Taxation in India.

Joost Claeys / Neeru Ahuja

16 March 2009
Deloitte. in India
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Our Range of Services

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Contents

• Legislative Framework
• Regulatory
• Direct Tax
• Indirect Tax
• Other Tax
• Incentives
• Promising Sectors

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Legislative Framework
 Legislative Framework

Central
Government

State
Regulatory Government Revenue

Foreign Investment Trade Laws Direct Tax

Foreign Exchange Labour Laws Indirect Tax

Corporate Law Other Taxes

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Foreign Investment Regulatory
Foreign Direct Investment

Automatic Route FIPB Approval Route

Cap Sector/ Activity Cap Sector/ Activity

• Cigarettes Manufacture
• Construction Development Projects • Courier Services
(Conditional) 100% • Tea Sector
• Non Banking Finance Companies • Trading of items sourced from small
• Power sector
100%
• Telecom Equipments • Atomic Minerals
74%
• Wholesale / cash & carry trading • Telecommunication Services > 49%
• Trading for Export
• Special Economic Zone 51% • Single Brand product retailing

• Asset Reconstruction Co.

74% • Private Sector Bank 49% • Cable Network
• Direct to Home
49% •Telecommunication Services
• Defence Production
26%
26% • Insurance • Newspapers

• Retail Trading (except single brand product retailing)

Prohibited • Atomic Energy
Activities • Lottery Business
• Gambling and Betting
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Legal Entity structure

 Joint Venture Company

 Wholly Owned Subsidiary Company

 Limited Liability Partnership

 Branch Office

 Project Office

Liaison Office

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 Business Taxation

Tax

Direct Tax Indirect Tax

Corporate Tax Fringe Benefit Tax Value Added Tax Customs Duty

Dividend
Wealth Tax Entry Tax/ Octroi Excise Duty
Distribution Tax

Personal Tax Central Sales Tax Service Tax

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Direct Taxes
Corporate Tax
Effective Tax Rates
Company
Income > USD 200,000 Income ≤ USD 200,000

Domestic Company 33.99% 30.9%

Foreign Company 42.23% 41.2%

 Domestic company is a company incorporated in India or has prescribed

arrangements for declaration and payments of dividend in India

 Tax is payable on taxable income derived after adjustment of admissible

and in admissible expenses to the book profits of the company

 Unadjusted losses may be carried forward to offset income in the

following eight years and unabsorbed depreciation for unlimited years

 Depreciation rates as per Income Tax Rules (Written Down Value)

Asset Building Furniture Machinery Computers Intangibles

Rate 10% 10% 15% 60% 25%

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Corporate Tax

 Minimum Alternate Tax (MAT)

Effective Tax Rate

Company
Income > USD 200,000 Income ≤ USD 200,000

Domestic Company 11.33% 10.3%

Foreign Company 10.5575% 10.3%

 MAT is payable by a company when normal tax is less than 10% of its
book profit

 MAT paid may be carried forward to offset income tax payable in the
following seven years

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Double Taxation Avoidance Agreement (DTAA)

Comparative Indian Income- Mauritius Netherlands

S. No Belgium Treaty*
Parameters tax Act Treaty* Treaty*

1 Interest 21.115% 15% 21.115% 10%

2 Dividend Nil 15% 5%, 15% 10%,

3 Royalty 10.5575% 10% 15% 10%

Fee for Included

Services/ Fee for
4 10.5575% 10% NIL 10%
Technical
Services

*Rates applies to a recipient who is a beneficial owner

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Dividend Distribution Tax

Company Tax Rate

Domestic Company 16.995%

 Payable by domestic company on any amounts declared, distributed or

paid as dividend

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 Fringe Benefit Tax (FBT)
Expenses Value
 FBT is imposed on value of fringe
benefits that employer provide or Tour & travel 5%
deemed to provide to their Entertainment
employees Hospitality
Conference
Employer FBT Rate Sales promotion

All 33.99% Employees’ welfare

Conveyance 20%
Foreign Company 31.6725%
Hotel, boarding and lodging
Repair & running of motor cars
 Stock options, air tickets, Repair & running of aircrafts
contribution to superannuation
Telephone
funds are valued at 100%
Festival celebration
Health club & similar facilities
Other club facilities
50%
Gifts
Scholarships 16
Wealth Tax

