india taxation and investment 2012

8/12/2019 India Taxation and Investment 2012

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A publication of Deloitte Touche Tohmatsu Limited

Taxation and Investment in

India 2012

Reach, relevance and reliability


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India Taxation and Investment 2012

1.0 Investment climate

1.1 Business environment

India is a federal republic, with 28 states and seven federally administered union territories; itoperates a multi-party parliamentary democracy system. It is a common law country with a writtenconstitution. Parliament has two houses: the Lok Sabha (lower house) and the Rajya Sabha

(upper house). The President, the constitutional head of the country and of the armed forces,acts and discharges the constitutional duties on the advice of the Council of Ministers, which isheaded by the Prime Minister. The Prime Minister and the Council of Ministers are responsible toparliament and subject to the control of the majority members of parliament. The states andunion territories are governed by independently elected governments.

India is a three-tier economy, comprising a globally competitive services sector, a manufacturingsector and an agricultural sector. The services sector has proved to be the most dynamic inrecent years, with trade, hotels, transport, telecommunications and information technology,financial, and business services registering particularly rapid growth.

Price controls

The central and state governments have passed legislation to control production, supply,

distribution and the price of certain commodities. The central government is empowered to listany class of commodity as essential and can regulate or prohibit the production, supply,distribution, price and trade of these commodities for the following purposes: maintain orincrease supply; equitable distribution and availability at fair prices; and secure an essentialcommodity for the defense of India or the efficient conduct of military operations.

Intellectual property

Indian legislation covers patents, copyrights, trademarks, geographical indicators and industrialdesigns. The Patent Act 1970 has been amended several times to meet Indias commitments tothe WTO, such as increasing the term of a patent to 20 years.

Trademarks can be registered under the Trade Marks Act, 1999, which provides for registrationof trademark for services in addition to goods, simplifies procedures, increases the registrationperiod to 10 years and provides a six-month grace period for the payment of renewal fees.

Copyrights are protected on published and unpublished literary, dramatic, musical, artistic andfilm works under the Copyright Act 1957. Subsequent amendments have extended protection toother products, such as computer software and improved protection of literary and artistic worksand established better enforcement. The protection term for copyrights and rights of performersand producers of phonograms is 50 years.

India is a signatory to the Paris Convention for the Protection of Industrial Property and thePatent Co-operation Treaty, and it extends reciprocal property arrangements to all countriesparty to the convention. The convention makes India eligible for the Trademark Law Treaty andthe Madrid Agreement on Trademarks. The country also participates in the Bern Convention onCopyrights, the Washington Treaty on Layout of Integrated Circuits, the Budapest Treaty onDeposit of Micro-organisms and the Lisbon Treaty on Geographical Indicators.

As a member of the WTO, India enacted the Geographical Indications of Goods (Registration &

Protection) Act (1999).

1.2 Currency

The currency is the Indian rupiah (INR).

1.3 Banking and financing

Indias central bank is the Reserve Bank of India (RBI), which is the supervisory authority for allbanking operations in the country. The RBI is the umbrella network for numerous activities, allrelated to the nations financial sector, encompassing and extending beyond the functions of atypical central bank. The primary activities of the RBI include:


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Monetary authority;

Issuer of currency;

Banker and debt manager to the government;

Banker to banks;

Regulator of the banking system;

Manager of foreign exchange; and

Regulator and supervisor of the payment and settlement systems.

The RBI formulates implements and monitors the monetary policy. It is responsible for regulatingnon-banking financial services companies, which operate like banks but are otherwise notpermitted to carry on the business of banking.

The banking sector in India is broadly represented by public sector banks (where thegovernment owns a majority shareholding and includes the State Bank of India and itssubsidiaries); private sector banks; foreign banks operating in India through theirbranches/wholly owned subsidiaries; and regional rural bank and co-operative banks, whichusually are regional.

The RBI has released draft guidelines for the licensing of new banks in the private sector.

Stringent rules govern the operations of systemically important non-deposit taking non-bankingfinancial services companies, such as those with assets of INR 1 billion or more, to reduce thescope of regulatory arbitrage vis--vis a bank.

The financial and commercial center in India is Mumbai, and there are proposals to develop thisarea further as an International Financial Center.

1.4 Foreign investment

Many foreign companies use a combination of exporting, licensing and direct investment in India.India permits 100% foreign equity in most industries. Units setting up in special economic zones(SEZs), operating in electronic hardware or software technology parks or operating as 100%export-oriented units also may be fully foreign-owned. Nevertheless, the government has setsector-specific caps on foreign equity in certain industries, such as basic and cellular

telecommunications services, banking, civil aviation and retail trading.Foreign direct investment is made through two routes: automatic approval and governmentapproval:

Automatic Route:Foreign investors or an Indian company do not need the approval of thegovernment or the RBI. The recipient (Indian company) simply must notify the RBI of theinvestment and submit specified documents to the RBI through an authorized dealer. Wherethere are sector-specific caps for investment, proposals for stakes up to those caps areautomatically approved, with a few exceptions. Foreign direct investment (including theestablishment of wholly owned subsidiaries) is allowed under the automatic route in all sectors,except those specifically listed as requiring government approval. The government hasestablished norms for indirect foreign investment in Indian companies, according to which aninvestment by a foreign company through a company in India that is owned and/or controlled bya nonresident entity would be considered as foreign investment.

Approval Route:Proposed investments that do not qualify for automatic approval must besubmitted to the Foreign Investment Promotion Board (FIPB); areas where FIPB approval isrequired include asset reconstruction, commodity exchange, courier service, defense, printmedia, etc.

Investment in certain sectors is prohibited even under the approval route. Examples of prohibitedinvestment sectors include agriculture (subject to conditions), retail trading (except single brandretail), lotteries, the manufacturing of cigarettes, the real estate business, atomic energy andrailway transport.

The Secretariat for Industrial Assistance (SIA), which operates within the Ministry of Commerceand Industry, issues industrial licenses, provides information and assistance to companies and


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investments, monitors delays and reports all government policy relating to foreign investmentand technology. Investors may submit a package application covering both the license and theforeign investment with the SIA or the FIPB. Normal processing time is up to three months.

Overseas investors such as financial institutional investors (FIIs) and foreign venture capitalinvestors (FVCIs) are permitted to invest in Indian capital markets. FIIs must register with theSEBI and FVCIs require the approval of the RBI, followed by registration with SEBI.

1.5 Tax incentives

Indias investment incentives are designed to channel investments to specific industries, promotethe development of economically lagging regions and encourage exports. The country offers anumber of benefits, including tax and non-tax incentives for establishing new industrialundertakings; incentives for specific industries such as power, ports, highways, electronics andsoftware; incentives for units in less-developed regions; and incentives for units producingexports or in export processing zones and SEZs.

Incentives include the following:

Tax holidays, depending on the industry and region;

Weighted deductions at 200% for in-house research and development (R&D) expenses,including capital outlays (other than those for land) in the year incurred. Companies also canclaim a deduction for expenses incurred in the three years immediately preceding the year

in which the company commenced business; and

Accelerated depreciation for certain categories, such as energy saving, environmentalprotection and pollution control equipment.

The central governments development banks and the state industrial development banks extendmedium- and long-term loans and sometimes take equity in new projects. Some Indian statesprovide additional incentives.

1.6 Exchange controls

The government sets Indias exchange control policy in conjunction with the RBI, whichadministers foreign exchange (forex) regulations. The Foreign Exchange Management Act, 1999(FEMA) established a simplified regulatory regime for forex transactions and liberalized capital

account transactions. The RBI is the sole monitor of all capital account transactions.The rupee is fully convertible on the current account and forex activities are permitted unlessspecifically prohibited.

The RBI allows branches of foreign companies operating in India to freely remit net-of-tax profitsto their head offices through authorized forex dealers, subject to RBI guidelines.


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2.0 Setting up a business

2.1 Principal forms of business entity

The principal forms of doing business in India are the limited liability company (public companyor private company); limited liability partnership (LLP); partnership firm; association of persons;representative office, branch office, project office or site office of a foreign company; and trust.

