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. I
ts role in the international economy to this point has been less remarked than t
he rise and dominance of China but increasingly India will be appreciated for th
e opportunities it is creating for its citizens, employers and foreign and domes
tic firms. Recently, I have been researching on ‘Comparison & Contrast of India &
China’. India & China can be compared along many dimensions to better understand t
he reasons for the disparities in the growth rates, GDP, exports & FDI. A few of
the parameters are: Political Systems Monetary Policies Fiscal Policies (Tax R
gimes) Quality of living Infrastructure Availability Skilled manpower
In this paper, I make an attempt to compare and contrast the TAX LAWS between In
dia 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, 1986-201
5” by Thomas Piketty and Nancy Qian, the authors evaluate income tax reforms in Ch
ina and India. The combination of fast income growth and under-indexed tax sched
ule 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. C
hinese income tax revenues, as a share of GDP, increased from less than 0.1 perc
ent 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 cause
d 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 makin
g the comparisons like collecting data from the same source, using comparable da
ta, the different Tax structures in the two countries etc. The paper also descri
bes 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 aut
hor describes the differences between doing business in India and China in diffe
rent 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 t
he 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. How
ever, 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 t
he law passed by the legislature or the parliament. The main body which is respo
nsible 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 I
ndian 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 impor
tant economic lever utilized by the State to strengthen macro-economic regulatio
n, which produces important impacts on China’s economic and social development. Af
ter 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 re
venue, 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 (CES
S) of 3% is imposed too. A limited company in India is liable for tax at the rat
e of 30% for a local company and 40% for a foreign company. Companies in India w
hose tax liability is less than 10% of the "book profits" pay a 18% minimum alte
rnative tax, MAT on the "book profits" with a surcharge and CESS, bringing the e
ffective tax rate of 19.93% for domestic companies and 19% for foreign companies
.
CHINA
The tax on an individual s income is progressive. As at 2010, an individual s in
come is taxed progressively at 5% - 45%. The 2010 corporate tax rate for domesti
c 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
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 Exchan
ge, shares that have been held for over a year). The long term tax rate is 20% f
or 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 te
rm negotiable securities on the Indian Stock Exchange are tax exempt. A short te
rm 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 indi
viduals and companies.
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% r
ate.
TAX RATES FOR INDIVIDUALS
INDIA
Tax % 0% 10% 20% 30% Income (INR) 1 - 160,000 160,001-300,000 300,001-500,000 50
0,001 and above Tax % 5% 10% 15% 20% 25% 30% 35% 40% 45%
CHINA
Monthly Income (CNY) 1 – 500 501 - 2,000 2,001 - 5,000 5,001 - 20,000 20,001 - 40,
000 40,001 - 60,000 60,001 - 80,000 80,001 - 100,000 100,001 and above
OVERSEAS INCOME
INDIA
An individual and company who are Indian residents are also taxed on their incom
e outside India and receive a credit for overseas taxes Qualification for reside
nce 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 inco
me outside China and receive a credit for overseas taxes. Qualification for resi
dence for an individual: Permanent residence in China while an individual who ha
s no permanent residence in China but has lived in China for less than 5 years i
s 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 world
wide income too. Companies are resident if incorporated or have its efficient ma
nagement 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 acco
rdance with the provisions of Indian law. A pension from work. A capital gain fr
om transfer of a residential property that has been held for a long term when th
e proceeds are invested in the purchase of another residential property. Capital
gain from the sale of listed shares held for a long term.
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 t
he provisions of Chinese law. Subsidies that are lawfully received. A pension fr
om work, and allowances for survivors. Prizes granted by the Government for spor
ting, 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 E
xchange.

PERSONAL TAX DEDUCTIONS

INDIA
A credit for donations given by an individual up to a limit A credit for a taxpa
yer who is disabled or for a disabled member of the family up to INR 50,000 or I
NR 75,000 in the case of a severely disabled person. 20% of the investment in go
vernment bonds and investment plans as defined in law. Payments for medical insu
rance as well as medical expenses of the taxpayer or his dependant relatives. In
terest on mortgage for residence, up to INR 150,000 per year.
CHINA
A credit for donations given by an individual up to 30% of the income. Income fr
om 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 di
saster. Relief for the disabled, widows/widowers and orphans.
BUSINESS TAX DEDUCTIONS
CATEGORY
Offset of Losses Consolidated financial statements 8 years
INDIA
5 years
CHINA
There are no consolidated statements for tax purposes in India. As a general rul
e, financing expenses that are for the creation of income are generally allowabl
e as an expense. Nevertheless, interest expenses for tax exempt income is not an
allowable expense. The Indian income tax authorities investigate transactions b
etween associated parties that are not conducted according to the accepted marke
t conditions for transactions with companies that are not associated.
There are no consolidated financial statements in China for tax purposes. Financ
ing 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 authorit
ies investigate transactions between associated parties that are not conducted a
ccording to the market conditions that are customary for transactions with compa
nies that are not associated companies.
Financing Expenses
Transactions between associated parties
DEPRECIATION RATES
INDIA
Class of Asset Buildings Furniture and equipment Intangible assets (goodwill, et
c.) Machinery and equipment Vehicles Aircraft and trucks Annual Depreciation 5 -
10% 10 - 15% 25% 25% 20% 40%
CHINA
Class of Asset Buildings Intangible assets Electronic equipment Machinery Years
of Depreciation 20 10 3 10
VALUE ADDED TAX
INDIA
The standard rate of VAT is 12.5%. There are reduced rates of 4% and 1%. The min
imum 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.
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 appli
es 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
This tax is imposed on a defined group of services provided in India as follows:
advertising services, consultancy services, banking, insurance and more. The ta
x imposed is 10.3% including CESS. Service tax is paid monthly/quarterly. Return
s are filed each half year.
CHINA
The tax is imposed inter-alia on sale of alcohol, petrol, jewellery and cars. Th
e 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, vehic
les, 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 ra
te of 1%, is imposed only on assets with a value in excess of INR 3 million.
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%.

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://w

ww.indiataxes.com http://en.allexperts.com/q/Economics-2301/2010/2/Tax-Systems-D
evelopmentQuality.htm