Answer ... Indian corporates are subject to multiple taxes. For example, taxes are levied on:

• income (income tax);
• trade (goods and services tax);
• imports (customs duty); and
• employment (professional tax).

Specifically, in relation to income tax, India follows a single tax regime implemented under a central income tax law.

Answer ... Tax rates are applicable to corporate entities based on whether they are domestic companies or otherwise. A company incorporated in India is regarded as a domestic company. Corporate tax rates change regularly from year to year. Further, the tax rates vary for small companies, companies engaged in manufacturing, companies which do not claim specified deductions and exemptions, and so on. For financial years April 2020-March 2021 and April 2021-March 2022, the corporate tax rates applicable for domestic companies are as follows:

If the tax payable on a company’s total income, as computed under the normal tax computation provisions, is less than 15% of its book profits, the company is liable to pay minimum alternate tax (MAT) of 15% on such book profits. MAT is not applicable to companies that opt for the 15% or 22% tax regime.

In addition to the above rates, a surcharge is applicable at:

• 7% if net income exceeds INR 10 million, but does not exceed INR 100 million; and
• 12% if net income exceeds 100 million.

A health and education cess of 4% is also levied on income tax, plus surcharge.

Answer ... Indian tax law follows a scheduler system of taxation. For corporates, depending on the nature of income, income will be taxable under distinct heads, such as:

• income from house property;
• business income;
• capital gains (earned pursuant to transfer of capital assets); and
• income from other sources (eg, interest income, royalty income).

Ordinarily, business income is taxable on a net income basis and is computed by taking account of allowances and disallowances as specified under Indian tax law. However, in respect of certain categories of business carried on by foreign companies – such as oilfield services, shipping services and civil construction in turnkey power projects – income is taxable on a deemed profit basis. For some sectors, such as oilfield services, a deemed system of taxation is an available option.

Answer ... Taxable income is computed under different heads (see question 1.3). Different rules apply for computing income under the various heads of income, including permissible deductions.

Answer ... India follows a residence-based taxation system. While a tax resident is taxable on its worldwide income, a non-resident is taxable in respect of the following income:

• income accruing or arising in India;
• income that is statutorily deemed to accrue or arise in India; and
• income that is received or deemed to be received in India.

The above terms are defined and described under Indian tax laws.

Answer ... India follows an entity-based taxation system (as against a system of group-level taxation). Only losses specific to the entity can be adjusted, which may include losses of a foreign branch of the legal entity.

Business losses, excluding losses resulting from unabsorbed depreciation of business assets, can be carried forward for eight years and offset against business profits. This carry-forward is subject to the timely filing of the income tax return for the year of loss and a 51% continuity of ownership test being satisfied in the case of closely held companies. Unabsorbed depreciation can be carried forward indefinitely to be offset against business income of subsequent years. Special rules apply to the transfer and carry-forward of losses and depreciation in case of amalgamations and demergers.

Similarly, losses under the heading ‘capital gains’ can be carried forward for eight years and can be offset against capital gains only. Long-term capital losses may be offset against long-term capital gains, while short-term capital losses can be offset against both. There are also rules for the carry-forward and set-off of losses under the head ‘house property’.

Answer ... Income is taxable in the hands of the person that is the rightful owner of the income, thus alluding to the concept of beneficial ownership. In ordinary application, the legal owner is assumed to be the beneficial owner of income, unless in substance the arrangement between the parties denotes otherwise. However, with regard to the application of tax treaties, the entitlement to treaty benefits is specifically prescribed to be available to the beneficial owner of income.

Answer ... Yes, different tax rates apply depending on the turnover in the previous year and the nature of the business. The rate of surcharge also differs depending on the taxable income. Please see question 1.2.

Foreign companies are taxable at a rate of 40% on a net income basis if they have a permanent establishment in India. Additionally, a surcharge is applicable at:

• 2% if their net income is between INR 10 million and INR 100 million; and
• 5% if their net income exceeds INR 100 million.

