The Corporate Tax Landscape: Rates, Surcharges, and the New Regime
India's corporate tax framework underwent a landmark transformation in September 2019 when the Taxation Laws (Amendment) Ordinance introduced Section 115BAA, slashing the base corporate tax rate from 30% to 22% for domestic companies willing to forgo specified exemptions and deductions. With surcharge at 10% and health and education cess at 4%, the effective rate lands at 25.17% — competitive with Singapore (17%) and the UAE (9%) when factoring in India's large consumer market and skilled workforce. However, this concessional regime comes with strings attached: companies opting for Section 115BAA must forgo deductions under Section 10AA (SEZ units), Section 35 (scientific research), Section 80-IA/80-IAB/80-IBA (infrastructure and housing), and most area-based incentives. For new manufacturing companies incorporated after October 2019 and commencing production before March 2024, Section 115BAB offers an even lower effective rate of 17.16% (15% base plus surcharge and cess). Foreign companies — those not incorporated in India but operating through a branch or project office — face a higher base rate of 40%, making the subsidiary route almost always preferable from a pure tax perspective. The Minimum Alternate Tax (MAT) under Section 115JB, which operates as a floor tax computed at 15% of book profits, does not apply to companies opting for the Section 115BAA regime, removing a significant compliance and cash flow burden.
- Section 115BAA delivers an effective rate of 25.17% (22% base + 10% surcharge + 4% cess) but requires forgoing SEZ benefits, accelerated depreciation (beyond standard rates), and most area-based deductions
- Section 115BAB for new manufacturing entities offers 17.16% effective rate (15% base + 10% surcharge + 4% cess), but the entity must be incorporated after October 1, 2019 and must not engage in any business other than manufacturing
- Foreign companies (branches, project offices) are taxed at 40% base rate plus applicable surcharge (2% for income between INR 1 crore and 10 crore, 5% above INR 10 crore) and 4% cess
- MAT under Section 115JB at 15% of book profits is inapplicable to companies exercising the Section 115BAA option — once exercised, the option is irrevocable for all subsequent assessment years
- The equalization levy at 2% on e-commerce supply/services by non-resident operators (Section 165A) was withdrawn effective August 2024, simplifying compliance for digital business models
Following the Section 115BAA introduction, India's effective corporate tax rate dropped from 34.94% to 25.17% — a 28% reduction that brought India within 2 percentage points of the OECD average of 23.5% and triggered a 47% increase in new company incorporations in FY2021.
India's tax framework encompasses direct taxes, GST, transfer pricing, and withholding tax obligations that collectively impact effective returns for foreign investors.
The GST Framework: CGST, SGST, IGST, and What Foreign Companies Get Wrong
The Goods and Services Tax, implemented on July 1, 2017, replaced a labyrinthine system of 17 indirect taxes with a unified, destination-based consumption tax. The GST architecture comprises three levies — Central GST (CGST), State GST (SGST), and Integrated GST (IGST) — with rates organized in four slabs: 5%, 12%, 18%, and 28%. Intra-state supplies attract CGST plus SGST (each at half the applicable rate), while inter-state supplies attract IGST at the full rate. For foreign companies, the most critical concept is the Reverse Charge Mechanism (RCM) under Section 9(3) and 9(4) of the CGST Act. When a foreign entity provides services to an Indian recipient, the Indian recipient is liable to pay GST under RCM — but this creates input tax credit (ITC) for the Indian entity, making the mechanism revenue-neutral in most B2B scenarios. Where foreign companies consistently stumble is in the treatment of cross-border services. Import of services is taxable under IGST (18% for most professional and consultancy services), payable by the Indian recipient under RCM. Export of services from India is zero-rated (not exempt), meaning the exporter can claim refund of accumulated ITC — but the refund process involves filing under Rule 89 of the CGST Rules and typically takes 60 to 90 days for processing.
- GST registration is mandatory for any entity with aggregate turnover exceeding INR 20 lakh (INR 10 lakh for special category states) and for all entities making inter-state supplies regardless of turnover
- Reverse Charge Mechanism (RCM) applies to import of services — the Indian recipient self-assesses and pays IGST at 18% for most professional services, which becomes available as input tax credit in the same return period
- E-invoicing is mandatory for all entities with aggregate turnover exceeding INR 5 crore, requiring real-time Invoice Registration Portal (IRP) validation before the invoice can be issued to the recipient
- Input tax credit claims require matching of supplier returns (GSTR-1) with recipient purchase records (GSTR-2B) — mismatches result in automatic ITC reversal under Rule 36(4), which now caps provisional ITC at 5% of matched credits
- GST on software licensing is assessed at 18% (classified under SAC 997331 for licensing of rights to use computer software), but embedded software supplied with hardware may attract the hardware's GST rate if supplied as a composite supply
Anti-profiteering provisions under Section 171 of the CGST Act require businesses to pass on the benefit of ITC or rate reductions to customers through commensurate price reductions. The National Anti-Profiteering Authority (now merged into the Competition Commission of India) has penalized over 200 entities for non-compliance, including several MNCs operating in India.
