Businesses generally take the form of companies (public and privately held), limited liability partnerships (LLPs) or, in some cases, partnerships and sole proprietorships. Each company is regarded as a separate legal entity and is taxed separately. India does not have a system for the consolidation of income-tax returns.

Companies in India may be broadly categorised as follows.

• Private companies: Companies having transfer restrictions on their shares and a maximum of 200 members/shareholders.
• Public companies: Companies that are not private and have the option of inviting the public to subscribe to shares. The shares of such companies are not subject to transfer restrictions, and there is no cap on the maximum number of members.
• One-person companies: Companies with only a single member, generally undertaking actions on a smaller scale.

Partnership Firms and LLPs

Partnerships may be constituted either as a partnership firm under the Indian Partnership Act, 1932 or an LLP under the Limited Liability Partnership Act, 2008 (the “LLP Act”).

A partnership firm does not have a legal identity separate from its partners, who are jointly and severally liable for the firm’s obligations. It is generally suited for professional practices, family-owned businesses and closely held ventures where partners actively participate in management.

An LLP is a separate legal entity with perpetual succession. The liability of each partner is limited to the extent of the partner’s agreed contribution. An LLP combines the operational flexibility of a partnership firm with limited liability protection.

Partnerships and LLPs are both taxed as separate legal entity for Indian income-tax purposes. Partners are not taxed separately on their share in the profits that they receive from the partnership firm or LLP, thereby avoiding any kind of double taxation.

Foreign Companies

In addition to Indian companies, partnership firms and LLPs, as described in the foregoing, foreign companies are also permitted to conduct business operations in India subject to the rules and regulations prescribed in this regard. These are generally in the following forms.

• Liaison offices: These are not allowed to undertake profit-generating activities in India and are, therefore, typically not subject to tax in India. Activities of a liaison office are generally limited to acting as a communication channel between a foreign company and Indian companies, representing the foreign company in India, promoting import and export from/to India, etc.
• Branch and project offices: These are generally treated as constituting a permanent establishment in India and are taxed in the same manner, and at the same rates, as a foreign company (ie, 35% plus applicable surcharge and cess on a net income basis) on the profits attributable to their activities in India.

India’s tax framework generally treats all entity structures as taxable unless specifically granted pass-through status. The exception is limited to some investment vehicles, enabling income to be taxed at the investor level without an intermediate layer of tax at the entity level.

Commonly used transparent entities include business trusts (REITs and infrastructure investment trusts – InvITs), investment funds (Category I and II alternative investment funds (AIFs) and securitisation trusts. These structures are most widely adopted in sectors requiring pooled capital like real estate, infrastructure, private equity, venture capital and structured finance, where the pass-through framework avoids double taxation and makes collective investment economically viable.

The tax framework of these tax pass-through entities is different, such that they are subject to different rules and conditions under the Indian tax laws. As an example, investment funds are generally taxed on their business income, while all other income is taxed in the hands of the unitholders/investors.

In India, residence is determined on a year-to-year basis and is subject to the provisions of applicable double-taxation avoidance agreements (tax treaties).

For non-individuals, the two key tests for determining corporate residence are the place of incorporation and the place of effective management (POEM). A company is resident in India if it is an Indian company (ie, incorporated under Indian law) or if its POEM – ie, the place where key management and commercial decisions are, in substance, made – is in India. In other words, foreign companies would be regarded as Indian tax residents if their POEM is in India by virtue of key management and commercial decisions in substance being made in India.

Taxpayers organised in the form of partnership firms, associations of persons (AOPs) and bodies of individuals (BOIs) are regarded as tax residents of India if any part of the control and management of their affairs is located in India.

Individuals can be regarded as resident and ordinarily resident (ROR), resident but not ordinarily resident (RNOR) or non-resident. While residents (ie, RORs RNORs) are generally subject to tax on their global income, RNORs would not be subject to tax on their income from businesses/professions that are not controlled or set up in India. The basic rule for determining residential status in the case of individuals is that physical presence in India of 182 days or more in a year establishes residence, though additional rules may apply on a case-by-case basis. An individual will also be regarded as a RNOR if:

• he or she is a citizen of India;
• he or she is not liable to tax in any other country on the basis of his or her domicile/residence, etc; and
• his or her Indian income exceeds INR1.5 million in the relevant year.

Companies

Domestic companies may opt to forgo certain exemptions and deductions and avail a concessional corporate tax regime with a tax rate of approximately 25.17% (including applicable surcharge and cess). Alternatively, companies claiming the available deductions and incentives are generally taxed at 25% – where turnover for FY 2024–25 does not exceed INR4 billion or 30% (where turnover exceeds INR4 billion) – plus applicable surcharge and cess.

Foreign companies are generally taxed on their business income at the rate of 35% (plus surcharge ranging from 2% to 5%, depending on their taxable income). In some cases, foreign companies may also be taxed at the lower rate of 20% (plus applicable surcharge) when they earn income in the form of interest, royalties or fees for technical services.

Individuals

Under the default tax regime, individuals are taxed at progressive rates ranging from nil to 30%, with the highest rate applying to income exceeding INR2.4 million. A surcharge is applicable at rates of 10%, 15% and 25% where total income exceeds INR5 million, INR10 million and INR20 million, respectively.

