RESOURCE PAPER - 19

Tax Framework
in Indiaby
R. Sridhar
Pranaav Murali
Prasanna CP

RESOURCE PAPER - 19

Tax Framework in India

byR. Sridhar
Pranaav Murali
Prasanna CP

Dear Reader,
Quite often, heard our Japanese friends lament, the Indian tax system‘so complex and difficult to understand’. India being geographicallyvast and heterogenous in nature, such reforms take time. It might berecalled, when GST was introduced, a Resource Paper was brought out
exclusively on the subject for our readers. To provide a guideline on
this subject, after careful analysis, Mr. R. Sridhar and his colleagues
have presented this Resource Paper “Tax Framework in India”. We
hope it would serve as a ‘ready reckoner’ for the Japanese businessmen.
Any additional input / expert opinion required from the Japanese side
will be gladly provided by IJCCI Expert Panel.
Mr. R. Sridhar is a Commerce Graduate, Company Secretary,
specialised in Law and also an expert in investment structuring,corporate restructuring, tax planning, ESOP planning, drafting,negotiating agreements, drafting MoU with the State Government andother bodies, assist in Indian corporate laws, foreign exchange
regulations matter etc. He is the Partner, Tax in Grant Thornton India
LLP (a member firm within the Grant Thornton International Ltd.
Group), one of the oldest, the largest and the most prestigious
accounting and advisory firms in India to help global businesses.
Mr. Pranaav Murali is a Chartered Accountant and senior consultant
and Mr. Prasanna CP is an expert in audit assignments, indirectcompliance and advisory, are working with Walker Chandiok & Co.
LLP (a member firm within the Grant Thornton International Ltd.
Group).
Hope our readers would find the Resource Paper informative anduseful.
July 01, 2018

Suguna Ramamoorthy
Secretary GeneralTax Framework in India

Income Tax:
Corporate Income Tax:
Income is broadly divided into the following headsa) Profit and Gains from business or professionb) Capital Gainsc) Income from Other Sources
The global income of a resident company is taxable in India. However,for a non-resident, only income that is received in India, or that accruesor arises, or is deemed to accrue or arise, in India would be taxable inIndia.
Residential Status:
A Company is treated as a resident in any previous year ifa) It is an Indian Company; orb) Its Place of Effective Management is in India.
Place of Effective Management (“PoEM”) The Income Tax Act,
1961 (“IT Act”) states that “Place of Effective Management” means aplace where key management and commercial decisions that arenecessary for the conduct of a business or entity as a whole, are in
substance is made. PoEM acts as a tie-breaker rule for most of the tax
treaties entered into by India.
The Central Board of Direct Taxes has also issued a circular on 24
January 2017, containing the principles for determination of PoEM of aCompany.
5Tax Rates:
The effective Corporate tax rates (including surcharge and cess) for the
Financial Year (“FY”) 2018-19 are as follows:
Turnover

Income lower thanRs. 1 Crore

Income Greater than Income Greater thanRs. 1 Crore
Rs. 10 Crores

Domestic Companies-TurnoverLess than Rs 250 Crores

26.00%

27.82%

29.12%

Domestic Companies-Turnover
Greater than Rs 250 Crores

31.20%

33.38%

34.94%

Foreign Companies

41.60%

42.43%

43.68%

Turnover for the above purpose shall be based on financial statements
for the FY 2016-17. Surcharge is applicable at the rate of 7% for
domestic companies and 2% for foreign companies if the total income
exceeds INR 1 Crore and 12% for domestic companies and 5% forforeign companies if the total income exceeds INR 10 Crores.
Minimum Alternate Tax (“MAT”)
Companies are liable to pay MAT on their adjusted book profits where
the tax liability under the normal provisions (excluding surcharge andcess) of the Income-Tax Act, 1961 ('IT Act') for the year is not more than
18.5% (excluding surcharge and cess) of such book profits. If tax ispayable under MAT, any amount paid over and above the normal tax
liability will be accrued by the Company as MAT credit and can be
carried forward for 15 years.
However, MAT credit to the extent of difference between the foreign
tax credits allowed against MAT over such credit allowable against the
tax under the other provisions of the Act shall not be eligible to be
carried forward. MAT provisions are not applicable to foreigncompanies that do not have a permanent establishment (“PE”) in India.
Capital Gains from the transfer of securities, interest, royalties, and fees
for technical services accruing or arising to a foreign company (which
has a PE in India) have been excluded from chargeability of MAT if tax
payable on such income is less than 18.5% (exclusive of surcharge andcess). Further, expenditure, if any, debited to the profit and loss accountcorresponding to such income shall be added back to the book profit forthe purpose of computation of MAT.
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Type of Company