Withholding Tax Obligations: The Hidden Cash Flow Drain
India operates one of the most extensive tax deduction at source (TDS) regimes globally, covering over 30 categories of payments under Sections 192 through 206C of the Income Tax Act. For foreign companies, the withholding tax framework is not merely a compliance issue — it is a fundamental cash flow planning variable. Payments to non-residents attract TDS under Section 195 at rates ranging from 10% to 40% depending on the nature of the payment, unless a Double Taxation Avoidance Agreement (DTAA) provides a lower rate. The payer must obtain a Tax Deduction Account Number (TAN), deduct tax at the time of payment or credit (whichever is earlier), deposit the TDS with the government within 7 days of the month-end, and file quarterly TDS returns (Form 27Q for non-resident payments). Failure to deduct TDS attracts disallowance of the entire expenditure under Section 40(a)(i), effectively converting a compliance issue into a substantive tax cost. The TDS rate on technical services (fees for technical services, or FTS) and royalties paid to non-residents is 10% under most DTAAs, compared to the domestic rate of 10% under Section 115A. However, the characterization of payments — particularly in the technology sector — as FTS, royalty, or business income remains one of the most litigated areas of Indian tax law.
- Section 195 TDS on non-resident payments requires the payer to determine the taxability of the payment, apply the lower of domestic rate or DTAA rate, and obtain a lower/nil withholding certificate under Section 197 if applicable
- Disallowance under Section 40(a)(i) for non-deduction of TDS on non-resident payments applies to 100% of the expenditure — meaning a missed TDS of INR 10 lakh on an INR 1 crore payment results in INR 1 crore being added to taxable income
- Equalisation Levy (EL) at 2% on e-commerce operators was withdrawn from August 2024, but historical liabilities (April 2020 to July 2024) remain enforceable and assessable
- Form 15CA/15CB compliance is mandatory for all foreign remittances exceeding INR 5 lakh per transaction — Form 15CB requires a chartered accountant certificate confirming TDS compliance and DTAA applicability
- Interest under Section 201(1A) for late TDS deposit accrues at 1.5% per month from the date of deduction to the date of deposit, compounding the cost of delayed compliance
Apply proactively for lower or nil withholding certificates under Section 197/195(3) at the start of each financial year. The processing time is typically 30-45 days, but once obtained, the certificate applies to all payments of the specified nature for the entire financial year, preventing unnecessary cash lockup and refund claims.
Proactive tax planning leveraging India's DTAA network of 95+ treaties can significantly reduce cross-border withholding tax obligations.
The Foreign Company's India Tax Playbook
A no-nonsense guide to India's tax system for foreign companies — covering corporate tax rates, GST mechanics, withholding obligations, treaty planning in the GAAR era, and transfer pricing documentation requirements that cannot be deferred.
DTAA Benefits and the GAAR Shadow: Treaty Planning in the Post-MLI Era
India has an extensive network of over 95 Double Taxation Avoidance Agreements (DTAAs), but the landscape has shifted fundamentally since 2017 with the Multilateral Instrument (MLI) ratification and the introduction of the General Anti-Avoidance Rule (GAAR) under Chapter X-A of the Income Tax Act (Sections 95 to 102, effective April 2017). GAAR empowers the tax authority to disregard or recharacterize any arrangement if the main purpose (or one of the main purposes) is to obtain a tax benefit, and the arrangement lacks commercial substance, creates rights or obligations not normally created between arm's length parties, or results in abuse or misuse of tax law provisions. The Commissioner must refer the matter to an Approving Panel (headed by a High Court judge) before invoking GAAR, providing a procedural safeguard — but the broad drafting of the provisions creates significant uncertainty. The MLI's Principal Purpose Test (PPT) operates in parallel with GAAR at the treaty level, meaning that even if GAAR is not invoked under domestic law, treaty benefits can be denied under the PPT. For India-bound structures, the practical implication is that substance requirements have moved from optional to mandatory. A Mauritius or Singapore entity without genuine commercial rationale, decision-making authority, adequate capitalization, and economic substance in the intermediate jurisdiction will face dual challenge — under GAAR domestically and under the PPT at the treaty level.