A health and education cess of 4% is levied on income tax plus surcharge. Foreign companies earning income from royalties or fees for technical services without constituting a permanent establishment in India are taxable on a gross basis at a rate of 10% (plus surcharge and education cess), subject to the applicability of preferential rates under a double tax treaty.

Answer ... Indian tax law recognises a broad range of taxable persons, including:

• individuals;
• Hindu undivided families;
• companies;
• partnership firms, including limited liability partnerships;
• associations of persons or bodies of individuals, whether incorporated or not;
• local authorities; and
• all artificial legal persons that do not fall within any of the specified categories.

Different tax rates are prescribed for corporate entities and other categories of taxpayers.

Answer ... Indian tax law sets out diverse schemes of taxation and rates for various categories of income and activities. Differential schemes are provided in relation to the income of entities such as:

• foreign institutional investors;
• insurance businesses;
• non-resident sportspeople and sports associations;
• mutual funds;
• patents developed and registered in India;
• shipping businesses;
• real estate/infrastructure investment trusts; and
• units established in international financial service centres.

In addition, certain business undertaken by non-resident taxpayers – such as the operation of ships and aircraft for the carriage of passengers, livestock or mail; oilfield services; and civil construction services – are eligible for a deemed system of taxation, with a deemed profit rate ranging from 5% to 10%.

Answer ... Corporate reorganisation measures such as demergers and amalgamations, subject to prescribed conditions, generally do not attract capital gains tax under the corporate income tax regime. Broadly, such measures require the transfer of all assets and liabilities of the amalgamating company or undertaking being transferred in case of demerger and the issue of shares to the shareholders of the amalgamating/demerged entity as the consideration. Further, the transfer of capital assets by a parent company to its wholly owned Indian subsidiary and vice versa does not attract capital gains tax.

Answer ... Taxable income is computed under different heads, such as:

• salary;
• income from house property;
• business income;
• capital gains; and
• income from other sources.

Different rules apply when computing income under the various heads of income, including the permissibility of deductions. With regard to business income, as a general rule, income is taxable on a net income basis as per the books of account regularly maintained, which in theory can be on either a cash or a mercantile basis. However, corporate entities must maintain books of accounts on a mercantile basis under corporate laws, and thus a cash basis is not practically feasible for corporate taxpayers. Other taxpayers may have the flexibility to choose, although a mercantile basis is generally adopted. Indian tax law also prescribes specific income computation and disclosure standards which must be additionally considered in computing income.

Some categories of business undertaken by non-resident taxpayers – such as operation of ships and aircraft for the carriage of passengers, livestock or mail; oilfield services; and civil construction services – are eligible for a deemed system of taxation, with a deemed profit rate ranging from 5% to 10%. The deemed system is also provided for a limited category of small domestic businesses and professionals.

Answer ... There are specific rules for the conversion of income in foreign currency earned by a local reporting company. The income must be converted based on the applicable exchange rate on the specified date applicable to the income.

Answer ... Indian tax law provides for a concessional tax rate of 10% for income earned from the exploitation of patents under the patent box regime. This regime is available to a resident taxpayer which is the true and first inventor of an invention, and whose name is entered on the patent register as the patent holder in accordance with the Patents Act, 1970. No deduction is available in respect of expenditure or allowances in the year in which there is eligible royalty income from the patent.

Intangible assets – that is, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of a similar nature – are regarded as assets which, if acquired (and not self-generated), are eligible for tax depreciation for computing business profits. On the transfer of such assets, the gains may be taxable as business income or capital gains, depending on the nature and characterisation of the intangible asset.

Answer ... Employers’ contributions to social security schemes for the benefit of employees are permissible for tax deduction. Such contributions are allowed as deductions on a payments basis.

Answer ... The tax rates may differ depending on factors such as:

• residential status;
• the category of taxpayer (eg, individual, company, partnership, trust, society); and
• in some cases, the nature of the income.

However, the tax rates are universally applied across business sectors.

