Overview of the Indian Taxation System

8/9/2019 Overview of the Indian Taxation System

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MAT

*inimum alternate tax or *AT is a tax levied on $rms+ companies those are

maing abundant pro$ts as ell as distributing dividend to its shareholders

ho leveraging on the features of the Indian taxation system do not

contribute toards the governments taxation itty. As corporates ith their

excellent tax planning and capitali"ing on the available deductions,

exemptions and incentives under the Income tax la tend to contribute

insigni$cantly toards the governments tax itty. *AT as introduced for the

$rst time in the 19. It as felt that due to various concessions provided in

Tax /as big corporate groups become "ero tax companies. Therefore, to

counter this, as system of *AT as introduced. Thus, for such corporates a

minimal tax amounting to some $xed 0 of boo pro$ts i.e. pro$ts according

to accounting records is charged as minimal alternative tax &*AT'.

This provision speci$cally states that Tax payable for any assessment year by

any corporate entity cannot be less than a certain percentage &mat rate' ofthe oo 2ro$t. In other ords if the Income Tax payable by a company on its

total income as computed under the Income Tax Act is less than a certain

percentage &mat rate' of the boo pro$ts, then such boo pro$t shall be

deemed total income of the entity ith tax payable on rate speci$ed under

income tax act .A company may also be re3uired to pay tax even during tax

holiday period.

DDT

4ividend distribution tax is the taxlevied by the Indian 5overnmenton

companies according to the dividendpaid to a companys investors. 44T is

levied at the rate of 16.99 percent on the amount of dividend declared,

distributed or paid by an Indian company. 44T is payable in addition to

regular corporate income tax.

F-T

The taxation of per3uisites or fringe bene$ts &mostly non cash bene$ts'

provided by an employer to his employees, in addition to the cash salary or

ages paid is fringe bene$t tax. Any bene$ts or pers that employees

&current or past' get as a result of their employment are to be taxed, but in

this case it(s in the hands of the employer.

This includes
http://en.wikipedia.org/wiki/Taxhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Tax


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7mployers expenses on entertainment, travel, employee elfare and

accommodation..

7mployers provision of employee transportation to or or a

cash alloancesfor this purpose.

7mployers contributions to an approved retirement plan&called

a superannuation fund'.

7mployee stoc option plans &782s' have also been brought under

fringe bene$ts tax from the $scal year :!!;

II. Inirect Tax

Ser/ice Tax

8ervice tax is applicable on identi$ed services provided or received in

India

=urrent scope of taxable services is very ide and covers a vast

ma>ority of service categories

7ngineering, management, scienti$c and technical consultancy,

broadcasting,=onstruction, insurance, manpoer, communication, online access,training, cargo handling, and business auxiliary services are some ofthe ey categories.

8ervice tax is applicable at 1!.?! percent.

7xport of services is exempt from service tax - export determined asper prescribed rules.

Import of service also liable to service tax - import determined as per

prescribed rules.VAT 0e1i"#ation

8ince its inception in April :!!, @AT has been implemented in almostall 8tates and nion Territories ith exception of Andaman and Bicobarand /ashadeep

@AT is a multi-point taxation system entailing a @AT at every point of

sale+lease

4ealers are alloed to avail credit of input tax on input and capitalgoods for set-oC against out-put @AT.

=ommon rate of tax adopted across all 8tates ith rates of 1:.

percent, D percent and 1 percent prescribed for diCerent categories ofgoods. Also, some category of goods have been declared exempt fromlevy of @AT
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Interstate sale of goods is not governed by @AT &liable to a central salestax'.

2"tom D2t&

=ustom 4uty is payable on import of goods+ e3uipments into India

It is levied as per rates speci$ed in the =ustoms TariC Act

2ea rate of =ustoms 4uty is 1! percent.

Exci"e 2t&

5enerally levied at the rate of 1! percent plus education cess of ?

percent on manufacture of goods. It is 2ayable at the time of removal

of goods from factory gate.

7xcise duty paid by the buyer to the seller is available as input credit

and may be utili"ed to set-oC the buyer(s output 7xcise duty+ 8ervice

tax liability.

