Considering doing business in India? You’re not alone. India's GDP growth of 7.3 percent makes it one of the world's fastest-growing economies. The country's Foreign Direct Investment (FDI) of $60 billion also makes it one of the world's largest FDI recipients.
India’s recent tax and economic reforms present strong opportunities for U.S. companies that want to do business in India. If you’re one of them, you’ll need to familiarize yourself with the complex taxes and tax incentives in this emerging market. Here’s an overview.
Taxes In India
Goods and Services Tax (GST)
The Indian government has introduced major tax reform with the Goods and Services Tax (GST), which provides single-point taxation and eliminates complex disparate tax systems. Filing is all online; there's no paper filing.
The tax rate varies by product but is typically 18 percent. GST is levied on the supply of all goods and services (with the exception of alcohol for human consumption). GST on petroleum, natural gas, and other fuels has been postponed.
In a dual levy structure, both the center (central government) and states or union territories (UTs) have the authority to levy a tax on goods and services. Under the dual levy structure:
Central Goods and Services Tax (CGST) can be levied by the center, while State Goods and Services Tax (SGST or UTGST) can be levied by respective states or UTs on all supplies within the state or UT.
Integrated Goods and Services Tax (IGST) is levied by the center on supplies between two states or UTs. IGST is also levied on the export and import of goods or services to and from India.
Compensation Cess (Cess) is levied on specified supplies in order to compensate states for their lost revenue due to GST implementation.
The assessment of these taxes is based on the nature of the supply. To define the nature of supply under GST law, separate requirements for goods and services have been established. The supplier's location and the location of the supply of goods or services are among the criteria for the determination of the nature of the supply in question.
Under the GST, goods and services are taxed under a four-tier rate structure: 5, 12, 18, and 28 percent. Food grains and other essentials are taxed at a zero rate, whereas luxury goods are assessed at the highest tax rate and may also be assessed the Compensation Cess.
The professional tax is a state tax on all income earners who are employed in professions and trades in a given state. Some state governments do not levy professional tax, but in the states that do, all enterprises and employees earning income are legally required to register and to pay this tax on their income.
Indian Transfer Pricing Regulations were put into effect in 2001 to prevent profits from being transferred out of India through international transactions with Associated Enterprises (AEs). Transfer Pricing Regulations were expanded in scope to include Specified Domestic Transactions (SDTs).
India's federal government levies taxes on the import and export of goods to and from the country. Import and export duty is to be paid at the time the import or export occurs. India adheres to the Harmonized System of Nomenclature (HSN) rules of classification. Goods are classified primarily based on their description, various components, and their mode of use.
Taxes and duties on imports are:
Basic Customs Duty (BCD): Levied at a rate of 10 percent
Customs Cess: Levied on the component of the BCD, at a rate of 3 percent
Integrated Goods and Services Tax (IGST): Levied on the total value of BCD, plus Customs Cess, at a rate of 18 percent
The effective rate of customs duty applicable on imported goods is about 30.15 percent. That includes the input of tax credit for IGST. There is currently no export duty on goods being exported from India (with the exception of certain scarce minerals).
Tax Incentives In India
India is divided into Special Economic Zones (SEZs) to promote regional competitiveness and progress. Infrastructure developers and businesses operating within the SEZs currently benefit from significant long-term tax incentives.
Additionally, new ventures into certain economic activities in designated endeavors, such as energy or infrastructure, can also benefit from tax deductions on their profits for as long as 10 years.
In some Northeastern states, some projects qualify for even more tax deductions and incentives. Tax benefit eligibility, periods of applicability, and tax exemption schedules vary by sector and project type, among other criteria.
General categories of tax incentives in India include:
Location-based tax incentives: State or UT-based tax incentives, such as tax holidays
Special zones incentives: Tax incentives offered within a designated SEZ
Activity-based incentives: Indirect tax benefits, applicable to exports from the SEZs
Industry-specific incentives: For energy, infrastructure development, hospitals, etc.
Employment of new workers: Deduction of 30 percent for the first three years of adding new hires.
Investment allowance: For large investments, 15 percent of some acquisitions and installations
Additional Tax Incentives
Customs duty exemption: On imported goods to be utilized for authorized purposes
Excise duty exemption: On all goods specified, full exemption is granted (for purposes of DTA)
Value-added tax exemption: On goods purchased within the state, applicable in most states
Service tax upfront exemption: For services provided to the SEZ for authorized purposes
While India presents a promising opportunity for U.S. retailers, telecoms, and other companies who want to do business there, it’s not without its complexities — particularly when it comes to taxes and tax incentives. If you want to maximize your investment in India, contact us today for more information and your complimentary consultation.