Individuals may alternatively opt for the old tax regime, which permits certain deductions and exemptions but is subject to different slab rates, with the highest rate of 30% applying to income exceeding INR1 million. Under the old regime, the rate of surcharge remains the same, with an additional slab of surcharge at the rate of 37% for income exceeding INR50 million.

Partnership Firms and LLPs

Partnership firms and LLPs are taxed at a rate of 30% plus a surcharge of 12% on income exceeding INR10 million.

In all cases (ie, companies, individuals, partnership firms and LLPs), a health and education cess of 4% is levied on the aggregate of tax and surcharge.

Profits are taxed in accordance with either the mercantile (accrual) system or the cash (receipts) system of accounting regularly employed by the taxpaying entity. Most businesses, and virtually all companies, follow the mercantile system, recognising income when it accrues and expenses when the liability arises, rather than when cash is actually received or paid.

While accounting profits as reflected in the financial statements serve as the starting point, taxable income is not identical to book profit. The book result is subject to a series of deductions specifically allowed and disallowances specifically mandated by the law to arrive at the taxable figure.

Some examples of tax-related adjustments to book profits follow.

• Depreciation: Accounting depreciation charged in the financial statements is disregarded for tax purposes. Instead, depreciation is computed at prescribed rates using methods prescribed by Indian Tax Law, which may differ from the depreciation claimed as per accounting standards. Additional depreciation on new plants and machinery acquired for manufacturing may also be available, subject to certain conditions.
• Disallowances in case of non-withholding of taxes: Certain expenditures are specifically disallowed, such as payments to non-residents on which tax has not been withheld, corporate social responsibility expenses and penal expenses.
• Payment-basis deductions: Notwithstanding the mercantile system, the law provides for cash-based recognition for specified liabilities where deductions are allowed only in the year of actual payment. Deductions for certain specified items such as taxes, duties, employer contributions to provident funds, etc, are allowed only in the year of actual payment, not in the year the liability is incurred.
• Minimum alternative tax (MAT): For companies, even after all adjustments, the Indian Income-tax Act, 2025 (the “IT Act”) prescribes a MAT if the regular tax payable on normal taxable income is less than a prescribed percentage of “book profit” (accounting profit adjusted after prescribed additions and deductions). MAT provisions also include some adjustments to book profits.

India also allows for some additional incentives, which are a mix of income-based tax holidays, investment-based deductions and sector-specific benefits. Some of the key incentives under the IT Act available subject to fulfilment of certain prescribed requirements are as follows.

• Patent box regime:
1. who can benefit – eligible taxpayers earning royalty income from patents developed and registered in India; and
2. nature of benefit – preferential taxation of qualifying patent royalty income.
• Scientific research:
1. who can benefit – businesses incurring qualifying scientific research expenditure; and
2. nature of benefit – deduction for qualifying revenue and certain capital expenditure on scientific research.
• In-house R&D facility:
1. who can benefit – companies with approved in-house R&D facilities; and
2. nature of benefit – deduction for qualifying in-house scientific research expenditure, excluding land and buildings.

India provides a range of tax incentives to various industries, transactions and businesses under the IT Act.

• Offshore banking units and international financial services centres (IFSCs): A 100% deduction of specified income is available for 20 consecutive tax years to offshore banking units in special economic zones (SEZs) and IFSC units (20 out of 25 years for IFSC units).
• Start-up companies: A 100% deduction of profits for three consecutive tax years out of ten years from incorporation is available to eligible start-ups.
• Employment generation: A 30% deduction of additional employee costs is allowed for three consecutive tax years from the year employment is provided, subject to certain conditions.
• IFSC benefits: Additional tax benefits in the form of exemption from lease rental income is also available to aircraft and ship leasing units set up in the IFSC. Any interest income earned by a resident from a unit set up in the IFSC would also be exempt from Indian income tax. Certain investment-related benefits are also available for investments made in the stock exchange located in an IFSC, such as exemption from Indian capital gains tax on the transfer of capital assets listed on the IFSC exchange where consideration is payable in foreign currency, etc.
• Data centre services tax holiday: Foreign companies using Indian data centres may avail income tax exemption until 31 March 2047.

The IT Act contains detailed provisions in relation to the set-off and carry forward of losses. Tax losses incurred in a particular year can only be set-off subject to the restrictions prescribed in the IT Act. Any loss that is not set off in the year in which it was originally incurred can be carried forward and set-off in the subsequent years.

Offset of Losses

Loss from any source under a head of income (other than capital gains) may be set off against income from any other source under the same head for that tax year. For capital gains, short-term capital loss may be set off against any capital gains, while long-term capital loss may be set off only against long-term capital gains.

Loss under any head (other than capital gains) may be set off against income under any other head subject to two key restrictions: business loss cannot be set off against salary income, and house property loss is capped at INR200,000 against other heads. Capital loss cannot be set off against income under any other head.

Carry Forward of Losses

Business losses

These losses can be carried forward for up to eight tax years and set off only against business income.

Speculation business losses

These losses can be set off only against speculation profits and carried forward for up to four tax years.

Capital losses

These losses can be carried forward for up to eight tax years. Short-term capital losses may be set off against any capital gains; long-term capital losses can only be set off against long-term capital gains.

