India legal and accounting and tax considerations in 2023
How to prepare and file tax audit report in India?
India has two types of taxes: a) Direct Tax and b) Indirect Tax. Direct taxes are paid directly to the government and are levied directly on an individual or entity by the Central Board of Direct Taxes.
- Direct taxes include i) income tax ii) gift tax iii) wealth tax iv) capital gains tax v) securities transaction tax and vi) corporate tax;
- In India, domestic companies for FY 2018-19 are taxed based at tax rate 25% if the gross turnover is up to Rs.250 Crores and at 30% in other cases. Additionally, surcharge is charged at 7% up to total income of 10 crores and 12% if it exceeds 10 crores, and Health & Education Cess of tax at 4% (inclusive of surcharge, if any);
- Foreign companies are taxable at 40%. Additionally, surcharge is charged at 2% up to total income of 10 crores and 5% if it exceeds 10 crores, and Health & Education Cess of tax at 4% (inclusive of surcharge, if any);
- Dividends paid by a domestic company are subject to Dividend Distribution Tax (DDT) which is 15% on grossed up amount of dividend plus surcharge and cess. Effective rate of DDT would be 20.56%;
- Interest payments and royalty payments to non-resident entities will be subject to a withholding tax of 20% and 25% respectively;
- Companies including foreign companies will be subject to pay Minimum Alternate Tax (MAT) at the rate of 18.5% on book profits, if the tax calculated as per rates are less than 18.5% of book profits;
- Income tax act requires a class of companies to get their accounts and tax audited which is called “Tax Audit”, and submit a tax audit report to Income Tax Department along with income tax return;
- Capital gains tax and securities transaction tax are applicable.
- Since July 2021, any person who is a buyer paying any sum to a seller for the purchase of goods whose total value exceeds INR5 million (US$66,683) in any previous year, shall deduct tax at source if all of the following conditions are met: i) turnover from the buyer’s business exceeds INR100 million during the financial year immediately preceding the financial year in which the purchase of goods has been made ii) the buyer is resident in India and is neither excluded nor exempted from the provision for tax deduction iii) the aggregate value of goods purchased exceeds INR5 million in any previous year.
- The buyer shall deduct tax at source at the rate of 0.1% of the purchase value exceeding INR 5 million. If the seller is unable to provide a permanent account number (PAN) issued by the Income Tax Department, tax deducted at source will be 5%. Amounts below INR5 million are not subject to tax deducted at source
- Indirect taxes are not levied on goods and services. This tax is not levied on profit, income or the revenue of an individual or entity;
- Indirect taxes can be transferred from one person to another. The same includes i) sales tax ii) service tax iii) goods & services tax iv) VAT v) customs duty and vi) toll tax;
- To avoid hassles in compliance, the Indian Government merged many indirect taxes and with effect from 1st July 2017, introduced a comprehensive “Goods and Service Tax” (GST) which is applicable to both central and state level;
- GST is indirect tax that is being levied on the supply of goods and services in India. Average GST rate in India is now 18% with the rates varying between 0% and 28%.
LLC LLP EPZ Branch Project Office Start-up schemes by Indian government Yes Yes Yes Yes Yes Eligibility for tax-holiday 3 years 3 years 5 years 3 years 3 years Annual turnover to avail tax holiday Up to US$3.29m Up to US$3.29m 0 US$3.29m US$3.29m Capital Gains Exemption on long-term capital gains Yes Yes Yes Yes Yes Duration to avail exemption Within 6 months of asset transfer Within 6 months of asset transfer No limit for IFSCs Within 6 months of asset transfer Within 6 months of asset transfer Maximum amount of long-term asset for exemption US$66,137 US$66,137 No limit US$66,137 US$66,137 Duration of investment of specified fund 3 years 3 years N/A 3 years 3 years Carry forward losses and capital gains in case of change in shareholding pattern Yes Yes Yes Yes Yes Loss Relief Double taxation relief Yes Yes Yes Yes Yes Tax consolidation No No No No No Employees’ Provident Fund Percentage of employees’ salary 8.33% 8.33% 8.33% 8.33% 8.33% Government body for registration EFPO EFPO EFPO EFPO EFPO SEZs Tax payable in first 5 years N/A N/A No N/A N/A Tax payable in next 10 years N/A N/A 50% N/A N/A Dividend distribution tax payable N/A N/A Exempted for IFSCs N/A N/A Securities Transaction Tax payable N/A N/A Exempted for IFSCs N/A N/A Long-term capital gains tax payable N/A N/A Exempted for IFSCs N/A N/A Commodities tax payable N/A N/A Exempted for IFSCs N/A N/A
India Double Tax Avoidance Agreements (DTAAs)
- India has DTAAs with more than 85 countries;
- This DTAA network ensures protection to taxpayers and promotes i) free flow of international trade ii) investment and iii) transfer of technology between two countries;
- DTAAs between India and other countries cover only residents of India and residents of the negotiating country.
