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In India, under the constitution taxes can be levied by Central and the State Governments, and by the local government bodies. Principal taxes, including Income-tax, Custom Duties, Central Excise Duty and Service Tax are levied by the Central Government. On the other hand, States levy taxes like State
Excise Duties, Value-Added Tax, Sales Tax and Stamp Duties. Local government bodies levy Octroi Duties and other taxes of local nature like Water Tax, Property Tax, etc. Income is taxed in India in accordance with the provisions of the Income-tax Act, 1961 (the Act). The Ministry of Finance (Department of Revenue) through the Central Board of Direct Taxes (CBDT), an apex tax authority, implements and administers direct tax laws.

India has embarked on a series of tax reforms since the early 1990s. The focus of reforms has been on rationalisation of tax rates and simplification of procedures.

India follows a ‘residence’ based taxation system. Broadly, taxpayers may be classified as ‘residents’ or ‘non-residents’. Individual taxpayers may also be classified as ’residents but not ordinary residents’.

The ‘tax year’ (known as the financial year) in India, runs from 1 April to 31 March, of the following calendar year for all taxpayers. The ‘previous year’ basis of assessment is used i.e. any income pertaining to the ‘tax year’ is offered to tax in the following year (known as the assessment year).

Taxable income has to be ascertained separately for different classes of income (called as heads of income) and is then aggregated to determine the total taxable income. Income tax is levied on ‘taxable income’, comprising of income under the following categories, referred to as heads of income:

  • Salaries
  • Income from house property
  • Profits and gains of business or profession
  • Capital gains
  • Income from other sources.

Generally, the global income of domestic companies, partnerships and local authorities are subject to tax at flat rates, whereas individuals and other specified taxpayers are subject to progressive tax rates. Foreign companies and non resident individuals are also subject to tax at varying rates on specified incomes which are received/accrued or deemed to be received/accrued in India.
Agricultural income is exempt from Income-tax at the central level but is taken into account for rate purposes. Income earned by specified organisations, for e.g. trusts, hospitals, universities, mutual funds, etc., is exempt from Income-tax, subject to the fulfillment of certain conditions.
India adopts the self-assessment tax system. Taxpayers are required to file their tax returns by specified dates. The Tax Officer may choose to make a scrutiny assessment to assess the correct amount of tax by calling for further details.
Generally, taxpayers are liable to make Income-tax payments as advance tax, in three or four installments, depending on the category they belong to, during the year in which the income is earned. Balance tax payable, if any, can be paid by way of self-assessment tax at the time of filing the return of income.
Employed individuals are subject to tax withholding by the employer on a ‘pay-as-you-earn’ basis. Certain other specified incomes are also subject to tax withholding at specified rates.

Residential status
Individual
Depending upon the period of physical stay in India during a given tax year (and preceding 10 tax years), an individual may be classified as a resident or a non-resident or a ‘not ordinarily resident’ in India.
Company
A resident company (also referred to as an Indian Company) is a company formed and registered under the Companies Act, 1956 or one whose control and management is situated wholly in India. An Indian company by definition is always a resident.

A non-resident company is one, whose control and management are situated wholly outside India. Consequently, an Indian company that is wholly owned by a foreign entity but managed from India by foreign individuals/companies is also considered a resident Indian company.

Kinds of taxes
Corporate Income tax
Income-tax @ 30 % is levied on income earned during a tax year as per the rates declared by the annual Finance Act. Surcharge @ 7.5 % is chargeable, in case of companies other than a foreign company, if the total income exceeds INR 10 million. Education cess is applicable at 3 percent on income-tax (inclusive of surcharge, if any).
Minimum Alternate Tax (MAT)

With a view to bring zero tax paying companies having book profits, under the tax net, the domestic tax law requires companies to pay MAT in lieu of the regular corporate tax, in a case where the regular corporate tax is lower than the MAT.

However, MAT is not applicable in respect of:
• Income exempt from tax (excluding exempt long-term capital gains)
• Income from units in specified zones including SEZs or specified backward districts
• Income of certain sick industrial companies.

The Finance Act 2010 increased the rate of MAT from 15 percent to 18 percent (plus applicable surcharge and education cess) of the adjusted book profits of companies where the income tax payable is less than 18 percent of their book profits. Education cess is applicable at 3 percent on income-tax (inclusive of surcharge, if any).
A tax credit is available being the difference of the tax liability under MAT provisions and regular provisions, to be carried forward for set off in the year in which tax is payable under the regular provisions. However, no carry forward shall be allowed beyond the tenth assessment year succeeding the assessment year in which the tax credit became allowable.

