Doing business in India: Taxation and Payroll

Tax Figures

Corporate Income Tax

The current corporate income tax rate is 30% for resident companies and 40% for non-resident companies (such as a branch) plus a surcharge, bringing the effective tax rate up to 41.2%.

Companies are required to submit their tax returns by 31 March of the year following the tax year.

Companies must make four provisional advance payments of tax on 15 June (10%), 15 September (45%), 15 December (75%) and 15 March (1005).

Income Tax Rate

INR 250,000: 0%
INR 250,001 – 500,000: 10%
INR 500,001 – 1,000,000: 20%
More than INR 1,000,001: 30%

A 10% surcharge on total tax payable applies to individuals with total taxable income exceeding INR10 million.

An education cess of 3% is also levied on taxes payable

Payroll Tax

Sales Tax

VAT is imposed on the supply of most moveable goods and specified intangible goods in India, as well as on the supply of taxable goods and services in India. Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on goods which they receive (input tax).

The registration threshold for VAT purposes is INR 500,000 in most states.

The current standard rate of VAT imposed on taxable goods and services is 12.5-15%, depending on the state with reduced rates of 1% and 5% in most states.

Withholding Tax

India imposes withholding tax (WHT) on certain classes of income earned by non-residents:-

Dividends: No WHT applies. However, a a dividend distribution tax of 15% may apply.
Royalties: 25%
Interest: 10% (residents), ranges from 5-40% for non-residents.
Technical service fee: 25%
Payments to non-resident contractor companies: 40% plus surcharge and cess
Purchase of immoveable property: 1% plus surcharge and cess

A reduced rate may be available under an applicable Double Tax Treaty.

Other Tax

Net wealth tax: Payable at a rate of 1% if the taxable value of net wealth exceeds INR3 million. Assets subject to tax include residential houses, cars, yachts, boats, aircraft, urban land, jewelry, bullion, precious metals, cash in excess of INR50,000, any amount not recorded in the books of account and commercial property not used as business, office or factory premises.
Transactions above INR 50,000: Any sum of money in excess of INR50,000 received by an individual without consideration may be taxable subject to certain exemptions.
Real estate taxes
Transfer taxes: Levied on the purchase of any security such as a share, derivative or unit of an equity oriented fund. Ranges from 0.025% to 0.25%.
Central sales tax of 2% on interstate movement of goods
Service tax of 14% on all services
Central excise duty on the production or manufacture of goods in India. Generally taxed at 12.56%
R&D cess of 5% on the import of certain types of “technology”

Time to prepare and Pay Taxes

241 hours

Employers Social Security and statutory contributions

Employers have to contribute 12% of the employees’ monthly salary towards the Provident Fund Scheme and 4.75% to the national insurance scheme.

Employees Social Security and statutory contributions

Employees have to contribute 12% of their monthly salary towards the Provident Fund Scheme and 1.75% to the national insurance scheme.

Payroll

Foreign companies operating in India may find it challenging to deal with the complexities of the country’s tax system. The primary concerns for a foreign company that needs to comply with tax laws in India are: Individual income tax (IIT) for employees in India, social security costs, VAT, withholding tax, business tax and permanent establishment concerns.

Remote Payroll

A remote payroll in India is where a foreign company, i.e. a non-resident company, payrolls a resident employee in India. This applies to both local and foreign employees. One option for a non-resident company to payroll its employees (local and foreign) in India is to use a fully outsourced service like a GEO or PEO which will employ and payroll the staff on their behalf.

Local Payroll Administration

In some cases, a company will register their business in India under one of the forms available but prefer to have another company administer its payroll. This can be accomplished through a payroll provider. It is important to note that the company, as the Employer of Record, is still fully responsible for compliance with employment, immigration, tax and payroll regulations. But the payroll calculations, payments and filings can all be outsourced to the payroll provider.

Internal Payroll

Larger companies with a commitment to India may wish to run their own local payroll for all employees, foreign and local. In order to accomplish this, they will have to complete the incorporation, register the business and then hire the necessary staff. There will be a need for in country human resources personnel who have the background needed to manage an Indian payroll and can fulfil all tax, withholding tax and payroll requirements.

This approach carries significant cost and requires some knowledge of local employment and payroll regulations. The company will need a local accounting firm and potentially legal counsel to ensure full compliance with Indian employment laws.

Setting up payroll in India

Currency

Indian rupee (INR), ₹

Employee Information Required

Following information is required: