India follows the classical system of taxation, by which income of companies is taxed and such income when distributed as dividend is again taxed in the hands of the recipient.
Tax treatment for companies would depend upon the kind of the company. While an Indian company is taxed on its world wide income, a foreign company is taxed on income earned in India or income that arises or is deemed to arise in India. Royalty, interest, dividend from Indian companies and fees for technical services are all treated as income arising in India.
Income of a company from profits and gains from business operations, capital gains due to sale of capital assets and income from other sources attract income tax. All business expenses are deductible if they are incurred wholly and exclusively for the purpose of the business. The income tax law provides for specific categories of expenses and also allows discretion to the concerned authority to allow expenses which are not specifically indicated.
Individuals are taxed on income derived from salaries, house property, professional income, capital gains and other income. The tax law does not allow deduction of any expenses incurred by an individual except expenses incurred for business or profession and incurred in acquiring capital assets.
India has signed tax treaties with over forty countries, most of which are based on the Organisation of Economic Cooperation and Development (OECD) model. These treaties provide for favourable treatment of computing taxable business profits. Specifically, income like dividends, interest, royalty and fees for technical services are taxed at lower rates than those applicable under the domestic law.
Sales tax is imposed on sales of goods. The incidence of tax is primarily on the seller who may or may not shift the burden on the purchaser. Each province has its own sales tax administration and the tax charged is commodity dependent and varies from year to year. Under certain conditions a Central Sales tax is also levied.
Stamp tax is levied on transfer of movable/ immovable properties and is normally paid by the purchaser. Certain documents like bills of exchange, insurance policy, etc. also attract stamp tax.