Dividend Distribution Tax
Dividends paid by an Indian company are currently exempt from Income-tax in the hands of the recipient shareholders. However, the company paying the dividends is required to pay DDT on the amount of dividends declared. The rate of tax is 16.609 % (inclusive of surcharge and educational cess). DDT is a tax payable on the dividend declared, distributed or paid. An exemption from this tax has been granted in case of dividends distributed out of profits of SEZ developers.
Domestic companies will not have to pay DDT on dividend distributed to its shareholders to the extent of dividend received from its subsidiary if:

  • The subsidiary has paid DDT on such dividend received; and
  • Such a domestic company is not a subsidiary of any other company.

A company would be subsidiary of another company if such a company holds more than half in nominal value of equity share capital of the company.

Tonnage tax scheme for Indian shipping companies
Tax is levied on the notional income of the shipping company arising from the operation of ships at normal corporate tax rates. The notional income is determined in a prescribed manner on the basis of the tonnage of the ship. Tax is payable even in the case of loss. The scheme is applicable to shipping companies that are incorporated under the Indian Companies Act (with its effective place of management in India) with at least 1 ship with minimum
tonnage of 15 tonnes and holding a valid certificate under the Merchant Shipping Act, 1959. Shipping companies have an option to opt for the scheme or taxation under normal provisions. Once the scheme has been opted for, it would apply for a mandatory period of 10 years and other tax provisions would not apply.

Securities Transaction Tax (STT)
STT is levied on the value of taxable securities transactions at specified rates.
The taxable securities transactions are –

  • Purchase/Sale of equity shares in a company or a derivative or a unit of an equity-oriented fund entered into in a recognized stock exchange
  • Sale of unit of an equity-oriented fund to the mutual fund.
  • The rates of STT are:
Transactions Rates Paid by
Purchase/Sale ofequity shares, units of equity
orientedmutual fund (delivery based)
0.125% Purchaser/seller
Sale of equity shares, units of equity oriented
mutual fund (non – delivery based)
0.025% Seller
Sale of Derivatives (on the premium amount) 0.017% Seller
Sale of an option in securities 0.017% Seller
Sale of derivatives (where the option is exercised) 0.125% Purchaser
Sale of unit of an equity oriented fund to the mutual fund 0.25% Seller

Source: Income-Tax Act, 1961

Wealth Tax
Wealth tax is leviable on specified assets at 1 percent on the value of the net assets as held by the assessee (net of debts incurred in respect of such assets) in excess of the basic exemption of INR 3 million.

Tax rates
Personal taxes
Individuals (excluding women and senior citizen) are liable to tax in India at progressive rates of tax as under:

Individual

Income Slab Effective Tax rate (including educational cess of 3 percent) (in percent)
Upto INR 160,000 NIL
INR 160,001 to 500,000 10.3
INR 500,001 to 800,000 20.6
800,001 and above 30.9

Source: Income Tax Act, 1961

Women

Income Slab Effective Tax rate (including educational cess of 3 percent) (in percent)
Upto INR 190,000 NIL
INR 190,001 to 500,000 10.3
INR 500,001 to 800,000 20.6
800,001 and above 30.9

Source: Income Tax Act, 1961

Senior Citizens (individuals of the age of 65 years or more)

Income Slab Effective Tax rate (including educational cess of 3 percent) (in percent)
Upto INR 240,000 NIL
INR 240,001 to 500,000 10.3
INR 500,001 to 800,000 20.6
800,001 and above 30.9

Source: Income Tax Act, 1961

Capital gains tax
The profits arising from the transfer of capital assets are liable to be taxed as capital gains. Capital assets include all kinds of property except stock-in-trade, raw materials and consumables used in businesses or professions, personal effects (except jewellery), agricultural land and notified gold bonds.
The length of time of holding of an asset determines whether the gain is short term or long term. Long term capital gains arise from assets held for 36 months or more (12 months for shares, units, etc).
Gains arising from transfer of long-term capital assets are taxed at special rates / eligible for certain exemptions (including exemption from tax where the sale transaction is chargeable to STT). Shortterm capital gains arising on transfer of assets other than certain specified assets are taxable at normal rates.
The following figure shows the rates of capital gains tax (excluding the effect of cess and surcharge that may apply):

Type of gain Tax rate in case of transfer of assets subject to payment of STT Tax rate in case of transfer of other assets
Long-term capital gains NIL 20 percent
Short-term capital gains 15 percent Normal Tax Rates applicable to corporates/ individuals

Source: Income Tax Act, 1961

Taxability of Non Resident Indians
NRIs are also be liable to tax in India on a gross basis depending upon the type of income received.
Foreign nationals
Indian tax law provides for exemption of income earned by foreign nationals for services rendered in India, subject to prescribed conditions. For example:

  • Remuneration from a foreign enterprise not conducting any business in India provided the individual’s stay in India does not exceed 90 days and the payment made is not deducted in computing the income of the employer.
  • Remuneration received by a person employed on a foreign ship provided his stay in India does not exceed 90 days.

