Indian Income Tax Law is governed by the Income Tax Act 1961 and regulations based thereon. Among other things, the law essentially regulates the tax situation, tax residence, tax burden, income breakdown, incentives / tax exemptions / exemptions, tax rates and withholding, transfer pricing (or profit withdrawal test) and other anti-circumvention provisions. India has also entered into double tax avoidance agreements with various countries. These FAQs answer some of the most common questions about the applicability and scope of the Income Tax Act 1961.
Q. What is the Law on Income Tax in India?
A. The Income Tax Act 1961 and Income Tax Regulations 1962 are the governing laws governing income tax in India.
Q. Who Pays Income Tax in India?
A. An Indian resident and a non-resident who receive their income from a source located in India.
Q. What is the tax base?
A. India generally follows residence-based taxation. However, for non-residents, India follows source-based taxation. Double taxation agreements with other countries ensure that an income is not taxed twice.
Q. Who is a Resident Indian?
A. “Tax Residency Test” – Currently, an individual is a tax resident in India if they are at least – “Resident in India.
a. 182 days & # 39; during the current year or & # 39;
b. 365 days "in the last four years and" 60 days "in the current year – however, for Indian citizens and persons of Indian origin, the condition" 60 days "would be replaced by" 120 days ".
A company is based in India in a given year, if
a. It is registered in India, or
b. His place of effective management (POEM) is in India this year. POEM refers to the place where essential management and business decisions are made that are necessary for the running of a company as a whole.
A resident taxpayer in India is taxable in India on his total income. However, a non-resident is liable to tax in India only on income earned or earned in India and not on income earned or earned outside of India.
Q. When is a non-resident taxable in India?
A. An individual is liable to tax on income that is incurred or originating in India or that is incurred or arises in India. The test for "arising or arising" is very broad in India. Accordingly, a non-resident would be liable to tax in India on any income that is or is Indian origin and therefore either incurred or incurred in India or considered "incurred" in India.
Q. Under what categories would income normally be calculated for a non-resident for tax purposes?
A. Typically, earnings are divided into the following categories:
- Income from trade or profession
- capital gain
- Homeownership Income (if a non-resident Indian owns immovable property in India)
- Different income
Q. What are capital gains and how are they generally calculated?
A. Capital gains arise on the transfer of a "capital asset". The term “capital assets” is defined and would include, but is not limited to, securities and immovable property. “Capital assets” are further classified as “short term capital assets” or long term capital assets depending on how long the owner is held immediately prior to the transfer of those capital assets by that owner. The consideration received on such a transfer minus the cost of such capital assets in the hands of the owner would be the capital gain in the hands of the owner / seller of those capital assets. Capital gains are also classified as such, depending on whether the investments are short-term or long-term. However, for long-term investments, the cost of acquisition is generally indexed (based on a cost inflation index) while the capital gains are calculated. The law also designates certain "transfers" as non-capital gains. For example, corporate reorganization transfers are not treated as “transfers” that result in capital gains. Additionally, in relation to capital gains made by owners / sellers, the law also provides for certain exemption / deduction mechanisms that meet the fulfillment of conditions that would effectively minimize the taxation of capital gains.
The law is broad and offers different scenarios for determining the “acquisition cost” in the hands of the owner and the “holding period” in the hands of the owner. The tax rate on such capital gains would be different for different capital assets and different categories of owner / seller. For example, short-term capital gains are typically taxed more heavily than long-term capital gains, residents are subject to different tax rates than non-residents, and so on
Q. What are transfer pricing and when do they apply?
A. Transfer pricing is a form of the "Base Erosion of Profits Test". It is a fraud prevention provision and includes rules and methods for pricing “international transactions” between two or more “affiliates”, one or both of which are non-resident companies. “Associate companies” are essentially companies under common control. Both “Affiliate” and “International Transaction” are broad.
Income from such transactions is to be calculated according to the arm's length principle, i. H. the amount payable if the trading companies are not affiliated or not controlled.