If Book Profit <INR If Book Profit >INR
1 Crore1 CroreIf Book Profit >INR
10 Crores

Domestic Company

19.24%

20.58%

21.54%

Foreign Company

19.24%

19.62%

20.20%

If the Company is located in the International Financial Services
Centre, the applicable MAT rate is 9%.
Capital Gains
Capital Gains refers to the gains made on transfer of a capital asset. The
tax treatment depends on the type of asset and the period the asset washeld. They can either be short term or long term.
A gain is long-term if the underlying asset was held for at least 3 years(exception period of 1 year / 2 years are applicable for certain shares,
units and bonds, based on listing status). The cost of assets resulting in
long-term capital gains is indexed in accordance with the cost inflationindex.
Short-term capital gains derived by domestic companies are taxed at thenormal income tax rate. However, tax on short-term capital gains
arising from the sale of securities on which the securities transaction tax
has been paid is 15%.
The rate applicable to long-term capital gains derived by domestic
companies is 20%. Long-term capital gains arising from the sale ofsecurities on which the securities transaction tax has been paid aretaxable at the rate of 10%, on the amount exceeding INR 1 Lakh
(Subject to grandfathering benefit until February 01, 2018).
The tax on long-term capital gains arising from the sale of securities on
which the securities transaction tax has not been paid is chargeable totax at the rate of 20%, with indexation benefit.
Other Taxes:
Dividend Distribution Tax (“DDT”)
Any amount declared,
distributed or paid by a company by way of a dividend is taxable at therate of 15% and the tax has to be paid to the Government within 14 days
from the date of declaration, distribution or payment, whichever isearlier. The taxable amount shall be reduced by the amounts received
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from its subsidiary as a dividend, if the subsidiary has paid DDT on thesame. The DDT rate has to be grossed up and the effective DDT rate
after grossing up is 20.55%.
However, no tax shall be chargeable on distribution of dividends by
Companies being a unit of an International Financial Services Centre,
deriving income solely in convertible foreign exchange.
Patent Box Regime In order to encourage more research anddevelopment activities in India, the Government has made the tax
regime for royalty income of inventors at a concessional rate of 10%,from 30% on the gross income of royalty, subject to conditions
specified under Section 115BBF.
Buyback of Shares Any amount of distributed income by theCompany on buy-back of shares from a shareholder shall be charged to
tax at the rate of 20% on the distributed income.
Securities Transaction Tax(“STT”) STT is applicable on thepurchase and sale of equity shares, derivatives, units of equity oriented
funds purchased through a recognised stock exchange. It is also
applicable on the sale of unlisted equity shares under an offer for sale tothe public or through an Initial Public Offer (IPO) where such shares
will be subsequently listed on a recognised stock exchange.
Deductions
The expenses allowable as a deduction for the purposes of computationof taxable income are revenue expenditure which are laid out
exclusively for the purpose of business of the company during the year.
A weighted deduction is allowable for expenditure on scientificresearch.
The following are few of the expenditures which are not allowable asdeduction:a) Capital expenditureb) Personal expenditurec) Expenditures which are penal in natured) Dividends paid by the Company
8e) Corporate Social Responsibility expensef) Expenses prohibited by lawg) Any sum paid on account of any rate or tax levied on the profits orgains of any business or profession
Depreciation Tangible and Intangible Assets are depreciated using thewritten down value method at the rates specified in the IT Act.
Depreciation is applied on the “block of assets”. Unabsorbed
depreciation can be carried forward indefinitely and set off against
future income, under any head. The following are the common
depreciation rates for various block of assets BlockRate (%)

