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Benefits of IT Outsourcing to India - Taxation

Taxation

India has a well developed tax structure, with the authority to levy taxes divided between the Central government and the State Governments. The Central Government levies direct taxes such as personal income tax and corporate tax and indirect taxes such as customs duty, excise duty and the service tax. The States impose local and state sales taxes along side others.

The tax system in India has undergone considerable reform in the past few years. Tax rates have been rationalized and tax laws have been simplified. Tax revenue as a percentage of GDP has been consistently increasing. During fiscal year 2000-01, it was 14.6 percent.

Taxes

Any company incorporated in India or having its entire management and control in India is considered a domestic company and has to pay 35.7 percent tax to the central government. A non-resident (foreign) corporation is taxed 48 percent, only on income derived in India from Indian operations, income that is accounted to arise in India and income that is received in India.

Minimum Alternate Tax (MAT) is leviable at the rate of 7.65 percent of book profits of the companies. The profits from software and goods exports and from exports of television news software are not considered as part of book profits for the purposes of MAT.

The Indian law allows withholding of tax from certain payments and all payments made to non-residents at rates specified as follows:

Type of Payment Rate
Interest 20%
Royalties 20%
Technical services fees 20%

Remuneration for work done in India is taxable irrespective of the place of receipt. Taxable income includes:

  • Salaries and wages
  • Pensions
  • Fees
  • Commissions
  • Profits in lieu of salary or in addition to salary and perquisites
  • All allowances
  • Stocks granted by an employee
  • Capital gains on transfer of capital assets situated in India
  • Capital gains on assets held for over three years
  • Short term capital gains are taxed at rates applicable to normal income at 30 percent for Foreign Institutional investors (FII).

Tax rates under some tax treaties signed by India

Payee Company Resident in Interest
(percent)
Royalties
(percent)
Technical Fees(percent)
Australia 15 10-15 Covered by Royalties
Austria No rate provided for No rate provided for No rate provided for
Belgium 10-15 20 20
Brazil 15 15-25 No provision
Canada 15 10-20 10-20
China 10 10 10
Denmark 10-15 20 20
Finland 10 10-20 10-20
France 10-15 20 20
Germany 10 10 10
Greece No rate provided for No rate provided for No provision
Indonesia 10 15 No provision
Italy 15 20 20
Japan 10-15 20 20
Korea 10-15 15 15
Mauritius No rate provided for 15 No provision
Netherlands 10 10 10
New Zealand 10 10 10
Norway 15 20 20
Russia 10 10 10
Singapore 10-15 10-15 10-15
South Africa 10 10 10
Spain 15 10-20 10-20
Sweden 10 10 10
Switzerland 10-15 10-20 10-20
United Kingdom 10-15 10-15 10-15
USA 10-15 10-15 10-15
Vietnam 10 10 No provision

Tax Incentives

The Indian government offers many incentives to investors in India to promote growth and development:

Infrastructure

A ten-year tax holiday is available to ventures engaged in developing and/or maintaining and operating an infrastructure facility.

Power

A ten-year tax holiday is also applicable to undertakings, which generate and/or distribute power.

Telecom

A five-year tax holiday is available to companies providing telecom services including Internet services and broadband networks. Moreover, 30 percent deduction from profits for the next five years in any 10 consecutive years out of the first ten years is also offered.

Industrial Parks and Special Economic Zones

A ten-year tax holiday is applicable to ventures that develop and/or operate or maintain notified industrial parks and special economic zones.

Other Industries

A five-year tax holiday for new industrial units set up in backward states and districts is available.

Venture Capital

Any income of a venture capital fund or company is exempt from tax, in the event the income is derived from investment in a venture capital undertaking, which is engaged in the business of providing services, or manufacturing products other than the notified services or articles or things.

Incentives for Exports

Tax is deducted on exportsí profits for units set up in EPZs, STPs, EHTPs, FTZ and SEZs.

Other Incentives

Concessional tax rates for FII and weighted deduction of 150 percent for scientific research and development expenditure have been offered. Also, a ten-year tax holiday is available for R&D companies engaged in scientific and industrial research.


Learn more about the advantages of India as an Offshore Destination


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