 Payable by all companies @ 1% of Specified Assets

aggregate value of specified assets
Building other than used
for business purpose
 Payable on value exceeding USD 30,000 * Motor car
in aggregate
Jewellery
Yacht, boats & aircrafts
Urban land
Unaccounted cash

* Assumption : USD 1 = INR 50

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Critical Issues

 Transfer pricing

 Tax compliance and documentation

 Interest and penalties on non compliance

 Relationship with tax authorities

 Slow and lengthy tax litigation process

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 Personal Tax

Aa Rates of Taxes
Individual
Slab (USD)* Tax

0 – 3,000 0
Resident but
Resident Non Resident not ordinarily 3,000 – 6,000 10.30%
Resident

6,000 – 10,000 20.60%

Income received, deemed to be
Global Income received, accrued or deemed to be 10,000 – 20,000 30.90%
accrued in India
Above 20,000 33.99%

Assumption : USD 1 = INR 50

 Resident if physically spend at least 182 days in India in the fiscal year; or
 60 days, if spent at least 365 days in preceding 4 years

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Indirect Taxes
 Value Added Tax (VAT)

 Tax levied by the States and Union Particulars Tax Rate

Territories on goods sold within Specific Products such as
20%-30%
their State/ Union Territory petroleum products, liquor etc.

Standard Rate 12.5%

 Basic exemption limit prescribed
under respective State VAT Agricultural, industrial, capital
4%
goods and medicines
legislations.
Gold & silver ornaments 1%
 Compulsory Registration generally
applicable if annual turnover
exceeds USD 10,000

 Tax credit
 Available for State VAT paid on intra-
state purchase of goods
 Not available for VAT levied by other
States/ Union Territories
Assumption : USD 1 = INR 50
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 Entry Tax/ Octroi
 Entry Tax/ Octroi levied by certain Particulars Tax Rate
States and Union Territories General Rate 2% - 5%

 Levied on movement of goods into

the State from a place outside the
State and from one local area to
another
 Specific provisions considerably
differ from State to State

 Tax credit generally not available

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Central Sales Tax (CST)

 Tax levied by Central government Particulars Tax Rate

on inter-state sale of goods
Against specified forms 2%

 No minimum threshold of sales Otherwise

Local VAT rate
of selling State

 Tax credit not available

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Customs Duty
 Generally levied on import of goods into India. In certain cases on
exports also

 Transaction value serves as basis of valuation except when hit by

relationship or other exceptions

 Components of custom duty

Particulars Rate
 Basic Duty
General effective Rate 24.42%
 Countervailing Duty (‘CVD’)
 Additional Duty of Customs (‘ADC’)
 Other Duties (Safeguard duty, Anti- Dumping duty)

 Tax credit of duty paid available to (subject to conditions applicable)

Duty Manufacturer Service Provider Trader
CVD a a x
ADC a x a
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Excise Duty

 Levied on manufacture of excisable Particulars Rate

goods in India General Rate 8.24%

 Transaction value generally serves as

basis of valuation

 Tax credit of input excise duty

available to
 Manufacturer of excisable goods
 Provider of taxable services

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Service Tax
 Levied on certain specified services
provided in India Particulars Rate

General Rate 10.3%

 Applicable on 106 services
Effective from 24 February 2009
 Specified Services includes
advertising, brokering, business
support, consultancy, construction,
franchise, cargo handling,
warehousing, renting of commercial
property, etc.

 Tax credit of input service tax

available to
 Manufacturer of excisable goods
 Provider of taxable services

Convergence of Excise duty, Central Sales Tax, State VAT and Service Tax
into Goods and Service Tax (‘GST’) proposed by 2010
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Other Taxes
Other Taxes

Tax Rate of tax Liability

Payable on purchase or sale of an equity
Securities share/ derivative/ unit of equity oriented
0.017% - 0.125%
Transaction Tax fund entered into a recognized stock
exchange in India

Commodities Levied on value of taxable commodities

0.017% - 0.125%
Transaction Tax transactions

Banking Cash Levied on account holder on cash

0.1%
Transaction Tax withdrawn exceeding USD 1000*

*Assumption : USD 1 = INR 50

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Incentives
Incentives
 Developer or a Unit in Special Economic Zone (SEZ).
 No Customs duty on goods imported
 No Excise duty on domestic procurement
 No Sales tax/ VAT on purchase of goods
 No Income tax

 100% Income tax benefit to

 Export Oriented Units
 Software Technology Park
 Infrastructure Projects

 Higher depreciation rates for commercial vehicles, computers, etc.

