TERM PAPER

ON

TAX COMPARISON BETWEEN

INDIA & CHINA

IN

PARTIAL FULFILMENT OF THE COURSE

IBLT

BY

RAVI JAIN

MBA (IB)

GSIB, GITAM UNIVERSITY

TO

PROF. R.ANITA RAO

Date: Visakhapatnam

INTRODUCTION

India has emerged as a trading superpower and as an increasing magnet for FDI. Its role in

the international economy to this point has been less remarked than the rise and

dominance of China but increasingly India will be appreciated for the opportunities it is

creating for its citizens, employers and foreign and domestic firms.

Recently, I have been researching on ‘Comparison & Contrast of India & China’. India &

China can be compared along many dimensions to better understand the reasons for the

disparities in the growth rates, GDP, exports & FDI. A few of the parameters are:

Political Systems

Monetary Policies

Fiscal Policies (Tax Regimes)

Quality of living

Infrastructure Availability

Skilled manpower

In this paper, I make an attempt to compare and contrast the TAX LAWS between India and

China. I have made the analysis along the following four tax categories:

Income Taxes and Tax Laws

Tax Exempt Income

Tax Deductions

VAT and other Taxes

REVIEW OF LITERATURE

In “Income Inequality and Progressive Income Taxation in China and India, 1986-2015” by

Thomas Piketty and Nancy Qian, the authors evaluate income tax reforms in China and

India. The combination of fast income growth and under-indexed tax schedule in China

implies that the fraction of the Chinese population subject to the income tax has increased

from less than 0.1 percent in 1986 to about 20 percent by 2008, while it has stagnated

around 2-3 percent of the population in India. Chinese income tax revenues, as a share of

GDP, increased from less than 0.1 percent in 1986 to about over 1.5 percent in 2005 and 2.5

percent in 2008, while the constant adaptation of exemption levels and income brackets in

India have caused them to stagnate around 0.5 percent of GDP.

In “Tax Systems, Development, Quality of Life: India and China” by Warren D. Miller, the

author describes the difficulty in comparing the Tax Structures of the two countries. The

author gives some important guidelines to be followed while making the comparisons like

collecting data from the same source, using comparable data, the different Tax structures in

the two countries etc. The paper also describes the extent of unreliability in the data

provided by the two Governments.

In “Doing Business in China and India — A Comparative Study” by Keith E. Kube, the author

describes the differences between doing business in India and China in different business

models like The WFO, The EJV, The CJV and The RO.

THE TAX SYSTEMS

INDIA

India has a well developed taxation structure. The tax system in India is mainly a three tier

system which is based between the Central, State Governments and the local government

organizations. In most cases, these local bodies include the local councils and the

municipalities.

According to the Constitution of India, the government has the right to levy taxes on

individuals and organizations. However, the constitution states that no one has the right to

levy or charge taxes except the authority of law. Whatever tax is being charged has to be

backed by the law passed by the legislature or the parliament.

The main body which is responsible for the collection of taxes is the Central Board of Direct

Taxes (CBDT). It is a part of the Department of Revenue under the Ministry of Finance of the

Indian government. The CBDT functions as per the Central Board of Revenue Act of 1963.

CHINA

Tax is the most important source of fiscal revenue of China. It is also an important economic

lever utilized by the State to strengthen macro-economic regulation, which produces

important impacts on China’s economic and social development.

After the tax system reform in 1994 and the fine-tuning of it in subsequent years, China has

preliminarily built up a tax system adaptable to the socialist market economy, which has

been playing an important role in assuring China's fiscal revenue, broadening the opening to

the outside world and promoting the sustained, fast and healthy development of China's

national economy.

COMPARISON

INCOME TAX RATES

INDIA CHINA

The tax in India on an individual's income is

progressive. An education tax (CESS) of 3%

is imposed too.

A limited company in India is liable for tax at

the rate of 30% for a local company and 40% for a foreign company.

