In this section, we will delve into the essential obligations and guidelines governing financial reporting for businesses operating in India. We'll cover the key aspects and regulatory frameworks that dictate how companies are required to prepare and disclose their financial information.

There are basically two types of General-Purpose Financial Reporting Frameworks in India:

Direct taxes in the form of income tax are imposed by the central government. The Central Board of Direct Taxes (CBDT) is responsible for the administration, supervision, and control of these taxes.

The fiscal year in India commences on April 1st of a given year and concludes on March 31st of the following year.
Tax liability needs to be estimated and discharged by way of advance tax on a quarterly basis, if applicable.

The due date for filing RoI is as follows:

Withholding Taxes / Tax Deducted at Source

Tax Deducted at Source (TDS) is a mechanism introduced by the Indian government to collect taxes directly from the source of income. The payer deducts a specific percentage of tax at the time of disbursing payments to the recipient, and this deducted amount is subsequently forwarded to the government. TDS is applicable to various income types including salaries, interest on fixed deposits, rent, commissions, and more. Understanding TDS is essential for both those making payments and those receiving income in India, as it plays a significant role in preventing tax evasion.

Refer our TDS Chart for more details.

Tax Audit

Every company engaged in a business is required to maintain books of accounts and get them audited by an accountant if its total sales, turnover or gross receipts exceed INR10 million (INR100 million provided cash transactions are less than 5% in value) during the year.

Dividends

Shareholders are liable to pay taxes on dividends received from domestic companies. Deductible expenses include interest costs up to 20% of the dividend income. Companies distributing dividends must withhold taxes at the relevant rates.

Carry forward of loss

Losses incurred in businesses, excluding those from speculative activities, can be offset against income from any other source (excluding salary income) in the same fiscal year. If business losses cannot be entirely offset, they are allowed to be carried forward for up to eight subsequent years to set off against future business profits. Additionally, unabsorbed depreciation can be carried forward without any time limit for future adjustments.

MAT/Alternate Minimum Tax (AMT)

Indian tax regulations mandate corporations to pay Minimum Alternate Tax (MAT) based on profits revealed in their financial statements when the tax liability under regular tax provisions is less than 15% (excluding surcharge and cess) of their book profits. MAT does not apply to domestic companies choosing the concessional tax rates of 15% or 22%. The MAT paid can be carried forward for 15 years and offset against the income tax payable under the standard provisions of the Income Tax Act, limited to the difference between tax liabilities under normal provisions and MAT.

A modified version of MAT, known as Alternative Minimum Tax (AMT) at 18.5% (excluding surcharge and cess), is applicable to Limited Liability Partnerships (LLPs) and certain other taxpayers (excluding companies) availing specified profit-linked tax incentives. Unadjusted AMT credit can be carried forward for 15 years and set off against income tax payable under the standard provisions of the Income Tax Act, limited to the difference between tax liabilities under normal provisions and AMT.

Equalization levy

In alignment with the OECD's BEPS project Action Plan 1, which focuses on the digital economy, India has introduced an equalization levy on specific transactions.

A 6% equalization levy is applicable to payments made by a resident engaged in a business or profession, or the Permanent Establishment (PE) in India of a non-resident, to another non-resident providing specified services. The term "specified services" encompasses online advertisement, provision of digital advertising space, or any other facility or service intended for online advertisement. It also includes any additional service notified by the central government.

Starting from April 1, 2020, a 2% equalization levy is imposed on the consideration received or receivable by a non-resident e-commerce operator from e-commerce supplies or services conducted, provided, or facilitated by such a non-resident beyond the threshold of INR 20 million during a tax year. This applies to transactions involving:
• A person residing in India.
• A non-resident involving the sale of advertisement targeted at a customer residing in India or accessing such advertisement through an Indian IP address.
• A non-resident involving the sale of data collected from a person residing in India or using an Indian IP address.
• A person purchasing goods or services using an Indian IP address.

Relief on Foreign tax payments

India has established Double Taxation Avoidance Agreements (DTAAs) with various countries to manage foreign tax relief and prevent double taxation. In the absence of such agreements, resident corporations have the option to seek a foreign tax credit for taxes paid in other countries, provided certain conditions are met. The credited amount is determined as the lesser of the Indian effective tax rate or the tax rate of the respective country on the income subject to double taxation.  

Transfer Pricing

India's transfer pricing (TP) provisions adhere to the guidelines for multinational companies and tax administrators set forth by the OECD, with some notable distinctions.

Under transfer pricing regulations (TPRs), any international transaction and specified domestic transaction between two or more associated enterprises (AEs) (including PEs) must be conducted at arm’s length price (ALP).

International Transactions and Related Provisions:

International transactions, as defined by Transfer Pricing Regulations (TPRs), involve exchanges between two or more Associated Enterprises (AEs), with at least one being a non-resident, influencing the profits, income, losses, or assets of the involved enterprises. Additionally, a transaction with a non-AE may be treated as international if a prior agreement or arrangement concerning the transaction exists between the non-AE and the taxpayer's AE.

Specified Domestic Transactions (SDT):

When the aggregate value of SDT surpasses INR 200 million, it falls under the purview of TPRs, with the computation being based on the Arm's Length Price (ALP). Transactions covered by TPRs include dealings with related domestic companies or units eligible for tax holidays, or new domestic manufacturing companies subject to a reduced tax rate.

Safe Harbor Rule (SHR):

The SHR identifies circumstances where tax authorities accept a declared transfer price by a taxpayer as being at arm's length. The SHR, initially applicable from FY 2016-17 to FY 2020-21, has been extended to FY 2021-22.

Advance Pricing Agreement (APA):

India offers an APA program where the transfer price of goods and services between group entities is predetermined by tax authorities (CBDT in India) and taxpayers. This aims to prevent disputes arising from controlled transactions between AEs, and applications can be submitted for unilateral, bilateral, or multilateral APAs.

Three-Tiered Documentation:

To implement OECD's BEPS report on Action 13, the Indian Government has adopted a three-tiered documentation structure, including TP documentation, a master file, and country-by-country (CbC) reporting.

Secondary Adjustment:

In cases where the primary adjustment to the transfer price results in increased total income or reduced loss, any excess funds with the AE, not repatriated to India within the specified time, are considered an advance made by the taxpayer to the AE (subject to certain conditions). Interest on such advances is calculated as per prescribed methods.

Interest Limitation Rules:

These rules restrict the deductible interest expenditure (pertaining to amounts lent by a non-resident AE or third-party debt guaranteed by an AE) to 30% of EBITDA. Any excess interest may be carried forward for up to eight successive years.