Foreign investors may adopt any recognized form of business enterprise. The limited liabilitycompany is the most widely used and the most suitable form for a foreign direct investor. Jointventures also are popular.

The formation, management and dissolution of limited liability companies is governed by theCompanies Act 1956 (Companies Act), which is administered by the Ministry of Corporate Affairs(MCA) through the Registrar of Companies (ROC), Regional Director, Company Law Board andOfficial Liquidator.

Formalities for setting up a company

A foreign company can commence operations in India by incorporating a company under theCompanies Act as a subsidiary (including a wholly owned subsidiary) or as a joint venturecompany.

Private or public companies are formed by first obtaining name availability approval, followed byregistering the memorandum and articles of association and prescribed forms with the Registrarof Companies (ROC) in the state in which the registered office is to be located. If the documentsare in order, the ROC will issue a certificate of incorporation. The filing for company formation ismade in electronic form. A private company can commence its business immediately uponincorporation. A public company is required to obtain a Certif icate of Commencement ofBusiness from the ROC before starting its business operations.

All directors or proposed directors must obtain a Director Identification Number (DIN). At leastone director must obtain a Digital Signature Certificate (DSC) from the certifying authority forelectronic filings.

Depending upon the nature of the business activities and the business sector, companies needto register with relevant sector regulators:

Financing and investing operations, etc., must register with the RBI as a non-bankingfinance company;

Asset reconstruction companies must register with the RBI;

Insurance services (life and non-life) and insurance broking companies, etc., mustregister with the Insurance Regulatory Development Authority;

Stock brokers, sub-brokers, merchant bankers, underwriters, custodians, portfoliomanagers, credit rating agencies, mutual funds, venture capital, asset managementcompanies, share transfer agents, etc., must register with SEBI; and

Pension funds must register with the Pension Fund Regulatory and DevelopmentAuthority.

Forms of entityCompanies are broadly classified as private limited companies and public limited companies.Companies may have limited or unlimited liability. A limited liability company can be limited byshares (liability of a member is limited up to the amount unpaid on shares held) or by guarantee(liability of a member is limited up to the amount for which a guarantee is given). Companieslimited by shares are a common form of business entity. Public limited companies can be closelyheld, and unlisted or listed on a stock exchange.

A private company is one that, by virtue of its articles of association, prohibits any invitation tothe public to subscribe for any of its shares or debentures; prohibits any invitation or acceptanceof deposits from persons other than members, directors or their relatives; restricts the number of


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members to 50 (excluding employees and former employees); and restricts the right to transferits shares.

A public company is a company that is not a private company. A public company may offer itsshares to the general public and no limit is placed on the number of members. A privatecompany that is a subsidiary of a company that is not a private company is also a publiccompany. However, the status of a private subsidiary with more than one shareholder, where oneis a foreign corporate body (holding company) and the other shareholder is not, depends on thestatus of its holding company.

A section 25 company is a company formed for the purpose of promoting commerce, art,science, religion, charity or other useful objective and intends to apply its profits, if any, or otherincome in promoting its objects. A section 25 company is not permitted to pay dividends to itsmembers. It must be licensed by the government (powers delegated to Registrar of Companies)and can be a private or public company whether limited by shares or guarantee.

Requirements for public and private company

Capital. A public limited company must have a minimum paid-up capital of INR 500,000; aprivate limited company must have INR 100,000.

Types of share capital.There are two types of shares under the Company Law: preferenceshares and equity shares. Preference shares carry preferential rights in respect of dividends at afixed amount or at a f ixed rate before holders of the equity shares can be paid, and carry

preferential rights with respect to the repayment of capital on winding up or otherwise. In otherwords, preference share capital has priority both in repayment of dividends and capital. Thetenure of preference shares is a maximum of 20 years.

Equity shares are shares that are not preference shares. Equity shares can be shares with votingrights or shares with differential rights as to dividends, voting, etc. A public company may issue equityshares with differential rights for up to 25% of the total share capital issued if it has distributableprofits in the preceding three years and has complied with other requirements. Listed publiccompanies cannot issue shares in any manner that may confer on any person superior rights as tovoting or dividends vis--vis the rights on equity shares that are already listed. A private companymay freely issue shares with different rights as to dividends, voting, etc., subject to the provisions ofits articles of association.

Securities can be held in electronic (dematerialized) form through the depository mode. In thecase of a public/rights issue of securities of listed companies, the company must give investorsan option to receive the securities in physical or electronic form. For shares held indematerialized form, no stamp duty is payable on a transfer of the shares. Shares of unlistedpublic company or private company also may be held in dematerialized form.

Members, shareholders.An individual or legal entity, whether Indian or foreign, may be ashareholder of a company. A public company should have at least seven members; the minimumnumber of members in a private company is two and the maximum is 50 (excluding employeesand former employees).

Management.Public companies with paid-up capital of INR 50 million or more must appoint amanaging director or a full-time director or manager. The maximum term of a managingdirector/manager is five years, which may be renewed. Managing directors may hold thatposition in no more than two public companies. A public company with paid-up capital of INR 50million or more also must set up an audit committee. Private companies are not required to

appoint a managing director or a full-time director or manager.

Board of directors.Only individuals may be appointed as directors. A public limited companymust have at least three directors and a maximum of 12 (any increase requires the approval ofthe Ministry of Corporate Affairs). A private company must have at least two directors. Centralgovernment approval is required where a nonresident is appointed to any managerial position(i.e. managing director, full-time director, manager) in a public company. Directors are elected bya simple majority or by methods provided in the articles of association. Remuneration of thedirectors of a listed company is subject to ceilings and requires approval of the centralgovernment if the company has insufficient profits or losses.


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Board meetings, which may be held anywhere, must be held once per quarter. Barring certainexceptions, the board has full powers and may delegate its powers to a committee of the board.

General meeting.An Annual General Meeting (AGM) of shareholders must be held at leastonce in a calendar year and the time between two AGMs should not exceed 15 months(extendable up to three months with approval, except for first AGM). A company may hold its firstAGM within 18 months from the date of incorporation and, in such a case, it will not benecessary to hold an AGM in the year of incorporation or the following year. Among the businessto be addressed at an AGM is approval by the shareholders of the audited financial statements

for the financial year, declaration of dividends, and appointment of auditor and directors. Thefinancial statements to be approved by the AGM cannot be older than six months from the dateof the AGM (nine months in the case of the first AGM). The financial year of a company may beless or more than a calendar year, but it cannot exceed 15 months (extendable by three monthsby the ROC). An extraordinary general meeting can be called by the board of directors at therequest of holders of 10% of the paid-up share capital.

A quorum is established when five members in a public company (two in the case of a privatecompany), or more, according to a companys articles, are present at a meeting. If a quorum isnot present, then subject to the provisions of the articles of association, the meeting is adjourneduntil the following week, at which time all members present, regardless of number, constitute aquorum.

There are two kinds of resolutions: ordinary and special. An ordinary resolution may be passed

by a simple majority of members present in person or represented by proxy. Special resolutionsrequire at least a 75% vote and include proposals for liquidation, transfer of the companysoffices from one state to another, buyback of securities, amendment of the articles ofassociation, increases in inter-corporate investment/loans, etc.

Unless a poll is demanded by the chairman of the general meeting or by the specified number ofshareholders or by the shareholders holding specified shares, the voting at a general meeting isdone through a show of hands. Each shareholder has one vote. In the case of a poll, voting rights ofa member are in proportion to his share of the paid-up equity capital. Preference shareholders havethe right to vote only on matters that directly affect the rights attached to preference shares.Preference shareholders have the same rights to voting as equity shareholders if the dividend hasremained unpaid for a specified period.

