India is a large, diverse country with a complex taxation system. In this article, we will discuss how the taxation system works in India, double taxation agreements, the main taxes expats need to be aware of, special tax breaks that could apply to expats, how and when to file a tax return as an expat, and tax exit procedures for anyone leaving India to move abroad.
The Taxation System in India
The taxation system in India is divided into two categories: direct taxes and indirect taxes. Direct taxes are taxes that are paid directly to the government by individuals and businesses, while indirect taxes are taxes that are collected by businesses on behalf of the government.
Direct taxes
Direct taxes in India include income tax, corporate tax, and capital gains tax. These taxes are levied by the Central Board of Direct Taxes (CBDT).
Indirect taxes
Indirect taxes in India include goods and services tax (GST), excise duty, customs duty, and service tax. These taxes are levied by the Central Board of Indirect Taxes and Customs (CBIC).
Double Taxation Agreements
India has signed double taxation agreements with over 90 countries, including the United States, the United Kingdom, and Canada. These agreements are designed to prevent individuals and companies from being taxed twice on the same income.
If you are an expat living in India and your home country has signed a double taxation agreement with India, you may be able to avoid being taxed twice on your income. However, it is important to check the terms of the specific agreement as they can vary between countries.
Main Taxes in India
Income tax
All residents in India are required to pay income tax on their worldwide income. The income tax rate varies depending on income levels and ranges from 0% to 30%.
Corporate tax
Companies registered in India are required to pay corporate tax on their profits earned in India. The corporate tax rate is currently 25%.
Goods and services tax (GST)
The GST rate in India varies depending on the type of goods or services being provided. The standard rate is currently 18%, while some goods and services are taxed at a lower rate of 5% or 12%.
Special Tax Breaks
There are several special tax breaks that could apply to expats living in India. These include:
Foreign tax credit
Expats who pay tax on their income in another country may be eligible for a foreign tax credit, which can reduce their income tax liability in India.
Tax deductions
Expats may be eligible for tax deductions for certain expenses, including moving expenses and travel expenses related to work.
Reduced tax rates
Expats who are in India on a short-term assignment may be eligible for a reduced tax rate of 15% on their income.
Filing a Tax Return in India
If you are an expat living in India, you are required to file a tax return if you meet certain criteria. If you are a resident in India, you are required to file a tax return if your income exceeds INR 2.5 lakhs per year. If you are a non-resident and earn income within India, you must also file a tax return.
The tax return must be filed annually by the end of July of the following year. The Indian Income Tax Department provides an online platform where you can file your tax return, and it is recommended that you seek the assistance of a tax professional to ensure that you file correctly and take advantage of any applicable tax breaks.
Tax Exit Procedures for India
If you are leaving India to move abroad, you must complete a tax exit procedure with the Indian Income Tax Department. This involves filing a tax return for the year in which you leave India and obtaining a tax clearance certificate. The tax clearance certificate confirms that all taxes owed to the Indian government have been paid.
It is important to complete the tax exit procedure to avoid any legal consequences or penalties. Failure to complete the tax exit procedure can result in your name being added to the blacklist maintained by the Indian Income Tax Department, which can affect your ability to return to India in the future.
India has a complex taxation system that includes both direct and indirect taxes. Expats living in India may be eligible for special tax breaks, including foreign tax credits and tax deductions for certain expenses. It is important to file a tax return correctly and complete the tax exit procedure if leaving India to move abroad. It is recommended that you seek the assistance of a tax professional to ensure that you comply with all tax regulations in India.