Residential Buildings

5

Office Buildings

10

Furniture and Fittings

10

Plant and Machinery

15 / 60

Computers

40

Intangible Assets

25

Also, additional depreciation of 20% is allowed on new plant andmachinery purchased during the year by companies engaged in thebusiness of manufacture of articles or things, or in the business ofgeneration, transmission or distribution of electricity.
The depreciation (including additional depreciation) is restricted
to 50% of the applicable rates, if the asset is used for less than 180 days in
the FY. The balance 50%, if any, shall be allowable in the subsequent FY.
Additional deduction in respect of employment of new employees
A deduction of 30% of the additional employee cost incurred shall beallowable as deduction, provided the employee was employed for atleast 240 days during the FY. However, in the case of companies
engaged in the business of manufacturing of apparel or footwear orleather products, a lower period of 150 days can be considered.
9If an employee is employed for a period less than the aforesaid days,
then deduction shall be allowable in the subsequent FY, subject tofulfilment of certain conditions.
Losses
Losses incurred under a head of income are set off first against an
income under the same head, and then against income from other heads
of Income.
Losses which are carried forward can be set off in the following manner :Loss

Can be set-off against

Loss from House Property

Income from House Property

8 Years

Loss from Business or Profession

Income from Business or Profession

8 Years

Short Term Capital Loss

Short Term or Long Term Capital Gain

8 Years

Long Term Capital LossLong term Capital Gains

8 Years

Loss from Speculation Business

Income from Speculation Business4 Years

Unabsorbed Depreciation

Income under any headNo time Limit

Time Limit

Withholding Taxes There is an obligation on the payer to withhold tax
on certain specified payments. Withholding tax on payments made to
Non-resident's shall be deducted based on the rates in force.
The following are a few important withholding tax rates for payments
to resident’s :TypeThresholdRate (%)

Professional or Technical Services

30,00010

Commission or Brokerage

15,0005

Rent of Plant, Machinery or Equipment

1,80,0002

Rent of Land, Building or Furniture

1,80,000

10

Payment on Contracts (Except to
Individuals / HUF)

30,000 (Single Payment)
1,00,000 (Aggregate Payments)

2

Payment on Contracts (Except to
Individuals / HUF)

30,000 (Single Payment)
1,00,000 (Aggregate Payments)

1

Royalty or Fees to Technical Services

30,0001010Taxable returns and assessment - The Assessment Year starts on April
01. The tax return must be filed by November 30 for a company which
has international transactions or specified domestic transactions and by
September 30 for all other companies.
Advance Tax A Company is liable to pay advance tax in four
instalments :a) 15% of the tax payable by June 15;b) 45% of the tax payable by September 15;c) 75% of the tax payable by December 15;d) 100% of the tax payable by March 15.
Any tax remaining to be paid is payable along with applicable interest
on filing the income tax return.
Tax Holiday Tax incentives are available to the below mentioned
extent in the case of new units located in a SEZ commencing activities
on or after April 01, 2006 but before the April 01, 2021:
First Five Years

100% of Profits

6th Year to 10th Year

50% of Profits

11th to 15th Year

50% of Profits or amount transferred to credit of
SEZ re-investment allowance reserve,
whichever is lower

Exemption for Start-ups The profit earned by a company, being astart-up, shall be exempt from paying tax for three consecutive
assessment years out of seven years beginning from the date ofincorporation of start-up, subject to certain conditions.
Indirect Taxes in India
An indirect tax [such as sales tax, per unit tax, value added tax (VAT), or
goods and services tax (GST)] is a tax collected by an intermediary(such as a retail store) from the person who bears the ultimate economic
burden of the tax (such as the consumer). The intermediary later files a
tax return and forwards the tax proceeds to government with the return.
In this sense, the term indirect tax is contrasted with a direct tax, whichis collected directly by government on income earned by persons (legal
or natural) on whom it is imposed.
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Prior to imposition of Goods and Services Tax (GST), there was amultitude of indirect taxes imposed on taxpayers. These included:•

Central Excise Duty Excise duty was a duty paid on
manufactured goods, which was levied at the moment at the
manufacturing. This tax was payable by the manufacturers who
would then shift the tax burden to retailers and wholesalers.

•Service Tax Service tax was a tax levied by Central Government
on services provided or agreed to be provided excluding services
covered under negative list and considering the Place of Provisionof Services Rules, 2012 and collected as per Point of Taxation
Rules, 2011 from the person liable to pay service tax. It was anindirect tax wherein the service provider collects the tax on services
from service receiver and pays the same to government of India. It
was imposed on the gross or aggregate amount charged by theservice provider on the recipient.