Re12#ator& an Tax Re1ime for the 3p"tream Sector

India also provides a customi"ed tax regime for the upstream sector and

non-resident service providers in relation to 7xploration ) 2roduction

operations.A brief overvie of the regulatory and tax regime for upstream

sector is outlined belo%

Re12#ator&

#4I up to 1!! percent is permitted under the automatic route&i.e.

ithout approval'in the upstream sector in exploration activities of oiland natural gas $elds, infrastructure related to mareting of petroleum

products, actual trading and mareting of petroleum products, maret

study and formulation.

A foreign company can setup a pro>ect oEce or an Indian company for

undertaing upstream operations in India.

Fi"ca# re1ime

There is a special mechanism for taxation of income of companies hich

have entered into a 2roduction 8haring =ontract &28=' ith the 5overnmentof India for undertaing exploration and production activities.

As per these provisions, taxable pro$ts of a tax payer, ho has entered

into a 28= ith the 5overnment for participation in the business ofprospecting, exploration or production of mineral oil, to be determinedin accordance ith the special provisions contained in the 28=.

The provisions of the domestic tax la are deemed to be modi$ed to

that extent.


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Treatment of exp#oration an e/e#opment co"t"All exploration and drilling costs are 1!!0 tax deductible. 8uch costs areaggregated till the year of commencement of commercial production. Theycan be either fully claimed in the year of commercial production or amorti"ed

e3ually over a period of 1! years from the date of $rst commercialproduction.4evelopment costs &other than drilling expenditure' are alloable under thenormal provisions of domestic tax la.

No Rin1 Fencin1 of Expenit2reAll unsuccessful exploration costs in other contract areas can be set oCagainst income in the contract area in hich commercial production hascommenced.Thus, it is possible to oCset the exploration costs of one blocagainst the income arising from another bloc4ro2ction "harin1 contract re1ime

India has a hybrid system of 28=s containing elements of royalty as ell asthe sharing of production ith the 5overnment. 7)2 companies &contractors'that are aarded exploration blocs enter into a 28= ith the 5overnmentfor undertaing the 7)2 of mineral oil. The 28= sets forth the rights andduties of the contractor. The 28= regime is based on production value. nderthe current regime, in 28=s for conventional crude oil and gas the share ofproduction for the 5overnment is lined to pro$t petroleumo"t petro#e2m or co"t oi#H=ost petroleum is the portion of the total value of crude oil and natural gasproduced &and saved' that is allocated toard recovery of costs. The coststhat are eligible for cost recovery are%

F 7xploration costs incurred before and after the commencement ofcommercial productionF 4evelopment costs incurred before and after the commencement ofcommercial productionF 2roduction costsF GoyaltiesThe unrecovered portion of the costs can be carried forard to subse3uentyears until full cost recovery is achieved.4ro%t petro#e2m or pro%t oi#H2ro$t petroleum means the total value of crude oil and natural gasproduced and saved, as reduced by cost petroleum. The pro$t petroleum

share of the 5overnment is biddable by the contractor as blocs areauctioned by the 5overnment. The bids from companies are evaluated basedon various parameters, including the share of pro$t percentage oCered bythe companies. The la has placed no cap on expenditure recovery. Thepercentage of recovery of expense incurred in any year is as per the bidssubmitted by the companies.#urthermore, no uplift is available on recovered costs.Ro&a#tie"


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F /and areas J payable at the rate of 1:.0 for crude oil and 1!0 fornatural gas and coal bed methaneF 8hallo ater oCshore areas J payable at the rate of 1!0 for crudeoil and natural gasF 4eepater oCshore areas &beyond D!!m isobath' J payable at the

rate of0 for the $rst ; years of commercial production and thereafter at arate of1!0 for crude oil and natural gas

apita# a##o+ance"Acce#erate epreciation4epreciation is calculated using the declining-balance method and is alloedon a class of assets. #or $eld operations carried out by mineral oil concerns,the depreciation rate is 6!0 for speci$ed assets hile the generic rate ofdepreciation on the ritten-don basis is 10 &ma>ority of the assets fallithin the generic rate'. #urther, additional depreciation of :!0 is available

on the actual cost of ne machinery or plant in the $rst year.A##o+ance for in/e"tment in ne+ p#ant an machiner&In addition to depreciation and+or additional depreciation, deduction at therate of 10 is available on the actual cost of ne plant or machineryac3uired and installed during the period 1 April :!1? to ?1 *arch :!1,sub>ect to the ful$llment of certain conditions

Tax Ho#ia&

ne hundred percent tax holiday available in respect of pro$ts earnedfrom production of mineral oils.