Answer ... India imposes no remittance tax or other category of taxes on income earned by taxpayers other than income tax. However, the rate of income tax has an additional levy of surcharge and education cess (please also see the rates discussed in question 1.2).

India imposes an equalisation levy (EL) on certain types of digital transactions. Payments for specified services – including online ads, provision for digital advertising space and other facilities or services for the purpose of online advertising – are subject to an EL of 6%.

The scope of the EL has also been widened to bring considerations in the hands of ‘e-commerce operators’ from ‘e-commerce supply or services’ within the ambit of the EL. For this purpose, an ‘e-commerce operator’ is defined as a non-resident that owns, operates or manages a digital or electronic facility or platform for the online sale of goods, the online provision of services or both. Further, ‘e-commerce supply or services’ include:

• online sales of goods owned by the e-commerce operator;
• the provision of services provided by the e-commerce operator; and
• facilitation of the online sale of goods or services.

The EL imposed on this new category of e-commerce operations of non-residents is applicable at a rate of 2%.

Answer ... There are no such deemed deductions. However, for capital gains taxation, cost indexation adjustment is available if the assets have been held long term, as per the applicable provisions.

Answer ... Expenditure of a personal or capital nature is not allowed for tax deductions. However, in the case of capital expenditure incurred on acquiring business assets (eg, plant and machinery, buildings, furniture, intangibles), tax depreciation is allowed at rates prescribed based on the written-down value method under the tax laws.

Answer ... Indian tax law offers profit-linked tax incentives, exemptions and reductions, subject to prescribed conditions, in limited cases. These incentives are being phased out in a time-bound manner.

However, to encourage investment and propel growth in key sectors, the tax laws provide for investment-linked incentives. The deduction of capital expenditure incurred wholly and exclusively for certain specified business is allowed in the year of incurrence of such expense. These provisions apply to specified businesses, which include:

• setting up and operating cold chain facility/warehousing facilities for the storage of agricultural produce;
• laying and operating cross-country natural gas or crude or petroleum oil pipeline networks for distribution, including storage facilities that are an integral part of such networks;
• building and operating a new hotel with a rating of two stars or above;
• building and operating a new hospital with at least 100 beds;
• developing and building a housing project under a government scheme for slum redevelopment/rehabilitation or affordable housing;
• producing fertilisers;
• setting up and operating a semiconductor wafer fabrication manufacturing unit; and
• developing or operating and maintaining an infrastructure facility.

Businesses that are engaged in manufacturing or production, or in the generation, transmission or distribution of power, are eligible for extra benefits in the form of an additional claim of depreciation of 20% over and above the normal rates on investments in new plant and machinery.

In addition to tax-related incentives, to promote investments, a number of states offer incentives for setting up new operations or expanding operations in India. Such incentives include:

• the allocation of land at nominal value;
• stamp duty exemptions;
• goods and services tax-linked subsidies; and
• interest subsidies.

Further, to enhance manufacturing capabilities, the central government has also announced, for a limited duration, a production-linked incentive scheme, providing a percentage of incremental sales as an incentive for certain key sectors, including:

• advance chemistry cell batteries;
• electronic/technology products;
• automobiles and auto components;
• pharmaceuticals;
• telecommunications and networking products;
• textile products;
• food products;
• high-efficiency solar photovoltaic modules;
• white goods (air conditioning and light-emitting diodes); and
• specialty steel.

Answer ... The Indian government has notified 10 income computation and disclosure standards (ICDSs). The ICDSs provide a set of rules for computing taxable income under the headings:

• profits and gains of business or profession; and
• income from other sources.

They apply to all taxpayers following the mercantile system of accounting.

The method for the valuation of inventory for the purpose of computing business profits is prescribed under a specific ICDS. The tax accounting standard is broadly aligned to general accounting norms that require inventories to be valued at the lower of the actual cost or the net realisable value. The tax accounting standard defines the basis for determining cost of inventory, net realisable values and so on.

