In this article, we shall look into the Top 14 Direct Tax scenarios that a typical a statup in its journey would be eventually encountering with. Let’s jump into the brief details on these – Direct Taxes in India that startups should know.
1. Corporate income tax – Indian company, A resident company is taxed on its global income.
- Tax at the rate of 30 percent is levied on income earned during a tax year.
- A Surcharge and Education Cess is also levied. Alternatively, a company is required to pay MAT at 18.5 percent on the adjusted book profits in the case that the book profits are less than the taxable income of the Company.
- A Surcharge and Education Cess is also levied DDT at 16.995 percent (including a surcharge of 10 percent and education cess) is liable to be paid on the dividend, declared, distributed or paid by a domestic company.
- Dividend income received by an Indian company from foreign companies would be taxed at 15 percent (plus applicable Surcharge and Education Cess as given above) provided it holds at least 26 percent in the nominal value of equity share capital of the foreign company.
- 66 percent (inclusive of applicable surcharge and education cess) shall be levied on the specified distributed income of unlisted domestic companies that buy back shares from its shareholders.
2. Tonnage Tax Scheme for Indian shipping companies:
Tax is levied on the national income of the Indian shipping company arising from the operation of ships at normal corporate tax rates. The national income is determined in a prescribed manner on the basis of the tonnage of the ship. Shipping companies can opt for the scheme or taxation under normal provisions. Once the scheme has been opted for, it would apply for a mandatory period of ten years and other tax provisions would not apply.
3. Securities Transaction Tax:
STT is levied on the value of taxable securities transactions at specified rates. The taxable securities transactions are:
- Purchase/sale of equity shares in a company or a derivative or a unit of an equity-oriented fund entered into in a recognized stock exchange; and
- Sale of a unit of an equity-oriented fund to the mutual fund.
4. Commodity Transaction Tax:
CTT is levied on the sale of a commodity derivative (other than agricultural commodities) entered in a recognized association from a date to be notified.
5. Wealth Tax:
Wealth tax is levied on specified assets at one percent on the value of the net assets as held by a taxpayer (net of debts incurred in respect of such assets) in excess of the basic exemption of $ 55,147.
6. Head Office Expenditure and Taxes:
Foreign companies operating in India through a branch are allowed to deduct executive and general administrative expenditure incurred by the head office outside India. However, such expenditure is restricted to the lower of:
- Five percent of adjusted total income (as defined); or
- Expenditure attributable to the Indian business. In cases where the adjusted total income for a year is a loss, the expenditure is restricted to 5 percent of the average adjusted total income (as defined).
7. Taxation on the transfer of shares of a closely held company without or for inadequate consideration:
With effect from 1 June 2010, the transfer of shares of a closely held company without or for inadequate consideration to a firm or to a closely held company is taxable in the hands of the recipient of shares. The taxable income for the recipient will be the fair market value of the shares if the transfer is without consideration. If the transfer is for inadequate consideration then the taxable income will be the difference between the fair market value and consideration that exceeds the threshold of $ 919. The computation of the fair market value of the shares has been prescribed.
8. Share premium in excess of the fair market value deemed as income:
With effect from 1 April 2012, where a closely held company receives from any person, being a resident, any consideration for issue of shares that exceeds the face value of shares, the aggregate consideration received for such shares as exceeds the fair market value of shares is taxable in the hands of the recipient. However, this does not apply in a case where the consideration for issue of shares is received by (a) a VCU from a venture capital company or a venture capital fund; or (b) a company from a class or classes of persons as may be notified.
9. Withholding of taxes:
Generally, incomes payable to residents or non-residents are liable to withholding tax by the payer. However, in most cases, individuals are not obliged to withhold tax on payments made by them.
10. Carry forward of losses and unabsorbed depreciation :
Subject to the fulfillment of prescribed conditions Business loss (including that of speculation business), unabsorbed depreciation, and capital loss (long-term as well as short-term) can be carried forward and set off as per the prescribed provisions of the law. Business losses can currently be carried forward for a period of eight years whereas unabsorbed depreciation can be carried forward infinitely.
11. Corporate Re-organisations:
Corporate reorganizations, such as mergers, demergers, and slump sales, are either tax neutral or taxed at concessional rates subject to the fulfillment of the prescribed conditions.
12. Limited Liability Partnerships:
The LLP Act was introduced in 2008 in India. LLPs are subject to AMT at the rate of 18.5 percent of the adjusted total income in the case where the income tax payable is less than 18.5 percent of the adjusted total income. The provisions dealing with DDT do not apply to an LLP. The conversion of a private company or unlisted public company into an LLP is exempt from tax subject to prescribed conditions.
13. Foreign Institutional Investors:
To promote the development of Indian capital markets, Business investing in listed Indian shares and units are subject to tax as per the beneficial regime. A Surcharge and Education Cess will also be levied. The rate of tax on other short-term capital gains is 30 percent plus surcharge (if applicable) and education cess.
14. Domestic Transfer Pricing:
The transfer pricing regulations also apply to certain domestic transactions defined as SDT covering the following:
- Payments (i.e. only expenditure) to specific parties;
- Transactions between tax holiday eligible units and other business of the same taxpayer;
- Computation of ordinary profits of a tax holiday unit of the taxpayer where there are transactions with entities with close connection;
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