The Indian Tax Rate Cuts

Featured UK | Arvinder Matharu | Oct 22, 2019

India has recently cut its corporate tax rates in a bid to revive its stagnant economy.

The move has widely been seen as a positive and much needed one and sees the rates cut as follows:

  • Companies that don’t seek exemptions will see their tax rate cut from 30% to 22% before surcharge and cess. This would be effectively 25.17% after surcharge and cess.
  • Companies have an option not to take exemptions and have their effective tax rate drop from 35% to 25%. inclusive of cess and surcharge with an additional benefit of no MAT (Minimum Alternate Tax).
  • Some companies that are qualifying manufacturing vehicles will see their tax rate cut from 25% to 15%. Bear in mind that this is only available to manufacturing companies registered on or after 1st October 2019 and commencing operations before 31st March 2023. This will translate to an effective rate of 17.16% after surcharge and cess representing one of the lowest corporate tax rates in Asia.

Since the new rules provide of an optional tax regime, the effect of the changes would in fact result in two sets of corporate tax rules which is bound to create a web of complexity. Companies seeking to do business in India should discuss these options with their tax advisors.

Nevertheless, these tax cuts are a huge step in the right direction in transforming the “Make In India” slogan into reality and may present opportunities for UK businesses looking to expand into the Indian market. 

For a UK holding company with an interest in an Indian trading company, some of the tax benefits are as follows.

  • Where the UK company holds at least 10% of the ordinary shares of the Indian company and some other conditions are met, a sale of the shares is exempt from UK corporation tax.
  • A dividend paid from the Indian company to the UK company is potentially exempt from UK corporation tax.
  • No withholding tax will be levied on dividends paid by the UK company to its shareholders.

Also, in general, the UK has an extensive network of Double Tax Treaties to reduce withholding tax on dividends from subsidiaries located in other jurisdictions.

For other tax reasons, a subsidiary company in India may not be appropriate and a branch may be the preferred option, especially where the operation is initially expected to be loss making.  The loss here can be set off by the UK company against its profits for UK corporation tax purposes. While this might be efficient for tax purposes, it should be remembered that a branch is not a separate legal entity and this exposes the UK company to commercial and legal risk as it is responsible for liabilities of the branch.

The details and conditions attaching to the new corporate tax rates in India as well as those in relation to a UK holding company, should be discussed with an appropriate tax advisor.


Top Ten Year-End Tax Planning Checklist

As the year draws to a close, taking proactive steps in your financial planning can significantly impact your tax liability. This checklist provides a guide to key strategies that individuals can consider before the end of the year to potentially decrease their income tax. By strategically managing income, deductions, and investments, you can optimize your tax situation and position yourself for a more tax-efficient financial future.

Read More »