House property losses

These losses are carried forward for up to eight tax years and set off only against house property income. There is no provision for the carry back of losses under the IT Act.

Restrictions on Carry Forward

In a closely held company, a business loss may be carried forward only if shareholders holding at least 51% of the voting power remain unchanged between the year the loss was incurred and the year of set-off. However, certain relaxations have been prescribed under the IT Act in order to protect some genuine cases such as eligible start-ups.

Amalgamation and Demerger

Accumulated loss and unabsorbed depreciation of an amalgamating company are deemed to be the loss of the amalgamated company, subject to meeting prescribed conditions. The eight-year carry forward limit runs from the year the loss was first computed for the original predecessor entity.

In demergers, losses are allocated between the demerged and resulting companies in proportion to assets retained and transferred.

Return Filing Requirement

No loss may be carried forward unless determined pursuant to a return filed within the prescribed due date.

Interest paid on capital borrowed for the purposes of business or profession is a tax-deductible expenditure. However, Indian income tax law imposes several restrictions on the deduction of interest by local corporations.

Transfer Pricing Rules

Indian transfer pricing rules apply to interest paid by an Indian corporation to its foreign related parties (associated enterprises). Any interest that is in excess of an arm’s length rate is disallowed as a deduction.

Thin Capitalisation Rule

India has introduced a specific thin capitalisation rule as an anti-avoidance mechanism to cap interest deductions claimed by an Indian company or an Indian permanent establishment of a foreign company on debts issued by a non-resident associated enterprise. The restriction operates over and above the arm’s length price rule applicable to all expenditure where payment is made to an associated enterprise. The key features are as follows.

• The rule seeks to disallow any interest expenditure that exceeds 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA) of the borrower in the tax year. The disallowance applies to the extent of the total interest paid or payable in excess of 30% of EBITDA, or to the interest paid or payable to the associated enterprise for that tax year, whichever is lower.
• Interest expenditure that is not deductible in a given tax year on account of this limitation may be carried forward for up to eight tax years immediately succeeding the tax year in which the excess interest expenditure was first computed and set off against the profits and gains of any business or profession carried on by the taxpayer, subject to the 30% EBITDA cap in each subsequent year.
• This rule is also applicable to interest payments by a permanent establishment in India to its foreign head office.

Consolidated tax grouping is not permitted under Indian income tax law. Each individual company within a group is required to file its return of income and discharge its tax liability on a standalone basis.

Capital gains and losses arising from the transfer of capital assets are taxed at prescribed rates, which depend on the nature of the capital asset, the period of holding (short- or long-term) and the residential status of the transferor.

Classification of Capital Assets

A capital asset is classified as a long-term capital asset if it is held for more than 24 months immediately preceding the date of transfer. However, in the case of listed equity shares, units of an equity-oriented fund, units of a business trust or zero-coupon bonds, the holding period threshold is reduced to 12 months. Assets held for a period not exceeding these thresholds are classified as short-term capital assets. As a general rule, unlisted bonds/debentures, some debt-oriented mutual funds and market-linked debentures are regarded as short-term capital assets irrespective of their period of holding.

Computation

Capital gains are computed by deducting from the full value of the consideration received or accruing on transfer the expenditure incurred wholly and exclusively in connection with the transfer, the cost of acquisition of the asset and the cost of any improvement thereto.

In case of unlisted shares, the book value of such shares (determined as per the prescribed formula) is regarded as the “full-value consideration” if the actual sale consideration is lower than such book value.

Tax Rate

Long-term capital gains are generally taxed at the rate of 12.5% (plus applicable surcharge and cess). Short-term capital gains are generally taxed at the regular rates applicable to the taxpayer – eg, in the case of foreign companies, 35% (plus applicable surcharge and cess). In the case of listed securities traded on recognised stock exchanges and subject to securities transaction tax (STT), the short-term capital gains tax rate is restricted to 20% (plus applicable surcharge and cess).

Exempt Transactions

Certain transactions are not regarded as transfers for capital gains purposes and are specifically granted an exemption from capital gains tax. These include, inter alia:

• transfer of a capital asset by a company to its wholly owned subsidiary company (being an Indian company) and vice versa, subject to certain conditions;
• transfer of a capital asset by an amalgamating company to an amalgamated company in a scheme of amalgamation, where the amalgamated company is an Indian company;
• transfer of shares by a shareholder in a scheme of amalgamation, in consideration of allotment of shares in the amalgamated company (being an Indian company);
• transfer of a capital asset by the demerged company to the resulting company in a demerger, where the resulting company is an Indian company;
• transfer of shares to shareholders of the demerged company in a scheme of demerger;
• transfer of rupee-denominated bonds issued outside India by a non-resident to another non-resident; and
• transfer of certain assets – bonds, derivatives, etc – by a non-resident on a stock exchange in the IFSC where consideration is received in foreign currency, etc.

Goods and Services Tax (GST)

India’s unified indirect tax framework, effective 1 July 2017, subsumed multiple indirect taxes that were previously levied by central and state governments, such as central excise duty, service tax and value added tax levied, resulting in a single destination-based consumption tax.

Petroleum products (petroleum crude, high-speed diesel, motor spirit, natural gas and aviation turbine fuel) and alcoholic liquor for human consumption continue to be outside the ambit of GST and are subject to taxes under the erstwhile indirect tax regime (such as central excise, state value added tax and state excise duty).