•

Sales Tax A sales tax was a tax paid to a state government for thesales of certain goods and services. This tax was paid by theretailer, who would then shift the tax burden to customers bycharging sales tax on goods and service.

•

Value Added Tax (VAT) It was collected on the value of goods orservices that were added at each stage of their manufacture or
distribution and then finally passed on to the customer.

The following major taxes are now subsumed under GST:
Central taxes subsumed under GST

State taxes subsumed under GST

Central Excise duty and Additional Excise Duties

Value Added Tax (VAT)

Central Sales Tax

Entertainment Tax (other than those levied by
local authority)

Service Tax

Luxury Tax

Special Additional Duty (SAD) and Countervailing
Duty (CVD) Additional customs duties

Taxes on lottery, betting and gambling

Central Surcharges and Cesses

State Cesses and Surcharges (related to supply
of goods and services)

Excise duty levied under Medicinal and Toiletries
Preparation Act

Entry Tax

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Apart from the above listed central and state taxes some of the local
municipal taxes such as Octroi and Local Body taxes are also subsumed
by GST.
Goods and Services Tax Goods and Service Tax (GST) is an indirecttax (or consumption tax) levied in India on the sale of goods andservices. GST is levied at every step in the production process, but iscreditable to all parties in the chain of production other than the final
consumer.
The tax came into effect from July 01, 2017 through the implementationof One Hundred and First Amendment of the Constitution of India.
GST has three components:• CGST: Collected by the Central Government on an intra-state supply;• SGST: Collected by the State Government on an intra-state supply

or UTGST: Collected by Union Territory on an intra-state supply;• IGST: Collected by the Central Government for inter-state supply.
Transaction

Taxes

Revenue Sharing

Sale within the State CGST +SGST

Revenue will be shared equally between the Centre and theState

Sale to another State IGST

There will only be one type of tax (central) in case of inter-state sales.
The Center will then share the IGST revenue based on the destinationof goods

GST Rate Structure
Sl. No. Particulars

GST Rates

General rates on supply of goods andservices

Five tax slabs - 0%, 5%, 12%, 18%, 28%1.

Special rates on rough, precious and semiprecious stones

Special rate of 0.25%

2.
3.

Special rate on gold and jewellery

Special rate of 3%4.

Compensation cess on few items such as
aerated drinks, luxury cars and tobacco
products

It can be either Specific amount per unit oron Ad Valorem basis or Specific cum advalorem basis.

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GST is making sure the slogan “One Nation, One Tax, One Market”
becomes the reality of our country.The biggest relief under GSTso far isclearly the elimination of the 'cascading effect of tax' or the 'tax on tax'
quandary.
Structure of GST•

Input Tax Credit: At the time of paying tax on the final product,
one can reduce the tax an entity has already paid on its purchases
and pay just the balance amount. This is called Input Tax Credit
which works on the principle that tax is to be paid on the value
added by the entity and not on the entire produce.

•

Composition Scheme under GST: A Composition Scheme isavailable for small businesses with a turnover below Rs.1.5 crore(75 Lakh for North Eastern states and Himachal Pradesh). As per
the scheme, such small businesses don't have to go through thetime-consuming formalities of GST but only pay the tax at a
fixed rate based on their business turnover. For service providers
are not eligible for the composition scheme.

Type of Business

CGST

SGST

Total

Manufacturers and traders (goods)

0.5%

0.5%

1%

Restaurants not serving alcohol

2.5%

2.5%

5%

•

Higher threshold for registration of Rs 20 Lakhs is provided forunder the GST regime compared to the earlier regime.

