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Ensure your organisation is tax compliant when doing business in India

16 November 2021

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A checklist to help you navigate complexity in one of the most exciting business regions in Asia-Pacific.

Over the past decade, India has emerged as an international player. The country has benefited from the rapid growth of its private sector and increasingly strong ties with developed economies. It is now a top target for multinational companies seeking opportunities.

Several factors have contributed to the country’s economic growth, including an expanding services sector – which now dominates the economy – alongside greater domestic consumption, higher investment, growing infrastructure and a reform-focused government.

However, India’s tax system remains complex and while many processes and regulations have been simplified, it can be tricky for foreign investors to navigate compliance requirements and regulatory formalities. Understanding tax issues can be challenging and professional advice can assist you in dealing with these complex matters. Here is our tax checklist to help ensure your business in India is compliant.

1. Decide on how to structure your business in India

Foreign investors can opt to do business in India as a domestic company or as a foreign one. Setting up an Indian company constitutes a foreign direct investment (FDI), while doing business in India as a foreign entity involves the opening of a liaison, project or branch office. Each is treated differently for tax purposes.

2. Tax in India has several brackets for goods and services

India overhauled its indirect taxation system in 2017 with the introduction of the Goods and Services Tax (GST), replacing a number of multiple taxes and duties prevalent before.

Goods and services subject to GST are categorised under four tax brackets: 5%, 12%, 18% and 28%.

Most goods are covered by the 12% and 18% tax brackets, the latter generally applying to the services sector. Currently, the 28% tax bracket covers mostly luxury items including motor vehicles, personal aircraft and yachts.

3. Pay corporate tax in India on the right source of income

Corporate tax in India is levied on the profits of the company after deducting applicable expenses and deductions.

All domestic companies are liable for tax on their global income, while foreign companies are liable for tax in India with respect to income received or accrued in-country.

The effective corporate tax rate (base rate + corporate tax surcharge + cess, a form of tax charged over and above direct and indirect taxes) depends on whether the company is domestic or foreign, as well as its level of taxable income in the previous financial year.

4. Be aware of the tax year-end and keep up-to-date with new tax legislation

In India, the financial year commences on 1 April and ends on 31 March of the subsequent year. Tax, surcharge and cess rates can be changed by the Finance Act passed by the government every year.

5. Understand the different ways domestic and foreign companies pay tax in India

Currently, corporate tax for domestic companies with turnover up to 4 billion rupees is set at 25%, while companies with turnover above 4 billion rupees pay corporate tax of 30%. Companies can also pay tax at a lower rate by opting in on sections 115BA, 115BAA and 115BAB, if applicable on them. In addition to corporate tax and surcharge, Health and Education Cess of 4% is also applicable.

The corporate tax rate for foreign companies ranges from 40% to 50% depending upon the nature of the income; and this amount is increased by a surcharge at the rate of 2-5% depending on the taxable income. Health and Education Cess of 4% applies here as well.

6. Make the most of tax rebates

India’s tax regulations offer several rebates and deductions. In some cases, interest earned by foreign companies can be taxed at reduced rates of between 5% and 20%. If the company has set up new infrastructure or energy sources, they too are subject to deduction. A company can carry forward any losses incurred for a maximum of eight years.

7. Decide whether your employees qualify as residents for tax purposes

The central government is responsible for the collection of withholding tax. Employers must deduct the tax at time of payment to non-resident individuals (NRI).

To be a resident in India for tax purpose, the taxpayer must have either stayed in India for at least 182 days in the previous year, or more than 60 days in the previous fiscal year, and must have been present in India for a total of at least 365 days in the four years leading up to the previous year. Withholding tax returns are filed quarterly.

8. If you are importing goods, apply for the correct licence

Companies intending to import goods must apply to the Directorate General of Foreign Trade and obtain an Importer and Exporter Code (IEC) number.

In India, customs duty is levied on goods imported into the country and is payable at the time of customs clearance.

How Intertrust Group can help in India

We assist foreign investors with the incorporation process and compliance within Indian companies, as well as providing application, registration and compliance services for those who opt to enter India as a foreign entity.

We also provide tax regulatory services, entity management including accounting and reporting, asset assurance services, transaction support and risk advisory services.

Why Intertrust Group?

  • Intertrust Group is a publicly listed company with more than 65 years’ experience in providing world-class trust and corporate services to clients around the world.
  • Our 4,000 professionals work together across 30 jurisdictions to offer undisputed global reach, deep local knowledge and an extensive international network to help clients achieve their strategic goals.
  • Our team in India includes experts specialising in administration services dedicated to multinational, private equity and fund clients.
  • We have more than 900 experts who carry out a wide range of services including IT and funds from four locations: Bangalore, Chennai and Mumbai, Gurgaon.