Dividends.Dividends must be paid in cash. Once declared, the dividend must be paid within thestipulated time. Dividends for a financial year can be paid out of (a) profits of that year afterproviding for depreciation; (b) out of profits of any previous financial year(s) arrived at afteraccounting for depreciation and remaining undistributed profits; or (c) from both. Losses ordepreciation of earlier years (whichever is lower) must be adjusted from the profits beforepayment of dividends. Before declaring dividends from the current years profit, the companymust transfer between 2.5% and 10% of its current profits to reserves, depending on the amountof dividends declared. The accumulated profits in the reserve may be utilized for payment ofdividends, subject to conditions.

Sole selling agencies.A company may appoint a sole selling agent for a maximum period offive years. If a company has paid-up capital of more than INR 5 million, central governmentapproval is required for the appointment. The central government prohibits the appointment of asole selling agent in certain industries in which demand substantially exceeds supply.

Branch of a foreign corporation

In addition to establishing a wholly owned subsidiary (or setting up a joint venture in India), aforeign company may establish its presence in India by setting up a liaison office, representativeoffice, project or site office or branch. However, a branch of a foreign company attracts a higherrate of tax than a subsidiary or joint venture company.

A liaison off ice (also known as representative office) acts as a communication channel betweenthe head office abroad and parties in India. It cannot carry on commercial activities in India andcannot earn income in India. The expenses of a liaison office must be met out of inwardremittances from the head office. A liaison office may be permitted to promote export from orimport to India, facilitate technical and financial collaboration between a parent/group companyand companies in India, represent the parent/group company in India, etc.


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Foreign companies engaged in manufacturing and trading may establish a branch in India for thefollowing activities:

Export/import of goods (retail trading activity of any kind is strictly prohibited);

Rendering of professional or consulting services;

Conduct research for the head office;

Promoting technical or financial collaboration between Indian companies and the head office

or an overseas group company; Representing the head office in India and acting as a buying/selling agent in India;

Rendering services in information technology and development of software in India;

Rendering technical support for products supplied by the head office/group companies; and

Foreign airline/shipping business.

Eligibility criteria for setting up a branch or liaison office center on the track record and net worthof the foreign head office. For a branch, the head office must have a profit-making track record inits home country during the immediately preceding five financial years (three years for a liaisonoffice). The net worth of the foreign head office cannot be less than USD 100,000 or itsequivalent to establish a branch (USD 50,000 or its equivalent to establish a liaison office). Networth for these purposes isthe paid-up share capital (+) free reserves (-) intangible assets

(computed as per the latest audited balance sheet or account statement certified by a certifiedpublic accountant or registered accounts practitioner).

RBI approval, followed by registration with the RBI is required to set up a branch of a foreigncompany, a representative off ice or a liaison office. Financial statements, annual activitycertificates, etc. must be submitted annually to the ROC/RBI.

Foreign companies planning to carry out specific projects in India may establish temporaryproject/site offices for the purpose of carrying out activities relating to the project. The RBI hasgranted general permission to foreign companies to establish project offices in India providedthey have secured a contract from an Indian company to execute the project, and otherrequirements are met. If the foreign company cannot meet the requirements, it must seekapproval from the RBI before setting up. Project offices may not undertake or carry on anyactivities other than those relating and incidental to execution of the project. Once the project is

completed and tax liabilities are met, the project office may remit any project surplus outsideIndia.

Joint ventures

Joint venture companies are commonly used for investment in India.

2.2 Regulation of business

Mergers and acquisitions

Mergers and acquisitions are generally governed by the Companies Act, 1956 and sector-specific law, such as insurance, pension, banking law, etc. The provisions of SEBI (Issue ofCapital and Disclosure Requirements) Regulations, 2009, Listing Agreements with the stockexchange, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI

(Prohibition of Insider Trading Regulations) 1992 must be complied with in the case of listedcompanies. If a merger has cross-border aspects/nonresident shareholder/investor, the partiesmust comply with the foreign direct investment policy of the government and Foreign ExchangeManagement Act, 1999. Indian companies are permitted to acquire businesses/companiesabroad if certain conditions are satisfied.

In the case of a public company, broadly, the transfer of business/assets requires the approval ofthe shareholders. This can be done with the additional procedure of court approval or can be asimple shareholders approval without court approval, depending on the manner of the transfer.

A reorganization involving the amalgamation of companies or a tax neutral demerger wouldrequire approval of High Court, as well as shareholders and creditors, regional director and


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official liquidators (for the transferor company in the case of an amalgamation). If the transferoror transferee company or both are listed on a recognized stock exchange, the draftreorganization proposal requires prior approval of the stock exchange before application is madeto the High Court.

Where an acquisition exceeds the specified threshold or there is a change in control of a listedcompany, the acquirer must provide an exit opportunity to the shareholders through a timelypublic offer with appropriate disclosures. In certain acquisitions, such as an inter setransfer ofshares between the promoter, Indian promoter and foreign collaborator, pursuant to a scheme of

arrangement/amalgamation, no open offer is required, subject to disclosures being made.The government can order the amalgamation of two or more companies if this is in the publicinterest. The Board for Industrial and Financial Reconstruction can issue an order under the SickIndustrial Companies (Special Provisions) Act, 1985 for the amalgamation of an ailing industrialcompany with another company.

Monopolies and restraint of trade

Indias markets are monopolized in only a few areas reserved for the public sector, such as postalservices, defense, atomic energy and railways. The government is considering gradual privateparticipation in areas reserved for exclusive state ownership. Monopolies are rare in activities opento the private sector.

The Competition Act, 2002 prohibits anti-competitive agreements, including the formation of

cartels and the sharing of territories, restrictions of production and supply, collusive bidding andbid rigging and predatory pricing. The following practices are considered objectionable if theylead to a restriction of competition: t ie-in arrangements that require the purchase of some goodsas a condition of another purchase; exclusive supply or distribution agreements; refusal to dealwith certain persons or classes of persons; and resale price maintenance.

The Act prohibits the abuse of a dominant position (i.e. a position of strength enjoyed by anenterprise in the relevant market in India) that enables it to operate independently of competitiveforces prevailing in the relevant market, affect its competitors or consumers or the relevantmarket in its favor.

The acquisition of control/shares/voting rights/assets of an enterprise, a merger or anamalgamation, etc., that exceed a specified threshold of assets/turnover (in and outside India)must be approved by the Competition Commission unless an exemption applies. TheCommission functions as the market regulator to prevent and regulate anti-competitive practices.

2.3 Accounting, filing and auditing requirements

Accounting standards

Accounting Standards issued by the Institute of Chartered Accountants of India, which arelargely based on IAS, apply. Financial statements must be prepared annually.

Filing requirements

Companies are required to prepare their financial statements each year as per the provisions ofthe Companies Act and have them audited by a practicing Chartered Accountant or a firm ofChartered Accountants registered with the Institute of Chartered Accountants of India. TheCompanies Act permits companies to choose their financial year end. The audited financial

statements must be approved by the shareholders in an annual meeting of the shareholders,which should be convened by the company normally within six months from the end of thefinancial year. All companies are required to file their audited financial statements with theRegistrar of Companies (ROC) after they have been approved by the shareholders. With effectfrom fiscal years ending on or after 31 March 2011, the filing of the financial statements with theROC must be in the eXtensible Business Reporting Language (XBRL) mode for certaincategories of companies.

The financial statements of companies should be prepared in accordance with the accountingstandards prescribed under the Companies Act. There are differences between these accountingstandards and IFRS. India has proposed convergence of its accounting standards with IFRS andissued the converged standards in February 2011. The effective date of applicability of the


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converged standards has not yet been notified. Upon notification, these converged standards willbe applicable in a phased manner to specified categories of companies. The existing standardswill continue to be applicable to the category of companies that will not be required to adopt theconverged standards.

The fiscal year end for purposes of filing income tax returns is March 31 for all persons includingcompanies. In case a company has a year-end other than March 31 under the Companies Act,such company will be required to prepare a set of financial statements for the year ending March31 and have them audited for purposes of filing its income tax return. In addition to the audited

financial statements, certain other particulars that are considered in the preparation of theincome tax return are also required to be audited as per the provisions of the Income Tax Act.