Companies in India whose tax liability is less

than 10% of the "book profits" pay a 18% minimum alternative tax, MAT on the "book

profits" with a surcharge and CESS, bringing

the effective tax rate of 19.93% for domestic companies and 19% for foreign companies.

The tax on an individual's income is

progressive. As at 2010, an individual's

income is taxed progressively at 5% - 45%.

The 2010 corporate tax rate for domestic and

foreign companies is 25%. Small companies pay 20% corporate tax in

certain cases. Qualified new hi-tec companies

pay 15% corporate tax.

CAPITAL GAINS

INDIA CHINA

Long term capital gains relate to the sale of

an asset that has been held for 3 years or longer (on the sale of negotiable securities

on the Indian Stock Exchange, shares that have been held for over a year).

The long term tax rate is 20% for assets. For

purposes of calculation, the cost is adjusted to the increase in the Index and deducted

from the proceeds.

Capital gains from the sale of long term

negotiable securities on the Indian Stock Exchange are tax exempt.

A short term capital gain is added to regular

income. At the same time a capital gains on the sale of negotiable securities on the Stock

Exchange is taxed at 15% for individuals and

companies.

An individual's capital gains and investment

income are taxable in China at the rate of 20%.

Capital gains tax for a Chinese company is

added to the regular tax. A 10% deduction at source is made from the

capital gains of a foreign company in China.

On taxing capital gains from the sale of real

estate, when calculating the capital gain the purchase cost is deducted from the sale price

at the 20% rate.

TAX RATES FOR INDIVIDUALS

INDIA CHINA

Tax % Income (INR)

0% 1 - 160,000

10% 160,001-300,000

20% 300,001-500,000

30% 500,001 and above

Tax % Monthly Income

(CNY)

5% 1 – 500

10% 501 - 2,000

15% 2,001 - 5,000

20% 5,001 - 20,000

25% 20,001 - 40,000

30% 40,001 - 60,000

35% 60,001 - 80,000

40% 80,001 - 100,000

45% 100,001 and above

OVERSEAS INCOME

INDIA CHINA

An individual and company who are Indian

residents are also taxed on their income outside India and receive a credit for

overseas taxes Qualification for residence for an individual:

residence in India of at least 182 days in

the tax year,

or: residence in India at least 60 days in the tax year and at least 365 days in the 4

previous years. An Indian resident is also taxed on his

income overseas.

An individual and company who are Chinese

residents are also taxed on their income outside China and receive a credit for

overseas taxes. Qualification for residence for an individual:

Permanent residence in China while an

individual who has no permanent residence

in China but has lived in China for less than 5 years is taxed on his income in China, or

overseas income that has its origins in China. Individuals staying in China more than five

tax years are taxed on their worldwide

income too. Companies are resident if incorporated or

have its efficient management in China.

TAX EXEMPT INCOMES

INDIA CHINA

A standard annual exemption of INR 160,000

on the income of an Indian resident. No tax returns have to be filed for income up to INR

160,000. Income from a tax - exempt dividend held by

the recipient but the company is liable for a

dividend distribution tax.

Compensation from an insurance company.

Severance pay in accordance with the

provisions of Indian law. A pension from work.

A capital gain from transfer of a residential

property that has been held for a long term

when the proceeds are invested in the purchase of another residential property.

Capital gain from the sale of listed shares

held for a long term.

A standard monthly exemption of CNY 4,800

on income from a salary for a foreign resident, and CNY 2,000 for a Chinese

resident. Income from interest on a State bond.

Compensation from an insurance company.

Severance pay in accordance with the

provisions of Chinese law.

Subsidies that are lawfully received.

A pension from work, and allowances for

survivors.

Prizes granted by the Government for

sporting, educational and other achievements.

Income from interest and a divided on

shares, as defined in law. That was distributed to a foreign resident as well as

income as above from shares in Chinese companies that are traded on the Stock

Exchange.

PERSONAL TAX DEDUCTIONS

INDIA CHINA

A credit for donations given by an individual

up to a limit

A credit for a taxpayer who is disabled or for

a disabled member of the family up to INR 50,000 or INR 75,000 in the case of a

severely disabled person. 20% of the investment in government bonds

and investment plans as defined in law.

