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Payroll & Tax in India

India payroll & taxation

Foreign companies operating in India may find it challenging to deal with the complexities of the country’s tax system. The primary concerns for a foreign company that needs to comply with tax laws in India are: Individual income tax (IIT) for employees in India, social security costs, VAT, withholding tax, business tax and permanent establishment concerns.

Here's our most recent article on running payroll and taxes in India.

Your Payroll Options in India

Remote Payroll

A remote payroll in India is where a foreign company, i.e. a non-resident company, payrolls a resident employee in India. This applies to both local and foreign employees. One option for a non-resident company to payroll its employees (local and foreign) in India is to use a fully outsourced service like a GEO or PEO which will employ and payroll the staff on their behalf.

Local Payroll Administration

In some cases, a company will register their business in India under one of the forms available but prefer to have another company administer its payroll. This can be accomplished through a payroll provider. It is important to note that the company, as the Employer of Record, is still fully responsible for compliance with employment, immigration, tax and payroll regulations. But the payroll calculations, payments and filings can all be outsourced to the payroll provider.

Internal Payroll

Larger companies with a commitment to India may wish to run their own local payroll for all employees, foreign and local. In order to accomplish this, they will have to complete the incorporation, register the business and then hire the necessary staff. There will be a need for in country human resources personnel who have the background needed to manage an Indian payroll and can fulfil all tax, withholding tax and payroll requirements.

This approach carries significant cost and requires some knowledge of local employment and payroll regulations. The company will need a local accounting firm and potentially legal counsel to ensure full compliance with Indian employment laws.

Fully Outsourced Payroll & Employment

Companies can outsource the employment and payroll of their staff in India to a GEO, like Shield GEO. This is possible for both foreign workers and Cypriot nationals. This is the easiest, fastest and safest way to payroll staff in India.

Shield GEO manages all aspects of payroll for workers in India, including taxes, withholding, social security payments and other statutory requirements. Shield GEO becomes the Employer of Record and employs the staff on behalf of the client.

Staff are paid monthly with tax and social security deducted at source and paid to local authorities. Shield GEO will invoice the client monthly in advance of the payroll date. The invoice consists of the Total Cost of Employment (Base salary + Employers Statutory Contributions + Additional statutory contributions) and a Management Fee. Shield GEO provides the employees with payslips.

Setting up payroll in India

Information	Explanation
Currency ?	Indian rupee (INR), ₹
Employee Information Required ?	Following information is required: • Permanent Account Number of the employee • Proof of investments • Whether he/she resides in rented premises • Details of dependents • Form 12B • Certification of the previous employer • Deceleration for tax benefits • Written employment contract • Work permit (if applicable)
Social Security Registration ?	Provident Fund Number and the Employee State Insurance Number, if applicable and as per act, must also be applied for.
Corporate Income Tax Rate	The current corporate income tax rate is 30% for resident companies and 40% for non-resident companies (such as a branch) plus a surcharge, bringing the effective tax rate up to 41.2%.
Payroll Tax	No
Sales Tax	VAT is imposed on the supply of most moveable goods and specified intangible goods in India, as well as on the supply of taxable goods and services in India. Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on goods which they receive (input tax). The registration threshold for VAT purposes is INR 500,000 in most states. The current standard rate of VAT imposed on taxable goods and services is 12.5-15%, depending on the state with reduced rates of 1% and 5% in most states.
Withholding Tax	India imposes withholding tax (WHT) on certain classes of income earned by non-residents:- Dividends: No WHT applies. However, a a dividend distribution tax of 15% may apply. Royalties: 25% Interest: 10% (residents), ranges from 5-40% for non-residents. Technical service fee: 25% Payments to non-resident contractor companies: 40% plus surcharge and cess Purchase of immoveable property: 1% plus surcharge and cess A reduced rate may be available under an applicable Double Tax Treaty.
Other Tax	Net wealth tax: Payable at a rate of 1% if the taxable value of net wealth exceeds INR3 million. Assets subject to tax include residential houses, cars, yachts, boats, aircraft, urban land, jewelry, bullion, precious metals, cash in excess of INR50,000, any amount not recorded in the books of account and commercial property not used as business, office or factory premises. Transactions above INR 50,000: Any sum of money in excess of INR50,000 received by an individual without consideration may be taxable subject to certain exemptions. Real estate taxes Transfer taxes: Levied on the purchase of any security such as a share, derivative or unit of an equity oriented fund. Ranges from 0.025% to 0.25%. Central sales tax of 2% on interstate movement of goods Service tax of 14% on all services Central excise duty on the production or manufacture of goods in India. Generally taxed at 12.56% R&D cess of 5% on the import of certain types of “technology”

Tax Figures

Information

Explanation

Corporate Income Tax ?

The current corporate income tax rate is 30% for resident companies and 40% for non-resident companies (such as a branch) plus a surcharge, bringing the effective tax rate up to 41.2%.

Income Tax Rate ?

Grossed income	Tax Rate (%)
0- INR 250,000	0
INR 250,001 - 500,000	10
INR 500,001 - 1,000,000	20
More than INR 1,000,001	30
* A 10% surcharge on total tax payable applies to individuals with total taxable income exceeding INR10 million. *An education cess of 3% is also levied on taxes payable

Payroll Tax ?

Sales Tax ?

VAT is imposed on the supply of most moveable goods and specified intangible goods in India, as well as on the supply of taxable goods and services in India. Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on goods which they receive (input tax).

The registration threshold for VAT purposes is INR 500,000 in most states.

The current standard rate of VAT imposed on taxable goods and services is 12.5-15%, depending on the state with reduced rates of 1% and 5% in most states.

Withholding Tax ?

India imposes withholding tax (WHT) on certain classes of income earned by non-residents:-

Dividends: No WHT applies. However, a a dividend distribution tax of 15% may apply.
Royalties: 25%
Interest: 10% (residents), ranges from 5-40% for non-residents.
Technical service fee: 25%
Payments to non-resident contractor companies: 40% plus surcharge and cess
Purchase of immoveable property: 1% plus surcharge and cess

A reduced rate may be available under an applicable Double Tax Treaty.

Employee Social Security (EE SS)

Employees have to contribute 12% of their monthly salary towards the Provident Fund Scheme and 1.75% to the national insurance scheme. For more details, please refer to the section on Employment.

Employer Social Security (ER SS)

Employers have to contribute 12% of the employees’ monthly salary towards the Provident Fund Scheme and 4.75% to the national insurance scheme. For more details, please refer to the section on <a href=”http://shieldgeo.com/countrieswecover/employment-in-india/ ‎”>Employment</a>.

Payments

Information	Explanation
Payment Mode ?	Via employee’s bank account.
Frequency of Salary Payment ?	Generally salaries are processed once a month to Employee’s Bank Account. Some company will pay 1st of every month. As per Payment of Wages Act: Less than 1000 Employees: Every month before 7th. More than 1000 Employees: Every month before 10th.
Invoice / Payslips required ?	Payslip is required.
Minimum Wage ?	Varies according to state and sector of industry. For the agriculture sector, there’s a separate minimum wage that’s set by the state governments.

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