Expanding to India? What U.S. Entrepreneurs Need to Know

• Company formation / Compliances
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• March 12, 2025

Expanding to India? What U.S. Entrepreneurs Need to Know

The expeditiously developing economy and large potential market are some of the reasons why India is lucrative for international businesses and investments. While India offers numerous opportunities, certain types of investments may be more suitable for U.S. entrepreneurs than others. With this, taxation in India can prove to be quite intricate, and thus, knowing how it functions in the country is crucial to undertaking business in a legally efficient manner.

In this blog, we aim to provide detailed information to U.S. entrepreneurs regarding the taxation system in India, ensuring they do not encounter problems and can make informed decisions.

Overview of the Indian Taxation System

India has a multi-layered taxation system that includes taxes levied by the central government, state governments, and local bodies. Each has its own role in the collection of taxes and handles different categories of taxes. The structure is a bit different from what U.S. entrepreneurs might be accustomed to, so it’s essential to understand the various tax categories and their implications.

Types of Taxes at Different Levels

Central Taxes: The central government collects taxes such as Income Tax, Goods and Services Tax (GST), Customs Duty, and Excise Duty. The Income Tax Department, under the Ministry of Finance, handles income-related taxes.

State Taxes: Taxes are collected by the state government, like Sales Tax (applicable for certain goods only, now replaced by GST), Stamp Duty, Vehicle Tax, and Professional Tax, and other state-level taxes. GST, however, is a unified tax levied by both the central and state governments.

Local Taxes: Municipalities may levy taxes on properties and services within their jurisdiction, such as:

• Property Tax: Property tax is a type of tax levied on properties such as residential, commercial, and industrial properties by local municipal bodies based on the property’s value or rental income.
• Professional Tax: It is a type of tax on professionals, traders, and employees (in certain states) based on their income. It is usually collected by state or local government authorities.

Kinds of Taxes in India

1. Direct Tax

This term refers to taxes that are paid directly by individuals or organizations to the government. The burden of a direct tax cannot be transferred to another person or entity. In other words, the taxpayer who is liable to pay the tax is the one who bears the financial responsibility—for example, Income Tax, Corporate Tax, Withholding Tax, etc.

• Income Tax: In India, income tax is applied to both individuals and entities. The Indian tax year follows the financial year (April 1 to March 31).
  • Income Tax Slabs for Individuals: If you are an individual entrepreneur or are drawing income from your business, you will be taxed according to the income tax slabs. The personal income tax rates vary from 0% to 30% based on income brackets along with applicable surcharge, if any, and health and education cess.
  • Corporate Tax Slabs: For U.S. entrepreneurs running a business in India, the corporate tax rates will apply. The standard corporate tax rate in India is 40% for foreign companies and 25% for domestic companies, but there are lower rates for small companies, domestic companies, and start-ups. If a U.S. entrepreneur’s business qualifies as a “start-up” under the government’s Start-up India scheme, they may be eligible for tax holidays or reduced tax rates.
  • Withholding Tax: India imposes withholding tax on various payments made to non-residents. If U.S. entrepreneurs are making payments like royalties, interest, or fees for technical services, they will likely be subject to a withholding tax.
    • Rates: The rates for withholding tax depend on the type of payment. For instance, royalties and technical fees are taxed at 10%, while interest payments may be subject to a 15% tax rate.
• Tax Treaty: Fortunately, India has a Double Taxation Avoidance Agreement (DTAA) with the United States, which means that U.S. entrepreneurs can claim relief to avoid paying taxes in both countries on the same income.
• Filing Tax Returns and Compliances: U.S. entrepreneurs operating in India must file tax returns as per defined timelines. The Indian tax system is complex, and failure to comply can lead to penalties.
  • Filing Deadlines: The due date for corporate tax returns in India is typically September 30th of the year following the end of the financial year (Starting from Apr 01 and ending on March 31st). Given the complexity of India’s tax system, it is highly advisable for U.S. entrepreneurs to work with local tax consultants or chartered accountants who can ensure timely filing, help with compliance, and offer guidance on minimizing tax liabilities.

2. Indirect Tax

Indirect tax refers to taxes that are levied on goods and services rather than on income or profits. The key feature of indirect taxes is that the tax burden can be passed on to another party, typically the consumer. Businesses collect the tax on behalf of the government and then remit it to the tax authorities. For example, Goods and Services Tax (GST), Customs Duty, VAT, etc.