Payments for medical insurance as well as

medical expenses of the taxpayer or his dependant relatives.

Interest on mortgage for residence, up to

INR 150,000 per year.

A credit for donations given by an individual

up to 30% of the income.

Income from personal services, a deduction

of CNY 800 or 20% whichever is the higher for each type of income.

Current expenses for income from rental, up

to CNY 800 for each single expense. Relief for an individual who has suffered from

a natural disaster.

Relief for the disabled, widows/widowers and

orphans.

BUSINESS TAX DEDUCTIONS

CATEGORY INDIA CHINA

Offset of Losses 8 years 5 years

Consolidated financial

statements

There are no consolidated

statements for tax purposes in

India.

There are no consolidated financial

statements in China for tax

purposes.

Financing Expenses As a general rule, financing

expenses that are for the creation

of income are generally allowable

as an expense.

Nevertheless, interest expenses

for tax exempt income is not an

allowable expense.

Financing expenses that are for the

generation of income are generally

allowable as an expense China.

Nevertheless, expenses for

shareholders loans are not allowable

when the debt to equity ratio

exceeds 2:1 ratio.

Transactions between associated parties

The Indian income tax authorities investigate transactions between

associated parties that are not conducted according to the

accepted market conditions for transactions with companies that

are not associated.

The Chinese income tax authorities investigate transactions between

associated parties that are not conducted according to the market

conditions that are customary for transactions with companies that

are not associated companies.

DEPRECIATION RATES

INDIA CHINA

Class of Asset Annual

Depreciation

Buildings 5 - 10%

Furniture and equipment 10 - 15%

Intangible assets (goodwill, etc.)

25%

Machinery and equipment 25%

Vehicles 20%

Aircraft and trucks 40%

Class of Asset Years of

Depreciation

Buildings 20

Intangible assets 10

Electronic equipment 3

Machinery 10

VALUE ADDED TAX

INDIA CHINA

The standard rate of VAT is 12.5%. There

are reduced rates of 4% and 1%.

The minimum annual turnover for V.A.T.

registration is INR 500,000. V.A.T. returns are filed on a monthly or

quarterly basis.

Sales tax of 2% is imposed on transfer of

goods between Indian states.

The standard rate of VAT in China is

17%.V.A.T. is imposed on sale and import of

goods and supply of certain services. There is a reduced rate of 13% that applies to

products such as books and types of oils.

Exporters are entitled to V.A.T. refund for

materials bought in China. Small businesses with a turnover of less than

the legally defined limit pay value added tax

at 3%.

SERVICE TAX (IND) & CONSUMPTION TAX (CHN)

INDIA CHINA

This tax is imposed on a defined group of services provided in India as follows:

advertising services, consultancy services,

banking, insurance and more. The tax imposed is 10.3% including CESS.

Service tax is paid monthly/quarterly. Returns

are filed each half year.

The tax is imposed inter-alia on sale of alcohol, petrol, jewellery and cars.

The relevant rates are 3%-45%.

Consumption tax returns are filed monthly.

WEALTH TAX

INDIA CHINA

The tax is imposed in India on assets

specified in the law such as houses, vehicles,

plots of land. Individuals and companies are

liable for the tax.

The tax is not imposed on productive assets

or income producing assets.

The tax, at the rate of 1%, is imposed only

on assets with a value in excess of INR 3

million.

A tax of 1.2% is imposed on owners of real

estate, according to the value of the real

estate. The tax on rental income is 12%-18%.

FRACTION OF POPULATION SUBJECT TO INCOME TAX

INCOME TAX REVENUES AS FRACTION OF GDP

REFERENCES

http://www.worldwide-tax.com/china/

http://www.worldwide-tax.com/india/

http://www.indiataxes.com

http://en.allexperts.com/q/Economics-2301/2010/2/Tax-Systems-Development-

Quality.htm