All you need to know about basics of Indian Taxation
Income tax in India is governed by the Income Tax Act of the year 1961. The Act, inter alia, provides for the mechanism of determining income, the amount of tax to be paid & information that the taxpayer has to submit to the taxman.
This document gives an overview of the tax laws of India and will be useful to first time tax payers and foreign companies who intend to set up a base in India.
Who pays and how much?
A progressive rate of tax has been prescribed for individuals. No tax is payable upto Rs. 250,000. Income above this amount is taxed at 10%, 20%
Domestic companies & LLPs have to pay tax at a flat rate of 30% on the profits earned.
Branches & liaison officesof foreign companies have to pay tax at 40%.
Tax payable is also subject to cess (3%) and surcharge depending on the quantum of income earned.
Taxation of business profits
Taxes are payable at different rates by different taxpayers. Companies are additionally subject to Minimum Alternative Taxthat is payable if the tax as per normal rates (i.e. 30%) is less than 18.5% of the profits declared to its shareholders.
Net profits are determined by deducting allowable expenses from gross receipts.
The taxpayer is also entitled to deductions based on investments made / profits earned. The net income so remaining after such deductions is offered to tax.
The Act prescribes the manner in which expenses can be claimed. There are provisions for disallowing expenses if certain conditions are not met & also provisions providing for accelerated deductions.
A taxpayer should get his books auditedif gross receipts from his business exceed Rs. 200 lakhs or gross receipt from his profession exceed Rs. 50 lakhs.
Tax returns & due dates
Individualshave to file their tax returns by 31st July for the income earned in the tax year.
Companieshave to file their tax returns by 30th September.
Where an entity transacts with any related party outside India, it has to additionally comply with the transfer pricing lawsof India. Such entities have to file their tax returns by 30th November.
Any tax due has to be settled by these dates.
The tax year in India begins on 1st April and ends on 31st March. The income earned in this year has to be assessed by the tax department by the 31st March of next year.
Categories of income that are subject to tax
Salary income: Salary earned by an employee from his employer.
Rental income:Income earned by letting out a house property.
Business income:Profits from business - see chart above for taxation of profits.
Capital gains:Gains from sale of capital assets.
Other sources:Interest income, foreign dividend etc.
Collection & payment of taxes
The Act provides for different ways by which taxes can be paid. The taxpayer is required to pay taxes in advanceon the best estimate of net income within the tax year itself. Advance tax has to be paid in 4 instalments.
The Act also prescribes a way by which taxes are deductedby the consumer from the payments made by him to the supplier.
Where the final tax liability is more than the advance tax paid & taxes so deducted, the taxpayer should settle the balance tax dues by paying 'Self Assessment Tax'.
Taxation of non-residents
The amount of income subject to tax in India depends on the residential status of the taxpayer. In some cases, non-residents could be subject to tax in India on their receipts that are deemed to be income in India.
Resident of India: Global income is taxable in India
Non Resident:Only income received / accruing in India is taxable
Taxes paid in India can, however, be offset with the taxes payable in the country of residence under the aegis of the Double Taxation Avoidance Agreements that India has signed up with over 100 countries worldwide.