There are currently 5 (five) notified methods for determining the external price:
- Comparable uncontrolled pricing method (CUP);
- Resale Price Method (RPM);
- Cost plus method (CPM);
- Profit Sharing Method (PSM);
- Transactional Net Margin Method (TNMM);
Q. For a foreign parent company and an Indian subsidiary, what would the typical profit repatriation method be?
A. Typically, such repatriation from an Indian subsidiary to a foreign parent company would take the following forms:
b. Capital gains through stock transfer or buyback mechanism
c. Bonus shares
d. License fees
The tax implications are different for everyone.
Q. For an Indian subsidiary, what is the difference between normal corporate income tax and the minimum alternative tax (MAT)?
A. In India, corporations calculate their "normal accruals" taxable income after applying any applicable deductions, exemptions and incentives. Minimum Alternate Tax (MAT) is a separate chapter for calculating the taxable income of Indian companies. The goal of MAT is to ensure that a legal entity pays a minimum tax (i.e. at least 15%) on its "book profits". “Book profits” are calculated in a certain way and derived from the net profit according to the income statement. If the tax calculated under the "normal provisions" of the Income Tax Act 1961 is found to be less than MAT (for example, due to tax incentives or exemptions under the "normal provisions"), the company would be liable to tax under MAT provisions. The difference between the surplus of such a MAT compared to such a “normal tax” for this particular year would be available for the carryforward for the next 15 years and offset as a MAT credit. In a later year, if the company pays "normal taxes" in the following year, this MAT credit is available for offsetting this "normal tax" in the following year in the prescribed manner.
Q. What is TDS?
A. TDS means tax at source. It is the global equivalent of "withholding taxes" or withholding taxes. TDS provisions are included as a separate chapter in the Income Tax Act 1961. The TDS regulations are based on the concept that any person who makes a certain type of payment to an individual must deduct taxes at the source and deposit them into the government's account at the rates prescribed in the Income Tax Act 1961. In addition, different TDS rates were required for different payments and different categories of recipients
Q. What are the income tax norms regarding tax losses for an Indian subsidiary, especially carry forward to future setoff and also forfeit?
A. Under the Income Tax Act 1961, a corporation would have “business loss” and “unabsorbed depreciation”. Operating losses can be carried forward for a period of 8 years to be offset against operating income in the future. Depreciation that has not been offset can be carried forward for offsetting without restriction. In addition, the carryforward of business losses by companies would be affected by the change in the economic majority ownership of such a company each year.
Q. Which typical restructuring models are recognized as tax neutral under Indian income tax law?
A. Merger or Merger, Split or Spin-Off, Slump Sale, Cross-Border Merger / Merger, and Conversion of Legal Status are the main forms of corporate restructuring in India that are also under Income Tax Act, 1961. However, certain conditions of the Act would have to be met to ensure the tax neutrality granted to such restructuring plans by law.
Q. What are Tax Agreements or Double Taxation Agreements (DTAAs) signed by the Government of India?
A. A non-resident would be taxed under the Income-Tax Act of 1961 when deemed incurred, accrued, or accrued or accrued income in India. If the non-resident
a. is the beneficial owner of this income from India and
b. is resident for tax purposes in a foreign country with which India has signed a DTAA (tax agreement), and
c. is entitled to claim benefits in accordance with the relevant provisions of such a double taxation agreement, then
such a non-resident can rely on relevant contractual provisions that give him preferential treatment over tax treatment under the Income-Tax Act of 1961. Such an advantage would usually reduce the tax impact or even completely relocate the tax incidence from India to India's country of residence. Applying the provisions of the Double Taxation Agreement to the Income Tax Act of 1961 is a technical exercise and also a matter of interpretation that can be the subject of litigation. The underlying principle of tax treaties, however, is that such non-residents should be entitled to the more favorable treatment, either under the Income Tax Act 1961 or the Tax treaty.