The key concepts under the GST Law include the following.

• Rate structure – GST applies to the supply of goods and services at multiple rate tiers, ranging from 0% to 40% (with major slab rates being 0%, 5%, 18% and 40%). The rates are dependent on the classification of the goods (with lower rates for essential items and the highest rates for luxury and demerit goods).
• Federal structure – given the federal structure of India, GST is implemented, levied and governed by central and state governments simultaneously:
1. intra-state supplies (ie, supplies made within the same state or union territory) are subject to central goods and services tax (CGST) and state goods and services tax (SGST)/union territory goods and services tax (UTGST); and
2. inter-state supplies (ie, supplies made between different states or union territories or cross-border trade of goods or services) are subject to integrated goods and services tax (IGST).
• Liability to pay GST – being an indirect tax, the liability to discharge/pay taxes to the government devolves upon the supplier of goods and/or services. However, in respect of specific supplies (such as legal services, sponsorship services or procurement of services by a taxable person from a person located outside India), the liability to discharge/pay GST devolves upon the recipient of supplies under the reverse charge mechanism.
• Input tax credit (ITC) – since GST is a value added tax, ITC of taxes paid on procurements is available for set-off against output liabilities, subject to prescribed restrictions and conditions.
• Zero-rated supply – export of goods and services from India to a place outside India and supply of goods/services to an SEZ unit/developer is referred to as “zero-rated supply”. The zero-rating benefit is provided via the following two alternative mechanisms:
1. export without payment of IGST under a bond or a letter of undertaking, where the exporter is entitled to claim a refund of the accumulated and unutilised ITC used in creating such zero-rated supplies; and
2. export with payment of IGST, where the exporter is entitled to claim a refund of the IGST paid on such exports.
• Specific provisions are prescribed for the taxation of transactions effected by digital economy businesses operating from outside India under GST, whereby the service provider located outside India providing services to an unregistered customers located in India is required to obtain GST registration and discharge GST on such transactions.
• Taxability of new-age transactions such as virtual digital assets, carbon credits, etc, continues to be ambiguous.

The legal framework for GST aims to maximise automation and improve clarificatory mechanisms. For instance, the compliances under GST are managed electronically through the GST network, which is an online portal (e-invoicing, e-way bill, etc) improving the efficiency of reporting. The GST law specifically provides compliances/mechanisms for the taxation of supply through e-commerce platforms.

Customs Duty

Goods imported into India attract customs duty comprising basic customs duty, IGST, a social welfare surcharge and, in certain cases, anti-dumping or safeguard duties. The rate structure varies significantly depending on the tariff classification of the imported goods.

The provisions under the Customs Act, 1962 and rules and regulations framed thereunder cover procedures, documentation, formalities and operations related to international trade transactions, with the aim of simplifying, harmonising and standardising transactions.

India has entered into preferential trade agreements, free trade agreements and other such agreements with various country(ies) to eliminate or reduce customs tariff and non-tariff barriers, thus facilitating trade between countries.

The Foreign Trade Policy, 2023 (FTP) provides various export promotion schemes, such as the export promotion capital goods (EPCG) scheme, export oriented units (EOUs), advance authorisation and the Remission of Duties and Taxes on Exported Products scheme, etc. The FTP also aims to achieve critical objectives such as reducing cargo release times, enabling a paperless regulatory environment, improving the ease of doing business, etc.

In addition to the foregoing, there are various other schemes having benefits that can be availed by an entity, as follows.

• SEZs: An entity can consider setting up its business in SEZs, which are highly regulated and specially delineated zones providing various benefits, especially from an export perspective. A trader or an overseas entity looking at inventory management can consider utilising the services of a free-trade warehousing zone (a specific category of SEZ).
• Software Technology Park of India (STPI): An exporter of software can consider setting up a business or converting its existing premises into an STPI unit.
• Sector/state-specific schemes: The government provides sector-specific incentives for companies setting up operations in India, such as the packaged scheme of incentives (PSI), state industrial policies, the manufacturing and other operations in warehouse (MOOWR) scheme, etc.

Stamp Duty

The execution of instruments including conveyances, mortgages, lease deeds, share transfer forms and financial agreements attracts stamp duty under central or relevant state legislation. Rates differ across states and depend on the character of the instrument and the value of the underlying transaction.

Property Tax

Municipal bodies levy property tax on the ownership or occupation of immovable property within their jurisdiction. Assessment methodologies and rates vary by municipality.

STT

Transactions undertaken on recognised stock exchanges involving the purchase or sale of equity shares, equity-oriented mutual fund units and derivatives are subject to STT at prescribed rates. While STT is not deductible when computing capital gains, its payment triggers the application of concessional capital gains tax rates for listed equity instruments.       

Incorporated businesses are generally subject to regular income tax on business profits, capital gains taxes, indirect taxes (GST, customs, etc) and STT for transactions on recognised stock exchanges, property taxes and stamp duties.

The form of business entity typically depends on the nature of the business activities proposed to be undertaken by it, the commercial requirements of the promoters who set up the business and tax efficiencies.

Most closely held local businesses operate in a non-corporate form, particularly as sole proprietorships or partnership firms rather than as LLPs or companies where these are generally smaller in scale, or the nature of activities is professional in nature (lawyers, accounting firms, consulting firms, etc); this also applies to small-scale trading firms.