• Goods and Services Tax (GST): GST is India’s unified indirect tax system, like sales tax in the U.S. However, GST covers a wide range of goods and services, and it is important for U.S. entrepreneurs to understand its applicability.
  • Applicability: It is applicable in India if a supplier supplies goods or services in India and if your annual turnover:
    • Exceeds INR 40 lakh (~USD 48K Approx) in case of Goods.
    • Exceeds INR 20 lakh (~USD 24K) in case of Services

    Then you must get registered for GST. GST is charged on both goods and services at different rates (5%, 12%, 18%, and 28%).

  • GST Compliance: Entrepreneurs need to file monthly or quarterly returns based on their turnover as per GST. Failure to comply might result in penalties, so it’s crucial for U.S. entrepreneurs to file promptly and report accurately.
• Custom Duty: Customs duty is a tax imposed on goods crossing international borders to regulate their movement. There are two main types of customs duties:
  • Import Duty: Levied on goods entering India from abroad.
  • Export Duty: Imposed on goods being exported out of India, though it is rare and usually applies to specific items.

Treaties and Agreements Between India and the U.S.

• Double Taxation Avoidance Agreement (DTAA): India and the U.S. have signed a Double Taxation Avoidance Agreement (DTAA), which prevents double taxation on income to prevent entrepreneurs from being taxed twice on the same income. The DTAA between India and the United States enables entrepreneurs to claim tax credits or exemptions on income that is taxed in both countries.
  • Benefits: The purpose of the DTAA is to alleviate the threat of double taxation, wherein American entrepreneurs may be allowed to deduct taxes paid in India from U.S. tax obligations or vice versa. It includes various sources of income and covers dividends, royalties, and business profits.
  • Claiming Relief: To obtain relief under the DTAA, entrepreneurs need to provide the relevant documentation to both Indian and U.S. tax authorities. Since the process can be quite complicated, it is advisable to team up with a tax consultant who specializes in both Indian and U.S. tax laws.
• Transfer Pricing Regulations: Transfer pricing refers to the pricing of goods, services, and intangible assets traded between related entities, such as a U.S. parent company and its Indian subsidiary. India has stringent transfer pricing rules to ensure that businesses do not manipulate prices to avoid taxes.
  • Transfer Pricing Methods: India includes the Comparable Uncontrolled Price (CUP) method, the Cost-Plus method, Profit split method, and the Transactional Net Margin method as transfer pricing methods. When it comes to inter-company transactions, U.S. entrepreneurs must ensure that the transactions are priced in accordance with a market value, appropriately documented, and supported by the relevant evidence.
  • Documentation: Companies are required to prepare detailed transfer pricing documentation to support their pricing policies in their intercompany transactions and avoid being subject to penalties. Failure to comply can lead to hefty penalties and adjustments by the Indian tax authorities.

Repatriating Profit to the U.S.

Repatriating profits back to the U.S. is a critical aspect of doing business in India. U.S. entrepreneurs can transfer funds from their Indian entities to the U.S., but there are specific procedures and taxes involved.

• Withholding Tax: When repatriating profits in the form of dividends, royalties, or interest, U.S. entrepreneurs will be subject to withholding tax in India. The tax rates vary depending on the type of payment and may be reduced under the DTAA.
• Exchange Control Regulations: India’s Foreign Exchange Management Act (FEMA) governs the repatriation of profits. The process involves filing the appropriate forms with the Reserve Bank of India (RBI) and ensuring compliance with FEMA regulations.

Conclusion

India offers a lot of opportunities for U.S. entrepreneurs, but it is only through understanding the correct tax landscape that they can be successful. From income tax to GST and withholding tax, navigating India’s complex tax system requires careful planning and compliance. By understanding the key tax regulations, leveraging the benefits of the Double Taxation Avoidance Agreement, and ensuring that all filings are made correctly, U.S. entrepreneurs can avoid costly mistakes and build a successful business in India.

U.S. entrepreneurs should work with experienced tax professionals in both the U.S. and India to ensure that their operations are fully compliant and optimized for tax efficiency. The right guidance can help you make the most of India’s vibrant market while minimizing your tax burden.

At Mercurius, we assist our clients with various income tax compliances, including income tax assessments, ITR filings, tax advisory, TDS matters, and other related services by providing them adequate support and guidance from our end. If you require any assistance in this regard, kindly click here.