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3.0 Business taxation

3.1 Overview

Taxes are levied in India at the national and state levels. The principal national taxes oncompanies are the corporate income tax, minimum alternate tax, capital gains tax, dividenddistribution tax (DDT), wealth tax, and indirect taxes, such as value added tax (VAT), central sales

tax (CST), securities transaction tax (STT), customs duty, excise duties and service tax.Transaction taxes are set to witness a major change as India works towards implementing a goodsand services tax (GST) across the country. State taxes include sales tax, profession tax and realestate taxes.

Tax incentives focus mainly on establishing new industries, encouraging investments inundeveloped areas, infrastructure and promoting exports. Export and other foreign exchangeearnings were previously favored with income tax incentives, but these generally have beenphased out except for predominantly export-oriented units set up in SEZs. The Special EconomicZones Act (2005) grants fiscal concessions for both SEZ developers and units in the SEZs andprovides for a legislative framework in establishing offshore banking units and internationalfinancial service centers.

Separate divisions of the Ministry of Finance administer various national taxes. The Central Board

of Direct Taxes administers direct taxes.

A new Direct Taxes Code Bill, 2010 (DTC) that will bring about significant structural changes todirect taxation in India was unveiled on 12 August 2009 to replace the Income Tax Act that datesfrom 1961 and is expected to become effective on 1 April 2012. Once enacted, the DTC willconsolidate and amend the law relating to income tax, DDT, capital gains tax and wealth tax, andwill create a system that facilitates voluntary compliance. The chart below summarizes thecorporate tax changes in the DTC:

Direct Taxes Code

Corporate tax The corporate income tax rate for all the companies (domestic and foreign) will be setat 30% with no surcharge or cess.

Branch profit tax In addition to the 30% corporate income tax rate, foreign companies will be liable to a

15% branch profits tax (on total income from the permanent establishment or animmovable property situated in India as reduced by the corporate tax), regardless ofwhether the income is repatriated.

Minimumalternate tax

Companies will pay MAT at a rate of 20% of adjusted book profitsof corporationswhose tax liability is less than 20% of their book profits, with a credit available forMAT paid against tax payable on normal income, which may be carried forward for 15years. MAT will continue to apply to both domestic and foreign companies.

Dividenddistribution tax

Resident companies will be subject to DDT at a rate of 15% of dividends declaredand dividends that have been subject to DDT will be exempt from tax in the hands ofthe recipient.

Securitiestransaction tax

The STT will be abolished.

Wealth tax Wealth tax is to be paid by every person other than a non-profit organization and thethreshold limit of the net wealth will be increased to INR 10 million (currently INR 3million).

Withholding tax Dividends-If dividends paid by a resident company are not subject to DDT, the payerwill be required to withhold tax at a rate of 10% (20% for nonresident recipientsunless reduced by a tax treaty). No surcharge or cess will apply.

Interest, royalties and fees for technical services -The withholding tax rate will be

10% (20% for nonresidents unless reduced by a tax treaty) and no surcharge or cesswill apply.

Other payments-A 30% withholding tax rate will apply for nonresidents (unless


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reduced by a tax treaty) on any other payments not specifically mentioned in theDTC. No surcharge or cess will apply.

Treaty override The provisions of a tax treaty will override domestic law except where the GeneralAnti Avoidance Rule (GAAR), controlled foreign company (CFC) and branch profitstax rules apply.

Domesticcompany

A domestic company will be defined as a company that is resident in India, i.e. if i t isan Indian company (incorporated in India) or its place of effective management is inIndia at any time in the financial year.

Losses Losses would be able to be carried forward indefinitely.

Depreciation The scope of intangible assets will be expanded to include expenditure on any assetor project constructed or otherwise set up by the assessee where the benefit oradvantage arises to the assessee but the asset is not owned by the assessee (at arate of 20% if the benefit period does not exceed 10 years, 15% if it does).

Capital gains Income from the transfer of an investment asset (except for personal effects andagricultural land) will be subject to tax as capital gains. The distinction between ashort and long-term investment asset will be eliminated. The base date fordetermining the acquisition cost for computing capital gains will shift from 1 April 1981to 1 April 2000. Further, any gain (long-term or short-term) arising on the transfer ofan investment asset will be included in the taxpayers total income, chargeable to taxat the applicable slab rate.

Gains from the transfer of shares of a nonresident company by one nonresidentcompany to another if the nonresident company having its shares transferredindirectly holds a controlling interest in an Indian company will be taxable, subject toconditions.

Incentives All but a few of the tax exemptions will be abol ished and replaced with investment-linked incentives.

Related partytransactions

The threshold limits for two enterprises to be classified as associated enterprises willbe reduced. Advance pricing agreements and safe harbor rules will be introduced.

Returns The tax return filing date will be 30 June following the financial year for taxpayers thatare not companies and having any income from business, and 31 August followingthe financial year for all other taxpayers.

Penalties The amount of a penalty will be 100%-200% of the amount of tax payable in respectof the amount by which the tax base is underreported.

GAAR A new GAAR will empower the tax authorities to declare an arrangement asimpermissible avoidance arrangement if it was entered into with the objective ofobtaining a tax benefit, and (a) it creates rights or obligations that normally would notbe created between persons dealing at arms length; (b) it results, directly orindirectly, in the misuse or abuse of the DTC; (c) it lacks commercial substance inwhole or in part; and (d) it is carried out in a manner that would not be used for bonafide purposes.

3.2 Residence

A company is considered resident in India if it is incorporated in India or if control and managementof its affairs take place wholly in India.

3.3 Taxable income and rates

Corporate entities liable for income tax include Indian companies and corporate entitiesincorporated abroad. A resident company is liable for income tax on its worldwide income,including capital gains, less allowable deductions (essentially, outlays incurred exclusively forbusiness purposes). A nonresident company is liable for income tax on income arising in orreceived in India or deemed to arise or accrue in India. Income that is deemed to accrue or arise inIndia includes:


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Income arising from a business connection, property, asset or source of income in India;

Capital gains from the transfer of capital assets situated in India; and

Interest, royalties and technical service fees paid by an Indian resident, nonresident or theIndian government. Payments made to a nonresident for the provision of services aretaxable in India even if the services are rendered outside the country. Where the fees arepayable in respect of services used in a business or profession carried on by such personoutside India or for the purpose of making or earning income from a source outside India,they are not taxable in India.

Different rates apply to resident and nonresident companies.

The corporate tax rate for domestic companies is 30%, in addition to a surcharge of 5% where thetotal income exceeds INR 10 million. A 2% education cess and 1% secondary and highereducation cess (collectively referred to as cess) also are levied on the amount of income taxincluding the surcharge. The effective tax rate for domestic companies is, therefore, 30.9% (whereincome is less than or equal to INR 10 million) and 32.445% (where income exceeds INR 10million).

Nonresident companies and branches of foreign companies are taxed at a rate of 40%, plus asurcharge of 2%, where total income exceeds INR 10 million. The amount of tax is furtherincreased by a 3% cess, bringing the effective tax rate to 42.024%, where income exceeds INR 10million and 41.2%, where income is less than or equal to INR 10 million.

The taxable income of nonresident companies engaged in certain businesses (i.e. prospecting for,extraction or production of mineral oils, civil construction, testing and commissioning of plant andmachinery in connection with turnkey power projects) is deemed to be 10% of the specifiedamounts. Similarly, for nonresidents in the business of operating ships and aircraft, profits andgains from the operations are deemed to be 7.5% and 5%, respectively, of the specified amounts.

A minimum alternate tax (MAT) is imposed on resident and nonresident corporations. As from 1April 2011, where the income tax payable on the total income by a company is less than 18.5%of its book profits, the book profits are deemed to be the total income of the company on whichtax is payable at a rate of 18.5%, further increased by the applicable surcharge and cess for bothdomestic and foreign companies. Thus, the effective MAT rate for a domestic company is19.06% where the total income is less than or equal to INR 10 million, and 20.01% where thetotal income exceeds INR 10 million (rates comprise the base rate of 18.5%, plus the applicable

surcharge of 5% and cess of 3%). For nonresident companies, the effective MAT rate is 19.06%where the total income is less than or equal to INR 10 million, and 19.44% where the totalincome exceeds INR 10 million (rates comprise the base rate of 18.5%, plus the applicablesurcharge of 2% and the 3% cess). Tax paid under the MAT provisions may be carried forward tobe set off against income tax payable in the next 10 years, subject to certain conditions. Thescope of MAT has been broadened by making developers of SEZs and units in SEZs liable topay MAT. MAT also applies at a rate of 18.5% on limited liability partnerships.