These forms are generally preferred by small and family-owned businesses because they are easier and less expensive to establish and maintain, involve fewer compliance requirements and allow greater flexibility in management.

While in general such prohibitions do not exist, some Indian laws impose structural barriers that prevent individual professionals from accessing lower corporate tax rates for their professional earnings.

Certain professional regulatory statutes governing key professions in India, such as chartered accountancy, prohibit practitioners from carrying on their profession through a company. These legislative restrictions ensure that professional income remains taxable in the hands of the individual (or in a partnership or LLP) at the applicable individual or firm tax rates, rather than being sheltered within a corporate structure. Partnership firms and LLPs are taxed at a flat rate of 30% (plus surcharge and cess), which is broadly comparable to the top individual rate, thereby eliminating the arbitrage opportunity that a lower corporate rate might otherwise present.

Additionally, while individuals and partnership firms are taxed at a higher rate, there is no tax on the distribution of profits. On the other hand, while companies are taxed at a relatively lower rate, profits distributed by companies are again taxed in the hands of shareholders.

Currently, there are no rules that prevent closely held corporations from accumulating earnings for investment purposes.

Dividends

Dividends received from closely held companies are taxable directly in the hands of the shareholder. The tax treatment depends on the capacity in which the shares are held and the residential status of the individual.

Where the shares are held as an investment, dividend income is taxable under the head “Income from other sources” at the slab rates applicable to the individual. Where the shares are held as stock-in-trade (ie, the individual is a share trader), the dividend income may be taxable as business income under the head "Profits and gains of business or profession", and relevant business expenditure may be claimed against it.

For non-resident individuals, dividend income from an Indian company is taxed at the rate of 20% (plus applicable surcharge and cess) on a gross basis, subject to more favourable rates that may be available under an applicable tax treaty.

Capital Gains

Capital gains accruing to an individual from the sale of shares in a closely held corporation are taxed as follows.

• Long-term capital gains: Shares of a closely held (unlisted) company held for more than 24 months are classified as long-term capital assets. Long-term capital gains on the transfer of such shares are taxed at the rate of 12.5% (plus applicable surcharge and cess).
• Short-term capital gains: Where shares of a closely held corporation are held for 24 months or less, gains arising from their transfer are treated as short-term capital gains and taxed at the slab rates applicable to the individual.

Dividends

Dividends received from publicly traded companies are taxable directly in the hands of the shareholder. The tax treatment depends on the capacity in which the shares are held and the residential status of the individual.

Where the shares are held as an investment, dividend income is taxable under the head “Income from other sources” at the slab rates applicable to the individual. Where the shares are held as stock-in-trade (ie, the individual is a share trader), the dividend income may be taxable as business income under the head “Profits and gains of business or profession”, and relevant business expenditure may be claimed against it.

For non-resident individuals, dividend income from an Indian company is taxed at the rate of 20% (plus applicable surcharge and cess) on a gross basis, subject to more favourable rates than may be available under an applicable tax treaty.

Capital Gains

Capital gains accruing to an individual from the sale of shares in a publicly traded corporation are taxed differently to shares of closely held corporations.

Regarding STT transactions (ie, where transactions are undertaken on a recognised stock exchange), where STT has been paid on both the acquisition and transfer of such shares (unless they are listed in an IFSC stock exchange and consideration for transfer is in foreign currency), the following applies:

• long-term capital gains – equity shares of a listed company held for more than 12 months and capital gains exceeding INR125,000 in a tax year are taxed at the rate of 12.5% (plus applicable surcharge and cess); and
• short-term capital gains – equity shares of a listed company held for 12 months or less are taxed at the rate of 20% (plus applicable surcharge and cess).

Regarding non-STT transactions (ie, off-market transactions), the following applies.

• long-term capital gains are taxed at the rate of 12.5% (plus applicable surcharge and cess); and
• short-term capital gains are aggregated with the individual’s other income and taxed at the applicable slab rates.

Withholding taxes on interest, dividends and royalties are applied as final tax on the gross income earned by a non-resident and are subject to concessional tax rates under applicable tax treaties. The basic domestic rates, in the absence of an applicable tax treaty, are as follows.

• Interest: A withholding tax rate of 20% generally applies to interest on foreign currency borrowings paid by the government or an Indian concern to a non-resident. A concessional rate of 9% applies in specified cases.
• Dividends: A withholding tax rate of 20% is applicable to the payment of dividends to a non-resident. A lower rate of 10% applies to dividends received from a unit in an IFSC.
• Royalties and fees for technical services: A withholding tax rate of 20% is applicable to payments in the nature of royalty and fees for technical services made to a non-resident where such income is received from the government or an Indian concern pursuant to an approved agreement.

All of these rates are subject to increase by applicable surcharge and cess. No deduction in respect of any expenditure or allowance is permitted in computing the aforementioned incomes.

India has a wide network of tax treaties with approximately 100 countries. The primary treaty jurisdictions used by foreign investors for investments in Indian corporate stock or debt are the United States of America, Singapore, the Netherlands, Mauritius, Japan, the United Arab Emirates, etc. It is worth noting that India has imposed regulatory restrictions on investments from land-border-sharing countries into India.

