustive transfer pricing regime in place wherein rules are prescribed to determine ALP of the intra-group transactions.

    Separately, the IT Act does provide a mechanism for taxpayer to enter into Advance Pricing Agreement (“APA”) for determining ALP of a related party transaction (called ‘International Transactions’ in TP parlance). Several multinational companies have adopted the APA path which have turned out to be successful.

  10. Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?

    Yes, India introduced GAAR provisions effective 1 April 2017 wherein a particular arrangement if entered into with the main purpose of obtaining a tax benefit could be treated as an ‘impermissible avoidance arrangement’. Given that GAAR provisions have been recently introduced, applicability of the same is yet to be tested. It is however to be noted that even in the pre-GAAR regime, the tax authorities used to question substance in structures and sought to question transactions undertaken wherein tax avoidance was contemplated.

  11. Have any of the OECD BEPS recommendations been implemented or are any planned to be implemented and if so, which ones?

    Over the years, India have included various provisions under the IT Act in line with recommendations of OECD BEPS Action Plan as outlined below.

    In line with BEPS Action Plan 1, India has introduced ‘equalisation levy’ at 6% effective from 1 June 2016 on consideration received or receivable by a non-resident for rendering services in the nature of online advertisement, provision for digital advertising space or other facility or service for the purpose of online advertisement.

    Further, basis Action Plan 1, the scope of business connection has been expanded to bring the business undertaken through digital mode within its ambit. Thus, in case of a non-resident having significant economic presence, the same shall constitute business connection in India Significant economic presence has been defined to include transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India if the aggregate payment exceeds the prescribed amount. Significant economic presence shall also include systematic and continuous soliciting of its business activities or engaging in interacting with prescribed number of users in India through digital means.

    India has also introduced thin cap rules discussed above in accordance with BEPS Action Plan 4.

    In view of BEPS Action Plan 7: Preventing artificial avoidance of Permanent Establishment status, provision for dependent agent PE under the IT Act have been expanded to include agents habitually playing principal role leading to conclusion of contracts by that non-resident.

    As per BEPS Action Plan 13, India has made it mandatory for companies crossing specified threshold to file Country by Country Report and Master File for international group reporting.

  12. In your view, how has BEPS impacted on the government’s tax policies?

    India has introduced slew of restrictive measure under the IT Act with a view of prevent BEPS by the entities within the international group. This has resulted in tax authorities scrutinizing transaction to ensure that there is no BEPS.

  13. Does the tax system broadly follow the recognised OECD Model? Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties? If so, what are the current rates and are they flat or graduated?

    India tax system comprises of direct and indirect taxes. While direct taxes are levied by the Central Government, some of the indirect taxes are levied by the States. Direct tax is on income which is to be categorized as (a) Business profits (b) employment income (c) House Property Income (d) Capital Gains and (d) Other Income.

    Tax rates applicable are as under:

    Type of income

    Tax rate (exclusive of surcharge and cess)

    Business profits

    Domestic companies - 30% / 25% (if turnover is upto INR 400 crores in FY 2017-18)

    Non-resident companies: 40%

    Employment income

    Taxed on progressive basis as per slab rates*:

    Income                          Tax rate

    Upto INR 2.5 lakhs              NIL

    INR 2.5 lakhs- 5lakhs          5%

    INR 5lakh- 10lakh              20%

    More than INR 10lakhs      30%         

    *-slabs to vary for individuals more than 60years of age and upto 80years of age, and more than 80years of age.

    Capital Gains

    Rate varies based on residency of the taxpayer, nature of the asset and period of holding. For Indian residents, tax rate ranges from 10% to 30% and for non-residents, from 10% to 40%.

    House Property and Other Income

    Taxed as per normal rates as applicable for business income/employment income.