A domestic company is required to pay DDT of 15% (plus a surcharge of 5% and 3% cess) on anyamounts declared, distributed or paid as dividends. After adding the cess, the effective DDT rate is16.2225%. However, the ultimate Indian holding company is allowed to set off the dividendsreceived from its Indian subsidiary against dividends distributed in computing the DDT tax providedcertain conditions are satisfied. Dividends paid to the New Pension Scheme Trust are exempt fromDDT.

Taxable income defined

The law divides taxable income into various categories or heads. The heads of income relevantto companies are:

Business or professional income;

Capital gains;

Income from real estate; and

Other income.


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In general, a companys taxable income is determined by aggregating the income from all of theheads. The computation of business income is normally based on the profits shown in the financialstatements, after adjusting for exempt income, nondeductible expenditure, special deductions andunabsorbed losses and depreciation.

Dividends paid by a domestic company are exempt from tax in the hands of the recipient providedDDT has been paid by the distributing company, but dividends on which DDT has not been paidare taxed as income in the hands of the recipient at the normal rates subject to treaty rates.

Deductions

Various deductions are taken into account in computing taxable income and each head of incomehas its own special rules. Allowable deductions include wages, salaries, reasonable bonuses andcommissions, rent, repairs, insurance, royalty payments, interest, lease payments, certain taxes(sales, municipal, road, property and expenditure taxes and customs duties), depreciation,expenditure for materials, expenditure for scientific research and contributions to scientificresearch associations and professional fees for tax services.

Specific deductions are allowed as follows:

A 100% deduction for interest payments on capital borrowed for business purposes.However, if the capital is borrowed for the acquisition of an asset for the expansion of anexisting business or profession, interest paid for any period beginning from the date onwhich the capital was borrowed for the acquisition of the asset up to the date the asset

was first put into use is not allowable as a deduction; instead, it may be capitalized withthe cost of the asset and eligible for depreciation.

Capital expenditure on research conducted in-house (this can rise to 200%) and forpayments made for scientific research to specified companies or specified organizations(200%) for payments to a national government laboratory, certain educational institutionsand certain approved research programs).

Investment-linked incentives (a 100% deduction for capital expenditure other thanexpenditure incurred on the acquisition of land, goodwill or financial instruments) forsetting up and operating cold chain facilities, warehousing and laying and operating cross-country natural gas or crude or petroleum oil pipeline networks for distribution, includingstorage facilities that are an integral part of such networks. This incentive is also availableon investment made in housing projects under a scheme for affordable housing, building

and operating two-star hotel, building and operating a hospital with 100 beds and for theproduction of fertilizer in India.

Interest, royalties and fees for technical services paid outside India to overseas affiliatesor in India to a nonresident provided tax is withheld.

Payments to employees under voluntary retirement schemes may be deducted over fiveyears. To encourage companies to employ additional workers, an amount equal to 30% ofadditional wages paid to new workmen is allowed as a deduction for three years subject tocertain conditions.

Securities transaction tax paid.

Business losses (see below).

Indian tax law does not permit companies to take a deduction for a general bad debt reserve,

although specific bad debts may be deducted when written off. Expenses incurred for raising sharecapital are not deductible, as the expenditure is considered capital in nature. No deduction isallowed for expenditure incurred on income that is not taxable or for payments incurred forpurposes that are an offense or prohibited by law or that were subject to withholding tax by thepayer and the withholding obligation was not correctly administered.

Indian branches of foreign corporations may only claim limited tax deductions for generaladministrative expenses incurred by the foreign head office. These may not exceed 5% of annualincome or the actual payment of head office expenditure attributable to the Indian business duringthe year (unless otherwise provided for in an applicable tax treaty), whichever is lower.


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Long-term capital gains of FIIs on listed shares and units of equity-oriented mutual funds whereSTT is paid are exempt, and short-term capital gains on such assets where STT is paid are taxedat 15% (plus the applicable surcharge and cess). Other long-term capital gains derived by FIIs (i.e.gains not arising from listed securities that are exempt as discussed above) are taxed at 10% (plusthe applicable surcharge and cess). Other short-term capital gains derived by FIIs (i.e. gains notarising from listed securities referred to above) are taxed at 30%, plus the applicable surchargeand cess.

Other long-term capital gains derived by residents and nonresidents (i.e. gains not arising from

listed securities that are exempt as discussed above) are taxed at 20% (plus the applicablesurcharge and cess). In calculating long-term gains, the costs of acquiring and improving thecapital asset are linked to a cost inflation index published by the government. The holder of anasset purchased before 1 April 1981 may use the fair market value of the asset on that date as thecost basis for computing the capital gain. This generally reduces tax liability.

Other short-term capital gains derived by residents and nonresidents (i.e. gains not arising fromlisted securities referred to above) are taxed at normal rates (plus the applicable surcharge andcess).

Gains from the sale of long-term capital assets are exempt from capital gains tax if they arereinvested in certain securities (subject to an annual investment cap of INR 5 million) within sixmonths and locked in for three years.

3.5 Double taxation reliefUnilateral relief

A resident of India that derives income from a non-tax treaty country is elig ible for a credit for theforeign income taxes paid. The credit is granted on a country-by-country basis and is limited tothe lesser of the tax on income from the foreign country concerned or the foreign income taxpaid on the income. Most of Indias treaties grant relief from double taxation by the credit methodor by a combination of the credit and exemption methods.

Tax treaties

India has a comprehensive tax treaty network in force with many countries. There are alsoagreements limited to aircraft profits and shipping profits. Indias treaties also generally containOECD-compliant exchange of information provisions.

There is no special procedure to obtain a reduced rate under a tax treaty.

India Tax Treaty Network

Armenia Hungary Mozambique Sudan

Australia Iceland Myanmar Sweden

Austria Indonesia Namibia Switzerland

Azerbaijan Israel Nepal Syria

Bangladesh Italy Netherlands Taiwan

Belarus Japan New Zealand Tajikistan

Belgium Jordan Norway TanzaniaBotswana Kazakhstan Oman Thailand

Brazil Kenya Philippines Trinidad & Tobago

Bulgaria Korea (R.O.K.) Poland Turkey

Canada Kuwait Portugal Turkmenistan

China Kyrgyzstan Qatar Uganda

Cyprus Libya Romania Ukraine

Czech Republic Luxembourg Russia United Arab Emirates


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Denmark Malaysia Saudi Arabia United Kingdom

Egypt Malta Serbia United States

Faroe Islands Mauritius Singapore Uzbekistan

Finland Mexico Slovakia Vietnam

France Moldova Slovenia Zambia

Georgia Mongolia South Africa

Germany Montenegro Spain

Greece Morocco Sri Lanka

3.6 Anti-avoidance rules

Transfer pricing

The transfer pricing regulations are broadly based on the OECD guidelines, with some differences(and more stringent penalties). Definitions are provided for international transaction, associatedenterprise and arms length price. The definition of associated enterprise extends beyondshareholding or management relationships, as it includes some deeming clauses.

The arms length principle is enforced by determining an arms length price for an international

transaction, and allowing a deviation from that to be within 5% of the price of the internationaltransaction. Taxpayers must maintain documentation and obtain a certificate (in a prescribedformat) from a chartered accountant furnishing the details of international transactions withassociated enterprises, along with the methods used for benchmarking. Where the application ofthe arms length price would reduce the income chargeable to tax in India or increase the loss, noadjustment is made to the income or loss. If an adjustment is made to a company enjoying a taxholiday, the benefit of the holiday will be denied in relation to the adjustment made.

