India

Market overview

Market participants can often be heard saying that the Indian Revenue Service is among the toughest tax administrations in the world.

"Ever since transfer pricing was introduced in India in 2001, it has become the single largest source of tax disputes and litigation for MNEs operating in India," Rahul Mitra of KPMG told International Tax Review.

One could be forgiven for thinking that this statement implies that this is the status quo of TP matters in India. In fact, Mitra stated that there had been a significant change over the past three years under Narendra Modi's administration as the Inland Revenue Service (IRS) sought to tone down the rigours of TP audits. The IRS is also trying to use alternative mechanisms to litigation including APAs and MAPs.

The economic reforms of the Indian government, such as the introduction of the goods and services tax (GST) encompass a commitment to the BEPS Project. On April 1 2016, the Indian government introduced the concepts of master file and country-by-country reporting, both in line with BEPS Action 13.

The 2017 Indian budget put forward key proposals for TP rules in the country including secondary TP adjustment and restrictions on the deduction of interest.

A secondary adjustment follows a primary adjustment. A primary adjustment can be defined as the difference between the transfer price established through the arm's-length principle and the transfer price at which the transaction took place. The difference is the excess money which the associated enterprise (AE) needs to send back to India. If this does not happen, then the money will be viewed as an advance given by the taxpayer to the AE and the interest would be assessed in the form of a secondary adjustment.

Secondary adjustments will follow primary adjustments in the following circumstances: suo moto adjustments offered by the taxpayer, adjustments agreed by the tax officer and the taxpayer, adjustments determined by an APA, and adjustments made in relation to safe harbour rules.

The restrictions on interest deductions stem from the Indian government trying to meet the obligations of BEPS Action 4. This will apply to Indian companies or the permanent establishments of foreign companies in India. It will not apply to taxpayers engaged in the banking or insurance sectors. The provisions will apply to any interest paid or any interest that will be paid by foreign AEs or third-party lenders. Regarding third-party lenders, the underlying debt must be backed by a guarantee or the equivalent deposit from foreign AEs. Interest paid or that is payable up to $150,000 will not be affected by the provision.

For tax reasons, it has been proposed that any interest in excess of 30% of earnings before interest, depreciation, tax, and amortisation (EBIDTA) will be disallowed. The excess will be able to be carried forward up to a period of eight consecutive years. The provisions will not apply to banks and insurance companies.


Tax authorities

Ministry of Finance
New Customs House, Shoorji Vallabhdas Road, Fort, Ballard Estate, Fort, Mumbai, Maharashtra 400001
Tel: +91 22 2275 7575
Email: jsrev@nic.in
Website: finmin.nic.in


Tax rates at a glance

(As of August 2017)

Domestic company income tax rate 30% (a)
Capital gains tax rate 20% (a)
Branch tax rate 40% (a)
 
Withholding tax
Dividends n.a.
Interest
Paid to domestic companies 10% (b)(c)
Paid to foreign companies 20% (a)(b)(c)(d)(e)
Royalties from patents, know-how etc 10% (a)(b)(e)(f)
Technical services fees 10% (a)(b)(e)(f)
Branch remittance tax n.a.
 
Net operating losses (years)
Carrybacks 0
Carryforwards 8 (i)

  1. The rates are subject to an additional levy consisting of a surcharge and a cess. They are increased by the following surcharges on such taxes:
    • Domestic companies with net income exceeding INR100 million: 12%
    • Foreign companies with net income exceeding INR100 million: 5%
    • Domestic companies with net income exceeding INR10 million: 7%
    • Foreign companies with net income exceeding INR10 million: 2%
    No surcharge is payable if the net income does not exceed INR10 million. The tax payable (inclusive of the surcharge, as applicable) is further increased by a cess levied at 3% of the tax payable. The withholding tax rates are increased by a surcharge for payments exceeding INR10 million made to foreign companies and a cess (see above).
  2. A Permanent Account Number (PAN) is a unique identity number assigned to a taxpayer in India on registration with the India tax authorities. If an income recipient fails to furnish its PAN, tax must be withheld at the higher of the rate specified in the relevant provision of the Income Tax Act and 20%.
  3. Interest paid by business trusts is subject to a withholding tax at a rate of 10% for payments to residents and 5% for payments to non-residents (including foreign companies) plus applicable surcharge and cess.
  4. This rate applies to interest on monies borrowed, or debts incurred, in foreign currency. Withholding tax at a rate of 5% (plus a surcharge of 2% or 5%, as applicable, and a 3% cess) is imposed on interest payments to non-residents (including foreign companies) with respect to the following:
    • Infrastructure debt funds
    • Borrowings made by an Indian company in foreign currency by way of loans between July 1 2012 and July 1 2017, infrastructure bonds issued between July 1 2012 and July 1 2017 or long-term bonds issued between October 1 2014 and July 1 2017, subject to prescribed conditions
    • Rupee-denominated bonds of an Indian company or a government security issued to a foreign institutional investor or a qualified foreign investor, with respect to interest payable between June 1 2013 and June 1 2017
    • Interest received from units of business trusts in India
    Other interest is taxed at a rate of 40% (plus the surcharge of 2% or 5%, as applicable, and the 3% cess).
  5. If a recipient of income is located in a Notified Jurisdictional Area (NJA), tax must be withheld at the higher of the rate specified in the relevant provision of the Income Tax Act and 30%. Cyprus has been notified as an NJA.
  6. The 10% rate (plus the 2% or 5% surcharge, as applicable, and the 3% cess) applies to royalties and technical services fees paid to foreign companies by Indian enterprises. However, if the royalties or technical services fees paid under the agreement are effectively connected to a permanent establishment or fixed place of the non-resident recipient in India, the payments are taxed on a net income basis at a rate of 40% (plus the 2% or 5% surcharge, as applicable, and the 3% cess).
  7. Unabsorbed depreciation may be carried forward indefinitely to offset taxable profits in subsequent years.

Source: EY 2017 Worldwide Corporate Tax Guide


Firm contact details

Ashok Maheshwary & Associates
Dhruva Advisors – WTS Global
Economic Laws Practice
KPMG
Nangia & Co