Taxation

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Foreign collaboration and investment are subject to direct and indirect taxation as the case may be. Indirect taxes such as customs, excise and sales tax do not affect the income stream of the investment in as much as these levies are shifted to the ultimate consumer. However, the impact of Income-tax, which is a personal nature and which cannot be shifted to the ultimate consumer, is a crucial area which determines the investment strategy of the investor.

India has a well-developed tax structure, with the authority to levy taxes divided between the Central Government and the State Governments. The Central Government levies direct taxes such as personal income tax and corporate tax and indirect taxes such as customs duty, excise duty, central sales tax and service tax. The States are empowered to levy professional tax and state sales tax apart from various other local taxes like entry tax, octroi, etc.

Direct Taxes
Direct Taxes
An entity incorporated in India or having its entire management and control in India is a resident and is taxed on its worldwide income. A non-resident corporation (foreign company) is taxed only on income derived in India from Indian Operations, income that is deemed to arise in India and income that is received in India.The tax year runs from April 1 to March 31. The tax rate differs on the basis of category of the Company like Domestic and Foreign.

Minimum Alternate Tax (MAT)
MAT is leviable currently at the rate of 7.5 percent of book profits of the companies where tax under normal provision is less than 7.5 percent of book profits. The profits from software and goods exports and from exports of film, television, music or television news software, including telecast rights is not considered as part of book profits for the purposes of MAT. MAT is not allowed as credit against future normal tax payable.

Dividends Distribution Tax
Any dividend distributed by a Company to its shareholders is not taxable in the hands of Shareholders. On such dividend s, the Company will have to pay dividend tax under section 115 O of the act.

Residential Status and Tax liability
Under the Income- tax Act, 1961 ('Act') a resident is called up on to pay tax on his global income though he does not get relief against double taxation. A non-resident, on the contrary, is required to pay tax only on his Indian income unless he commits the 'indiscretion' of receiving his foreign income in India. For, income received in India is taxable in any case. There are basically two mutually exclusive tests for determining one's residential status whereas for individuals the accent is on 'minimum period of stay in the country', for others the test boils down to the situation of 'control and management of affairs'. A foreign company scores over other foreign entities in this regard. While a part control in India is enough for all others, a foreign company becomes a resident only if the control and management of affairs is situated wholly in India otherwise normally presumed to be a non-resident. The ensuing discussion proceeds on the twin assumption that the foreign collaborator is a company and the control and management of its affairs is not wholly situated in India.


Indirect Taxes
Excise Duty/CENVAT
Excise Duty is a tax on the manufacture of goods within the country. Excise duties are governed by the Central Excise Act, 1944, and the Central Excise Tariff Act, 1985.The term 'manufacture' has been interpreted to mean bringing into existence new article having a distinct name, character, use and marketability. Basic excise duty is levied at a uniform rate of 16 percent. In addition, special excise duty is levied on a few products at 16 percent. The Excise law provides for a CENVAT Credit Scheme, which limits the cascading effect of duty incidence on a number of excisable goods that are used as inputs / capital goods for use in manufacture of other excisable goods. Under the scheme, CENVAT credit can be claimed on the excise duty, special excise duty, NCCD and Additional duty of customs imposed on raw materials and capital goods, whether purchased locally or imported. This credit can be utilized for the payment of excise duty on the finished product. However, the credit of NCCD can be utilized for payment of NCCD only.

Customs Duty
Customs duty is levied on import of goods into India. A downward trend in customs duty rates has been seen over the past few years. The peak rate of basic customs duty has now been reduced to 35 percent.

The levy and the rate of customs duty is as per the Customs Act, 1962 ( the customs Act), and the Customs Tarrif Act, 1975 (the tarrif Act), respectively. Customs duty on imports comprise the following :

• Input tax credit in relation to any period can be set off by a registered dealer against his output tax.


• VAT liability of a dealer is to be calculated by deducting input tax credit from tax collected on sales during the payment period.


• Input tax credit is available for both manufacturers and traders for purchase of inputs / suppliers meant for both sale within the State as well as to other States, irrespective of when they would be ultimately utilized or sold.


• Excess credit would be carried over to the end of the next financial year. Where there is any excess unadjusted input tax credit at the end of the second year, the same shall be eligible for refund.


• Input tax credit on capital goods will be available both for the manufacturers and traders.


• Units located in Special Economic Zones and 100 % EOUs will be granted either exemption from payment of input tax paid within 3 months.


• CST purchases would not qualify for credit.


• VAT would be levied on goods when sold on or before 1-4-2005 and input tax credit would be given for the sales tax already paid in the previous year. This tax credit would be available over a period of 6 months after an interval of 3 months


• Registration of dealers with gross annual turnover above Rs.5 lakhs would be compulsory


• Small dealers with gross annual turnover not exceeding Rs. 5 lakhs will not be liable to pay VAT.


• There would be a Tax Payer Identification Number (TIN)


• VAT liability will be self - assessed and there will not be any compulsory assessment at the end of each year.


• All other existing taxes such as turn over tax, surcharge, additional surcharge, and special addition tax would be abolished States, which have already introduced entry tax and which intend to continue such levy, should make entry tax vattable. However this should not apply to entry tax that may be levied lieu of Octroi.


• Penal provisions would not be stringent than existing provisions.


• There would two basic rates of 4 % and 12.5 % plus a specific category tax exempted goods and a special VAT rate of 1 % for gold and silver ornaments, etc.


• There would about 270 commodities under the 4 % categories comprising of basic necessities such as medicines and drugs, agricultural and industrial inputs, capital goods and declared goods. The schedule of commodities would be attached to the VAT Bill of every State.


• The remaining commodities would fall under the general VAT rate of 12.5%.


• CST would continue and the Empowered Committee would review the position regarding CST during 2005-2006 and a suitable decision on the phasing out of CST will be taken.