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The configuration of levying taxes in India is segregated between Central Govt. and State Govt. The Central Government charges direct taxes like personal income tax, corporate tax and indirect taxes like customs duty, excise duty and the service tax. The State Govt. levies local and state taxes.
The revenue from taxes as a percentage of GDP is showing an upward trend even during GFC. This is the reflection of the many re-organizations that took place in the Indian tax structure which trimmed down many tax rates and tax laws. In India, software development is subject to the many tax and legal issues of the country.
The taxes levied:
- Domestic companies in India (any company that is incorporated or having complete management and control in India) are bound to pay 35.7% tax to the Central Govt.
- For a nonresident corporation tax amounting to 48% on income derived in India from Indian Operations (income that is accounted to arise in India and income that is received in India).
- 7.65% of book profits of the company in India is charged as MAT (Minimum Alternate Tax)
- Profits generated from software development, goods exports and from exports of Television news software are not counted as part of the book profits while coiling MAT taxes.
According to the Indian law, preserving of tax from certain or all payments made to nonresidents, in the rates specified as found below:
| Mode of payment Rate: | |
|---|---|
| Interest | 20% |
| Royalties | 20% |
| Technical service fees | 20% |
Irrespective of opportunities, the place of receipt the reimbursement for work done in India, there is a taxable income:
- Salaries and wages
- Pensions
- Fees
- Commissions
- Profits in lieu of salary or in addition to salary and perquisites
- All allowances
- Stocks granted by an employee
- Capital gains on transfer of capital assets situated in India
- Capital gains on assets held for 3 years
- Short-term capital gains are taxed at rates applicable to normal income at 30% for Foreign Institutional Investors (FII)
Tax rates under some tax treaties signed by India.
| Payee Company Resident in | Interest(percent) | Royalties(percent) | Technical Fees(percent) |
|---|---|---|---|
| Australia | 15 | 10-15 | Covered by Royalties |
| Austria | No rate provided for | No rate provided for | No rate provided for |
| Belgium | 10-15 | 20 | 20 |
| Brazil | 15 | 15-25 | No provision |
| Canada | 15 | 10-20 | 10-20 |
| China | 10 | 10 | 10 |
| Denmark | 10-15 | 20 | 20 |
| Finland | 10 | 10-20 | 10-20 |
| France | 10-15 | 20 | 20 |
| Germany | 10 | 10 | 10 |
| Greece | No rate provided for | No rate provided for | No provision |
| Indonesia | 10 | 15 | No provision |
| Italy | 15 | 20 | 20 |
| Japan | 10-15 | 20 | 20 |
| Korea | 10-15 | 15 | 15 |
| Mauritius | No rate provided for | 15 | No provision |
| Netherlands | 10 | 10 | 10 |
| New Zealand | 10 | 10 | 10 |
| Norway | 15 | 20 | 20 |
| Russia | 10 | 10 | 10 |
| Singapore | 10-15 | 10-15 | 10-15 |
| South Africa | 10 | 10 | 10 |
| Spain | 15 | 10-20 | 10-20 |
| Sweden | 10 | 10 | 10 |
| Switzerland | 10-15 | 10-20 | 10-20 |
| United Kingdom | 10-15 | 10-15 | 10-15 |
| USA | 10-15 | 10-15 | 10-15 |
| Vietnam | 10 | 10 | No provision |
Tax Incentives Provided
The Indian Govt. has declared tax incentives to investors in India in an effort to encourage growth and development.
- Infrastructure
The investors putting their money in developing and / or maintaining and operating an infrastructure facility is given a 10 years tax holiday. - Power Ventures:- Companies that generate and / or distribute power is provided with a tax holiday of 10 years.
- Telecom:- Companies doing telecom services including Internet services and broadband networks is entitled to a tax holiday of 5 years. Along with 30% deduction from profits for the next 5 years any 10 consecutive years out of the first ten years is also provided.
- Other Industries:- Industries setup in the backward states and districts are entitled to a tax holiday of 5 years.
Venture Capital
A tax exemption is given to any income of a venture capital fund or company, provided the income is earned from investment in a venture capital undertaking, engaged in providing services or manufacturing products other than the notified services, articles or things.
Export Incentives in India
Tax Deduction on exports profits for units set up in EPZs, STP, EHTPs, FTZ and SEZs
Opportunities for Added Incentives
- Ten-year tax holiday for R&D companies engaged in scientific industrial research.
- A weighted deduction of 150% has been offered for scientific research and development expenditure.
- For FII concession tax rates are provided.
The rule of laws and regulations
Software development is the hot sector in India, where continuous liberation of Govt. policies has supported the escalation of IT in India. Nasscom along with the Govt. of India, has made significant moves like.
