Guide to Corporate Indian Tax

In India, corporate income tax is levied on the taxable income of companies at a rate of 22%. This rate applies to both resident and non-resident companies.

Resident companies are taxed on their worldwide income, while non-resident companies are taxed only on income that is derived from or arose in India.

Taxable income is calculated by deducting allowable expenses from the company’s gross income. Allowable expenses include expenses that are incurred in the production of the company’s income and expenses that are not capital in nature.

In addition to corporate income tax, companies in India may also be subject to other taxes, such as goods and services tax (GST) and withholding tax on certain types of income.
There are also special tax rates and incentives for certain types of companies, such as start-ups and companies engaged in specified business activities.

Having an Indian Subsidiary

To establish a subsidiary in India, a foreign company must first obtain permission from the Reserve Bank of India (RBI). This permission is typically granted in the form of an approval to set up a Liaison Office, a Branch Office, or a Project Office.

Liaison Office: A Liaison Office is not allowed to engage in any commercial activities and can only undertake activities that are incidental to its main business. This includes conducting market research, promoting products and services, and communicating with clients and customers.

Branch Office: A Branch Office can carry out the same activities as a Liaison Office, but it is also allowed to carry out activities that are related to the parent company’s main business. This includes importing and exporting goods and rendering services.

Project Office: A Project Office can be set up to execute a specific project in India. It is not allowed to carry out any other activities.

To set up a Liaison Office, a Branch Office, or a Project Office, the foreign company must file an application with the RBI and provide certain documents, such as a certified copy of the company’s articles of association, a certificate of incorporation, and a no-objection certificate from the host government.

To set up a subsidiary, the foreign company must follow the same process as a domestic company. This includes incorporating the company, obtaining necessary approvals and licenses, and complying with applicable laws and regulations.

Foreign funds into India

Indian companies receiving foreign investment are subject to the rules and regulations set out in the Foreign Exchange Management Act (FEMA), which was enacted in 1999. The FEMA sets out the rules and procedures for foreign investors to invest in India, as well as the sectors in which foreign investment is allowed.

Under the FEMA, foreign investors can make investments in India through two main routes: the automatic route and the approval route. The automatic route allows foreign investment in sectors that are open to foreign direct investment (FDI) without the need for prior approval from the government.

The approval route requires foreign investors to obtain approval from the government or the Reserve Bank of India (RBI) before making an investment.

The sectors in which foreign investment is allowed under the automatic route include manufacturing, wholesale and retail trading, and infrastructure. Foreign investment in certain sectors, such as defense and nuclear energy, is restricted and requires prior approval.

There are also certain sectors in which foreign investment is prohibited, such as gambling and lottery businesses, atomic energy, and railway operations.

Indian companies receiving foreign investment can receive investment through the acquisition of shares or the establishment of a joint venture. In general, foreign investors can acquire up to 100% of the shares of an Indian company, subject to sector-specific limits and other conditions.

Indian companies receiving foreign investment are also subject to certain reporting and compliance requirements. For example, they may be required to report the details of the investment to the RBI and to obtain prior approval for certain transactions.

It’s important for Indian companies receiving foreign investment to be familiar with and comply with the rules and regulations set out in the FEMA to ensure a smooth and successful investment.

In India, foreign income earned by an Indian company is subject to tax. The tax rate for foreign income depends on the nature of the income and whether it is earned from a country with which India has a Double Taxation Avoidance Agreement (DTAA).

Under Indian tax laws, foreign income is divided into two categories: passive income and business income. Passive income includes income from dividends, interest, rent, and capital gains. Business income includes income from the sale of goods or services.

Passive income earned by an Indian company from a country with which India has a DTAA is taxed at the lower of the Indian tax rate or the tax rate in the foreign country. Passive income earned from a country without a DTAA is taxed at the Indian tax rate.

Business income earned by an Indian company from a country with which India has a DTAA is taxed at the lower of the Indian tax rate or the tax rate in the foreign country, subject to certain conditions.

Business income earned from a country without a DTAA is taxed at the Indian tax rate.

In addition to tax on foreign income, Indian companies may also be required to pay branch profit tax on profits earned from a foreign branch or subsidiary. The rate of branch profit tax is 15% for companies with a DTAA and 40% for companies without a DTAA.

It’s important for Indian companies to be aware of and comply with the laws regarding foreign income to avoid potential legal and financial consequences.

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