Direct Tax
Indian taxation overview:
Sense of duty.
India has embarked on a series of tax reforms since early 1990s. The
focus of reforms has been on rationalization of the tax rates and
simplification of procedures.
In India tax is levied by central, state and local government bodies.
Principal taxes including corporate tax, custom duties, central excise duty
and services tax are levied by the central government. On the other hand
states levy principal taxes like state excise duties, sales tax and stamp
duties. Local government bodies levy octroi duties and other taxes of local
nature like water tax and property taxes. .
Income Tax
Income earned in a financial year is liable to tax as per the rates
prescribed for that year. A financial year runs from 1 April to 31 March of
the following year. India follows a residence based taxation system.
Broadly, taxpayers may be classified as residents or non-residents.
Individual taxpayers may also be classified as 'residents but not ordinary
residents'.
An Indian company is always an Indian resident. Additionally, any other
company whose affairs are wholly controlled and managed from India is also a
resident. Any other company would be a non-resident.
Residential
Status
An individual is resident in India if he is in India in the tax year for:
- 182 days or more; or
- 60 days or more (the period of 60 days stands changed to 182
days or more for Indian citizens or persons of Indian origins on a
visit to India; and also for citizens of India who leave India for
employment abroad as member of a crew of an Indian ship) during the
tax year, and an aggregate of 365 days or more during the four years
preceding the tax year.
- An individual who does not satisfy the above conditions is a
non-resident.
- A resident is "not ordinarily resident" in India in
any tax year if he:
- has been "non-resident" in India in nine out of the 10
previous years preceding that year: or
- has during the previous seven years, preceding that year, been
in India for a total period of 729 days or less.
|
Taxability based on status
| Residential Status |
Indian Sourced Income |
Foreign Sourced Income |
| Resident |
Taxable in India |
Taxable in India |
| Resident but not ordinarily resident |
Taxable in India |
Not taxable in India |
| Non-resident |
Taxable in India |
Not taxable in India |
Heads of Income
The income is categorized under five broad heads or classes of income. The
taxable component of the income is ascertained according to the rules for a
particular head/class of income and then aggregated to determine the total
taxable income. However, losses under certain heads cannot be aggregated
with income earned under other heads.
Salaries cover those that are received for services rendered and
include wages, pension, fees, commission and the taxable value of
perquisites. For this purpose, valuation rules for certain standard
perquisites, typically provided by employers in India, have been issued.
Standard deduction is available from the salary income. The amount of
deduction depends upon the amount of salary earned.
Income from house property includes income arising from use of
residential and commercial property. Only two prescribed deductions are
permitted while computing the income.
Profits and gains from business or profession covers income earned
from business or profession net of permissible deductions, against the
revenue earned. In addition, general non-specified revenue expenses,
incurred for the business are also deductible.
Capital gains cover gains arising from transfer of capital assets.
The period of holding determines the classification of the asset, which then
determines the manner of taxation. Capital assets held for less than 36
months (12 months in case of shares/securities) are treated as short-term
assets. Other capital assets are categorized as long-term capital assets.
Long-term capital gains enjoy a lower rate of tax. This may further be
reduced by making prescribed investments.
Sale of certain specified investments are subject to gross basis of
taxation, under which tax is levied on value of transaction. Gain arising
from transactions subject to gross basis of taxation is entitled to
concessional tax treatment under income tax.
Income from other sources is the residuary head/class of income and
covers any income not specifically dealt with under the other heads. A
deduction in respect of expenses incurred for earning the income, is
available.
Individuals
Individuals are liable to tax in India at different rates of tax as under:
| Taxable income slabs (In Rupees) |
Rates of Tax |
| 0 - 100000* |
Nil |
| 100001 - 150000 |
10.2 per cent |
| 150001 - 250000 |
20.4 per cent |
| 250001 - 1000000 |
30.6 per cent |
| 1000000 and above |
33.66 per cent |
- Basic exemption limit in case of women is INR 135, 000 and in
case of senior citizen INR 185, 000
- Special rates/ exemptions apply in case of long-term/ short-term
capital assets. Individuals are also liable to surcharge as
discussed subsequently.
- Non-resident individuals may also be liable to tax in India on a
gross basis depending upon the type of income received.
|
Foreign Nationals
Indian tax law provides for exemption of income earned by foreign nationals
for services rendered in India, subject to prescribed conditions. For
example
- Remuneration from a foreign enterprise not conducting any
business in India provided, the individual's stay in India does not
exceed 90 days and the payment made is not deducted in computing the
income of the employer;
- Remuneration received by a person employed on a foreign ship
provided his stay in India does not exceed 90 days;
- Remuneration of foreign diplomats, consular staff, trade
officials and their staff and family; and
- Income of an employee or consultant of a government approved
foreign charitable institutions.
|
Companies
Resident Companies
Indian resident companies are liable to tax at 33.66 per cent on net basis.
Additionally, companies are also liable to dividend distribution tax (DDT)
at 14.025 per cent on the amount of profits distributed to shareholders.
Non-resident Companies
Non-resident companies are typically liable to tax at 41.82 per cent on net
basis. Non-resident companies may be taxed on a gross basis or on a
presumptive basis in certain cases. However, income from long-term capital
gains is taxable at the rate of 20.91 per cent.
Kinds of Taxes
Annual Tax
An annual tax is levied on income earned, for a financial year, on the
various taxpayers listed above as per the rates declared by the annual
budget. The rates for the financial year 2005-06 are as stated in the
section dealing with "Taxation of different taxpayers". The rates
would vary with each budget. The annual tax is payable in advance by way of
quarterly installments during the financial year. The quarters would vary
depending on the taxpayer involved e.g. in the case of companies the payment
for the first quarter would fall on 15 June of the financial year involved.
Minimum Alternate Tax (MAT)
The domestic tax law also requires companies to pay MAT in lieu of the
regular corporate tax, in a case where the regular corporate tax is lower
than the MAT. MAT is computed on the book profits; subject to certain
prescribed adjustments at the rate of 8.415 per cent in the case of domestic
companies and 7.841 per cent in case of non-resident companies; MAT paid in
any year is now available as credit in any subsequent year.
Dividend Distribution Tax (DDT)
Dividends are currently exempt from taxes in India. However the company
paying the dividends is required to pay DDT on the amount of dividends
declared, at the rate of 14.025 per cent. DDT is a tax payable on the
dividend declared, distributed or paid.