- Slimming down of import duty on computer software from a high 114% to nil.
- Amendment of copyright laws etc.
Guidelines for starting your own company in India
The industrial policy announced in India during 1991, unshackled the Indian industrial economy from the bonds of unnecessary bureaucratic control, and introduced liberation. This Indian economy integrated with world economy has made India a much safer playground for foreign investors. The Internet boost in India has favored this too. It is now easier for a non-Indian company to invest in India. One can invest in India for software development by either starting one's own setup or by offshore outsourcing to a local company in India.
While bringing-up your own setup:
You can have better control over management of the organization and can ensure that the company's processes are being followed, in one's own setup. In India, software development can make a head-start in (foreign) business in 4 ways.
1. A Branch Office in India
If you are engaged in manufacturing or trading you can open a branch office in India for
- Representing your company in various matters in India. E.g. acting as buying/selling agent in India etc.
- Conducting research work in which the parent company is engaged
- To protect the results of research work, made available to the Indian Companies.
- Undertaking export and import trading activities.
- Promoting possible technical and financial collaborations between Indian and overseas companies.
- Sale of products or services is not allowed in India. For IT enabled services, you should fill up Form FNC-12 (available with Chartered Accountant) and submitted at
The Controller, Exchange Control Department, Reserve Bank of India, Foreign Investment Division Central Office, Central Office Building, 11th Floor Bombay - 400 023
2. 100% subsidiary in India
- For foreign investors in software industry the Govt. of India allows 100% ownership especially in EPZ (Export Processing Zone), Special Economic Zones (SEZ), STP (Software Technology Park) or EHTP (Electronic Hardware Technology Park) in almost in all the states in India.
- 75% of the final output of India has to be exported.
- For 100% Export Oriented Units (EOU) automatic approvals are given by the secretariat for Industrial Approval.
- Units established in EPZ or STP are provided with
Duty free imports Tax-free income Ready-made infrastructure Housing and living facilities
- For setting up units under 100% Export Oriented Units Scheme, applications must be submitted to
The Secretariat for Industrial Approvals (SIA) Department of Industrial Development Udyog Bhavan - New Delhi - 110 001.
- For setting up units in EPZ, the application must be forwarded to Development Commissioner of the concerned EPZ in 10 copies along with a crossed Demand Draft of Rs. 2500/- (Approx. $ 60) drawn in favor of
The Pay & Accounts Officer Department of Industrial Development Ministry of Industry & Payable at the State Bank of India, Nirman Bhavan, Branch New Delhi.
3. Joint Venture Companies
- By forming strategic alliances with Indian partners, foreign companies can set up their operations in India.
- This will benefit the foreign investor by
- Making available financial and human resources of the Indian partner.
- Making use of already established distribution / marketing set up of the Indian partner.
- Already established contacts of the Indian partner helps to smooth the process of setting up an operation.
- Automatic approval is given to foreign equity up to 50%, 51% and 74% by RBI, provided they comply with the prescribed parameters as specified by the Govt. of India
- The govt. approval is given by FIPB (Foreign Investment Promotion Board) for foreign equity exceeding 50%, 51%, 74% in industries, specified and non-specified by the Govt. of India
- Automatic approval is given to foreign equity up to 50%, 51% and 74% by RBI, provided they comply with prescribed parameters as specified by the Govt. of India.
- Govt. approval is given by FIPB (Foreign Investment Promotion Board) for foreign equity exceeding 50%, 51%, 74% in industries, specified and non-specified by the Govt. of India
4. Acquisition of existing Indian companies.
- Acquisition can be done through the issue of fresh capital and for the transfer of shares of an existing Indian company to the foreign investor with the effect of shares of transferring contract.
- Shares of an Indian company could be acquired from another foreign investor, subject to RBI approval, which will give the advantage of a ready-made set up.
- The FERA Act (Foreign Exchange Regulation Act) makes it necessary to get RBIs permission before the acquisition of shares of an Indian company.
- The foreign investor cannot hold more than 5% of the total paid up capital and foreign investors and Non resident Indians cannot own more than 24% of the capital in total.
Offshore Software Outsourcing in India
These benefits are yours if you outsource your work in India for software development.
- You can divert your attention to core competencies as you can outsource it to the people who are experts in the IT field.
- The fact that the software programmers in India are well acquainted with outsourcing jobs from overseas clients, can be an added advantage for your firm.
- It also has to be added that this saves a lot of financial resources, as only the work done needs to be paid; as in intermittent jobs.
Being aware of the many tax and legal issues that are in force in India, software development becomes the obvious choice for business investment.
If you are interested to start a Joint Venture or 100% subsidiary or interested to acquire an IT company in India for Software development outsourcing; please contact us. We have some proposals for you.