Answer ... The tax laws generally apply only to real income/losses, and not notional gains/losses. Therefore, the taxation of derivative contracts is generally based on actual realisation. Given the complexity of derivative contracts, tax positions are often the subject of litigation, requiring an informed analysis.

Answer ... Non-resident corporate entities with a permanent establishment in India are typically taxed on a net income basis in relation to their business income, in a similar manner similar to resident entities. For specified business, a deemed system of taxation may apply.

For non-resident entities without a permanent establishment, income in the nature of royalties and technical service fees is subject to withholding tax at a rate of 10% (plus surcharge/education cess). Also, interest on foreign currency loans is subject to withholding tax at a rate of 20%. A lower rate of 5% may apply in the case of certain foreign currency/rupee-denominated loans, subject to conditions.

If more beneficial, tax treaty rates will apply to such withholding.

Answer ... Every person that is responsible for making a taxable payment to a non-resident must withhold taxes on such payment. For certain categories of payments made to non-residents, such as the following, the specific withholding tax rate is prescribed under domestic tax law:

• royalties and fees for technical services (10%);
• interest on loans (20% or 5%, depending on the nature of the loan and lender);
• capital gains (10%, 15%, 20% or 40%, depending on the nature of the capital assets and whether they are held short term or long term); and
• dividend income (20%).

Ordinary business profits of non-residents which are taxable in India are subject to withholding tax at the regular rate of 40% applicable to foreign companies. The surcharge and education cess are levied in addition. If more beneficial, tax treaty rates will apply to such withholding

Answer ... India has a wide network of double tax avoidance agreements (DTAAs). A person that is a tax resident of a country with which India has a tax treaty can avail of the beneficial provisions of a DTAA to determine its taxability. In order to claim DTAA benefits, a non-resident must obtain a tax residency certificate. If the certificate does not state all necessary details, the taxpayer must self-declare the prescribed details.

Answer ... Yes. If any person that is resident in India proves that, in respect of its income, it has paid tax in any country with which there is no agreement for the relief or avoidance of double taxation, it is entitled to deduct the tax paid in that other country from the Indian income tax payable by it. The amount of this deduction is subject to the limit of tax applicable to double-taxed income under Indian tax law.

Answer ... There are no provisions in Indian tax law for a step-up in asset basis for inbound corporate entities.

Answer ... The disposal of assets or investments or management control will typically incur capital gains tax. Indian tax law further seeks to tax the indirect transfer of shares or interests in a company or entity that is registered or incorporated outside India if the shares or interests derive, directly or indirectly, their value substantially from assets located in India. The shares or interests will be deemed to derive their value substantially from tangible or intangible assets located in India if, on a specified date, the value of the Indian assets:

• exceeds INR 100 million; and
• represents at least 50% of value of all assets owned by the company or entity.

An exemption from the indirect transfer provisions is available for small shareholders.

Answer ... Indian tax law sets out a General Anti-Avoidance Rule (GAAR), which took effect on 1 April 2017. The GAAR is a broad rule designed to deal with aggressive tax planning. Wide discretion is afforded to the tax authorities to invalidate an arrangement – including disregarding the application of tax treaties – if the arrangement is treated as an ‘impermissible avoidance arrangement’. Anti-avoidance principles have also emerged from tax rulings from time to time.

In addition to the GAAR, Indian tax law contains specific anti-avoidance rules – for instance, in relation to:

• the provision of loans to shareholders (regarded as deemed dividends);
• the transfer of property without adequate consideration;
• unreasonable payments to related parties;
• the transfer of income without the transfer of assets; and
• interest deductibility in case of thin capitalisation.

Answer ... Under the GAAR, an arrangement entered into by a taxpayer may be declared to be an impermissible avoidance arrangement. An 'impermissible avoidance arrangement’ is defined as an arrangement whose main purpose is to obtain a tax benefit and which:

• creates rights or obligations that are not ordinarily created between persons dealing at arm’s length;
• results, directly or indirectly, in the misuse or abuse of the tax provisions;
• lacks commercial substance or is deemed to lack commercial substance under Section 97 of the Income Tax Act, 1961, in whole or in part; or
• is entered into, or carried out, by means or in a manner which is not ordinarily employed for bona fide purposes.

