India’s Main Tax and Accounting Hurdles Explained in 10 Minutes

India’s one of the most attractive markets your business can expand into. It’s projected to grow at 8% per year for the next two decades. It’s seeing a strong and growing consumer base buoyed up by rising income levels. There’s no doubt that India deserves your consideration when you’re planning an international expansion. Nonetheless, there are challenges as well as rewards to growing within the Indian market. While India has liberalised over recent decades, its tax system for foreign businesses remains complex. Here are the main hurdles you’ll have to overcome when you decide to expand into India.

Higher Corporation Tax in India

Corporation tax is high, even for domestic companies, standing at 25% plus up to 8% surcharges (the average global corporation tax in 2016 was only 23.62%). Corporation tax rates for foreign businesses can vary substantially, but you should watch out for steep rates. Check to see what agreements your country has with India around corporation tax, since this can significantly affect how much you’ll ultimately have to pay.

Indian Import Duties

Indian custom duty rates are complex and vary from industry to industry. Duty varies from 0% to 150%, with an average rate of 11.9%. Rates can be much higher when importing into a sector which is protected by the Indian government, while some goods are exempted entirely from import duty. You should check to see what rates you’ll be liable to pay on imports in your industry before embarking on any Indian expansion.

Union, State and Local Tax in India

India has a number of levels at which tax is administered. The union (national) government levies income tax, customs duties, central excise and service tax. State governments can levy sales tax, state excise and land revenue tax. Local authorities can also take in property duty, octroy, taxes on markets and charges for utilities. Since state and local taxes can vary from area to area, it’s worth checking the particular taxes which will apply wherever your Indian business is located.

Anti-Avoidance Measures in India

India has put in place strong measures to counter aggressive tax avoidance. The Indian government can designate any country or jurisdiction as a notified jurisdictional area. This means that any transaction between an Indian taxpayer and a party located in the area can be subject to withholding tax, non-deduction of expenses and taxability of receipts. This is designed to deal with aggressive tax planning – tax havens, for example, may be designed as notified jurisdictional areas to deter businesses moving profits there.

General Anti-Avoidance Rules (GAAR) will come into force in 2018/2019, and will allow the Indian government to invalidate any tax arrangement with an aggregate benefit of at least 30 million rupees which can be shown to be in place for the purpose of avoiding tax.

Income Tax

All Indian residents are liable for tax on their global income, not simply income made in India itself. You are considered an Indian resident in a given financial year if you have spent 182 days in India in that year, or 365 days over the preceding 4 years and 60 days in the given year. That means you don’t necessarily need to have spent a great deal of time living in India in a particular year to be liable for residential income tax. It is worth considering how long you expect to spend in India, and what tax agreements your country has with India, before expanding into the Indian market.

The Indian tax system is highly complex, and if you are planning on taking advantages of the many opportunities the country has to offer, it’s advisable that you consult an expert on Indian tax and accounting requirements. At Galvin International, we can help you with all your international expansion tax and accounting needs, giving you on-ground support to make your global growth a success. Please get in touch if you’d like to discuss how we can assist you in navigating India’s tricky tax and accounting system.

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