Social security contributions
Indian social security is broadly governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (PF Act) and schemes made thereunder, namely the Employees’ Provident Fund Scheme (EPF) and the Employees’ Pension Scheme (EPS). The Employees’ Provident Fund Organisation (EPFO), a statutory body established by the government of India, administers social security regulations in India.
Currently, Indian social security regulations apply mandatorily to establishments in India employing 20 or more persons or where an establishment voluntarily seeks registration with the authorities. Employees (including foreign nationals) working with an establishment in India to which the PF Act applies are liable to contribute towards the provident fund at the fixed rate of 12% of salary. The employer is required to make the matching contribution and deposit both the employer’s as well as the employee’s contributions (i.e. 24%) to the provident fund of the employee by the 15th day of the following month.
Out of the employer’s contribution of 12%, an amount equal to 8.33% of salary (salary capped at INR 15,000 per month in respect of Indian employees) is allocated to the pension fund of the employee where the employee has joined the establishment prior to 1 September 2014 and is drawing a salary of more than INR 15,000 per month.
The government of India has made the social security scheme mandatory for cross-border workers. A foreign national qualifies as an ‘international worker’, if one is coming to work for an establishment in India to which the PF Act applies.
Similarly, an Indian national qualifies as an ‘international worker’, if one has worked or is going to work in a country with which India has entered into a social security agreement (SSA) and is eligible to avail benefits under the social security program of the host country, according to the terms of the relevant SSA. However, it has been clarified that Indian employees holding a certificate of coverage (COC)/detachment certificate obtained from Indian social security authorities and contributing to the Indian social security schemes will not become international workers and will continue to be treated like any other domestic Indian employees. Also, Indian employees qualifying as international workers on account of working/having worked in a country with which India has an SSA will re-acquire the status of Indian employees upon repatriation to India after completion of the overseas assignment. Accordingly, such employees will not be subject to the special provisions applicable to international workers after repatriating to India.
An international worker from a country with which India has an SSA in force is exempted from Indian social security where one:
- is contributing to one’s home country’s social security, either as a citizen or resident, and
- enjoys the status of ‘detached worker’ for the period and according to the terms specified in the relevant SSA.
Similarly, an international worker from a country with which India has entered into a bilateral comprehensive economic agreement prior to 1 October 2008 is exempted from Indian social security where:
- one is contributing to one’s home country’s social security, either as a citizen or resident, and
- the agreement specifically exempts natural persons of the other contracting country from contributing to the social security system of India.
Capital gains taxes
As a general rule, capital gains from the disposal of capital assets are liable to tax in the tax year in which such assets are sold or transferred. Capital assets include all forms of property, stocks and shares, land and buildings, goodwill, etc. (but exclude personal effects except jewellery, stock-in-trade, stores, and raw materials held for business purposes).
Categorising capital gains
Capital assets held for more than 24 months (12 months in the case of shares or securities listed on a recognised stock exchange in India, equity oriented mutual funds, and zero coupon bonds; 36 months in case of debt oriented mutual funds and unlisted debentures) are termed as ‘long-term capital assets’, and the assets not so held are called ‘short-term capital assets’. Capital gains arising from the transfer/disposal of long-term capital assets are called long-term capital gains (LTCG). Gains arising from the disposal of short-term capital assets are called short-term capital gains (STCG). This distinction is important as LTCG are taxed or treated beneficially and there are also planning opportunities to save taxes provided the consideration or gain is re-invested, subject to fulfilment of certain other conditions.
LTCG is subject to tax at a flat rate of 20% (plus applicable SC, EC, and SHEC). STCG is added to the taxable income of the individual and subject to tax at normal slab rates.
Computation of LTCG
Except in cases of debentures and zero coupon bonds, the cost of acquisition of long-term capital assets is determined after indexing costs by a prescribed inflation factor (known as ‘indexed cost of acquisition’). The base year for computation of indexed cost of acquisition is 2001. Assets acquired before 1 April 2001 can be taken at fair market value as of 1 April 2001 for the above purposes.
In cases where shares or debentures of an Indian company are purchased by utilising foreign currency, the subsequent capital gains are determined by computing the gains in the same foreign currency in which it was purchased and reconverting the gains into Indian rupees to calculate the tax payable on the same.
However, there are a few exceptions for indexation and rate of tax on LTCG/STCG:
- For equity shares and equity oriented mutual funds that have been sold on recognised stock exchanges in India, and where securities transaction tax (STT) has been paid, the LTCG earned (if any) is fully exempt from tax. For LTCG to be exempt in such cases, STT should also be paid on acquisition for shares acquired on or after 1 October 2004 (subject to certain exceptions as prescribed in this regard viz. acquisition of shares in initial public offerings, bonus or rights issued by a listed company, etc.).
- The tax on LTCG (arising to any person) on transfer of the securities listed on a recognised stock exchange in India (except bonds and debentures), zero coupon bonds (other than units), and other than gains mentioned above is computed at the lower of 20% on gains computed with indexation or 10% of gains computed without indexation (plus applicable SC, EC, and SHEC).