Transfer pricing audits have been aggressive and the topic of substantial controversy and litigationin recent years. Several measures, such as the introduction of a Dispute Resolution Panel,additional resources to handle transfer pricing audits and an extension of the time to complete theaudit have been introduced to reduce the burden of the audit on the tax officers and make the auditprocess more reasonable so that the results are evaluated according to the facts andcircumstances of each taxpayer.

Thin capitalization

India does not have thin capitalization rules.

Controlled foreign companies

India does not have CFC rules, but these are proposed under the DTC.

General anti-avoidance rule

India currently does not have a GAAR, but one is included in the DTC.

3.7 Administration

Tax year

The tax year in India, known as the previous year (fiscal year), is the year beginning 1 April andending 31 March. Income tax is levied for a previous year at the rates prescribed for that year.Income of a fiscal year is assessed to tax in the next fiscal year (i.e. assessment year).

Filing and payment

Taxes on income of an assessment year are usually paid in installments by way of advance tax. Acompany must make a prepayment of its income tax liabilities by 15 June (15% of the total taxpayable), 15 September (45%), 15 December (75%) and 15 March (100%). Any overpaid amountis refunded after submission of the final tax return.


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A company must file a final tax return, reporting income of the previous year, by 30 Septemberimmediately following the end of the fiscal year, stating income, expenses, taxes paid and taxesdue for the preceding tax year. A non-corporate taxpayer that is required to have its accountsaudited also must file a return by 30 September. The due date for filing returns and transfer pricingaccountants report is extended to 30 November for taxpayers with international transactions duringthe year. All other taxpayers must submit a return by 31 July. Guidance is issued annually for theselection of tax returns for scrutiny by the tax authorities. If the tax authorities can proveconcealment of income, a 100%-300% penalty may be levied on the tax evaded.

All taxpayers are required to apply for a permanent account number (PAN) for purposes ofidentification. The PAN must be quoted on all tax returns and correspondence with the taxauthorities and on all documents relating to certain transactions. As from 1 April 2010, everyrecipient (whether resident or nonresident) of India-source income subject to withholding taxmust furnish a PAN to the Indian payer before payment is made. Otherwise, tax will have to bewithheld at the higher rate as prescribed.

Consolidated returns

No provision is made for group taxation or group treatment; all entities are taxed separately.

Statute of limitations

If a tax officer believes that income has escaped assessment, proceedings can be reopened withinseven years from the end of the financial year in which the income escaping audit exceeds INR 1

million. However, the proceedings can be reopened only within five years if the tax officer hasconducted an audit and assessed income, and the taxpayer has submitted a return and fullydisclosed all material facts necessary for assessment. There is no limitations period for theauthorities to collect tax once an audit is completed and a demand for tax is made.

Tax authorities

The Central Board of Direct Taxes (CBDT) is the apex body which is responsible for providingessential inputs for policy and planning of direct taxes in India and for administration of direct taxlaws through the following subordinate income tax authorities:

Director-General of Income-tax or Chief Commissioners of Income-tax;

Director of Income-tax or Commissioner of Income-tax or Commissioner of Income-tax(Appeals);

Additional Director of Income-tax or Additional Commissioner of Income-tax or AdditionalCommissioner of Income-tax (Appeals);

Joint Director of Income-tax or Joint Commissioner of Income-tax;

Deputy Director of Income-tax or Deputy Commissioner of Income-tax or DeputyCommissioner of Income-tax (Appeals);

Assistant Director of Income-tax or Assistant Commissioner of Income-tax;

Income-tax Officer;

Tax Recovery Officer; and

Inspector of Income-tax.

Rulings

The Authority for Advance Rulings issues rulings on the tax consequences of transactions orproposed transactions with nonresidents. Rulings are binding on the applicant and the taxauthorities for the specific transaction(s).

3.8 Other taxes on business

None


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4.0 Withholding taxes

4.1 Dividends

India does not levy withholding tax on dividends. However, the company paying the dividends issubject to DDT at a rate of 15% (plus a surcharge of 5% and a cess of 3%).

4.2 Interest

Interest paid to a nonresident is generally subject to a 20% withholding tax, plus the applicablesurcharge and cess (2% surcharge if payment exceeds INR 10 million and 3% cess, for awithholding rate of 20.6% or 21.012%). The rates may be reduced under a tax treaty.

4.3 Royalties

The withholding tax on royalties and fees for technical services paid to a nonresident is 10%unless reduced by treaty. Additionally, a surcharge (2% if the payment exceeds INR 10 million)and cess (3%) are imposed, increasing the withholding tax to 10.3% or 10.506%.

4.4 Branch remittance tax

Indian branches of nonresident companies are subject to a 40% corporate income tax on Indian-source income earned by or attributed to the branch.

4.5 Wage tax/social security contributions

There are no wage taxes. Both the employer and the employee are required to contribute tosocial security. The employee contributes 12% of his/her salary to the employee provident fundand 1.75% to the state insurance scheme.

4.6 Other

Contractors tax

All companies must withhold tax at a rate of 40% plus a surcharge (2% if the payment exceeds

INR 10 million) and cess (3%) from payments to a nonresident contractor companies and 30%plus a surcharge (2% if the payment exceeds INR 10 million) and cess (3%) in the case ofindividuals for carrying out any work under a contract or for supplying labor for carrying out suchwork, subject to satisfaction of certain conditions. An application may be submitted to the taxauthorities to benefit from a lower rate or an exemption.


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5.0 Indirect taxes5.1 Value added tax

All Indian states, including union territories, have moved to the VAT regime a broad-basedconsumption-type destination-based VAT driven by the invoice tax credit method that applies toalmost all types of movable goods and specified intangible goods, barring a few exempted goods

that vary from state to state. The tax paid on specified inputs procured within any state involved inthe manufacturing of goods for sale within the state or for interstate sale and the input tax onspecified goods purchased within the state by a trader (in both cases from registered dealers) areavailable as VAT credits, which may be adjusted against the tax on output sales within the state orthe tax on interstate sale.

The standard VAT rate is 12.5%, with reduced rates of 5% and 1% in most states. The reducedrates apply to the sale of agricultural and industrial inputs, capital goods and medicines, preciousmetals, etc. A refund of input tax is available for exporters.

Registration is compulsory for businesses exceeding a certain annual turnover (INR 500,000 inmost states), although certain state VAT laws also specify monetary limits of sales and/orpurchases. VAT returns and payments are either monthly or quarterly based on the amount of thetax liability.

5.2 Capital tax

India does not levy capital duty, although a registration duty is levied.

5.3 Real estate tax

Owners of real estate are liable to various taxes imposed by the state and municipal authorities.These taxes vary from state to state.

5.4 Transfer tax

STT is levied on the purchase or sale of an equity share, derivative or unit of an equity-orientedfund entered in a recognized stock exchange in India at the following rates:

0.025% paid by the seller on the sale of an equity share or unit of an equity-oriented fundthat is non-delivery-based;

0.017% paid by the seller on the sale of an option and futures in securities;

0.25% paid by the seller on the sale of unit of equity oriented fund to the mutual fund;

0.125% paid by the buyer on the sale of an option in securities, where the option isexercised; and

0.125% each paid by the buyer/seller on the purchase/sale of an equity share or unit of anequity-oriented fund that is delivery-based.

STT paid in respect of taxable securities transactions entered into in the course of business isallowed as a deduction if income from the transactions is included in business income.

5.5 Stamp duty

Stamp duty is levied on instruments recording certain transactions, at rates depending on thenature of instrument and whether the instrument is to be stamped under the Indian Stamp Act,1899 or under a State stamp law. Stamp duty rates for an instrument vary from state to state.

5.6 Customs duties

Customs duties are levied by the central government generally on the import of goods into India,although certain exported goods also are liable to customs duties. The basis of valuation in respectof imports and exports is the transaction value, except where the value is not available or has to beestablished because of the relationship between the parties.


