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Summary of Indian Tax System and Regulatory Overview (July 2017)

Core Content

The document provides an overview of the Indian tax system, including income tax rates, Goods and Services Tax (GST) structure, and key regulatory incentives. It also highlights the legal and dispute resolution framework for tax matters in India.

Key Income Tax Rates

Note: Rates are exclusive of surcharge and education cess.

Corporate Tax Rate Reduction

The corporate tax rate in India is expected to reduce to 25% in the coming years.

Key Legislative Framework

• Indian Transfer Pricing (TP) legislation enacted in 2001, based on OECD guidelines.
• Comprehensive legislation includes:
  • Mandatory "contemporaneous documentation"
  • Annual filing of "information form" on inter-company transactions
  • Penalty clauses for non-compliance
• Covers both specified domestic transactions and deemed international transactions
• Rampant litigation at lower tax authorities
• Indian judicial rulings are in line with global principles and BEPS reports
• Increasing use of Advance Pricing Agreements (APAs) for certainty and dispute resolution

Typical Areas of Controversy

• Advertising & Marketing expenses
• Marketing & sales support services
• Cross-border services
• Cost recharges
• Royalties
• Arms Length Margin (3% threshold)
• Choice of Comparables
• Location savings

As of 31 March 2017, 152 APAs were entered into out of 815 applications.

Goods and Services Tax (GST) Overview

• GST is a destination-based consumption tax, shifting the taxable event from manufacturing/sale to supply
• Integrates central, state, and local levies
• Provides seamless credit across the supply chain and states
• GST rates: 5%, 12%, 18%, and 28% for goods and services; exports are zero-rated
• Compliance is driven by the GSTN IT platform; strong ERP/IT preparedness is required

Central GST (Taxes Subsumed)

• Central Excise Duty/Additional Excise Duty
• Additional Customs Duty/Special Additional Duty
• Service tax
• Central Sales Tax
• Surcharge/Cess

State GST (Taxes Subsumed)

• VAT/Sales Tax
• Entry Tax / Purchase Tax
• Luxury Tax / Entertainment Tax
• Taxes on Lottery / Betting & Gambling
• Local Body Tax / Octroi

Key Areas to Watch Out for

• ERP/Biz. process changes: Minimum business disruption, maximum compliance; revamping P2P, O2C, and R2R processes
• Transition planning: Seamless transfer of input tax credits; applicability of GST on cut-over period transactions
• Impact on cost/working capital: Changes in business transactions and cost implications
• Contractual changes: Adjustments in contract terms to avoid financial risks
• Compliance: Multi-state registration required; use of government-approved service providers
• Anti-profiteering: Benefits from tax reductions must be passed on to customers

Indian Regulatory System

• Forms of business presence in India: Includes LLPs under the Automatic route in sectors with 100% FDI
• SEZ (Special Economic Zone): Defined as a duty-free enclave, deemed foreign territory for trade operations; requires positive net foreign exchange earnings (primarily export earnings)
• Income tax benefits for SEZ units:
  • Year 1–5: 100% exemption on export profits
  • Year 6–10: 50% exemption on export profits
  • Year 11–15: Lower of 50% of export profits or amount transferred to special reserve
  • MAT applicable, with tax credits available for offset
• Indirect tax benefits for SEZ units: Upfront exemption from customs duty and GST (subject to conditions)
• These benefits are available to units that commence eligible activities on or before 31 March 2020

Key Incentives in India

Dispute Resolution Process

• Robust judiciary process for resolving direct and indirect tax issues
• Amendment to Arbitration Act to streamline institutional dispute resolution in infrastructure
• Indian Supreme Court is the final decision maker
• Taxpayer and tax authorities have equal appeal rights to higher authorities

Dispute Resolution Routes

• CIT(Appeals): Commission of Income-tax (Appeals)
• MAP: Mutual Agreement Procedure