Overview of taxes for operating in India
Even as India has liberalized since 1991, its tax structure remains among the most complex and the taxman is quite pervasive. Laws, rules and practices can be confusing; foreign companies who don’t seek specialized help may overpay some taxes and underpay others. Information below is only a rough guide, ask your India business consultants to recommend a competent local accountant.
Corporate tax for foreign companies is 42 percent an there is a 2.5 percent surcharge plus an “education cess” of 2 percent of the tax payable. Dividends are taxed as are capital gains. Much foreign direct investment into India flows through the Indian Ocean island of Mauritius due to a favorable capital gains treaty.
Goods produced in India are subject to a federal excise tax of about 16 percent. Federal and state sales taxes are being replaced with a valued added tax. Most services are also taxed.
Prior to liberalization, customs duties for imports into India often exceeded 100 percent. Today the basic duty is 12.5 percent on most items. But in most cases importers pay an additional countervailing duty to match the amount of excise tax that an Indian producer might pay. “Additional duty” and education cess also apply to customs.
Personal income tax makes up a small portion of the Indian government’s overall collection. The maximum rate is about 34 percent. Much of the Indian population pays no personal income tax either because their income is not documented or because their income is below the threshold for taxation. There is on state level income tax, but some states do have a profession tax on salaried employees.
Corporate expenses are taxed via the “fringe benefits tax.”
If you have employees in India, there are number of payroll deductions and additional payments that are required by law. Provident fund is like a retirement plan. “Gratuity” and “bonus” are required payments. Historically, managers and executives receive several company-paid benefits such as car and driver allowances, subsidized loans, rent payments, furnished housing, household help, phone lines etc; most of these are now taxed.