Companies
A resident company is taxed on its global income. A non-resident company is taxed on income which is received / accrued or deemed to accrue / arise in India. The scope of Indian income is defined under the Act. The tax rates for the tax year 2010-11 are given in the table below:

Type of Company Effective tax rate (including surcharge and educational cess)
Domestic company 33.28 percent*
Foreign company 42.23 percent**

* Income-tax 30 percent plus surcharge of 7.5 percent (if the total income exceeds INR 10 million) thereon plus education cess of 3 percent on Income-tax including surcharge
** Income-tax 40 percent plus surcharge of 2.5 percent thereon plus education cess of 3 percent on Income-tax including surcharge.

A company may be required to pay the other taxes eg. MAT, Wealth tax, DDT, etc.

Modes of taxation
Gross basis of taxation
Certain specific income streams earned by non-residents are liable to tax on gross basis in certain cases, i.e. a specified rate of tax is applied on the gross basis and no deduction of expenses is allowed. The details of nature of income and applicable rate of tax are as under:

Income Stream Rate of tax
Interest 21.11 percent
Royalties 10.55 percent
Fees for technical services 10.55 percent

The rates are in the case of a foreign company and are inclusive of surcharge of 2.5 percent and education cess of 3 percent on tax and surcharge in respect of agreements made on or after 1 June 2005 respectively.

Presumptive basis of taxation
Foreign companies engaged in certain specified business activities are subject to tax on a presumptive basis i.e. income is recognized at a specific percentage of gross revenue and thereafter tax liability is determined by applying the normal tax on deemed income. Certain activities taxed on a presumptive basis along with the basis of taxation are set out below:

Activity Basis of taxation Effective tax rate (including surcharge of 2.5% and education cess of 3%) (in percent)
Oil and gas services Deemed profit of 10 percent of revenues 4.223
Execution of certain turnkey contracts Deemed profit of 10 percent of revenues 4.223
Air transport Deemed profit of 5 percent of revenues 2.115
Shipping operations Deemed profit of 7.5 percent of freight revenues 3.167

Deductions allowable from business income
Generally, all revenue expenses incurred for business purposes are deductible from the taxable income. The requirement for deductibility of expenses is that the expenses must be wholly and exclusively incurred for business purposes; that the expenses must be incurred or paid during the previous year and supported by relevant papers and records. Expenses of a personal or a capital nature are not deductible. Income tax paid is not allowable as a deduction. Depreciation on specified capital assets at prescribed rates is also deductible.
Expenditure incurred on taxes (excluding Income-tax) and duties, bonus or commission to employees, fees under any law, interest on loans or borrowings from public financial institutions and interest on loans and advances from scheduled banks is deductible only if it is paid during the previous year, or on or before the due date for furnishing the return of income. However, interest on capital borrowed for acquisition of assets acquired for extension of existing business is not allowed as a deduction until the time such assets are actually put to use.
Employee’s contributions to specified staff welfare funds – that is, provident funds, gratuity funds, etc. are allowed only if actually paid on or before the specified/ applicable due date. Salaries, interest, royalties fees for technical service, commission or any other amount payable outside India or in India to non-residents or a resident on which the tax has not been withheld or after deduction has not been paid within the prescribed time are not deductible. Such amounts are deductible in the year in which the withholding tax is paid.
Similarly, any payment made to residents for interest, commission or brokerage, rent, royalty, fees for professional or technical services, contract/sub-contract payments, where taxes have not been withheld or after withholding have not been paid within the prescribed time limit, will be disallowed in the hands of the payer. The deduction for such a sum will be allowed in the year in which the withholding taxes are paid.

Various allowable expenditures from business income are given below

  • Head-office expenditure

Foreign companies operating in India through a branch are allowed to deduct executive and general administrative expenditure incurred by the head office outside India. However, such expenditure is restricted to the lower of:
– Five percent of adjusted total income (as defined) or
– Expenditure attributable to the Indian business.

In cases where the adjusted total income for a year is a loss, the expenditure is restricted to 5 percent of the average
adjusted total income (as defined).