The IT Act contains a detailed anti-abuse provision in the form of General Anti-Avoidance Rules (GAAR). However, there are adequate safeguards in place for invoking GAAR provisions in the form of an approving panel, which needs to approve any action being taken by the tax authorities. Additionally, there is detailed judicial precedence on anti-avoidance and the principle of “substance over form”.

Indian tax authorities do challenge arrangements that may be construed as “treaty shopping”, relying on limitation of benefits (LoB) clauses, the principal purpose test (PPT) under the Multilateral Instrument (MLI) and GAAR.

A valid tax residency certificate is necessary but not sufficient, and authorities examine the economic substance underlying the arrangement and may deny treaty benefits where the structure is found to lack genuine commercial purpose.

The main transfer pricing issues for inbound investors operating through a local Indian corporation relate to:

• intragroup services;
• royalties and fees for technology/know-how;
• advertising, marketing and promotion (AMP) expenses;
• cost-contribution arrangements;
• methodologies and comparables; and
• choice of tested parties.

Indian tax authorities do not object to limited risk distribution arrangements as a matter of principle. The primary area of contention is the functional characterisation of the Indian distributor. Where the authorities determine based on a detailed analysis of functions performed, assets utilised and risks borne that the Indian entity is in substance performing activities beyond those of a limited risk distributor, they may reclassify the entity as a full-fledged or medium-risk distributor. This reclassification typically results in a greater arm’s length margin being attributed to the Indian operations, increasing the taxable income of the local entity.

Other issues typically seen in transfer pricing disputes relate to the choice of comparables and the methodology used for determining arms’ length prices.

Indian transfer pricing rules are broadly aligned with the OECD Transfer Pricing Guidelines.

Transfer pricing remains an important area for Indian tax authorities. The limitation period for completing tax audits is extended by 12 months where a reference to transfer pricing is made.

Recent policy changes suggest a greater institutional willingness to resolve cases through MAP. The advance pricing agreement mechanism, which permits unilateral as well as bilateral advanced pricing agreements for up to five prospective years, with rollback for four preceding years, has also gained traction as a complementary route for resolving and preventing transfer pricing disputes.

Compensating adjustments are statutorily recognised in India through the framework of “secondary adjustment” under the relevant provisions of the IT Act. The requirement applies where a primary transfer pricing adjustment exceeding INR10 million is made, and the associated enterprise does not repatriate the excess funds within the prescribed time, leading to the excess being deemed as an advance on which interest is computed.

Additionally, an option exists to pay additional income tax at 18% (plus surcharge and cess) on such excess money as a substitute for repatriation, treating it as final tax.

There is a meaningful distinction in the taxation of these two structures. An Indian subsidiary of a foreign corporation is treated as a domestic company and is subject to the same tax rates and rules applicable to any Indian corporation.

In contrast, an Indian branch of a foreign corporation does not constitute a separate legal entity as the taxable entity remains the foreign corporation itself and get taxed at the higher rate of tax applicable to foreign companies, as it is regarded as a permanent establishment of the foreign company in India.

For transfer pricing purposes, the branch is treated as a notionally independent entity from its head office to ensure that profits attributable to it are determined on an arm’s length basis. Additionally, the deductibility of head office expenses allocated to the Indian branch is capped at 5% of the adjusted total income of the branch, thereby limiting the extent to which overhead costs from the parent entity can reduce Indian taxable profits.

India taxes capital gains accruing to non-residents from the direct sale of shares in an Indian company. Beyond direct transfers, India also asserts taxing rights over indirect transfers – ie, where a non-resident transfers shares in a foreign holding company that derives substantial value from assets situated in India, including shares of Indian corporations.

The treaty position varies depending on the specific bilateral agreement in question. The vast majority of India’s tax treaties preserve India’s right to tax capital gains from the direct transfer of shares in an Indian company. However, the treatment of indirect transfers differs considerably across treaties. Certain treaties – such as those with Mauritius, Singapore, the Netherlands, etc – effectively shield non-residents from Indian capital gains tax arising on indirect transfers of shares in Indian companies. Conversely, other treaties – including those with the United States, the United Kingdom, Canada, etc – permit India to tax both direct and indirect share transfers, thereby offering no relief on either count in respect of gains connected to Indian assets.

Some recent judicial precedents by the Hon’ble Supreme Court have denied the benefits of tax treaties in the case of indirect transfer of Indian assets. In some cases, tax treaty benefits with respect to a direct or indirect transfer of shares of an Indian corporation may also not be available if taxpayers fail to demonstrate real commercial substance, decision-making autonomy, etc. Therefore, the underlying substance and commercial rationale of the holding structure is now central to whether the exemption survives.

India’s tax framework addresses change of control scenarios at both the direct and indirect levels. First, with respect to indirect transfers, India taxes gains arising from the transfer of shares or interests in a non-resident entity where such shares or interests derive their value substantially from assets located in India. This provision applies regardless of the level at which the shareholding change has occurred and how far removed the disposal is within the overseas group structure, subject to any available tax treaty relief.

Second, at the domestic entity level, a change in shareholding that results in a change of control can have significant consequences for the Indian company itself, in addition to the capital gains tax payable by the selling shareholder. Specifically, the ability of the Indian company to carry forward and set off its accumulated losses may be forfeited if there is a change in the beneficial ownership of shares beyond the prescribed threshold.

