Revenue accruing to foreign companies (including royalty and technical services fees) from providing services concerning the exploration or production of petroleum or natural gas is subject to a maximum tax on a deemed profit of 10% of gross revenue.
Foreign companies engaged in the execution of turnkey power project contracts approved by the government and financed by international programs are subject to a maximum tax on a deemed profit of 10% of gross revenue. The corporate income tax effective rate for domestic companies is 35% while the profits of branches in India of foreign companies are taxed at 45%. Companies incorporated in India even with 100% foreign ownership, are considered domestic companies under the Indian laws. For more details check our Tax Rates page.
India offers a wide range of concessions to investors to provide incentives for economic and industrial growth and development. India's tax rates may not be one of the lowest in the world, but a careful tax planning keeping in mind the tax holidays and the following general tax incentives reduce the taxes considerably:
No corporate taxes are levied for a period of five years for projects set up for domestic power generation and transmission and also for projects in Electric Hardware Technology Park Schemes.
Deduction of preliminary and preoperative expenses incurred in setting up a project
Complete tax exemption on profits from exports of goods
Full or partial exemption of foreign exchange earnings on construction projects, hotel and tourism related services, royalties, commission, etc.
Liberal depreciation allowances
Deduction of capital research and development expenditures
New industrial undertakings may deduct 25% of their gross total income for eight years
Tax Incentives for Exporters
The New Export-Import Policy of 1992 provides substantial tax incentives for investments in Export Oriented Units ("EOU's") and industries located in the Export Processing Zones ("EPZ's"). Automatic approvals are given by the Secretariat for Industrial Approval for setting up 100% Export Oriented Units ("EOU"). Incentives and facilities available under the EOU scheme include concessional rent for lease of industrial plots, preferential power allocation and supply, exemption from import duty for capital goods and raw materials for power sector industries as well as for trading companies primarily engaged in export activity.
There are six EPZ's or free trade zones located in different parts of the country. These zones are designed to provide internationally competitive infrastructure facilities and duty-free and low cost environment. Various monetary and non-monetary incentives are granted which include import duty exemption, complete tax holiday, decentralized "single window clearance," etc.
Twenty-five percent of goods manufactured in EPZ's are permitted to be sold in the domestic market. No excise duty is payable on such items and customs duties on imported components is 50% of normal rates. Major exporters are allowed to operate bank accounts abroad to facilitate trade. Companies that sell in the domestic market as well as international markets may deduct export earnings from their tax liabilities.
Exporters and other foreign exchange earners have been permitted to retain 25% of their foreign exchange earnings in foreign currency. For 100% Export Oriented Units and units in Export Processing Zones, Electronic Hardware Technology Parks, retention up to 50% is allowed.
Other incentives include:
Duty-free imports of raw materials and components.
Tax holiday for a period of 5 continuous years in the first 8 years from the year of commencement of production.
Exemption from taxes on export earnings even after the period of tax holiday.
Exemption from central and state taxes on production and sale.
Permission to install machinery on lease.
Freedom to borrow self-liquidating foreign currency loans at the prime rate of interest.
Inter-unit transfers of finished goods among exporting units.
Decentralized single-window clearance of proposals concerning units in Export Processing Zones.
EOU/EPZ units may export through Export Houses, Trading Houses and Star Trading houses.