Taxation overview with respect to non-resident in India

TAXATION OVERVIEW IN INDIA

1. Introduction

The tax structure in India is divided into direct and indirect taxes. While direct taxes are levied on taxable income earned by individuals and corporate entities, the burden to deposit taxes is on the assesses themselves. On the other hand, indirect taxes are levied on the sale and provision of goods and services respectively and the burden to collect and deposit taxes is on the sellers instead of the assesses directly. Taxes in India are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such as the Municipality and the Local Governments. Over the last few years, the Central and many State Governments have undertaken various policy reforms and process simplification towards great predictability, fairness and automation. This has consequently lead to India’s meteoric rise to the top 100 in the World Bank’s Ease of Doing Business (EoDB) ranking in 2018. The Goods & Services Tax (GST) reform is one such reform to ease the complex multiple indirect tax regime in India.

2. Taxation on Foreign Entities

3.1 Liaison Office

• A Liaison Office (LO) is generally not subject to Income Tax in India, as it cannot conduct business activities and earn profits on account of Indian exchange control regulations.
• It is required to obtain an Indian tax registration number (PAN) and a withholding tax registration number (TAN).
• It is required to file an annual statement of its financial affairs and an annual activity certificate (AAC).
• As an LO cannot generally earn any profits, no repatriation taxes are applicable. Even if there are any unutilized funds available at the time of its closure, they can be repatriated without any exit taxes

3.2 Project Office/ Branch Office

• A Project Office (PO)/ Branch Office (BO) is treated as an Indian Permanent Establishment (PE) of its Foreign headquarter. Therefore, it is taxable in respect of its Indian profits @ 40%.
• It is required to obtain a PAN and TAN, file an annual return of income and an AAC.
• Repatriation of surplus or at the time of closure, PO/ BO is not subject to any additional taxes.

3.3 LLP

• An LLP incorporated in India is treated as a tax resident of India and is taxed @ 30% of its global income.
• It is required to obtain a PAN and TAN, and file an annual return of income.
• When LLP distributes its profits to partners, they are not taxed in the hands of the LLP or its partners. Repatriation of capital contribution (say, upon dissolution) is permissible without any thresholds and is not subject to any additional taxes.

3.4 Company formed in India (Wholly-owned subsidiary/ Joint Venture)

• A company incorporated in India is treated as a tax resident of India and is taxed @ 30% on its global income. However, if its turnover is up to INR 4,000 mn in FY 2017-18, then the applicable rate of tax is 25%.
• It is required to obtain a PAN and TAN, and file an annual return of income.
• Profit repatriation by way of a dividend is subject to Dividend Distribution Tax (DDT) in the hands of the company @ 20.36% of dividend declared.

3. Key Tax Incentives in India

Export Promotion

Applicability: SEZ units operational before 1st April 2020

Incentive: Deduction of 100% of profits and gains derived from export business for first 5 years of commencement, 50% of profits and gains derived from export business for next 5 years, 50% of ploughed-back profits and gains from export business for next 5 years.

Research & Development

Applicability: Companies in respect of any expenditure on R&D in an approved in-house facility

Incentive: Weighted tax deduction of 200% granted to companies

Validity: 31st March 2020

Investment-linked

Incentive: To incentivize investment in certain sectors, any capital expenditure incurred for specified businesses is allowed as a deduction in the year in which it is incurred.

Startup India Scheme

Incentive: Tax incentives granted to eligible start-ups are the tax holiday for any consecutive 3 years (from initial 5 years) in respect to 100% of their profits, including fast-tracking of patent applications with 80% rebate.

International Financial Services Centre

Applicability: Caters to customers outside the jurisdiction of the domestic economy. Such centers deal with flows of finance, financial products and services across borders.

Incentives: Tax concessions on capital gains, Minimum Alternate Tax and Dividend Distribution Tax