Further, unless the assessee can prove otherwise, an arrangement is assumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit if the main purpose of a step-in or part of the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.

Answer ... India imposes no specific debt-to-equity restrictions. However, India has introduced interest limitation rules. Interest payments in excess of INR 10 million by an Indian company or a permanent establishment of a foreign company towards debt issued by a non-resident associated enterprise (ie, a related entity) is deductible only up to 30% of earnings before interest, taxes, depreciation and amortisation. Interest, to the extent disallowed, can be carried forward for eight years and claimed as a business deduction, subject to the rule.

Debt issued by an unrelated lender is deemed to be debt issued by an associated enterprise if the associated enterprise provides a guarantee to such lender or deposits that correspond to and match the amount of funds with the lender.

India currently has no controlled foreign corporation rules, although it does have elaborate transfer pricing regulations.

Answer ... A non-resident taxpayer or an Indian taxpayer that proposes to undertake a transaction with a non-resident can obtain an advance ruling in respect of any question of law or fact in relation to the tax liability of the non-resident arising from such transaction. As from April 2021, such rulings can be obtained from the Board of Advance Ruling. Such rulings are not binding on the applicant or the tax authorities, and may be appealed to the High Court. In certain high-value transactions, a ruling can also be obtained for domestic transactions.

Prior to April 2021, such rulings could be obtained from the Authority of Advance Ruling and were binding on the parties, subject to a limited right of appeal.

Answer ... India has detailed transfer pricing regulations which are broadly in line with the Organisation for Economic Co-operation and Development transfer pricing guidelines. Under the regulations, income and expenses – including interest payments – with respect to international transactions between two or more associated enterprises, including permanent establishments, must be determined on the basis of the arm’s-length principle. The transfer pricing regulations also apply, among other things, to:

• cost-sharing arrangements;
• certain capital financing transactions;
• business restructurings or reorganisations; and
• dealings in intangibles.

The regulations specify the following methods for determining the arm’s-length price:

• the comparable uncontrolled price method;
• the resale price method;
• the cost-plus method;
• the profit split method;
• the transactional net margin method; and
• any other method that takes into account the price that has been charged or paid, or that would have been charged or paid, in the same or a similar uncontrolled transaction with or between non-associated enterprises, under similar circumstances, considering all relevant facts.

The transfer pricing regulations require each person entering into an international transaction to maintain prescribed documents and information regarding a transaction. Each person entering into an international transaction must arrange for an accountant to prepare a report and submit it to the tax authorities by the due date for filing the corporate tax return, which is 30 November (following the close of the tax year in April-March) in such circumstances.

The transfer pricing regulations also prescribe safe harbour rules that specify the acceptable level of margins for certain categories of transactions. Taxpayers may also apply for advance pricing agreements in India.

In addition, certain transactions between specified related parties located in India are covered under the transfer pricing regulations if the quantum of the transaction exceeds INR 200 million.

Further, with effect from 1 April 2018, the concept of secondary adjustment has been introduced under domestic transfer pricing laws, whereby if any transfer pricing adjustment is made in excess of INR 10 million, the Indian associated enterprise must obtain funds from the non-resident associated enterprise within a specified period.

Answer ... With effect from April 2021, the limitation period for reopening past years has been reduced to four years from the end of relevant financial year. Serious cases of tax evasion involving avoidance of income of more than INR 5 million in a given tax year can be reopened for up to 11 subsequent tax years. Previously, past years could generally be reopened only for up to seven years.

Answer ... In India, the tax period runs from April to March. The due date for companies to file their income tax returns is 31 October following the end of the tax period. If the corporate entity is subject to transfer pricing, the due date is 30 November. Different dates are prescribed for other taxpayers.