  • Bad debts : Bad debts written off are tax deductible. Provision for doubtful debts is not tax deductible. Banking companies are allowed a deduction for provisions for bad and doubtful debts upto 7.5 percent of total income or 10 percent of its assets classified as doubtful assets restricted to the provision for doubtful debts made in the books. Banks incorporated in a country outside India and public financial institutions are allowed a deduction for provisions for doubtful debts up to 5 percent of income, as specifically defined for this purpose. Bad debts actually written off by banks and public financial institutions, in excess of the accumulated provision for doubtful debts, are deductible.
  • Depreciation : Depreciation allowance on various assets is available at specified rates on the written down value of the asset based on a block asset concept. Further, in case of manufacturing or production activities, additional depreciation is allowable at the rate of 20 percent of the cost of new plant and machinery (other than ships or aircraft) acquired and installed during the year. Assets used for less than 180 days in the year of acquisition are entitled to half of the normal depreciation allowance. Depreciation not set off against current year’s income can be carried forward as unabsorbed depreciation, for set off against any future income.
  • Amortisation Expenses : Indian companies are allowed to claim certain preliminary expenses such as expenses in connection with preparation of feasibility report, project report, legal charges for drafting Memorandum and Articles of Association of the company etc. as specified, and incurred before commencement of his business, or after commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit. A deduction shall be allowed of an amount equal to 1/5th of such expenditure for each of the five successive previous years beginning with the previous year in which the business commences or, the previous year in which the extension of industrial undertaking is completed or the new industrial unit commences production or operation.

Grouping/consolidation
No provisions currently exist for the grouping / consolidation of losses of entities within the same group.
Taxation on transfer of shares of a closely held company without any consideration
With effect from 1 June 2010, the transfer of shares of closely held company without or for inadequate consideration to a firm or to a closely held company is to be taxable in the hands of recipient of shares. The taxable income for the recipient will be the fair market value of the shares if the transfer is without consideration or difference between the fair market value and inadequate consideration exceeds the stipulated threshold of INR 50,000. The fair market value of the shares transferred is to be computed as under:

If the transferred shares and securities are quoted and If the transferred shares and securities are not quoted and
a. The transaction is carried out through stock exchange then the FMV of such shares and securities will be transaction value as recorded in such stock
exchange.
a) The shares transferred are equity shares then the FMV of such shares on the valuation date(Valuation date shall be the date on which the respective property is received by the assessee) shall be determined in following manner: FMV = {(A-L) * (PV)} / (PE)
b. The transaction is not carried out through recognized stock exchange then the FMV will be:
i. The lowest price of such shares and securities on any recognized stock exchange on the valuation date
ii. If shares and not traded on the valuation date then the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange
Where A = (Book value of all the assets shown in Balance Sheet) – (Advance tax paid under the Act) – (any amount which does not represent the value of any asset like Profit and Loss Account or the profit and loss appropriation account)
L = (Book value of all liabilities shown in the Balance Sheet) – (paid up equity share capital) – (provision for dividend on preference and equity shares where such dividends is not declared before the date of transfer at a general body meeting of the company) – (Reserves except those set apart towards depreciation) – (amount of Profit and Loss Account) – (tax provision in excess of the tax payable with reference to the book profits as per the Act) – (provision for unascertained liabilities) – (amount of contingent liabilities except outstanding dividend on cumulative preference shares)
PE = Total amount of paid up equity share capital as shown in Balance Sheet.
PV = Paid up value of such equity shares.
b) The shares and securities transferred are other than equity shares, then the FMV of such shares shall be estimated selling price which such shares would fetch if sold in the open market on the valuation date. The taxpayer may obtain a report from a merchant banker {Merchant Banker means category 1 merchant banker registered with Security and Exchange Board of India established under section 3 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992)} or an accountant in respect of such valuation.

Withholding of taxes
Generally, incomes payable to residents or non-residents are liable to withholding tax by the payer (in most cases individuals are not obliged to withhold tax on payments made by them). The rates in case of residents would vary depending on the income and the payee involved for e.g. in case of rent the rate is 2 percent for the use of any machinery or plant or equipment, 10 percent for other kind of rental payments.
Except where preferential tax rates are provided for under DTAA, payments to foreign companies/non-residents are subject to the following withholding tax rates:

Type of income Foreign companies (Effective tax rate including surcharge of 2.5 percent and education cess of 3 percent) Other non-residents (Effective tax rate including education cess of 3 percent.)
Interest on foreign currency loan 21.115 percent 20.60 percent
Winnings from horse races 31.67 percents 30.90 percent
Royalties and technical services fee approved by the Government or in accordance with the industrial policy 10.55 percent 10.30 percent
Winnings from lotteries and crossword puzzles 31.67 percent 30.90 percent
Long term capital gains 21.115 percent 20.60 percent
Any other income 42.23 percent 30.60 percent

Carry forward of losses and unabsorbed depreciation
Subject to the fulfillment of prescribed conditions:-

  • Business loss can be carried forward for eight consecutive financial years and can be set off against the profits of subsequent years. Losses from a speculation business can be set off only against gains from speculation business for a maximum of four years.
  • Unabsorbed depreciation may be carried forward for set-off indefinitely.
  • Capital losses may also be carried forward for set-off for eight subsequent financial years subject to fulfillment of certain conditions. Long-term capital losses can be set off only against long-term capital gains, whereas short- term capital losses can be set off against short-term as well as long-term capital gains. These losses cannot be set off against income under any other head.
  • Carry back of losses or depreciation is not permitted.