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The rate of basic customs duty is 10%. However, the aggregate customs duty, including additionalduties and the education cess, is 26.85%. Several products attract the basic customs duty of 7.5%,which works out to an effective duty of 23.89%. The rates vary depending on the classification ofthe goods under the Customs Tariff Act, 1975. Safeguard and anti-dumping duties also are leviedon specified goods. The clearance of goods from Customs is based on self-assessment of bills ofentries for imports.

5.7 Environmental taxes

None

5.8 Other taxes

Central sales tax

The central government levies a central sales tax (CST) on the interstate movement of goods, butthe tax is collected and retained by the origin state. CST is levied at a rate of 2% on the movementof such goods from one state to another provided specified forms are submitted. Failure to submitthe specified forms results in CST being charged at the applicable local rate of the state.Registration is compulsory for all dealers engaging in interstate sales or purchase transactionsliable to CST. CST returns and payments are monthly or quarterly based on the period applicablefor filing the return/payment of tax in the state in which CST is required to be paid.

CST paid on interstate purchases is not allowed as a set off or as a credit against VAT/CSTpayable in any state. Stock transfers of goods between states also are subject to reversal(surrendering) of the input tax credit up to specified percentages (ranging from 2% to 4% of thepurchase value of respective goods) in the state from which the goods are stock transferred.

Service tax

Service tax is levied at 10.30% of the value of taxable services (including the education cess andthe secondary and higher education cess) on a broad range of services. More than 118 servicesare subject to service tax, including advertising, brokering, business auxiliary, business support,information technology software, supply of tangible goods, banking and financial consulting,construction, credit rating, management consulting, financial leasing, franchise services, creditcard services, merchant banking, cargo handling, cable operation, storage and warehousing,intellectual property services, air-conditioned restaurant services, short-term accommodation,

renting of commercial property and works contract services. Service providers having aggregatevalue of taxable services up to INR 1 million are outside the scope of service tax, subject to certainconditions.

The receipt basis for determining the point of taxation was replaced as from 1 April 2011 in favor ofa new rule based on an accrual system of accounting. Credit for inputs, capital goods and inputservices used in the provision of taxable output services is available, subject to specific conditions.Trading and partially taxed services, however, are exempted services for purposes of an input taxcredit to offset output tax.

Central excise duty

A central excise duty is levied by the central government on the production or manufacture ofgoods in India. Liability for paying the duty is on the producer or manufacturer. Excise duty ratesare based on the transaction value, except where such value is not available or has to be

otherwise established. The standard excise duty rate is 10.3%, including education cess. The ratesvary depending on the classification of goods under the Central Excise Tariff Act, 1985. Credit forinputs, capital goods and input services used in the production of excisable goods is availablesubject to specific conditions.

Wealth tax

Wealth tax is levied on specified assets and on specified categories of persons on specified assetsexceeding INR 3 million. The wealth tax is 1% on the aggregate value of specified assets (net ofdebt secured on, or incurred in relation to, the assets).

R&D cess


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The R&D Cess Act (1986) provides for a cess of 5% on payments made for the import oftechnology. A credit mechanism to offset the cess may be available in certain situations upon thefulfillment of certain requirements.

Goods and services tax

India is expected to implement a goods and services tax and a bill to amend the Indias constitutionto facilitate introduction of the same is pending before the Parliament


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Use of movable assets of employer 10% per annum of the actual cost of the assets orthe amount of rent paid by the employer if the assets are leased (the use of computersand laptops is not treated as a perquisite).

Interest-free/concessional loans exceeding INR 20,000 Interest computed at the annualrate charged by the State Bank of India.

Other benefits The taxable perquisites value will be computed per the prescribedvaluation rules.

Approved superannuation fund A contribution in excess of INR 100,000 is taxable.

Medical reimbursements/health insurance premiums Exempt up to INR 15,000 perannum.

Voluntary retirement schemes Exempt up to INR 500,000 on satisfaction of specifiedconditions.

Deductions and reliefs

Standard deductions are not allowed. Allowed deductions include contributions to life insurance;recognized provident funds; national savings certificates; the national savings scheme;subscriptions to certain mutual funds; deposits made under the Senior Citizen Savings SchemeRules (2004); five-year time deposits under the Post Office Time Deposit Rules (1981); certaineducation expenses up to INR 100,000; interest on loans for higher education (self, spouse and

children) without limit; mortgage interest up to INR 150,000 annually on home loans obtained on orafter 1 April 1999 if the borrower resides in the home; royalties received by authors of literary,artistic and scientific books and for income from the exploitation of patents of up to INR 300,000.An additional deduction of INR 20,000 is allowed for investments in infrastructure bonds.

Rates

The personal tax rate is imposed at progressive rates of up to 30% (not including educationsurcharges totaling 3% that are levied on tax payable). A general exemption from tax and filingobligations applies for those with an income of less than INR 180,000 (INR 190,000 for residentfemale taxpayers below 60 years of age) and INR 250,000 for resident senior citizens. A newcategory of taxpayer called very senior citizen has been introduced to cover individuals who are80 years and above. The basic exemption limit for this category is INR 500,000.

The current tax brackets are: 10% bracket (exclusive of surcharges) for income from INR 180,001to INR 500,000; the 20% bracket from INR 500,001 to INR 800,000 and the 30% bracket(exclusive of surcharges) for amounts in excess of INR 800,000.

6.3 Inheritance and gift tax

India does not levy inheritance or gift tax.

6.4 Net wealth taxAll individuals and other specified persons must pay a 1% wealth tax on the aggregate value of netwealth exceeding INR 3 million of non-productive assets such as land; buildings not used asfactories; commercial property not used for business or profession; residential accommodation foremployees earning over INR 500,000 per annum; gold, silver, platinum and other precious metals,

gems and ornaments; and cars, aircraft and yachts.

6.5 Real property taxMunicipalities levy property taxes (based on assessed value), and states levy land-revenuetaxes.

6.6 Social security contributions

Both the employer and the employee are required to contribute to social security. The employeecontributes 12% of his/her salary to the employee provident fund and 1.75% to the stateinsurance scheme.


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6.7 Other taxes

None

6.8 ComplianceAll taxpayers are required to apply for a permanent account number (PAN) for purposes ofidentification. The PAN must be quoted on all tax returns and correspondence with the taxauthorities and on all documents relating to certain transactions. As from 1 April 2010, every

recipient (whether resident or nonresident) of India-source income subject to withholding taxmust furnish a PAN to the Indian payer before payment is made. Otherwise, tax will have to bewithheld at the higher rate as prescribed.

Individuals must file an income tax return showing their total income in the previous year if itexceeds INR 0.5 million. The return must be f iled in respect of a previous year is 31 July of theassessment year.


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7.0 Labor environment

7.1 Employee rights and remuneration

Indias labor laws are complex, with more than 60 pieces of relevant legislation. Employers faceparticular difficulties in terminating employment and closing an industrial establishment.

Working hours

The Factories Act, 1948 requires maximum working hours of 48 hours per week. In practice, officeemployees normally work a five-day week of 40-45 hours. Factory workers have on average a six-day week of 48 hours. Any work beyond nine hours per day or 48 hours per week requirespayment of overtime at double the normal wage.

Maternity leave of 12 weeks is provided under the Maternity Benefit Act, 1961.

The Industrial Employment (Standing Orders) Act, 1946 requires industrial establishments with 100(number may vary by state) or more employees to establish standing orders that specify workingconditions (hours, shifts, annual leave, sick pay, termination rules, etc.). These orders must meetminimum state standards and may be changed only with the consent of the workers or the tradeunions and only to augment benefits.

7.2 Wages and benefits

Wages and fringe benefits vary considerably depending on the industry, company size and region.The floor level minimum wage is INR 115 per day and may be higher in certain industries. Wagesgenerally have two components: the basic salary and the dearness allowance, which is linked to thecost-of-living index. The allowance, paid as part of the monthly salary, may be at a flat rate or on ascale graduated by income group. A mandatory bonus supplements wages.