- For bonds and debentures listed on a recognised stock exchange in India, LTCG is taxed at 10% (plus applicable SC, EC, and SHEC) without indexation benefit.
- In case of an NR, if the securities are not listed on an Indian recognised stock exchange, the tax on the corresponding LTCG is computed at 10% (without indexation and/or conversion/reconversion to/from foreign currency, as mentioned above) plus applicable SC, EC, and SHEC. Further, in case of NRs, the basic exemption limit of INR 250,000 does not apply against the LTCG earned on sale of long-term capital assets.
- STCG earned on equity shares and equity oriented mutual funds that are listed on a recognised stock exchange in India is taxable at 15% (plus applicable SC, EC, and SHEC) provided STT has been paid. For NRs, the basic exemption limit of INR 250,000 does not apply against the STCG earned on sale of such shares/units.
Tax liability on LTCG can be reduced by taking benefit of exemptions provided in the Act when gains/sale proceeds from the sale of the capital assets are reinvested into house property and/or prescribed investments, as the case may be.
Short-term capital losses can be offset against any capital gains (long-term or short-term). Long term capital loss can only be offset against long-term capital gains. Unabsorbed capital losses (short-term or long-term) can be carried forward for a maximum of eight years to be offset only against future capital gains as mentioned above.
Buyback of shares
An additional tax is payable on transactions involving buyback of shares by unlisted companies from its shareholders. A tax at 20% is payable by the company on the difference of consideration paid on buyback and the issue price of shares. The Central Board of Direct Taxes (CBDT) has prescribed the methodology for determination of the amount received for issue of shares under 12 different situations, being a subject matter of tax on buyback. These rules have been made effective from 1 June 2016. The buyback consideration received will be tax exempt in the hands of the receiver. No tax credit will be allowed in case of such taxes paid, either to the company or to the shareholder.
Value-added tax (VAT)/Central sales tax (CST)
The sale of movable goods in India is chargeable to tax at the central or state level. The Indian Constitution grants powers to state legislatures to levy tax on goods sold within that state. Such sales are therefore chargeable to VAT at the rates specified under the VAT laws of the relevant state. All goods sold in the course of inter-state trade are subject to CST.
Where goods are bought and sold by registered dealers on an inter-state basis for trading or for use in the manufacture of other goods or specified activities (such as mining or telecommunication networks), the rate of sales tax is 2%, provided Form ‘C’ is issued by the purchasing dealer. In the absence of Form ‘C’, the applicable rate would be the rate of VAT on such goods in the originating state. Inter-state procurement, on which CST is charged by the originating state, is not eligible for input tax credit in the destination state, and is a cost to the buyer.
Under the VAT regime, the VAT paid on goods purchased within the state is eligible for VAT credit. The input VAT credit can be utilised against the VAT/CST payable on the sale of goods. The cascading effect of taxes is thus avoided, and only the value addition is taxed.
Currently, there is no VAT on imports into India. Exports are zero-rated. This means that while exports are not charged to VAT, VAT charged on components purchased and used in the manufacture of export goods or goods purchased for export is available to the purchaser as a refund based on state VAT legislations.
State VAT is charged at different rates varying from 5% to 15%, with a few exceptions. The rate of VAT depends on the nature of the goods involved and varies from state to state.
A turnover threshold is prescribed so as to exclude small traders from the ambit of VAT. Under a composition scheme, tax may be levied on small traders within a specified turnover limit at a lower rate, in lieu of VAT.
Entry tax/Octroi duty
'Entry tax’ is a tax on the entry of specified goods into the state from outside the state for use, consumption, or sale therein. Entry tax continues to exist under the VAT regime. However, in certain states, it has been made VATable and can be offset against the output VAT liability in the state. Where entry taxes have been imposed in lieu of octroi, there is no offset available, and hence they are a cost. Typically, the rate of entry tax ranges from 0.5% to 15%, depending upon the state.
The levy of entry tax was considered unconstitutional by the High Courts in many states. However, the nine judges bench of Supreme Court has upheld the validity of ley of entry tax.
Octroi is a municipal levy that is levied at the time of entry of specified goods into the limits of the relevant municipal corporation. Thus, octroi is leviable if there is movement of goods from one city to another in the same state, if the cities fall under the jurisdiction of two different municipal corporations.
Central value-added tax (CENVAT) (Excise duty)
CENVAT is an excise duty levied by the Central Government on the manufacture or production of movable and marketable goods in India.
The rate at which excise duty is levied on goods depends on the classification of the goods under the Central Excise Tariff Act, 1985. The excise tariff is primarily based on the eight-digit Harmonized System of Nomenclature (HSN) classification adopted so as to achieve conformity with the customs tariff.
Excise duty on most consumer goods that are intended for retail sale is chargeable on the basis of the maximum retail sale price (MRP) printed on the package of the goods. However, abatements are admissible at rates ranging from 15% to 55% of the MRP. Goods, other than those covered by MRP-based assessments, are generally chargeable to duty on the ‘transaction value’ of the goods sold to an independent buyer. In addition, the Central Government has the power to fix tariff values for imposing ad valorem duties on the goods.
