United States-India Tax Treaty
Quick Summary. Situated in South East Asia, India is the second most populous country in the world. India is comprised of 28 states and eight union territories. A democratic republic founded by the constitution of India, its seat of government is located in New Delhi.
India taxes resident companies on worldwide income; non-resident companies are tax on Indian-sourced income. The Taxation Laws (Amendment) Act 2019 provide for beneficial, lowered rates with respect to certain newly established domestic manufacturing companies. In addition, India imposes a Minimum Alternative Tax (MAT).
Recent tax reforms include The Finance Act of 2020, which abolished the levy of the dividend distribution tax (DDT) effective April 1, 2020. The recently-enacted Direct Tax Vivad se Vishwas Act, 2020 (Scheme) provides a program for settling direct tax litigation. Moreover, the scope of the equalization levy was extended by the Finance Act, 2020 to e-commerce related providers.
U.S.-India Tax Treaty.
- Convention between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, together with a related Protocol, signed at New Delhi on September 12, 1989
- Technical Explanation of the Convention and Protocol between the United States of America and the Republic of India signed on September 12, 1989
- Indian Rupee (INR)
Common Legal Entities.
- Public/Private Limited Liability Company
- One-person Company (owned by a resident individual)
- Partnership Firm
- Limited Liability Partnership (LLP)
- Sole Proprietorship
- Branch office/Liaison office/ Project office/ or Site office of a Foreign Corporation
- India has comprehensive tax treaties with 97 countries. India signed the OECD multilateral instrument on 7 June 2017.
Corporate Income Tax Rate.
- Standard rate is 30% – domestic companies
- 40% – foreign companies and branches of foreign companies
- 25% rate, plus surcharge and cess, may be elected by certain new resident manufacturing companies, and if the company does not claim certain specified deductions, incentives, etc.
Individual Tax Rate.
- Rates are progressive up to 30%, plus a cess, currently at 4%.
- A 10%/15% surcharge applies if income exceeds INR 5 million or 10 million.
- Senior citizens – first INR 300,000 exempt; Very senior citizens – INR 500,000 exempt; First INR 250,00 exempt for all others.
Corporate and Individual Capital Gains Tax Rate.
- Rates vary depending on whether the gains are short or long-term.
- Long-term: If the asset is held for more than 3 years (one year in the case of listed shared and specified securities, and two years in the case of unlisted shares and immovable property).
- Long-term gains listed shares and specified securities are exempt if the transaction is subject to securities transaction tax (STT). With effect from 1 April 2018, the exemption is restricted to INR 100,000. Any gain in excess of INR100,000 is chargeable to tax at the rate of 10% (plus applicable surcharge and cess). Listed shares and specified securities not subject to STT, a 10% tax applies. Long-term capital gains derived by a nonresident from the sales of unlisted securities is 10% (without the benefit of foreign currency conversion or an inflation adjustment.) 20% tax on gains on other long-term assets but with inflation benefit.
- Short term: On listed shares or specified securities subject to a STT are taxed at 15%; gains from other short-term assets are taxed at normal tax rates. Surcharge and cess also imposed.
- Unlisted domestic company is liable to pay an additional tax of 20% on income distributed to a shareholder on account of a buyback of the company’s shares.
- Individual: Spends at least 182 days in the country in a given year, or at least 60 days provided the individual has spent at least 365 days in India in the proceeding four years.
- An individual is not ordinarily a resident if she/he has been a nonresident for nine out of the 10 proceeding years or has been in India for less than 730 days during the proceeding seven years. An individual who does not fulfill above the two conditions is considered ordinarily resident.
- Corporation: A corporation is resident if it is incorporated in India or if its place of effective management, in that year is in India.
- A partnership form, LLP, or other non-individual entity is considered resident in India if any part of the control and management of its affairs takes place in India.
- Not subject to withholding tax. However, the company paying the dividends is subject to DDT.
- An additional income tax of 10% (plus the surcharge and cess) applies on a gross basis on dividend income that is declared, distributed or paid by a domestic company to a resident individual, HUF or partnership firm if the aggregate dividend income of the recipient exceeds INR 1 million per annum.
- Interest paid to a nonresident on a foreign currency borrowing or debt generally is subject to a 20% withholding tax, plus the applicable surcharge and cess. A 5% withholding tax, plus the applicable surcharge and cess, applies to certain types of interest paid to a nonresident, including interest paid on specific borrowings in foreign currency and interest on investments made by a foreign institutional investor or a qualified foreign investor in a rupee-denominated bond of an Indian company, or in a government security.
- If the nonresident does not have a permanent account number (PAN), i.e. a tax registration number, tax must be withheld at a higher of the applicable tax treaty rate or 20%; however, this does not apply if the payments are in the nature of interest and the foreign taxpayer furnishes the prescribed documents to the payer.
- If the interest income derived by a nonresident does not fulfill certain prescribed conditions for concessional withholding tax rates, a withholding tax rate of 30% (for individuals and entities other than a foreign company) or 40% (for a foreign company), plus the applicable surcharge and cess, will apply. The rates may be reduced under a tax treaty.
- Royalties paid to a nonresident are subject to a 10% withholding tax, plus the applicable surcharge and cess. The rate may be reduced under a tax treaty.
- If a treaty applies, but the nonresident does not have a PAN, a tax must be withheld at the higher of the applicable tax treaty rate or 20%; however, this does not apply if the payments are in the nature of royalties and the foreign taxpayer are in the nature of royalties and the foreign taxpayer furnishes the prescribed documents to the payer.
- The transfer pricing regime is influenced by OECD norms, although the penalty provisions in India are stringent comparatively. The definition of “associated enterprise” extends beyond a shareholding or management relationship since it includes some deeming clauses. The transfer pricing provisions also cover specified domestic transactions with related parties if the aggregate value of those transactions exceeds INR 200 million one year.
- The pricing must be determined with regard to arm’s length principles, using methods prescribed under India’s transfer pricing rules, which are similar to OECD guidelines. The arm’s length price is determined based on multiple-year data, and based on a range (between the 35th and the 65th percentile of the data distribution) or the arithmetic mean (depending on certain prescribed conditions).
- The taxpayer is required to maintain detailed information and transfer pricing documents substantiating the arm’s length nature of related party transactions and submit a certificate to the tax authorities from a practicing chartered accountant that sets out the details of associated enterprises, international transactions, etc., along with the methods used to determine an arm’s length price. Certificate must be filed by the due date of filling the annual tax return.
- Where the application of the arm’s length price would reduce the income chargeable to tax in India or increase a loss, no adjustment will be made to the income or loss.
- The taxpayer is required to repatriate cash to India within a prescribed time to the extent of a transfer pricing adjustment. If not repatriated, the amount of the adjustment will be treated as an advance to the associated enterprise and will be subject to notional interest taxable in India.
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