Corporate reorganizations
Corporate re-organisations, such as mergers, demergers and slump sales are either tax neutral or taxed at concessional rates subject to the fulfilment of prescribed conditions.

  • Merger : Mergers are tax neutral, subject to the fulfilment of following conditions:
    – All assets and liabilities are transferred to transferee company
    – Transferee company should issue shares to the shareholders of the transferor company as consideration for merger
    – Transferee company continues to hold at least 3/4th of the book value of assets of the transferor company for a
    minimum period of 5 years
    – Business of the transferor company is continued for at least 5 years
    – Transferee company shall achieve minimum production level of 50 percent of the installed capacity within 4 years of the merger and maintain the minimum level of production until the end of fifth year. Upon fulfilment of the above conditions, the losses and the depreciation of the transferor company are available for carry
    forward and set off to the transferee company.
  • Demerger : Demergers are also tax neutral, subject to certain conditions. The conditions in relation to the method of demerger are relatively more restricted than in the case of mergers. For e.g., it is provided that the entire assets and liabilities of the relevant undertaking must be demerged, shares must be issued to the
    shareholders of the transferor company in the transferee company and the assets and liabilities must be transferred at book value in order for mergers to be tax neutral. Further, losses related and attributable to the undertakings transferred are also allowed to be carried forward in the hands of transferee company.
  • Slump Sale : Slump Sale refers to the transfer of one or more undertaking/s by way of sale for a lump sum consideration without values being assigned to the individual assets and liabilities comprised in the undertaking/s. The term ‘undertaking’ for this purpose has been defined under the Act in an inclusive manner and means:
    – Any part of an undertaking or
    – A unit or division of an undertaking or
    – A business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
    To qualify as a Slump Sale, it is necessary to ensure that:
    – All the assets and liabilities relating to the business activity are transferred
    – The transfer is on a going concern basis
    – The transfer is for a lump sum consideration i.e. no part of the consideration should be attributed to any particular asset or liability.
    The profits or gains arising from a Slump Sale in excess of its net worth are deemed to be income chargeable to tax as capital gain/loss arising from transfer of a long term capital asset provided the undertaking is held for at least three years.
    If undertaking is held for less than three years, the gain/loss shall be treated as short term capital gain/loss.
  • Tax neutrality in restructuring : If the transferee company is an Indian company, then, subject to
    the fulfilment of prescribed conditions, transactions pursuant to merger/demerger are entitled to various other tax concessions, including the following:
    – No capital gains to the shareholders in transferor company
    – No capital gains to the transferor company
    – Merger/demerger expenses shall be allowed to be amortised 1/5th every year for a period of five years
    – Pursuant to restructuring, various tax incentives hitherto available to the transferor company will ordinarily be available to the transferee company.

The Limited Liability Partnerships
The Finance Act 2009 introduced the tax treatment for the Limited Liability Partnerships which are recently introduced by the Limited Liability Partnership Act, 2008 in India. The terms ‘Firm’, ‘Partner’ and ‘Partnership’ has amended and an LLP defined under the LLP Act has been put on par with a partnership firm under the Indian
Partnership Act, 1932 (General Partnership) for the purpose of income-tax. Consequently, provisions relating to interest and remuneration to partners would apply to a LLP, while provisions applicable to companies such as MAT, DDT, etc. will not apply to an LLP.

Tax treatment on conversion of a company into a LLP:
The conversion of a private company or unlisted public company (Company) into LLP to be exempt from tax subject to the following:

  • The total sales or turnover or gross receipts of the Company not to exceed INR 6 million in any of the immediate three preceding previous years;
  • All the assets and liabilities of the Company before conversion become those of the LLP;
  • All the Shareholders of the Company become partners of LLP with their capital contribution and profit sharing ratio remaining same as their shareholding in the company;
  • Apart from the above, the shareholders of the company do not receive any other consideration or benefit, directly or indirectly;
  • The aggregate profit sharing ratio of the shareholders of the company in LLP to be minimum 50 per cent in subsequent five years;
  • The Partners do not draw any amount out of accumulated profit on the date of conversion in subsequent three years.

The tax neutrality specified for a private company or an unlisted public company (both referred hereafter as the company) on transfer of capital/intangible assets to LLP on conversion into LLP is available to their shareholders transferring shares in the company.
The above-referred exemption will be withdrawn if the specified conditions are not complied with.