 Certain States offer exemption on excise duty on large spectrum of products.

 Certain concessional schemes like Export Promotion Capital Goods Scheme

(EPCG) are available under Foreign Trade Policy & Customs Laws.

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Impact of Economic
Slowdown
Impact of economic slowdown on Indian economy
India’s long-term growth story……

Impacted by Slowdown
• Reversal in global risk appetite,
Demographics
resulting in sharp fall in capital inflows
into India
Growth • Cost of capital spike, hurting domestic
Reforms Globalization demand
• Risk aversion in the domestic financial
system will slow loan growth
• Private consumption will suffer due to
tightening in lending norms and a
Virtuous cycle of weakening job market.
Job creation – Income growth
– Savings – Investments –
Higher growth.

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GDP Growth – India and World

World US China India

12 12 12 12
Real GDP Growth (%)

10 10 10 10
8 8 8 8
6 6 6 6
4 4 4 4
2 2 2 2
0 0 0 0
-2 -2 -2 -2

• Despite slowdown in growth rate, India would relatively fare well

• Overall Outlook: Cautiously optimistic

Source: Economic Intelligence Unit

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Signs of revival?

• Cement sector grew 9.97% in Dec 2008 over Nov and 11% y-o-y

• Steel, which declined steadily through Sep, Oct and Nov last year
has shown a recovery in Dec 2008 and Jan 2009

• Jan 2009 figures in the passenger vehicles sector show a 32% rise
over Dec 2008, while the increase for commercial vehicles is 23%

• FMCG has had a record growth in y-o-y terms at 26.4% for the
quarter ended Dec

• Food & beverages registered a record 28% growth in the quarter

ended Dec

• The growth in railway freight had declined to 2.25% in October-

November, 2008, but the December 2008 figures show a growth of
7%
But, will this be sustained ?
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Promising Sectors
Promising Sectors

 Pharmaceuticals & Health care

Healthcare spending in India is
predicted to rise by 12% per annum.
An estimate suggests that by 2012
healthcare spending may contribute
8% of GDP and provides employment
to over 9 million people.

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Promising Sectors

 Defense
India is planning to increase
its spending by 50% to
almost USD 40 billion in
2009-10, making India’s
military expenditure three
percent of the annual GDP.

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Promising Sectors

• Logistics & Transport

Logistics in India is poised
for a significant leap
forward in the coming
years. The Logistics
Industry size has touched
the level of USD 90 billion
and is expected to reach
USD 110 billion by 2010.

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Promising Sectors

• Fast moving consumer goods

(FMCG)
Indian FMCG sector is fourth largest
sector in the economy.
Over a period of time with growth in
GDP, change in lifestyle, buoyant
rural spending, decrease in raw
material price and with established
distribution system across the
country this sector is growing.
Indian FMCG market experienced
16% growth in FY 07-08 and
expected to grow by roughly 20% in
FY 08-09.

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Promising Sectors

• Telecommunication
The revenue generation from
this sector is expected to
grow by about 25% in FY
2009-10. The telecom
industry is expected to add
another 90 million new
subscribers in 2009.

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Promising Sectors

• Infrastructure
The Indian government
is aiming to invest
another USD 20.38 billon
over the next two years
in the infrastructure
sector, on top of the USD
320 billion previously
planned. Huge spending
expected on highways,
Ports, Warehousing,
Container freight stations
and Airports

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Promising Sectors

• Food processing
The ministry of food processing is
taking several steps like demanding
infrastructure status for this sector.
Very good investment opportunities
exist in many areas of food
processing industries, the important
ones being : fruit & vegetable
processing, meat, fish & poultry
processing, packaged, convenience
food and drinks, milk products etc.

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For further details contact -

Ms. Neeru Ahuja

Deloitte Haskins & Sells
7th Floor, Building 10, Tower B
DLF Cyber City Complex
DLF City Phase - II
Gurgaon – 122 022, Haryana
Phone : +91 (124) 679 -2000
Fax : +91 (124) 679 -2012
E-mail : neahuja@deloitte.com

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