Taxpayers must pay taxes due for the year on an estimated basis within the tax period in quarterly instalments, as follows:

• on or before 15 June: 15% of advance tax;
• on or before 15 September: 45% of advance tax, less advance tax already paid;
• on or before 15 December: 75% of advance tax, less advance tax already paid; and
• on or before 15 March: 100% of advance tax, less advance tax already paid.

In case of any shortfall in payment of advance tax, the same can be paid before filing the tax return, along with interest.

Answer ... The income tax laws contain various provisions for the imposition of penalties of varying amounts depending on the nature of the non-compliance or default. In addition, the defaulting entity may be liable to pay interest and tax. Violations may also be prosecuted in certain cases. Where the offender is a company and it is proved that the offence was committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, that officer of the company will also be deemed to be guilty of the offence and will be liable to be punished accordingly.

Answer ... The Indian transfer pricing regulations mandate the reporting of related-party transactions. In this regard, they set out detailed rules on country-by-country reporting and the maintenance of master files and local files in line with the guidelines of the Organisation for Economic Co-operation and Development.

Answer ... The Indian tax regulations do not permit tax consolidation. The scheme of taxation applies individually to each legal entity/taxpayer.

Answer ... Goods and services tax (GST) applies on all forms of supplies of goods and services, except exempt and zero-rated supplies within the territory of India. The taxable event for GST is the supply of goods or services, or both. Both ‘goods’ and ‘services’ are defined in the GST Law. Securities are excluded from these definitions. Money is also excluded from these definitions; however, activities relating to the use of money or its conversion – by cash or by any other mode – from one form, currency or denomination to another for which a separate consideration is charged are included in the definition of ‘services’.

Any transaction involving the supply of goods or services without consideration is not regarded as a supply, with a few exceptions in which a transaction is deemed to be a supply even without consideration. Further, the import of services for consideration, whether or not in the course or furtherance of business, is treated as a supply.

The procurement of goods from outside India attracts customs duties in addition to GST. GST does not apply to supplies of alcohol for human consumption and petroleum products; these attract excise duty along with value added tax, which varies from state to state.

Answer ... The permanent transfer or disposal of business assets attracts GST in India where a tax credit has been availed of in relation to such assets. If the transfer of interest is in the form of the acquisition of shares, then GST will not apply. At the same time, if the transfer of interest takes any form other than the transfer of shares, the transfer may be subject to GST; this must be reviewed on a case-by-case basis.

Answer ... It is proposed that petroleum products should be brought within the ambit of goods and services tax (GST), in order to avoid the cascading of taxes and to pass on the benefits to end consumers, who are reeling from soaring fuel prices. The reforms to the GST law should also result in a more stable regime going forward, given that decisions are taken by the GST Council, comprised of the finance ministers of each state in India. There is a likelihood of increased litigation under the new GST regime, given that audit proceedings are being initiated by the GST authorities.

The government has taken various initiatives to develop a framework for ensuring the free flow of information between the GST, income tax and customs authorities. Further, changes and amendments are being made to reduce physical interaction between the tax authorities and the taxpayer, and to transform the taxation regime into a completely faceless system. However, preparing the tax authorities for these technological changes in order to ensure effective implementation of the new online systems remains a challenge.

Answer ... Given the complexity of the Indian tax regulations, it is advisable to have tax structures reviewed and to proceed only after obtaining holistic professional advice. The tax cost should be factored into contracts in order to avoid a burden at a later stage. Non-compliance and gaps in record keeping could result in high litigation costs, as well as the imposition of interest and penalties. Hence, compliance and record keeping are key in order to avoid exposure to unplanned transaction costs. With the current amendments extending the limitation period to 11 years under the income tax law, businesses will also be required to maintain their records for such extended periods. Given that real-time information is available between the GST, customs and income tax authorities to a much greater extent now than before, mismatches in accounting and reporting often result in the initiation of inquiries and audits.