Tax holiday is available for seven consecutive years from the year of

commencement of commercial production. Koever, companies availing deduction under these provisions ould

still be liable to pay *AT on boo pro$ts.

arr& for+ar #o""e"usiness losses can be carried forard and set oC against business incomefor eight consecutive years, provided the income tax return for the year ofloss is $led on time. #or closely held corporations, a 10 continuity-of-onership test must also be satis$ed.nabsorbed depreciation can be carried forard inde$nitely

De2cti$i#it& of Site Re"toration Expen"e"A special deduction is available for provisions made for site restorationexpenses if the amount is deposited in a designated ban account. Thededuction is the loer of the folloing amounts%F The amount deposited in a separate ban account or Hsite restorationaccountF Tenty percent of the pro$ts of the business of the relevant $nancial year.


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Withho#in1 taxe"The folloing ithholding tax &LKT' rates apply to payments made todomesticand foreign companies in India

M The rates are to be further enhanced by the surcharge and education levyMM 4ividends paid by domestic companies are exempt from tax in the handsof the recipient. 4omestic companies are re3uired to pay dividenddistribution tax &44T' at 16.990 on dividends paid by themMMM The rate of :!0 generally applies to interest from foreign currency loans.8ub>ect to ful$llment of certain conditions, a loer rate of 0 applies oninterest payable for foreign currency loans. ther interest is sub>ect to tax atthe rate of D!0 &plus applicable surcharge and education levy'MMMM 8ub>ect to treaty bene$ts. If a permanent establishment is constituted inIndia, the loer LKT rate depends on pro$tabilityTaxation of "er/ice pro/ier"

App#ica$i#it&8pecial tax regime for non-resident service providers engaged in thebusiness of providing services or facilities or supplying plant andmachinery on hire in connection ith prospecting for, or extraction or

production of, mineral oils.

Mechani"m1! percent of the gross receipts deemed to be business incomeresulting in an eCective tax rate of D.::? percent of gross revenues&rate as applicable for $nancial year :!!9-:!1!'.

Option to c#aim #o+er pro%t"5 "2$6ect to fo##o+in1 conition",- Neep+maintain boos+documents- 5et accounts tax audited


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- #urnish tax audit report - =ompulsory scrutiny assessment2"tom D2t& 8ub>ect to certain procedures and conditions, =ustom 4uty exemptionis available for%

73uipments etc. imported for exclusive use in petroleumoperations

8peci$ed goods re3uired in connection ith petroleum

operations under speci$c exemption noti$cation

2arts and ra materials for manufacture of goods for the purposeof oC-shore petroleum operations undertaen under speci$edcontracts.

Ser/ice TaxRe#e/ant Ser/ice Tax ate1or&

8urvey and exploration of mineral, oil ) gas services &eCective from 1!

8eptember :!!D'

- Includes geological, geophysical or other prospecting, surface andsubsurface surveying or map maing service, in relation to location orexploration of deposits of mineral, oil or gas

8ite formation and clearance services &eCective from 16 Oune :!!'- Includes drilling, boring and core extraction services in relation to siteformation and clearance, excavation and earth moving and demolition.

*ining services

- Introduced to tax any service provided in relation to mining ofminerals, oil ) gas.

=ommercial or industrial construction

- Includes construction of ell head and civil ors at site. 8ervice tax also leviable on the folloing services%

- 4redging services- Technical testing and analysis- 2ipeline transportation- =leaning &including services for tan, reservoir of commercial orindustrial building and premise'

Overview of the Indian Taxation System

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