India: Taxation Laws of India - An Overview

Taxes in India can broadly be classified into direct and indirect.

These include Income tax, Wealth tax and Interest Tax. The most significant of direct taxes is income tax.

The levy of income tax is governed by the Income-Tax Act, 1961. This is an enormously complex legislation running into over 300 Sections with several subsections. The Act undergoes changes every year with additions and deletions brought out through a Finance Act passed by the Parliament¹.

Broadly, income has been divided into five categories:

The tax incidence on the income of assesses is determined by their residential status. Different rates of taxes are applicable to the income of individual and non-individuals. The general rules of taxation on income are:

• Resident taxpayers are taxed on their worldwide income.
• Nonresident taxpayers are taxed only on income received in India or on income arising (or deemed to arise) in India.
• Corporate income is taxed both at corporate level and to shareholders upon distribution as dividends.
• The accounting year for tax purposes is April 1 to March 31.
• Double taxation relief is offered to residents through credits under the Income Tax Act and under the tax treaties.

The rates of taxes given below apply to all types of income except long term capital gains.

The income of non-individual resident assessees such as companies, partnerships etc. is taxable at 35 percent (plus a surcharge of 10 percent on tax) whilst the income of non-individual non-resident assessees is taxable at the rate of 48 percent.

Tax rates for individuals range between 10 percent and 30 percent depending on the tax slab in which the total income of the assessee falls.

The provisions of the Income Tax Act are also oriented to promoting the public purpose of economic development. Accordingly, the Act allows a ten year tax holiday for Infrastructure Projects such as development and/or operation & maintenance of roads, highways, ports, airports, rail systems, etc; power generation; development and/or operation & maintenance of Industrial parks including Special Economic Zones (SEZs). Further there is concessional rate of taxation for income from exports and tax incentives for the establishment of industries in areas notified as backward or underdeveloped.

India has executed double taxation avoidance agreements with many countries, including the UK, the USA, Cyprus, Mauritius Islands, etc. Favorable tax treatment is available under these treaties. It is quite common for foreign companies to route investments through the Mauritius Islands in order to avail of reduced withholding taxes on payments of royalty, technical service fees, interest on loans, capital gains, etc.

The Authority for Advance Rulings ('AAR'), constituted under the Income Tax Act, 1961 is authorised to determine any question of law or facts in relation to transactions which have been undertaken or are proposed to be undertaken² by a non-resident. The AAR is required to make an advance ruling within a period of six months. The advance ruling of the AAR is binding on the Commissioner of Income Tax and other subordinate income tax authorities and continues to be in force unless there is a change in law or in the facts on the basis of which it was pronounced.

A. Central Excise³

Excise duty is an indirect tax levied on a 'manufacturer' on the manufacture of dutiable goods. The liability arises upon ‘manufacture’ which may well include intermediary stages of production of final product. However, for ease of collection, duty is payable at the time of removal of goods from the factory.

The budget for the financial year 2000 streamlined the provisions relating to rates of excise duty. As a result, the then existing three rates of excise duty, namely 8 percent, 16 percent and 24 percent were converged into a uniform rate of 16 percent. This rate is called Central Value Added Tax (CENVAT). On a few items however, special excise duty is levied.

Although India does not have a typical value-added tax system, under the MODVAT (modified value added tax), a manufacturer can obtain credit for excise duty paid on capital goods and on inputs used in the manufacture of final products. The scheme is applicable to notified inputs and final products and covers most taxable commodities. Credit is also available for Additional Customs Duty (Countervailing Duty) paid on imported capital goods and inputs.

B. Customs Duty

The Customs Act, 1962 provides for duties to be levied on goods imported into or exported from India. Duties of customs are levied at the rate specified under the Customs Tariff Act, 1975. The said Act inter alia specifies the various categories of import items in accordance with the international scheme of classification of goods - ‘Harmonised System of Commodity Classification’.

Customs duty is leviable on imports into India and is payable when the goods are cleared. There are four slabs of basic customs duty ranging from 5 percent to 35 percent. In addition to the basic customs duty; countervailing duty and special additional customs duty are also payable on imported goods. For the protection of domestic industries, the authorities are empowered to levy protective and anti-dumping duties. Export duties are practically non-existent at present. They are levied occasionally to mop up excess profitability in international price of goods in respect of which domestic prices may be low at given time.

C. Sales Tax

The Central Government levies a sales tax on the inter-state sale of goods (i.e. which results in a movement of goods from one State to another). A sales tax of 4 percent is charged when the transaction is between two registered dealers whilst sales tax of 10 percent is charged in all other cases. Besides the Central Government, various State Governments also impose a tax on sales within their respective States.

D. Services Tax

Service Tax⁴ was introduced in 1994. Significant services covered by the legislation include services rendered by General Insurance Companies and telephone connection providers.