2010 © Neeraj Bhagat & Co1 TAXATION IN INDIA

2 INDEX 1- Overview 2- Corporate Tax Rates 3- Distribution of Profits 4- Tax Planning Through DTAA 5- Permanent Account Number (PAN) 6- Books of Accounts 7- Financial Year

3 Overview 1- The provisions of Indian Income-Tax are governed by Indian Income-Tax Act, 1961 which extends to the whole of India and became effective from 1 st April Every year a Budget is presented before the Parliament by the Finance Minister. One of the most important components of the Budget is the Finance Bill, which contains various amendments which are sought to be made in the area of Direct Taxes levied by the Central Government.

4 Corporate Tax Rates Nature of entity: Tax Rates 1- Indian company whether owned by foreigners or not : A- If profit does not exceed 10 million Indian Rupees % B- If profit exceeds 10 million Indian Rupees % 2- Branch office of a foreign company : A- If profit does not exceed 10 million Indian Rupees % B- If profit exceeds 10 million Indian Rupees % 3- Project office of a foreign company : A- If profit does not exceed 10 million Indian Rupees % B- If profit exceeds 10 million Indian Rupees %

5 4- Liaison Office N Not liable to tax as it is not permitted to earn any income and is only a cost centre. Liaison office can not enter into any commercial or business activity in India and can undertake only Liaison and related activities on behalf of its parent company.

2010 © Neeraj Bhagat & Co6 Distribution Of Profits 1- Indian companies are allowed to distribute profits by way of Dividend. However companies would have to pay Dividend Distribution Tax on amount distributed as dividend at following rates. Tax Rates A- If profit does not exceed 10 million Indian Rupees 15.45% B- If profit exceeds 10 million Indian Rupees 16.61% 2- Foreign companies i.e. Branch offices and Project offices are not required to pay any Dividend Distribution Tax.

7 Tax Planning Through DTAA 1- India has entered into Double Taxation Avoidance Agreement (DTAA) with various countries whereby tax paid in India is eligible for credit in foreign country. Similarly tax paid in foreign country is eligible for credit in India. 2- Article 13 of DTAA allows payment of fee for technical services to parent company. However this fee is subject to withholding tax of 10.56%. This withholding tax is eligible for credit in Italy. 3- Definition of technical fee as per DTAA means payments of any amount to any person other than payments to an employee of the company for following services :

8 Managerial services, Technical services and Consultancy services including services of other personnel. 4- No approval is required from Reserve Bank of India (RBI) which is Central Bank of the country for technical fee payment up to USD 1 million per project. Payment above USD 1 million is subject to approval from RBI. 5- Fee for Technical services is deductible expense in the books of accounts of Indian entity and reduces the tax liability of Indian entity legally.

9 R oyalty 1- Royalty as per Article 13 of one of the DTAA means payments of any kind received as a consideration for the use or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or process, or for the use or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial or scientific experience. 2- Royalty is subject to withholding tax of 10.56% which is eligible for credit in foreign country.

2010 © Neeraj Bhagat & Co10 3- Royalty can be paid by Indian entity to parent company in foreign country. 4- Royalty is deductible expense in Indian books and reduces the profit of Indian entity legally.

2010 © Neeraj Bhagat & Co11 P PP Permanent Account Number (PAN) 1- A new provision relating to Tax Deduction at Source (TDS) under the Income Tax Act 1961 became applicable with effect from 1st April Tax at higher of the prescribed rate or 20% will be deducted on all transaction liable to TDS, where the Permanent Account Number (PAN) of the deductee is not available. The Law will also apply to all non-residents in respect of payments / remittances liable to TDS. 2- PAN is Tax Id under Indian Income Tax Act and as per new amendment even foreign companies intending to receive payments taxable under Indian Income Tax Act are required to quote Indian PAN. However following payments are not subject to withholding tax and therefore foreign companies are not require to quote PAN.

2010 © Neeraj Bhagat & Co12 A- Import payments from India to foreign companies. B- Marketing services rendered by Italian companies to Indian entities in foreign country. C- Commission receivable by foreign companies for business promotion out side India. D- Profits of Airline and Shipping companies located in foreign countries and having branch office in India.

2010 © Neeraj Bhagat & Co13 Books of Accounts 1- Every Indian company including Branch office and Liaison office are required to maintain books of accounts so as to compute profit/loss derived from operations in India. Further such books of accounts are also required to ascertain creditors/debtors and other business transactions effected in India. 2- Such books of accounts have to be maintained at principal place of business carried out by the company. 3- Such books of accounts have to be maintained for a period of 6 years from end of the financial year. 4- It is a statutory requirement to maintain above books as per section 44AA of Indian Income-Tax Act 1961.

2010 © Neeraj Bhagat & Co14 Financial Year 1- Every company in India is given a choice to adopt its financial year. Such financial year can be more or less than 12 months, however it can not exceed a period of 18 months. Approval from Registrar of Companies is required for adopting a financial year exceeding 15 months. 2- Foreign company setting up a subsidiary has an option to choose January-December or any other period not exceeding 18 months as its financial year in India so as to integrate its Indian accounts with parent company outside India. 3- However for Income tax purposes separate financial statement for the period April-March covering 12 months period has to be prepared, audited and filed with the authorities.

2010 © Neeraj Bhagat & Co15 Contact us Neeraj Bhagat & Co. Chartered Accountants S-13,St. Soldier Tower, G-Block Commercial Complex, Vikas Puri, New Delhi , India M : T : F : E : W : Skype : bhagatneeraj

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