Indian tax law does not prescribe any formulas for determining the income of foreign-owned local affiliates engaged in the sale of goods or provision of services. Instead, the income must be computed in accordance with the arm’s length principle under the transfer pricing regulations in the case of related party transactions, which requires benchmarking of transactions using any of the prescribed methods.

Payments by a local affiliate for management and administrative expenses incurred by a non-local affiliate must adhere to the arms’ length pricing principle under Indian transfer pricing provisions.

Indian tax law does not impose any restriction on the quantum of borrowings that a local affiliate may obtain from its non-resident related parties. However, the deductibility of interest on such borrowings is subject to two key constraints:

• the interest rate and terms of the borrowing must conform to the arm’s length standard under India’s transfer pricing regulations; and
• the thin capitalisation rules impose a limitation on the deduction for interest expenses paid to associated enterprises where it exceeds 30% of EBITDA.

Indian resident taxpayers are subject to tax on their global income, and no exemption is available for foreign-sourced income. However, a foreign tax credit can be availed under the provisions of the IT Act.

Foreign income of Indian companies is generally taxable and is not exempt in India. Only expenditure that is incurred to earn such taxable income can be claimed as a deduction as per the IT Act.

Dividends received by an Indian company from its foreign subsidiaries are fully taxable in India at the applicable corporate tax rates. Additionally, any tax already paid on such dividends in the foreign jurisdiction may be claimed as a credit against the Indian tax liability, thereby mitigating the impact of double taxation.

Intangibles developed by an Indian corporation cannot be made available to a non-resident subsidiary at less than an arms’ length price. Even if no such sum is actually charged or received, transfer pricing provisions deem an arm’s length price to have accrued to the Indian corporation, and the Indian corporation is taxed as such.

However, no local Indian taxes would be applicable to the non-local subsidiary of an Indian corporation merely as a result of using the intangibles developed by an Indian corporation.

Indian income tax law does not contain any controlled foreign corporation (CFC) regime. Income from a foreign subsidiary is taxed in India only when the Indian corporation receives any such amounts as a dividend.

However, the position is different for foreign branches, since a branch is not a separate legal entity from its head office. Thus, income earned through a foreign branch of an Indian corporation forms part of the corporation’s own worldwide income and gets taxed in India in the year it is earned.

Additionally, a foreign company itself may be treated as resident in India if its POEM – ie, the place where key management and commercial decisions are in substance made – is in India during the relevant tax year. Where a foreign subsidiary is determined to have its POEM in India, it would be treated as a resident Indian company, and its global income would become taxable in India.

India does not have specific codified rules mandating “substance” requirements for foreign affiliates of Indian corporations. However, the POEM test operates as a de facto substance requirement. A foreign company is treated as resident in India if the place where its key management and commercial decisions are in substance made is situated in India during the relevant tax year. Accordingly, if a foreign affiliate lacks genuine decision-making substance in its jurisdiction of incorporation, and its strategic and commercial decisions are effectively being taken from India, it risks being classified as an Indian tax resident, with the consequence that its worldwide income becomes taxable in India.

Gains on the sale of shares in non-resident affiliates by an Indian resident company are taxable in India as capital gains. The tax character (short or long term), rate and computation depend on the period of holding and the nature of the shares. Foreign tax credit for any tax paid in the source country can be availed in India under the IT Act to mitigate double taxation.

India has a comprehensive GAAR framework, which empowers the tax authorities to scrutinise and recharacterise any arrangement classified as an “impermissible avoidance agreement” – ie, an arrangement wherein the primary purpose is to obtain a tax benefit.

As per GAAR, tax authorities have the power to disregard the legal form of the transaction, reallocate income or expenditure, and even deny the tax treaty benefits. However, this power can be invoked only if the aggregate tax benefit obtained by all the parties involved in such arrangement exceeds INR30 million in a single financial year.

In addition to GAAR, Indian tax law also contains several targeted anti-avoidance provisions applicable in specific contexts. For instance, the transfer pricing framework requires that international transactions between associated enterprises be conducted at arm’s length consideration, failing which the tax authorities may substitute the arm’s length price for the actual transaction value. Additionally, fair market value requirements are also applicable to certain specified transactions in immoveable property, shares, securities, etc.

India does not follow a fixed audit cycle for income tax assessments. Instead, tax authorities employ a risk-based hybrid selection mechanism, including the computer-aided scrutiny selection (CASS) system, which flags high-risk returns based on objective criteria such as past compliance history, the nature of the business, transactional patterns, information from third-party sources and other risk parameters.

India has implemented several BEPS Action Plan recommendations, including:

• Action 1 – significant economic presence (SEP) (it is to be noted that India’s earlier digital tax measures, namely the equalisation levy and online advertising levy, have been fully withdrawn);
• Action 4 – thin capitalisation;
• Action 6 – preventing treaty abuse;
• Action 1 – adoption of the MLI to implement these measures worldwide; and
• Action 13 – country-by-country reporting and master file requirements, etc.

India is principally committed to implementing the BEPS framework. Having joined the OECD/G20 Inclusive Framework consensus, India is expected to enact enabling domestic legislation for both Pillars, whose implementation timeline is likely to be aligned with the global roadmap.

