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(IB) GSIB, GITAM UNIVERSITY TO PROF. R.ANITA RAO
India has emerged as a trading superpower and as an increasing magnet for FDI. Its role in the international economy to this point has been less remarked than the rise and dominance of China but increasingly India will be appreciated for the opportunities it is creating for its citizens, employers and foreign and domestic firms. Recently, I have been researching on ‘Comparison & Contrast of India & China’. India & China can be compared along many dimensions to better understand the reasons for the disparities in the growth rates, GDP, exports & FDI. A few of the parameters are: Political Systems Monetary Policies Fiscal Policies (Tax Regimes) Quality of living Infrastructure Availability Skilled manpower
In this paper, I make an attempt to compare and contrast the TAX LAWS between India and China. I have made the analysis along the following four tax categories: Income Taxes and Tax Laws Tax Exempt Income Tax Deductions VAT and other Taxes
REVIEW OF LITERATURE
In “Income Inequality and Progressive Income Taxation in China and India, 1986-2015” by Thomas Piketty and Nancy Qian, the authors evaluate income tax reforms in China and India. The combination of fast income growth and under-indexed tax schedule in China implies that the fraction of the Chinese population subject to the income tax has increased from less than 0.1 percent in 1986 to about 20 percent by 2008, while it has stagnated around 2-3 percent of the population in India. Chinese income tax revenues, as a share of GDP, increased from less than 0.1 percent in 1986 to about over 1.5 percent in 2005 and 2.5 percent in 2008, while the constant adaptation of exemption levels and income brackets in India have caused them to stagnate around 0.5 percent of GDP.
In “Tax Systems, Development, Quality of Life: India and China” by Warren D. Miller, the author describes the difficulty in comparing the Tax Structures of the two countries. The author gives some important guidelines to be followed while making the comparisons like collecting data from the same source, using comparable data, the different Tax structures in the two countries etc. The paper also describes the extent of unreliability in the data provided by the two Governments.
In “Doing Business in China and India — A Comparative Study” by Keith E. Kube, the author describes the differences between doing business in India and China in different business models like The WFO, The EJV, The CJV and The RO.
THE TAX SYSTEMS
India has a well developed taxation structure. The tax system in India is mainly a three tier system which is based between the Central, State Governments and the local government organizations. In most cases, these local bodies include the local councils and the municipalities. According to the Constitution of India, the government has the right to levy taxes on individuals and organizations. However, the constitution states that no one has the right to levy or charge taxes except the authority of law. Whatever tax is being charged has to be backed by the law passed by the legislature or the parliament. The main body which is responsible for the collection of taxes is the Central Board of Direct Taxes (CBDT). It is a part of the Department of Revenue under the Ministry of Finance of the Indian government. The CBDT functions as per the Central Board of Revenue Act of 1963.
Tax is the most important source of fiscal revenue of China. It is also an important economic lever utilized by the State to strengthen macro-economic regulation, which produces important impacts on China’s economic and social development. After the tax system reform in 1994 and the fine-tuning of it in subsequent years, China has preliminarily built up a tax system adaptable to the socialist market economy, which has been playing an important role in assuring China's fiscal revenue, broadening the opening to the outside world and promoting the sustained, fast and healthy development of China's national economy.
INCOME TAX RATES
The tax in India on an individual's income is progressive. An education tax (CESS) of 3% is imposed too. A limited company in India is liable for tax at the rate of 30% for a local company and 40% for a foreign company. Companies in India whose tax liability is less than 10% of the "book profits" pay a 18% minimum alternative tax, MAT on the "book profits" with a surcharge and CESS, bringing the effective tax rate of 19.93% for domestic companies and 19% for foreign companies.
The tax on an individual's income is progressive. As at 2010, an individual's income is taxed progressively at 5% - 45%. The 2010 corporate tax rate for domestic and foreign companies is 25%. Small companies pay 20% corporate tax in certain cases. Qualified new hi-tec companies pay 15% corporate tax.
Long term capital gains relate to the sale of an asset that has been held for 3 years or longer (on the sale of negotiable securities on the Indian Stock Exchange, shares that have been held for over a year). The long term tax rate is 20% for assets. For purposes of calculation, the cost is adjusted to the increase in the Index and deducted from the proceeds. Capital gains from the sale of long term negotiable securities on the Indian Stock Exchange are tax exempt. A short term capital gain is added to regular income. At the same time a capital gains on the sale of negotiable securities on the Stock Exchange is taxed at 15% for individuals and companies.
An individual's capital gains and investment income are taxable in China at the rate of 20%. Capital gains tax for a Chinese company is added to the regular tax. A 10% deduction at source is made from the capital gains of a foreign company in China. On taxing capital gains from the sale of real estate, when calculating the capital gain the purchase cost is deducted from the sale price at the 20% rate.
TAX RATES FOR INDIVIDUALS
Tax % 0% 10% 20% 30% Income (INR) 1 - 160,000 160,001-300,000 300,001-500,000 500,001 and above Tax % 5% 10% 15% 20% 25% 30% 35% 40% 45%
Monthly Income (CNY) 1 – 500 501 - 2,000 2,001 - 5,000 5,001 - 20,000 20,001 - 40,000 40,001 - 60,000 60,001 - 80,000 80,001 - 100,000 100,001 and above
An individual and company who are Indian residents are also taxed on their income outside India and receive a credit for overseas taxes Qualification for residence for an individual: residence in India of at least 182 days in the tax year, or: residence in India at least 60 days in the tax year and at least 365 days in the 4 previous years. An Indian resident is also taxed on his income overseas.