The cost of acquisition of capital asset for the LLP will be the cost to the Company plus the cost of improvement, if any, by the LLP or the Company. Further, where the asset being rights of the LLP partner on tax neutral conversion of company into a LLP are subsequently transferred, the cost of acquisition thereof will be cost of the share(s) in the company immediately before its conversion.
The actual cost of block of assets for the LLP will be the written down value for the Company on the date of conversion. The depreciation on capital assets to be apportioned between the Company and LLP as per number of days of use.
The accumulated loss and unabsorbed depreciation of the Company to be that of the LLP as stipulated.
The profits or gains on conversion and benefit of losses claimed by LLP to be taxable for LLP if conditions stipulated are not met. The credit in respect of MAT paid by the Company not available to the LLP.
The five year amortization for expenditure on voluntary retirement scheme eligible to the Company to be claimed by the LLP for unamortized installments.

Foreign Institutional Investors
To promote the development of Indian capital markets, qualified FIIs /sub accounts registered with the SEBI and investing in listed Indian shares and units, are subject to tax as per beneficial regime as under:

Interest 20 percent
Long-term capital gains(Subject to payment of STT) NIL
Short- term capital gains(Subject to payment of STT) 15 percent

In addition, there is a surcharge of 2.5 percent in case of companies and 10 percent in case of non-corporate where the income exceeds INR 1 million and education cess of 3 percent. The rate of tax on other short-term capital gains is 30 percent plus surcharge and education cess; and on long-term capital gains (if not exempt) is 10 percent plus surcharge and education cess.

Relief from Double Taxation
For countries that have DTAAs with India, bilateral relief is available to a resident in respect of foreign taxes paid. Generally, provisions of DTAAs prevail over the domestic tax provisions. However, the domestic tax provisions may apply to the extent that they are more beneficial to the taxpayer. The DTAAs would also prescribe rates of
tax in the case of dividend income, interest, royalties and fees for technical services which should be applied if the rates prescribed in the Act are higher. Business income of a non-resident may not be taxable in India if the non-resident does not have a PE in India.

For countries with no DTAA with India, a foreign tax credit is available under Indian domestic tax law to a resident taxpayer in respect of foreign taxes paid. The amount of credit allowable should be the lower of the tax suffered in the foreign country or the Indian tax attributable to the foreign income. Currently, there is no carry forward/carry back of excess tax credits. Also, there are no detailed rules for availment of foreign tax credit but is governed by the DTAA’s clauses. With effect from 1 June 2006, a statutory recognition has also been given to agreements entered into between specified Indian association and a non-resident specified association for grant of double taxation relief, for avoidance of double taxation, for exchange of information for the prevention of evasion or avoidance of income tax or for recovery of income tax. It is also clarified that a higher charge of tax on the foreign entity will not be considered as discrimination against such an entity.

The Central Government may enter into agreement with the Government of any specified territory outside India for the purpose of double tax relief and specified purposes in the same manner as with the Government of any country outside India.
Authority for Advance Ruling (AAR)
• A scheme of advance rulings is available to an applicant (who may be either a non-resident or a resident who has entered a transaction with a non-resident) with respect to any question of law or fact in relation to the tax liability of the non-resident, arising out of a transaction undertaken or proposed to be undertaken.
• The advance rulings are binding on the tax authorities as well as the applicant. Further, an appeal can be filed before the High Court against the AAR order.

Dispute resolution mechanism

In order to facilitate expeditious resolution of transfer pricing disputes and disputes relating to taxation of foreign companies, an alternate dispute resolution mechanism has been provided in the form of Dispute Resolution Panel (DRP) effective from 1 October 2009 [a collegium comprising of three Commissioners of Income – tax (CIT)]. Under the proposed mechanism, the Assessing Officer (AO) is required to forward the draft of the proposed assessment order to the taxpayer, which the taxpayer may accept; or instead file an application against the same with the DRP within 30 days. The DRP upon hearing both sides shall issue necessary directions to the AO for completing the assessment, within a period of 9 months from the end of the month in which the draft order is forwarded to the taxpayer. Such directions of the DRP would be binding on the AO. Any appeal against the order passed by the AO in pursuance of the directions issued by the DRP shall be filed by the taxpayer only with the Income – tax Appellate Tribunal. It has also been clarified that the DRP is an alternate remedy for taxpayers; the traditional route of appeal through normal appellate proceedings, i.e. the Commissioner of Income Tax (Appeals) is still available.