The Subject to Tax Rule (STTR) under Pillar Two holds particular significance for India given its source-based taxation regime, as it would empower India to impose a top-up tax on payments otherwise taxed below the minimum rate in the recipient jurisdiction, thereby safeguarding its tax base.

International tax has a high public profile in India, given the scale of cross-border transactions and the revenue stakes involved. The tax administration maintains a separate departmental vertical, which is specialised in and focuses specifically on international tax and transfer pricing matters. This dedicated institutional capacity positions India to implement BEPS-related and other international tax reforms.

India has not traditionally used low tax rates as a tool to attract investment, and its corporate tax rate already sits comfortably above the 15% global minimum rate proposed under Pillar Two. India’s policy approach is less about defending a competitive rate regime and more about aligning with international standards for clarity in tax laws.

India does not operate on a competitive tax system of the kind that would be particularly vulnerable to anti-BEPS measures. India also does not frequently implement any promotional measures providing state aid where government subsidies or selective tax advantages to specific enterprises may be challenged. Consequently, the implementation of BEPS recommendations is not likely to pose a significant risk of disrupting any existing incentive-driven tax features within the Indian system.

Hybrid instruments have been used by Indian businesses historically and are increasingly being explored in newer forms as a cost-effective fundraising tool. India has not enacted a comprehensive BEPS-style hybrid mismatch regime because it becomes difficult for policymakers to arrive at a settled framework considering the wide variety of structures these instruments can take. In practice, the tax treatment of hybrid instruments is still driven by their legal form and specific transaction facts.

India employs a mixed residence-based (worldwide income) and sourced-based tax system. The interest deductibility restriction operates through India’s thin capitalisation rules, which cap the deductibility of interest expense on borrowings from associated enterprises and the transfer pricing provisions.

India does not have a territorial tax regime for resident companies since they are taxed on their worldwide income by virtue of their residential status.        

LoB clauses and anti-avoidance rules like the PPT, introduced into India’s tax treaties either bilaterally or via the MLI, are likely to significantly affect both inbound and outbound investors. Even prior to these treaty-based provisions, Indian tax authorities had frequently challenged treaty benefit claims by invoking substance-over-form principles and the judicially evolved anti-avoidance doctrine.

The explicit codification of LoB and PPT, alongside domestic GAAR, is likely to encourage the tax authorities to scrutinise treaty benefit claims more actively. In particular, the PPT’s inherently subjective, purpose-based test creates real interpretational uncertainty, and is expected to increase the scope for litigation for investors operating through treaty jurisdictions into or out of India.

Transfer pricing matters involving IP have long been a focal point of scrutiny in India, with the valuation, benchmarking and documentation of intangibles frequently contested during tax audits. The enhanced documentation requirements – comprising the country-by-country report, master file and local file, have added a further layer of compliance obligations that necessitate more comprehensive disclosures.

While these requirements do not fundamentally alter the underlying transfer pricing principles, they substantially increase the transparency of information available to tax authorities, both in India and in other participating jurisdictions.

In line with BEPS Action 13, India has adopted the three-tiered transfer pricing documentation framework:

• country-by-country reporting – this applies to large multinational groups having consolidated revenues above the prescribed thresholds and requires jurisdiction-wise disclosure of income, taxes paid and economic activity;
• master file – this provides a group-level overview of the global business and transfer pricing policies of the multinational enterprise (MNE); and
• local file – this documents entity-specific related-party transactions in detail.

While this framework significantly enhances transparency for tax authorities, it also imposes a considerable compliance burden on companies given the volume, granularity and frequency of the disclosures required, raising practical concerns about the administrative cost of compliance, particularly for groups with complex multi-jurisdictional structures.

The equalisation levy, India’s digital tax (6% on online advertising and 2% on non-resident e-commerce operators), has now been discontinued.

The SEP rule now serves as India’s primary domestic mechanism for taxing non-resident digital businesses. The SEP rule deems a foreign entity to have a taxable “business connection” in India based on prescribed revenue or user-engagement thresholds, even without a physical presence. However, the SEP provisions are subject to any applicable tax treaty protection. Therefore, the impact of the SEP rule seems to be minimal; it mainly impacts non-residents from non-tax treaty jurisdictions and those not eligible for tax treaty benefits.

India introduced digital taxation through the equalisation levy and SEP provisions. However, the equalisation levy -related provisions were discontinued with effect from 1 April 2025.

Income accruing to a non-resident from offshore IP deployed within India, typically in the form of royalties or fees for technical services, is subject to tax in India at a rate of 20% (plus applicable surcharge and cess). The Indian payer is responsible for withholding applicable tax at source and undertaking related compliances. Failure to do so will attract interest and penal consequences for the Indian payer. In instances where the payer fails to withhold the tax, the non-resident IP owner is directly liable to discharge the tax obligation.

Indian tax law does not draw any distinction based on whether the non-resident IP owner is situated in a tax haven or in a jurisdiction with a more conventional tax regime; the domestic rate applies uniformly. However, where a tax treaty exists between India and the non-resident’s country of residence, the IP owner may be entitled to a reduced rate of withholding tax (commonly 10–15%) or other beneficial treatment, as prescribed under the terms of that tax treaty, provided the requisite conditions for availing such treaty benefits are satisfied.