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
 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.
CAPITAL GAINS
INDIA
 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.
CHINA
 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.
CHINA
 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) Monthly Income
Tax %
0% 1 - 160,000 (CNY)

10% 160,001-300,000 5% 1 – 500

20% 300,001-500,000 10% 501 - 2,000

30% 500,001 and above 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
 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.
CHINA
 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
 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.
PERSONAL TAX DEDUCTIONS
INDIA
 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.
CHINA
 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.
CHINA
 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
Offset of Losses
Consolidated financial
statements
Financing Expenses
Transactions between
associated parties
DEPRECIATION RATES
INDIA
Class of Asset
Buildings
Furniture and equipment
Intangible assets (goodwill,
etc.)
Machinery and equipment
Vehicles
Aircraft and trucks
INDIA
8 years
There are no consolidated
statements for tax purposes in
India.
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.
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.
Annual Class of Asset
Depreciation
5 - 10%
Intangible assets
10 - 15%
Electronic equipment
25%
25%
20%
40%
CHINA
5 years
There are no consolidated financial
statements in China for tax
purposes.
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.
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.
CHINA
Years of
Depreciation
Buildings 20
10
3
Machinery 10
VALUE ADDED TAX
INDIA
 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.
SERVICE TAX (IND) & CONSUMPTION TAX (CHN)
INDIA
 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.
CHINA
 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%.
CHINA
 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
 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.
CHINA
 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%.

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

on assets with a value in excess of INR 3
million.

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