India Software Development - Tax and legal
issues
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, figuring 14.6% in 2000-2001. This is the
reflection of the many reorganizations 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
smoothen 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.
|