Chart of witholding tax rates under various tax treaties (in percent)

Sr.
No.
Country Dividend Interest Royalty Fees for Technical
Service (FTS)
Remarks
1 Armenia 10 10 (Note 1) 10 10
2 Australia 15 15 10/15/20 (Note 2) 10/15/20 (Note 2)
3 Austria 10 10 (Note 1) 10 10
4 Bangladesh 10/15 10(Note 1) 10 No separate provision 10 tax on dividends if at least 10 of capital is owned by a company; in other cases 15
5 Belarus 10/15 10 (Note 1) 15 15 10 tax on dividends if at least 25 of the capital is owned by a company; in other cases 15
6 Belgium 15 10/15 10
(Note 3)
10
(Note 3)
Interest taxable at 10 if the recipient is a bank; in other cases 15
7 Botswana 7.5/10 10 (Note 1) 10 10 7.5 tax on dividends if at least 25 of the capital is owned by a company; in other cases 10
8 Brazil 15 15 (Note 1) 15 (25 for trademark) No separate provision 15 tax on dividends if paid to a company; otherwise as per local tax laws
9 Bulgaria 15 15 (Note 1) 15/20 20 15 tax on royalties if relating to copyright of literary, artistic or scientific works, other than cinematograph films or films or tapes used for radio or television broadcasting; in any other cases 20
10 Canada 15/25 15 (Note 1) 10/15/20
(Note 2)
10/15/20
(Note 2)
15 tax on dividends if at least 10 of capital is owned by a company; in other cases 25
11 China (People’s Republic) 10 10 (Note 1) 10 10
12 Cyprus 10/15 10 (Note1) 15 15 10 tax on dividends if at least 10 of capital is owned by a company; in other cases 15
13 Czech Republic 10 10 (Note 1) 10 10
14 Denmark 15/25 10/15
(Note 1)
20 20 1)15 tax on dividends if at least 25 of the capital is owned by company; in other cases 25
2) Interest taxable at 10 if the recipient is a bank; in other cases 15
15 Egypt As per domestic law As per domestic law As per domestic law No separate provision
16 Finland 15 10 (Note 1) 10/15/20
(Note 2)
10/15/20
(Note 2)
17 France 10 (Note 3) 10 (Note 1) (Note 3) 10 (Note 3) 10 (Note 3)
18 Germany 10 10 (Note 1) 10 10
19 Greece As per domestic law As per domestic law As per domestic law No separate provision
20 Hungary 10 10 (Note 1) 10 10
21 Iceland 10 10 (Note 1) 10 10
22 Indonesia 10/15 10 (Note 1) 15 No separate provision 10 tax on dividends if at least 25 of the capital is owned by a company; in other cases 15
23 Ireland 10 10 (Note 1) 10 10
24 Israel 10 10 (Note 1) 10 10
25 Italy 15/25 15 (Note 1) 20 20 15 tax on dividends if at least 10 of the capital is owned by company; in other cases 25
26 Japan 10 10 (Note 1) 10 10
27 Jordan 10 10 (Note 1) 20 20
28 Kazakhstan 10 10(Note 1) 10 10
29 Kenya 15 15 (Note 1) 20 No separate provision 17.5 tax in case of management and professional
fees
30 Korea (Rep) 15/20 10/15 (Note 1) 15 15 1) 15 tax on dividends if at least 20 of the capital is owned by a company; in other cases 20
2) Interest taxable at 10 if the recipient is a bank; in other cases 15
31 Kuwait 10 10 (Note 1) 10 10
32 Kyrgyz Republic 10 10 (Note 1) 15 No separate provision
33 Libya As per domestic law As per domestic law As per domestic law No separate provision
34 Luxembourg 10 10 (Note 1) 10 10
35 Malaysia 10 10 (Note 1) 10 10
36 Malta 10/15 10(Note 1) 15 10 10 tax on dividends if at least 25 of the capital is owned by a company; in other cases 15
37 Mauritius 5/15 As per domestic laws 15 No separate provision 5 tax on dividends if at least 10 of the capital is owned by a company; in other cases 15
38 Mongolia 15 15 (Note 1) 15 15
39 Montenegro 5/15 10 (Note 1) 10 10 5 tax on dividends if at least 25 of the capital is owned by a company; in other cases 15
40 Morocco 10 10 (Note 1) 10 10
41 Myanmar 5 10 (Note 1) 10 No separate provision
42 Namibia 10 10 (Note 1) 10 10
43 Nepal 10/15 10/15 (Note 1) 15 No separate provision 1) 10 tax on dividends if at least 10 of the capital is owned by company; in other cases 15
2) Interest taxable at 10 if the recipient is a bank; in other cases 15
44 Netherlands 10 (Note 3) 10 (Note 1) (Note 3) 10 (Note 3) 10 (Note 3)
45 New Zealand 15 10 (Note 1) 10 10
46 Norway 15/25 15 (Note 1) (Note 4) 10 15 tax on dividends if at least 25 of the capital is owned by a company; in other cases 25
47 Oman 10/12.5 10 (Note 1) 15 15 10 tax on dividends if at least 10 of the capital is owned by a company; in other cases 12.5
48 Philippines 15/20 10/15 15 No separate provision 1) 15 tax on dividends if at least 10 of the capital is owned by a company; in other cases 20
