Direct taxation of businessesi Tax on profitsDetermination of taxable profit
Taxable income from business is required to be computed in accordance with either the cash or mercantile system of accounting regularly employed by the taxpayer. Taxable profits are based on accounting profits but are adjusted for specific allowances and disallowances. All revenue expenditure expended 'wholly and exclusively' for the purposes of the taxpayer's business is generally allowed as a deductible expense.
Further, while computing its taxable income, a taxpayer is entitled to claim certain deductions and industry-specific tax concessions, subject to the fulfilment of specific conditions. Adjustments on account of depreciation are available to all categories of taxpayers on an annual basis, where depreciation is to be reduced from the written down value of each 'block of assets', namely buildings, furniture and fittings, machinery and plant, intangible assets, etc. It is important to note that depreciation for the purposes of the IT Act is different from depreciation as computed under accounting principles.
Residents are subject to income tax on their worldwide income, whereas non-residents are subject to tax in India only on income that is sourced in India, namely income that: (1) is received or is deemed to be received in India; or (2) accrues or arises or is deemed to accrue or arise in India.Capital and income
The IT Act is schedular in nature and provides for different heads of taxable income. The general rule under Indian domestic law is that all revenue receipts are taxable unless a receipt is specifically exempt and all capital receipts are exempt from taxation unless there is a specific provision to tax it. While calculating taxable business income, only revenue receipts after deducting revenue expenses are considered. The IT Act provides a separate head of 'income from capital gains' for levying tax on certain capital receipts. Income from such capital gains is usually taxed at special rates, depending on the nature of the capital asset, and the period of holding. The IT Act also provides a residual category of income, namely 'income from other sources', which also taxes certain capital receipts as ordinary income of the taxpayer.
Taxpayers that use the mercantile system of accounting are required to follow the Income Computation and Disclosure Standards for computation of income chargeable under the headings 'profits and gains of business or profession' and 'income from other sources'.Losses
The IT Act provides for intra-head and inter-head adjustment of losses. If in any year, a taxpayer incurs a loss from any source under a particular head of income, then such taxpayer is allowed to adjust such loss against income from any other source falling under the same head (intra-head adjustments). Only after such intra-head adjustments are made can a taxpayer adjust losses from one head against income from another head (inter-head adjustments). However, there are certain rules for such adjustments. For instance, losses from speculative business can only be set off against income from speculative business, although non-speculative business losses can be set off against income from speculative business; long-term capital losses cannot be set off against any income other than income from long-term capital gains, although short-term capital losses can be set off against short or long-term capital gains, etc.
Losses are usually permitted to be carried forward for a period of eight years immediately succeeding the year in which such loss is incurred.
A taxpayer that operates as a private limited company is not permitted to carry forward any tax losses of the years prior to the relevant financial year, unless shareholders beneficially holding 51 per cent of the voting power as on the last day of the year in which the loss was incurred, and the year in which the loss is desired to be set off, remain the same. However, such losses are allowed to be carried forward in case of certain eligible start-ups and companies under insolvency proceedings.Rates
Rates as prescribed under the IT Act and as mentioned hereinafter are required to be increased by applicable surcharge and education cess (unless otherwise stated). Surcharge is payable as a percentage of the income-tax payable. For domestic companies, the rate of surcharge is 7 per cent (if income > 10 million rupees but ≤ 100 million rupees), and 12 per cent (if income > 100 million rupees). For foreign companies, the rate of surcharge is 2 per cent (if income > 10 million rupees but ≤ 100 million rupees), and 5 per cent (if income of > 100 million rupees). For general partnerships and LLPs, the rate of surcharge is 12 per cent (if income > 10 million rupees), and nil (if income ≤ 10 million rupees). Further, a health and education cess of 4 per cent is also payable on the aggregate of income tax and surcharge.Corporate
Domestic companies are liable to tax on their business income at the rate of 30 per cent. Certain domestic companies can choose to avail of a concessional tax rate of 25 per cent, subject to certain conditions. Non-resident companies having a permanent establishment in India are subject to tax on their business income at the rate of 40 per cent.
Domestic companies declaring, distributing, or paying dividends are required to pay an additional dividend distribution tax (DDT) at an effective rate of 20.56 per cent (including applicable surcharge and education cess of 4 per cent) on the dividends distributed. Such dividends are tax-exempt in the hands of all non-resident shareholders and resident corporate shareholders. However, a holding company does not have to pay DDT on dividends paid to its shareholders to the extent that it has received dividends from its Indian and foreign subsidiary company on which DDT has been paid by the subsidiary, subject to fulfilment of conditions.