- GAAR applies to any arrangement where the tax benefit exceeds INR 3 crore in a given year, the arrangement is entered into after April 1, 2017, and the main purpose test is satisfied — the threshold is aggregate, not per-transaction
- The Approving Panel (AP) under Section 144BA must include a High Court judge, a member of the CBDT, and an academic/scholar — the AP's declaration is binding on both the taxpayer and the assessing officer
- India's MLI positions include adoption of the PPT (without the Simplified LOB) for all covered tax agreements, retroactively modifying the benefit articles of existing DTAAs that have been notified under the MLI
- The India-Singapore DTAA provides a 0% capital gains rate only when the seller's shareholding in the Indian company was below 25% at all times during the 12 months preceding the transfer — a condition frequently misunderstood by first-time sellers
- Tax Residency Certificates (TRCs) issued under Section 90(4) are a necessary but not sufficient condition for claiming DTAA benefits — the assessing officer retains the right to look through the TRC and assess substantive treaty eligibility
GAAR and the MLI's PPT operate as independent, parallel anti-avoidance mechanisms. A structure that survives PPT scrutiny can still be challenged under GAAR, and vice versa. Post-2017 structures must be designed to withstand both tests simultaneously — substance, commercial rationale, and documented non-tax business purposes are now baseline requirements.
India's automated tax compliance monitoring systems flag discrepancies in real-time, making accurate and timely filing more critical than ever.
Transfer Pricing Documentation: The Three-Tier Compliance Architecture
India adopted the OECD's three-tier transfer pricing documentation framework under BEPS Action 13 with effect from April 2016, implementing it through Sections 92D and 92E of the Income Tax Act and Rules 10DA and 10DB of the Income Tax Rules. The three tiers — Local File, Master File, and Country-by-Country Report (CbCR) — create a comprehensive disclosure architecture that gives Indian tax authorities unprecedented visibility into multinational group structures, profit allocation, and intercompany pricing. The Local File must be maintained by every entity entering into international transactions or specified domestic transactions exceeding INR 1 crore. It requires a detailed functional analysis, selection and application of the most appropriate transfer pricing method (from among six prescribed methods — CUP, RPM, CPM, PSM, TNMM, and other methods), identification of comparable uncontrolled transactions, and computation of arm's length price. The Master File, introduced under Rule 10DA, is mandatory for Indian constituent entities of international groups with consolidated revenue exceeding INR 500 crore. It must describe the group's organizational structure, business activities, intangible assets, intercompany financial activities, and financial and tax positions across all jurisdictions. The CbCR, filed under Rule 10DB, is required for ultimate parent entities of groups with consolidated revenue exceeding INR 5,500 crore (approximately EUR 750 million) and must be filed with the CBDT within 12 months of the end of the reporting financial year. Indian subsidiary filing obligations are triggered when the parent entity's jurisdiction does not have a CbCR exchange agreement with India.
- Local File documentation must be maintained contemporaneously and be available by the due date of filing the income tax return (November 30 for transfer pricing cases) — retrospective preparation is treated as non-compliance and attracts penalties
- The Master File must be filed with the CBDT within the prescribed timeline in Form 3CEAA (Part A for notification, Part B for the full master file), with a strict due date of November 30 of the assessment year
- CbCR in Form 3CEAD must be filed within 12 months of the end of the reporting period, and Indian constituent entities must file an intimation in Form 3CEAC within 2 months of the end of the reporting period identifying the parent entity and its jurisdiction
- The CBDT accepts five prescribed methods plus the 'Other Method' — the most appropriate method (MAM) must be selected based on functional comparability, not merely convenience, with the TNMM being the most commonly applied method (over 70% of filings)
- Penalty for failure to maintain documentation under Section 271AA is 2% of the value of each international transaction, and penalty for failure to furnish a report under Section 271BA is INR 1 lakh per instance — with management liability under Section 271G for repeated defaults
India ranks third globally in the number of transfer pricing audits conducted annually, behind only China and Brazil. In FY2025, the CBDT's dedicated transfer pricing units processed over 4,200 cases, with an average adjustment of INR 24 crore per case and a dispute resolution timeline averaging 18-24 months through the Dispute Resolution Panel (DRP) route.
The Foreign Company's India Tax Playbook
A no-nonsense guide to India's tax system for foreign companies — covering corporate tax rates, GST mechanics, withholding obligations, treaty planning in the GAAR era, and transfer pricing documentation requirements that cannot be deferred.
