Understanding corporate tax and transfer pricing for an Indian subsidiary

When setting up an Indian subsidiary, understanding corporate tax and transfer pricing is crucial for ensuring compliance with Indian tax laws and managing your business’s financial health. This blog breaks down the essentials of corporate tax and transfer pricing, highlighting the key points every founder should know.

Corporate Tax: What You Need to Know

Corporate tax, also referred to as direct tax, is levied on the profits generated by the subsidiary in India. Any profits earned within India are subject to Indian corporate tax, and taxes must be paid based on the projected revenues and expenses for the financial year.

Taxation on Profits in India

For Indian subsidiaries, it’s essential to calculate the income tax based on the projected profits. The corporate tax must be paid in India to ensure compliance with local regulations. Understanding the applicable tax rates for your specific type of business is key to managing your tax obligations effectively.

Transfer Pricing: Key Considerations

In addition to corporate tax, transfer pricing is a critical component of India's tax landscape. Transfer pricing refers to the pricing of goods, services, or assets transferred between related entities—such as between a parent company and its Indian subsidiary.

Markup on Services and Operational Costs

India’s transfer pricing regulations require that the Indian subsidiary charges the parent company a markup on all services rendered. This markup is not limited to salaries; it includes every operational cost, such as:

• Depreciation of assets
• Rent and utilities (e.g., electricity, internet)
• Travel and compliance expenses

By applying a markup on these costs, the subsidiary ensures that it remains financially viable and meets regulatory requirements.

Impact of Transfer Pricing on Indian Subsidiaries

Due to the transfer pricing rules, an Indian subsidiary can never operate at a loss. The markup ensures that the subsidiary makes a profit, which is subject to corporate tax. This approach accumulates funds that can be used for capital expenditures (CapEx), such as purchasing equipment or expanding operations.

Restrictions on Fund Usage

While the funds generated through transfer pricing can be used for CapEx, they cannot be utilized for operating expenses or dividend distributions. This ensures that the subsidiary maintains a sustainable financial position while staying compliant with Indian tax laws.

Conclusion

Incorporating an Indian subsidiary requires a deep understanding of corporate tax and transfer pricing regulations. By ensuring that your subsidiary complies with these rules, you can avoid legal issues and ensure financial stability. Make sure to track all costs and services provided by the subsidiary, and apply the necessary markup for compliance with transfer pricing laws.

For more details on managing corporate taxes and transfer pricing for your Indian subsidiary, check out our YouTube video.