If the income-tax payable by a domestic company is less than 18.5 per cent of its adjusted book-profits, then such company would be required to pay a minimum amount of tax, known as minimum alternate tax (MAT) at the rate of 18.5 per cent. MAT credit can be utilised over a period of 15 years.Non-corporate
General partnerships and LLPs are taxed at the rate of 30 per cent. No additional tax is required to be paid by a partnership firm or an LLP at the time of distribution to the partners. Shares of profits received by partners of a general partnership or an LLP are tax-exempt in their hands.
An LLP is not subject to MAT. It is subject to an alternate minimum tax (AMT) at the rate of 18.5 per cent, when income tax on its total income is less than 18.5 per cent on its adjusted total income. However, this is applicable only if the LLP claims specified tax holidays or deductions under the IT Act.Administration
Unlike some other nations, income tax in India is a central (federal) levy, and not a state-specific levy.
The Ministry of Finance governs and administers the IT Act through the Central Board of Indirect Taxes and Customs, which from time to time issues notifications, circulars and instructions, etc., to clarify or interpret the provisions of the IT Act. In addition to this, every year, the Finance Minister of India proposes amendments to the IT Act and revises the applicable rates of taxation annually through the Finance Bill for that year. Once the Indian Parliament approves the proposed amendments, the Finance Bill is enacted and the relevant changes or amendments get incorporated into the law.
The Indian tax year runs from 1 April to 31 March. Certain taxpayers having business income are required to get their account books audited for tax purposes. All companies are required to electronically file income tax returns on or before 30 September of the year following the tax year. In the event transfer pricing provisions are applicable, the due date for filing tax returns is extended to 30 November.
Further, quarterly returns have to be filed for withholding taxes in the prescribed form and manner.
On filing of tax returns, details furnished by the taxpayer are assessed by the tax authorities, and accordingly, an 'assessment order' is passed by the 'assessing officer' after giving an opportunity of being heard to the taxpayer. A detailed appeal process is provided in the IT Act, which allows taxpayers to challenge an order passed by the tax authorities. The Supreme Court of India (i.e., the apex court of India), and the various High Courts provide a ruling on the law and do not engage in a fact-finding exercise.
Further, an advance ruling may be obtained from the Authority for Advance Rulings (AAR) on any question of law or fact in respect of a transaction undertaken or proposed to be undertaken by a non-resident or with a non-resident. Such a ruling obtained from the AAR is then binding on the revenue authority and the applicant in respect of the concerned transaction.Tax grouping
India does not recognise group taxation, and each company in a group (or otherwise) is taxed as a separate company.ii Other relevant taxesIndirect taxes
The goods and services tax (GST) legislation has been enacted by the Indian government with effect from 1 July 2017. GST overhauls much of the indirect taxation framework in India, and has subsumed most of the erstwhile indirect taxes such as sales tax or VAT, service tax, excise duty, entertainment tax (unless levied by local bodies), entry tax, additional customs duty (countervailing duty), special additional duty of customs, surcharges and cesses. Basic customs duty on import of goods into India remains outside the GST ambit. Further, certain tobacco, petroleum and alcohol products remain outside GST, and will continue to be taxed as per the earlier system. As opposed to the multiple taxable events under the erstwhile indirect tax regime, such as manufacture, sale, provision of service, etc., the GST law imposes tax on a single taxable event, 'supply' which covers all kinds of transactions such as sale, transfer, barter, lease, provision of service, etc., unless specifically exempted. Both the centre and the states simultaneously levy GST across the value chain.
While problems of immediate migration costs are posed by it, the overall economy is expected to benefit from a more seamless movement of goods and service, and a less burdensome indirect tax credit and compliance regime. GST allows for seamless credit flow throughout the value chain with fewer restrictions to mitigate the cascading effect of taxes.Stamp duty/registration fees
Separately, all legal documents are required to be stamped in India, and documents that have the effect of transferring immovable property are mandatorily required to be registered. Documents that have not been duly stamped cannot be introduced as evidence in any court. Stamp duty rates differ from state to state across the country, as stamp duty is a state subject. However, central government fixes the stamp duty rates for certain instruments.