2) Interest taxable at 10 if recipient is insurance company or similar financial institutions and also in case of public issue of bonds, debentures
etc; in other cases 15
3) Royalty taxable @15 if it is payable in  pursuance of any collaboration agreement
approved by the government of India. No rates prescribed in other cases.
49 Poland 15 15 (Note 1) 22.5 22.5
50 Portugal 10/15 10 (Note 1) 10 10 10 tax on dividends if at least 25 of the capital is owned by a company; in other cases 15
51 Qatar 5/10 10 (Note 1) 10 10 5 tax on dividends if at least 10 of the capital is owned by company; in other cases 10
52 Romania 15/20 15 (Note 1) 22.5 22.5 15 tax on dividends if at least 25 of the capital is owned by company; in other cases 20
53 Russian federation 10 10 (Note 1) 10 10
54 Singapore 10/15 10/15 (Note 1) 10 10 1) 10 tax on dividends if at least 25 of the capital is owned by company; in other cases 15
2) Interest taxable at 10 if recipient is bank, insurance company or similar financial
institutions ; in other cases 15
55 Serbia 5/15 10 (Note 1) 10 10 5 tax on dividends if at least 25 of the capital is owned by company; in other cases 15
56 Slovenia 5/15 10 (Note 1) 10 10 5 tax on dividends if at least 10 of the capital is owned by company; in other cases 15
57 South Africa 10 10 (Note 1) 10 10
58 Spain 15 15 (Note 1) 10 10 (Note 3) 10 tax on royalty if paid for industrial, commercial or scientific equipment; in other
cases 20
59 Sri Lanka 15 10 (Note 1) 10 No separate provision
60 Sudan 10 10 (Note 1) 10 10
61 Sweden 10 10 (Note 1) 10 10
62 Switzerland 10 10 (Note 1) 10 10
63 Syria 5/10 10 (Note 1) 10 No separate provision 5 tax on dividends if at least10 of the capital is owned bycompany; in other cases 10
64 Tajikistan 5/10 10 (Note 1) 10 No separate provision 5 tax on dividends if at least 25 of the capital is owned by company; in other cases 10
65 Tanzania 10/15 12.5 (Note 1) 20 No separate provision 10 tax on dividends if at least 10 of the capital is owned by company; in other cases 15
66 Thailand 15/20 10/25 15 No separate provision 1) 15 tax on dividends if at least 10 of the capital is owned by company; 20 if company paying dividend is engaged in industrial undertaking or company owns 25 of the company paying
dividend
2) ) Interest taxable at 10 if recipient is insurance company or similar financial institutions ; in other cases 25
67 Trinidad & Tobago 10 10 (Note 1) 10 10
68 Turkey 15 10/15 (Note 1) 15 15 Interest taxable at 10 if recipient is bank, insurance company or similar financial
institutions ; in other cases 15
69 Turkmenistan 10 10 (Note 1) 10 10
70 Uganda 10 10 (Note 1) 10 10
71 Ukraine 10/15 10 (Note 1) 10 10 10 tax on dividends if at least 25 of the capital is owned by company; in other cases 15
72 United Arab Emirates 10 5/12.5 10 No separate provision Interest taxable at 5 if recipient is bank or similar financial institutions; in other
cases 12.5
73 United Kingdom 15 10/15 10/15/20
(Note 2)
10/15
/20
(Note 2)
15 tax on dividends if at least 25 of the capital is owned by company; in other cases 20
74 United States of
America
15/25 10/15 10/15/20
(Note 2)
10/15
/20
(Note 2)
1) 15 tax on dividends if at least 10 of the capital is owned by company; in any other cases 25
2) Interest taxable at 10 if recipient is bona fide bank or similar financial institutions ; in other cases 15
3) Fees for technical services have been referred as ‘Fees for included services’
75 Uzbekistan 15 15 (Note 1) 15 15
76 Vietnam 10 10 (Note 1) 10 10
77 Zambia 5/15 10 (Note 1) 10 No separate provision 5 tax on dividends if at least 25 of the capital is owned by company; in any other cases 15
78 Saudi Arabia 5 10 (Note 1) 10 No separate provision

Notes:
1) Interest earned by the Government and certain institutions like the RBI or Central Bank of the other State is exempt from taxation in the country of source.
2) In case of Royalties, rate of tax is 15 (for first 5 years of the agreement- 20 in case of payer other than government or specified institution and 15 in case of government or specified institution); 10 for equipment rental and for services ancillary or subsidiary thereto.
3) ‘Most favoured Nation’ clause applicable.
4) Rate not mentioned hence rate as per domestic law apply

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