Rohatgi, Roy: Introduction to Indian Taxes – A Brief Guide

Introduction to Indian Taxes – A Brief Guide by Roy Rohatgi

(Updated to June 3, 2003)

A. Introduction

India taxes Indian source income as well as the foreign source income of its residents, subject to tax treaty and other relief. The foreign source income of non-residents or individual persons not ordinarily resident in India is only taxed if received in India. In certain circumstances, income arising outside India may be deemed Indian income.

The tax system is schedular. Taxable income is ascertained according to the rules for the particular class of income and then aggregated to determine total taxable income. Tax changes are introduced by annual Finance Acts preceded by the “Budget” statement, usually in February. The “previous year” basis of assessment is used.

The tax year ends on 31 March for all taxpayers.

B. Types of taxes

Besides income (including capital gains) taxes, India levies taxes on wealth. Wealth tax is levied at 1% on amount in excess of Rs 1,500,000. Foreign nationals are taxed only on their Indian wealth. There is no gift tax and death duty.

Indirect taxes include excise duties, service tax, central value added tax (VAT) covering manufacturing activities and local taxes e.g. sales tax, property tax, octroi and state excise taxes and state VAT covering trading of goods. Customs duties are levied on imports at specified tariff rates. Transfer of assets attracts stamp duties.

C. Residence rules

The Indian Income Tax Act, 1961, classifies every taxpayer (individuals and companies) as either resident or non-resident. Individuals can have ordinary resident status as well. Individuals resident and ordinarily resident in India pay income tax on their worldwide income. Non-residents and Resident but Not Ordinarily Residents pay Indian income tax on Indian source income and on foreign income if received in India.

An individual is resident in India, in respect of a particular tax year, if he satisfies any one of the following conditions:

– He is in India for at least 182 days in the relevant tax year; or- He is in India for 60 days or more in the relevant tax year and has stayed in India for 365 days or more in the immediately four previous tax years.

Introduction to Indian Taxes – A Brief Guide by Roy Rohatgi
(Updated up to May 2006) A. IntroductionIndia taxes Indian source income as well as the foreign source income of its residents, subject to tax treaty and other relief. The foreign source income of non-residents or individual persons not ordinarily resident in India is only taxed if received in India. In certain circumstances, income arising outside India may be deemed to be Indian income. The tax system is schedular. Taxable income is ascertained according to the rules for the particular class of income and then aggregated to determine total taxable income. Tax changes are introduced by annual Finance Acts preceded by the ?Budget? statement, usually in February. The ?previous year? basis of assessment is used. The tax year ends on 31 March for all taxpayers. B. Types of taxesBesides income (including capital gains) taxes, India levies taxes on wealth. Wealth tax is levied at 1% on amount in excess of Rs 1,500,000. Foreign nationals are taxed only on their Indian wealth. There is no gift tax and estate duty.Indirect taxes include excise duties, service tax, central sales tax covering manufacturing activities and local taxes e.g. property tax, octroi and state excise taxes and state Value Added Taxes (?VAT?) covering trading of goods. Customs duties are levied on imports at specified tariff rates. Transfer of assets (including shares) attracts stamp duties.C. Residence rulesThe Indian Income Tax Act, 1961, classifies every taxpayer (individuals and companies) as either resident or non-resident. Individuals can have ordinary resident status as well. Individuals resident and ordinarily resident in India pay income tax on their worldwide income. Non-residents and Resident but Not Ordinarily Residents pay Indian income tax on Indian source income and on foreign income if received in India. An individual is resident in India, in respect of a particular tax year, if he satisfies any one of the following conditions:
He is in India for at least 182 days in the relevant tax year; or
He is in India for 60 days or more in the relevant tax year and has stayed in India for 365 days or more in the immediately four previous tax years.
An individual is a Resident but Not Ordinarily Resident, in respect of a particular tax year, if he satisfies any one of the following two conditions:
He has been non-resident in India in 9 out of the 10 previous years preceding the relevant tax year; or
He has during the 7 years preceding the relevant tax year, been physically present in India for a total period of 729 days or less
Consequent to this definition of a Resident but Not Ordinarily Resident, if an individual goes out of India even for two years, his status on return will be that of a Resident but Not Ordinarily Resident. A company is a resident if it is incorporated in India or managed and controlled wholly in India.D. Tax rates Tax rates vary for individuals and companies. Individuals are taxed on a slab basis as follows:
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