Companies use both time and piece rates. The former is more common in organized factoryindustries, such as engineering, chemicals, cement, paper, etc. Rates may be per hour, day, weekor month. Piece rates, which the government has encouraged to boost productivity, are usuallypaid monthly, although casual workers are paid on a daily basis. Some industries pay productionpremiums.

In the organized sector, wages are often set by settlements reached between trade unions andmanagement. Statutory benefits, such as provident funds, pensions and bonuses, normally add30%-42% to the base pay.

The Payment of Bonus Act, 1965 requires all employers covered under the statute to pay a bonusto their employees. The Act applies to factories with 10 or more workers and other establishmentswith 20 or more persons.

A bonus must be paid to all employees that earn a salary or wage up to INR 10,000 per month andthat have worked for at least 30 days during the year. The minimum amount of bonus is 8.33% ofsalary or wages or INR 100 per annum, whichever is higher. The maximum bonus payable is 20%of salary or wage per annum.

Pensions

The Employees Provident Fund and Miscellaneous Provisions Act, 1952 provides for providentfunds and pension contributions for certain establishments with 20 or more employees. In practice,several industries are covered under the provident fund laws. Employers and employees contribute10% or 12% (depending upon the type of industry) of wages (i.e. basic wages, dearnessallowance, retaining allowance and cash value of food concession) per month. From theemployers contribution, an amount up to INR 6,500 per annum (8.33% of wages) goes towardsthe pension fund, and the balance towards the provident fund. Employees only contribute to theprovident fund (12% of monthly salary).

Exemption from such contributions is provided to expatriates from countries that have concluded asocial security agreement with India (currently Belgium, France, Germany, Luxembourg andSwitzerland).


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Health insurance

The Employees Compensation Act, 1923 provides compensation for industrial accidents andoccupational diseases resulting in disability and death. The minimum compensation payable by theemployer is INR 120,000 for death and INR 140,000 for permanent total disability. The maximum isINR 914,160 for death and INR 1,096,992 for total disability.

The Act, which applies to factories that employ at least 10 persons, provides health insurance forindustrial workers, for which employers contribute 4.75% of an employees wages and employeescontribute 1.75% on a monthly basis.

Other benefits

Share options are common in information technology, biotechnology, media, telecom sectors andbanks. SEBI has issued the SEBI (Employee Stock Option Scheme and Employee Stock PurchaseScheme Guidelines (1999), which are applicable to listed companies. Companies are permitted tofreely price the stock options, but must book the accounting value of options in their financialstatements. The guidelines specify among others a one-year lock-in period, approval ofshareholders by special resolution, formation of a compensation committee, accounting policiesand disclosure in directors reports.

The Payment of Gratuity Act, 1972 requires employers to pay a gratuity to workers who haverendered continuous service for at least five years at the time of retirement, resignation andsuperannuation at the rate of 15 days wages for every completed year of service or part thereof in

excess of six months up to a maximum of INR 1 million. The gratuity is payable at the same rate incase of death or disablement of workers even though the worker has not completed five years ofcontinuous service.

7.3 Termination of employment

The Industrial Disputes Act, 1947 requires industrial establishments with 100 (the number mayvary by state) or more employees to obtain government permission to close an operation.Employers must apply for permission at least 90 days before the intended closing date. If thegovernment does not issue a decision within 60 days of the application, approval is deemed to begranted. An employer can apply to the relevant government agency to review its decision, orappeal to the Industrial Tribunal. Workers in an establishment closed illegally (i.e. without approval)remain entitled to full pay and benefits. The employer may appeal against the labor court ortribunal order to a higher court and during the appeal process, the reinstated worker remains

entitled to 100% of wages.

Companies may use voluntary retirement schemes (VRSs) or redeployments. Beneficiaries underan approved VRS are exempt from tax on monetary benefits up to INR 500,000. Companies mayamortize their VRS expenses over five years under the tax law.7.4 Labor-management relations

With some exceptions, India has company unions rather than trade unions. These are oftenaffiliated with national labor organizations. Various trade unions are promoted by political parties.

In manufacturing and other companies, prior discussions between management and labor leadersoften help to forestall strikes. When strikes or disputes occur, they are usually settled bynegotiation or through conciliation boards. It is common practice in many foreign-owned

manufacturing companies to avert strikes by employing a labor welfare officer to act as a go-between for labor and management. By law, manufacturing companies with 500 or more workersmust have one or more welfare officers who act as personnel manager, legal adviser on labor lawand promote relations between factory management and workers. In non-unionized companies incertain states, workers representatives may be appointed to represent the workers.

The Industrial Disputes Act, 1947 requires industrial establishments with 100 or more workers toset up works committees consisting of representatives of employers and workers to promotemeasures for securing and preserving amity and good relations between the employer andworkforce.


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Collective bargaining has gained ground in recent years, but agreements normally apply only atthe plant level. Collective agreements are the norm in banking; such pacts may last up to fiveyears.

At the central level, labor policies are managed jointly by the Indian Labor Conference and itsexecutive body, the Standing Labor Committee, along with the various industrial committees.Representatives from the government, employers and labor are included in all three groups.7.5 Employment of foreigners

Expatriate employment in manufacturing industries is generally limited to technical and specializedpersonnel. Many foreign affiliates have a few expatriates in India. Permission from the RBI or thegovernment is not required to employ a foreign national, but the Ministry of Home Affairs, whichgrants visas and certain specific appointments, may require government approval in some cases.Foreigners entering India on a student, employment, research or missionary visa that is valid formore than 180 days are required to register with the Foreigners Registration Officer under whosejurisdiction they propose to stay within 14 days of arrival in India, irrespective of their actual periodof stay. Foreigners visiting India on any other category of long-term visa, including a business visathat is valid for more than 180 days are not required to register if their actual stay does not exceed180 days on each visit. If such a foreigner intends to stay in India for more than 180 days during aparticular visit, he/she should register within the expiry of 180 days.

It normally takes about three months to obtain an immigration visa. The visa is generally granted

for the same period as the employment contract. Once it is obtained, a stay permit is granted; thismust be endorsed annually by the state government where the foreign national resides.

Expatriates are often paid salaries several times more than those of their Indian counterparts.Domestic private sector salaries are rising quickly, although they vary widely among industries.

The Ministry of Commerce and Industry has issued guidance clarifying that foreign nationalscoming to India to execute projects or contracts are not covered under business visas andrequire employment visas. E-visa applications of foreign nationals working in India will beprocessed by the Indian missions abroad and will not be subjected to any quota restrictions.However, foreign nationals will have to draw a salary in excess of USD 25,000 to be eligible foran E-visa.


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8.0 Deloitte International Tax SourceProfessionals of the member firms of Deloitte Touche Tohmatsu Limited have created the DeloitteInternational Tax Source (DITS), an online resource that assists multinational companies inoperating globally, placing up-to-date worldwide tax rates and other crucial tax material within easyreach 24/7.

Connect to the source and discover:A unique tax information database for 65 jurisdictions including

Corporate income tax rates;

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Historical corporate rates;

In-force and pending tax treaty rates on dividends, interest and royalties;

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Guides and HighlightsDeloittes Taxation and Investment Guides provide an analysis of the

investment climate, operating conditions and tax system of most major trading jurisdictions whilethe companion Highlights series summarizes the tax landscape of more than 130 jurisdictions.

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Tax toolsOur suite of tax tools include annotated, ready-to-print versions of the holdingcompany and transfer pricing matrices; expanded controlled foreign company coverage for DITScountries; an information exchange matrix and monthly treaty update; and expanded coverage ofVAT/GST/Sales Tax rates.

WebcastsLive interactive webcasts and Dbriefs by Deloitte professionals give you valuableinsights into important tax developments affecting your business.

DITS is free, easy to use and always available!

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9.0 Office locationsTo find out how our professionals can help you in your part of the world, please contact us at theoffices listed below or through the contact us button on http://www.deloitte.com/tax.

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No A2, M2 & N2,Block EP & GP Sector V,Salt Lake Electronics Complex,Kolkata - 700 091Tel: +91 (033) 6612 1000Fax: +91 (033) 6612 1001

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