Currency and Capital Controls
- The Reserve Bank of India (RBI) sets exchange control policy based on forex regulations. It is the sole monitor of all capital account transactions;
- The rupee is fully convertible on current account, and forex activities are permitted in usual cases;
- The RBI allows branches of foreign companies operating in India to freely remit net-of-tax profits to their head offices, subject to RBI guidelines;
- Central and state government controls production, supply, distribution and pricing of certain commodities. Central government holds the power to maintain or increase supply of essential commodities to ensure equitable distribution and its availability at fair prices.
Tax reporting, audit and other considerations
- Companies, including foreign companies, must file an income tax return on or before 30 September every year;
- Due dates for filing GST return by GST registered entities are tabled below:
Form No. Particulars Frequency Due Date GSTR-1 Details of outward supplies of taxable goods and/or services affected Monthly
Taxpayers having Annual Turnover up to Rs.1.5Crore (US$ 214,286)
11th of the following month
31st of the following month
GSTR-3B Return for a summary of outward supplies along with Input Tax Credit is declared and payment of tax is affected by taxpayer Monthly 20th of the following month GSTR-4 Return for a taxpayer registered under the composition levy Quarterly 18th of the month succeeding quarter GSTR-5 Return for a Non-Resident foreign taxable person Monthly 20th of the following month GSTR-6 Return for an Input Service Distributor Monthly 13th of the following month GSTR-7 Return for authorities deducting tax at source. Monthly 10th of the following month GSTR-8 Details of supplies effected through e-commerce operator and the amount of tax collected Monthly 10th of the following month GSTR-9 Annual Return for a Normal Taxpayer Annually 31st December of next financial year GSTR-9A Annual Return a taxpayer registered under the composition levy anytime during the year Annually 31st December of next financial year GSTR-10 Final Return Once, when GST Registration is cancelled or surrendered Within three months of the date of cancellation or date of cancellation order, whichever is later. GSTR-11 Details of inward supplies to be furnished by a person having UIN and claiming a refund Monthly 28th of the month following the month for which statement is filed.
- Within 30 days of India company registration, our clients are required to appoint chartered accountants as statutory auditors for the company.
ConclusionIt is important our Clients are aware of their personal and corporate tax obligations in their country of residence and domicile; and they will fulfil those obligations annually. Let us know if you need Healy Consultants’ help to assist you in submitting your annual reporting obligations.
Legal and compliance
- An Indian business set up must have minimum 2 directors and 2 shareholders except for one person company. Both the directors and shareholders can be same persons. Minimum one director out of two should be resident in India;
- There is no minimum paid up share capital criteria under India company formation;
- If paid up share capital of the company exceeds US$694,445 (INR 50,000,000), a resident company secretary is compulsorily required to be appointed;
- Every applicant whether proposed director and proposed subscriber must have valid Digital Signature Certificate (DSC). Professionals such as chartered accountants, company secretaries and cost accountants are also required to obtain DSC for online certification of documents;
- Before incorporating a branch office or a liaison office, prior approval from the Reserve Bank of India (RBI) is mandatory. Furthermore, parent companies will need to submit their latest audited balance sheets showing assets worth at least US$100,000 (in case of branch office) and at least US$50,000 (in case of liaison office);
- Every listed company in India must have at least 1/3rd of its directors as independent directors;
- For every business, it is voluntary to protect their brand name through trademark registration in India. We, at Healy Consultants will help you secure your trademark before someone else takes opportunity away from you.
Reporting and other compliances
- All resident companies must file audited annual financial statements with the Registrar of Companies (ROC). Listed companies will, additionally, submit their unaudited quarterly financial results to the Securities and Exchange Board of India (SEBI) and the Stock Exchange;
- Companies are also required to file their withholding tax returns quarterly (only applicable for service providers);
- Branch offices and liaison offices are required to file an Annual Activity Certificate every year with the RBI;
- Every Indian company must hold at least 1 board meeting every quarter i.e. at least 4 board meetings in one calendar year. It is also mandatory to hold an Annual General Meeting (AGM) within 6 months of the close of the accounting year i.e. before the 30th of September;
- All corporate entities must obtain prior approval from the ROC, the RBI and the Income tax authorities before they can wind up their operations.
- In order to facilitate the ease of doing business in India, the Ministry of Labour and Employment has notified the “Ease of Compliance rules” to maintain registers under various labour laws, which have been in effect since February 2017. Now, the combined registers may be maintained either electronically or otherwise, without obtaining any prior permission;
- The maximum weekly working hours are fixed at 48 hours with a maximum of 9 hours a day. If employees work overtime, then they must be paid twice their current wage;
- Women workers can only be employed between 6AM and 7PM. Companies can request the respective state governments for exemptions but women still cannot be employed between 10PM and 5AM;
- Workers are entitled to 1 day of paid leave for every 20 days worked, provided they have worked for at least 240 days in the previous year;
- All companies with at least 20 employees must pay bonuses to employees earning a monthly wage up to US$160. The bonus paid will between 8% and 20% of the annual salary of the employee;
- All employers must contribute 12% of their employee’s wages to the latter’s pension fund and provident fund. Factories which employ at least 10 workers must also contribute an amount equivalent to 5% of their employee’s wage for the latter’s health insurance.