Goods Kept Outside the GST purview
Alcohol for human consumption: Alcoholic beverages for humanconsumption are kept out of the purview of GST as mandated byconstitutional provisions. Sales Tax/VAT would be continued to belevied on alcoholic beverages as per the existing practice. VAT is also
levied on alcohol purchases in some states, and there will be no change
to such levy. Excise duty, which is presently levied by the states, is also
unaffected.
Petrol and petroleum products (GST will apply at a later date) viz.
Petroleum crude, High speed diesel, Motor Spirit (petrol), Natural gas,
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Aviation turbine fuel: The full range of petroleum products, including
crude oil and motor spirits including Aviation Turbine Fuel (ATF) andHigh Speed Diesel (HSD), are kept outside GST. Although the GST
constitutional amendment provides for levying GST on these products,
it allows the timeframe for their inclusion to be decided by the GST
Council. Accordingly, till such time, Sales tax would continue to belevied by the States on these products with the prevailing floor rate.
Similarly, Centre would also continue its levies such as CENVAT. It is
not clear whether natural gas is kept outside the GST purview. A view
from the government will be issued after further deliberations.
The existing taxation system under VAT and the Central Excise Act willcontinue for both of the commodities listed above.
Customs
The Customs Act, 1962 and The Customs Tariff Act, 1975 are theprincipal legislations that levy customs duty on imports.
Section 12 of the Custom Act provides that duties of customs shall belevied at such rates as may be specified under the Customs Tariff Act,
1975 or other applicable on goods imported into or exported from India.
The basis of levy of tax is specified in Section 12, charging section of the
Customs Act. It identifies the person or properties in respect of which tax orduty is to be levied or charged. Under assessment, the liability for paymentof duty is quantified and duty is duly collected by the government.
Generally, exports are duty free (unless detrimental to the nation). On theother hand, imports are subject to several types of customs duties.
S.No. Various customs duties at the time of imports
1.

2.

3.

Customs duty rate

Basic Customs Duty BCD (normally levied as a percentage General basic rate is 10%of value). BCD may be exempted by notifications under
section 25.
The basic duty may have two rates - Standard and Preferential rate / for goods
Preferential Rates under the first schedule to customs tariff imported from any preferential areaact, 1975.
covered under the government ofIndia agreements.
Standard rate / where there is noprovisions for preferential rates.
Additional customs duty or counter vailing duty (CVD) or
IGST. For those goods covered under GST, IGST is charged
and for those goods not covered under GST, CVD is still
payable.

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CVD/IGST is calculated on thevalue of imports at effective rates
notified for such goods as if it isprocured from India.

S.No. Various customs duties at the time of imports
4.

5.

6.

7.

8.

Customs duty rate

Special Additional Duty (SAD)/IGST. For those goods SAD is levied at rates notified bycovered under GST, IGST is charged and for those goods central government not exceeding
not covered under GST, SAD is still payable
4%. IGST is levied at the effective
rates notified for such as goods as
if it is procured from India.
Protective Duty levied in order to protect the domestic Duty is levied by Central governproducts and markets (Currently the duty is not in force)
ment upon recommendation madeby Tariff Committee and upon CG
being satisfied to provide
protection to any industry.
Safeguard Duty the Central Government may impose The total period of levy ofsafeguard duty on specified imported goods, if it is satisfied safeguard duty / is restricted to 10
that the goods are being imported in large quantities and years.
they are causing serious injury to domestic industry.
Provisional Safeguard Duty / is levied when the Final The provisional safeguard duty
Safeguard duty is pending for determination.
shall not remain in force for morethan two hundred days from thedate on which it was imposed.
Anti-Dumping Duty (ADD) levied on dumped articles i.e.,
where any article is exported by an exporter or producer
from any country or territory to India at less than its normal
value.

The Central Government may, by
notification in the Official Gazette,
impose an anti-dumping duty notexceeding the margin of dumping
in relation to such article. The Antidumping duty is dumping margin or
injury margin whichever is lower.

Note with respect to determining the ADD
The margin of dumping is the difference between the normal value andthe price charged for exports to India. Normal value means comparable
price in the ordinary course of trade, in the exporting country, after
making adjustments to the extent of conditions of sale, taxation, etc.
Injury margin means difference between fair selling price of domestic
industry and landed cost of imported product.
Other Indirect taxes in force Apart from the GST and customs there
are several other indirect taxes still in force such as the stamp duty (thatis levied by States on certain kinds of documents/ agreements /conveyances etc.), Social Welfare Surcharge has been recently
introduced through union finance bills @ 10% on the notified list ofimported goods. Entertainment tax is levied by the Local authority.
Professional tax, License fee on entry of vehicles are levied under THE
CANTONMENTS ACT, 2006 etc.

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