    Minimum Alternate Tax (“MAT”)

    Companies are liable to pay MAT at 18.5% on adjusted accounting profits if the tax payable under normal provisions is lower than the amount of MAT

    Alternative Minimum Tax (“AMT”)

    For taxpayers other than companies, AMT is applicable at 18.5% on adjusted total income instead of MAT at 18.5% as mentioned above

    Royalty / fees for technical services

    Taxable for non-residents at 10%

    \Indirect tax: Goods and Service tax

    GST @ 5%, 12%, 18% and 28% on various goods/services.

     

    Stamp duties

    Varies from state to state

  14. Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?

    For the computation of business income, the starting point is the accounting profits computed according to principles of accounting standards, to which various adjustments as stipulated under IT Act are to be made.

  15. Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?

    Yes, companies and partnership firms carrying on business are recognized as taxable entities. However, in case of trusts such as set up as Alternative Investment Fund for pooling of investments, income other than business income is taxed on pass through basis in the hands of the Investors and not the trust.

  16. Is liability to business taxation based upon a concept of fiscal residence or registration? If so what are the tests?

    An Indian company is taxed based on its incorporation in India whereas, a foreign company is treated as a resident and taxed on global income if its POEM is in India.

    For foreign entities not having a POEM in India, business income is taxed in India provided such foreign entity either have a ‘business connection’ in India and/or a ‘Permanent Establishment’ in India under applicable Double Tax Avoidance Agreement with India.

  17. Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?

    Tax incentive has been provided for a period of 10 years on the profits from export of product or service for the units set up in Special Economic Zone prior to 1 April 2021.

    Further, the Government has developed Gujarat International Finance Tech City which is India’s first International Financial Service Centre (IFSC). Several tax incentives have been provided for business carried out from IFSC.

    There are certain other investment linked deductions wherein 100% of capital expenditure (other than on land, goodwill and financial instrument) is allowed in the year of incurrence.

  18. Are there any particular tax regimes applicable to intellectual property, such as patent box?

    As per the IT Act, income by way of ‘royalty’ in respect of a patent developed and registered in India is taxable at a concessional rate of 10% subject to certain conditions.

  19. Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?

    India does not have the concept of group taxation for corporates and each entity is taxed on independent basis on its own income.

  20. Are there any withholding taxes?

    Yes, India has comprehensive withholding tax regime, wherein specified payments (viz. professional fees, technical services fees, commission, contractual payments, etc.) to residents are subject to withholding of tax by the payer. However, for payments to non-residents, withholding of tax is required where such payments are chargeable to tax in India irrespective of whether the payer is a resident or non-resident of India.

  21. Are there any recognised environmental taxes payable by businesses?

    N/A

  22. Is dividend income received from resident and/or non-resident companies exempt from tax? If not, how is it taxed?

    Dividend received from resident company

    (a) Tax-exempt in the hands of non-resident shareholder

    (b) India resident shareholder (not being a corporate or a trust) taxed at 10% (plus applicable surcharge and cess) on dividend received in excess of INR 1 million

    (c) ‘Dividend distribution tax’ payable by distributing company at 20.56%

    Dividend received from non-resident company

    (a) Generally taxed at normal applicable rates in the hands of Indian residents.

    (b) Dividend received by an Indian company holding 26% or more of equity share capital in such foreign company, is taxed at a concessional rate of 15%.

    (c) No tax payable by distributing foreign company in India.

  23. If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?

    Advantages

    • Lower tax rate of 25% on business profits for companies
    • Wide network of tax treaties providing flexibility
    • New direct tax code under consideration for simplification of tax structure
    • Single tax for goods and services
    • Credit available for taxes paid in countries outside India
    • Digitization of tax proceedings
    • AAR mechanism to obtain certainty on tax treatment in India
    • APA mechanism to determine ALP for intra-group transactions for Transfer Pricing rules compliance

    Disadvantages

    • Pro revenue approach of the tax authorities
    • Tax Dispute Resolution at times takes longer time
    • Number of compliances
    • High tax rates for individuals
    • Varied interpretation of tax provisions resulting in tax dispute