Presently, the excise duty rate is 12.5% with a few exceptions. However, a partial or complete exemption from payment of excise duties is also available for specified goods.
The central excise duty is a modified VAT, wherein a manufacturer is allowed credit of the excise duty paid on locally sourced goods and the CVD and ADC paid on imported goods. The CENVAT credit can be utilised for payment of excise duty on clearance of dutiable final products manufactured in India. Manufacturers of dutiable final products are also eligible to take advantage of the CENVAT credit of the service taxes paid on input services used in or in relation to the manufacture of final products and clearances of final products from the place of removal, subject to the fulfilment of certain conditions.
Service tax is levied on all services provided or agreed to be provided in a taxable territory, except the following:
- Services on the negative list.
- Services specifically exempted by notification.
The present rate of service tax is 14% and a Swachh Bharat Cess is applicable at 0.5% on the taxable value of services with effect from 15 November 2015. Further, Krishi Kalyan Cess is applicable at 0.5% on taxable value of services with effect from 1 June 2016, making the effective rate of service tax 15%.
Typically, the onus of payment of service tax lies with the provider of services. However, for certain services (e.g. import of services), the onus of paying the service tax lies, either fully or partially, on the service recipient.
Goods and services tax (GST)
The Central Government took a major step towards the transition to a national integrated GST. A Working Group was constituted by the Empowered Committee to study global GST models and identify suitable models for introduction in India. The first draft of Model GST Law was released on 14 June 2016. In August 2016, the Constitutional Amendment Bill was passed to give powers to the centre and states to levy GST on supply of goods and services. In India, there will be a dual GST model, wherein one tax will be levied by the centre (Central GST or CGST), the other tax levied by the states/union territories (State/Union GST or SGST/UTGST). For intra-state transactions, CGST and SGST/UTGST will be applicable, and, in case of inter-state transactions, Integrated GST or IGST will become applicable. IGST will be submission of CGST and SGST/UTGST. The Central Government intends to implement GST from 1 July 2017.
The following existing indirect taxes are subsumed into the GST:
- Excise duty.
- Service tax.
- Entertainment tax.
- Luxury tax.
- Lottery taxes.
- State cesses and surcharges.
- Entry tax not in lieu of octroi.
Post release of Model GST Law, the Central Government issued draft rules for registration, payment, invoicing, refunds, and returns. The process of migration of existing registration to registration under GST on a provisional basis was also initiated. Taxpayers are expected to get a final GST registration number in the month of June 2017.
In November 2016, a revised Model GST Law was released inviting comments from the industry. Post this, in March 2017, the following bills were tabled in Lok Sabha:
- The Central Goods and Services Tax Bill, 2017 (CGST Bill).
- The Integrated Goods and Services Tax Bill, 2017 (IGST Bill).
- The Union Territory Goods and Services Tax Bill, 2017 (UTGST Bill).
- The Goods and Services Tax (Compensation to States) Bill, 2017 (Compensation Cess Bill).
The above bills were approved in both the houses of Parliament and the assent was also given by the President of India in April 2017.
Further, revised draft rules, including rules on e-way bills, accounts and records, advance ruling and appeal and revision, were also released by the government, which is expected to be finalised by end of May 2017. The category wise rates are expected to be released in the month of June 2017 itself.
As on date, there are 13 states that have passed the respective State GST laws and it is expected that all the states will be passing the State laws in their state assemblies before 1 July 2017.
The government is striving for achieving target implementation date of 1 July 2017.
There are no wealth taxes in India.
Inheritance, estate, and gift taxes
There is no inheritance tax in India.
There is no gift tax liability on the donor. However, any sum of money aggregating to INR 50,000 or more received during the relevant tax year without consideration or for an inadequate consideration by an individual from any person not being a relative (see below for details) is subject to income tax in the hands of the recipient.
Similarly, the following receipts are also subject to tax:
- Any specified movable property received without consideration, the fair market value of which exceeds INR 50,000: Total amount is taxable.
- Any specified movable property received for a consideration less than fair market value, where the difference of the fair market value and a consideration is more than INR 50,000: Such difference is taxable.
- Any immovable property received without consideration, the stamp duty value of which exceeds INR 50,000: Total amount of stamp duty value is taxable.
- Any immovable property received for a consideration less than stamp duty value, where the difference of the stamp duty value and consideration is more than INR 50,000: Such difference is taxable.
The above receipts are not considered as taxable if the same is/are received from any relative (i.e. brother, sister, brother or sister of the spouse, brother or sister of either of the parents of the individual, any lineal ascendants/descendants, or spouse of individual or of any of the above).
Further, the same are not considered as taxable if received on the occasion of marriage, under a will/inheritance, in contemplation of death of the payer, or through any other criteria specified in the law.
Property tax is levied by the governing authority of the jurisdiction in which the property is located. The rate of tax levied varies from city to city in India, and is generally related to the prevailing market prices for property in each locality.