An individual and company who are Chinese residents are also taxed on their income outside China and receive a credit for overseas taxes. Qualification for residence for an individual: Permanent residence in China while an individual who has no permanent residence in China but has lived in China for less than 5 years is taxed on his income in China, or overseas income that has its origins in China. Individuals staying in China more than five tax years are taxed on their worldwide income too. Companies are resident if incorporated or have its efficient management in China.
TAX EXEMPT INCOMES
A standard annual exemption of INR 160,000 on the income of an Indian resident. No tax returns have to be filed for income up to INR 160,000. Income from a tax - exempt dividend held by the recipient but the company is liable for a dividend distribution tax. Compensation from an insurance company. Severance pay in accordance with the provisions of Indian law. A pension from work. A capital gain from transfer of a residential property that has been held for a long term when the proceeds are invested in the purchase of another residential property. Capital gain from the sale of listed shares held for a long term.
A standard monthly exemption of CNY 4,800 on income from a salary for a foreign resident, and CNY 2,000 for a Chinese resident. Income from interest on a State bond. Compensation from an insurance company. Severance pay in accordance with the provisions of Chinese law. Subsidies that are lawfully received. A pension from work, and allowances for survivors. Prizes granted by the Government for sporting, educational and other achievements. Income from interest and a divided on shares, as defined in law. That was distributed to a foreign resident as well as income as above from shares in Chinese companies that are traded on the Stock Exchange.
PERSONAL TAX DEDUCTIONS
A credit for donations given by an individual up to a limit A credit for a taxpayer who is disabled or for a disabled member of the family up to INR 50,000 or INR 75,000 in the case of a severely disabled person. 20% of the investment in government bonds and investment plans as defined in law. Payments for medical insurance as well as medical expenses of the taxpayer or his dependant relatives. Interest on mortgage for residence, up to INR 150,000 per year.
A credit for donations given by an individual up to 30% of the income. Income from personal services, a deduction of CNY 800 or 20% whichever is the higher for each type of income. Current expenses for income from rental, up to CNY 800 for each single expense. Relief for an individual who has suffered from a natural disaster. Relief for the disabled, widows/widowers and orphans.
BUSINESS TAX DEDUCTIONS
Offset of Losses Consolidated financial statements 8 years
There are no consolidated statements for tax purposes in India. As a general rule, financing expenses that are for the creation of income are generally allowable as an expense. Nevertheless, interest expenses for tax exempt income is not an allowable expense. The Indian income tax authorities investigate transactions between associated parties that are not conducted according to the accepted market conditions for transactions with companies that are not associated.
There are no consolidated financial statements in China for tax purposes. Financing expenses that are for the generation of income are generally allowable as an expense China. Nevertheless, expenses for shareholders loans are not allowable when the debt to equity ratio exceeds 2:1 ratio. The Chinese income tax authorities investigate transactions between associated parties that are not conducted according to the market conditions that are customary for transactions with companies that are not associated companies.
Transactions between associated parties
Class of Asset Buildings Furniture and equipment Intangible assets (goodwill, etc.) Machinery and equipment Vehicles Aircraft and trucks Annual Depreciation 5 - 10% 10 - 15% 25% 25% 20% 40%
Class of Asset Buildings Intangible assets Electronic equipment Machinery Years of Depreciation 20 10 3 10
VALUE ADDED TAX
The standard rate of VAT is 12.5%. There are reduced rates of 4% and 1%. The minimum annual turnover for V.A.T. registration is INR 500,000. V.A.T. returns are filed on a monthly or quarterly basis. Sales tax of 2% is imposed on transfer of goods between Indian states.
The standard rate of VAT in China is 17%.V.A.T. is imposed on sale and import of goods and supply of certain services. There is a reduced rate of 13% that applies to products such as books and types of oils. Exporters are entitled to V.A.T. refund for materials bought in China. Small businesses with a turnover of less than the legally defined limit pay value added tax at 3%.
SERVICE TAX (IND) & CONSUMPTION TAX (CHN)
This tax is imposed on a defined group of services provided in India as follows: advertising services, consultancy services, banking, insurance and more. The tax imposed is 10.3% including CESS. Service tax is paid monthly/quarterly. Returns are filed each half year.
The tax is imposed inter-alia on sale of alcohol, petrol, jewellery and cars. The relevant rates are 3%-45%. Consumption tax returns are filed monthly.
The tax is imposed in India on assets specified in the law such as houses, vehicles, plots of land. Individuals and companies are liable for the tax. The tax is not imposed on productive assets or income producing assets. The tax, at the rate of 1%, is imposed only on assets with a value in excess of INR 3 million.
A tax of 1.2% is imposed on owners of real estate, according to the value of the real estate. The tax on rental income is 12%-18%.
FRACTION OF POPULATION SUBJECT TO INCOME TAX
INCOME TAX REVENUES AS FRACTION OF GDP
http://www.worldwide-tax.com/china/ http://www.worldwide-tax.com/india/ http://www.indiataxes.com http://en.allexperts.com/q/Economics-2301/2010/2/Tax-Systems-DevelopmentQuality.htm
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