The corporate tax rate for domestically-owned companies is 35%. Foreign-owned companies are subject to a 48% tax rate. The personal tax rate starts at 20% and rises to 40% on taxable income up to Rs120,000 per year.

Capital taxes: All companies must pay a 1% wealth tax on the aggregate value of specified assets net of debt secured on, or incurred in relation to, the asset. This tax applies to amounts in excess of Rs1.5 million of specified assets such as: urban land; buildings not used for the purpose of business carried on by the taxpayer other than property in the nature of commercial establishments and complexes or any residential accommodation not let out for a minimum period of 300 days in a year or residential accommodations for employees; gold, silver, platinum and other precious metals, gems and ornaments; and cars, aircraft and yachts.

Until October 1st 1998, voluntary transfers, made without consideration, attract a gift tax at a flat 30% of the value of the assets gifted in excess of Rs30,000 aggregate of gifts given during the year. Gifts to recognized charities, or towards education or marriage of dependants, or gifts in convertible foreign exchange to resident relatives, are exempt subject to specified conditions. Effective October 1st 1998, the gift tax is repealed. Accordingly, there is no gift tax on any voluntary transfers made without consideration.

Real property taxes (based on assessed value) and land revenue taxes are imposed by municipalities and states, respectively.

Corporate taxes: Corporate tax rates are 35% for all resident companies and 48% for branches of foreign companies.

The profits attributable to the branch of a foreign company are subject to tax. For computing taxable income in the case of branch offices, deductibility of Head Office expenses is allowed up to 5% of the adjusted total income of the branch for the relevant previous year. A branch of a foreign company is liable to corporate tax at the rate applicable to a foreign company (the highest rate of 48%). In the case of a locally incorporated company, the company is not only taxed at a lower rate but is entitled to all incentives and rebates available to an Indian company.

A 10% surcharge on the tax payable by domestic companies, firms, cooperative societies and local authorities has been levied with effect from April 1st 1999. Hence, the effective corporate tax rate on Indian firms has increased from 35% to 38.5%.

The distinction between private and public companies for tax purposes is not of much importance with the exception of carry forward of losses. Private companies must satisfy a 51% continuity of ownership test.

Profits accruing to non-residents for providing services, facilities or the supply of plant and machinery used in prospecting or extracting and producing mineral oils are deemed at 10% of the receipts and taxed at the normal rate of tax (48%).

A 10% withholding tax applies to income of approved overseas funds and long-term capital gains on units of specified mutual funds or funds of the Unit Trust of India purchased in foreign currency.

Taxable profits arising from non-residents' involvement in civil construction, installation, testing or commissioning of plant or machinery in connection with turnkey power projects financed by international aid programs and approved by the central government is deemed to be 10% of the receipts and such profits are taxed at the normal rate (48%).

The 1999 Finance Act has introduced specific provisions for granting relief to corporate reorganizations such as de mergers, amalgamations and slump sales. Such provisions include making corporate reorganizations tax neutral.

For ex gains and losses: Revenue gains or losses from foreign exchange are included or deducted in computing taxable income.

Dividend withholding tax: Domestic companies are liable to pay an additional tax of 22% (inclusive of a surcharge of 10%) on dividends declared, distributed or paid after May 2000 in addition to regular corporate income tax on profits. Shareholder dividend income is exempt. No withholding tax in India will apply to dividends distributed by an Indian company to its foreign parent or any other investor under the domestic tax laws or any foreign double tax avoidance treaty.

Interest withholding tax: Interest paid to non-residents is normally subject to 20% withholding tax (or lower under an applicable tax treaty). The following interest payments received by non-residents are exempt from tax subject to approval by the Ministry of Finance:

* Interest payable by industrial undertakings in India on borrowings from approved foreign financial institutions; and

* Interest on approved foreign currency loans from sources outside India.

The tax rate is reduced to 10% for bonds issued abroad by Indian companies under government-approved schemes.

Royalties and fees withholding tax: Withholding taxes apply to royalties, technical-service fees and most lump-sum payments at the rate of 20% (reduced under most tax treaties) if the agreement for payment of such royalty and technical fees is entered on or after June 1st 1997. The tax rate is 30% (or any reduced rate under the applicable tax treaty) if the agreement has been entered into before June 1st 1997. However, an exception was made in the tax treaty between India and Austria. Under this treaty, technical service fees are not taxable in India if the relevant services are rendered outside India.

Any lump-sum expenditure made for acquiring technical know-how on or before April 1st 1998 may be deducted from taxable income in equal installments over six years. However, from the financial year 1998-99 expenditure on technical fees form part of a block of intangible assets on which depreciation at the rate of 25% will be allowed. Deduction of royalty and fee payments for technical services of a revenue nature is allowed if the taxes have been withheld at source and paid to the government treasury.

Deductions: In general, in the case of a domestic company, tax is levied on gross worldwide income less allowable deductions (essentially outlays incurred exclusively for business purposes).

These include expenditures for materials, wages, salaries, reasonable bonuses and commissions, rent, repairs, insurance, guest houses, traveling expenses, royalty payments, interest, some dividends, lease payments, certain taxes (sales taxes, municipal taxes, road taxes, property taxes, customs duties and expenditure taxes), depreciation, expenditures for scientific research and contributions to scientific- research associations.

Business losses and unabsorbed depreciation may be carried forward for up to eight years. Loss carry back is not permitted.

Depreciation: Depreciation must be calculated on blocks of assets (ie, on the aggregate of assets entitled to the same rate of depreciation) on the declining-balance method. Depreciation is based on the declining-balance value at the beginning of the year plus the actual cost of purchase of capital assets during the year (including certain installation expenses) and reduced by the sale proceeds of any asset sold from that block. In case of assets purchased during the year and used for a period of less than 180 days, only half of the admissible depreciation is allowable. If, at the end of the year, any block of assets is wiped out and shows a credit balance, such balance is taxed as short-term capital gains at normal rates applicable to business income. In general, depreciation rates are:

* 25% for standard plant and machinery;

* 100% for energy-saving, environmental-protection, and pollution-control equipment;

* 10-15% for furniture and fittings;

* 40% for airplanes, buses and taxis and 20% for other vehicles;

* 10-20% for ships;

* 20% for worker housing;

* 60% for computers;

* Up to 60% for commercial vehicles; and

* 20% for hotel buildings; 5% for residential buildings; and 10% for factory buildings.

From the financial year 1998-99 onwards, depreciation will be allowed on intangible assets such as know-how, patent rights, trademarks, license, franchise or any other business or commercial right at the rate of 25% on the written-down value (WDV) basis. These intangible assets will form a separate block of assets.

By an amendment of the Income Tax Act, projects engaged in the generation or generation and distribution of power have the option to claim depreciation on their assets on a straight-line basis. The rates of depreciation have been specifically provided for this purpose. This amendment provides for a differential treatment of depreciation of assets used in generation of power or generation and distribution of power.

Capital assets other than land purchased for scientific research may be written off in the year incurred. In cases of drugs, pharmaceuticals, electronic equipment, computers, telecommunications and chemical research, a weighted deduction of one and one-fourth times is allowed. Preliminary outlays for project or feasibility reports (limited to 5% of the cost of project or capital employed) can be amortized over five years from the commencement of business. Any expenditure of a capital nature incurred on or before April 1st 1998 on acquisition of patents or copyrights can be in 14 equal installments. However, with effect from April 1st 1998 depreciation may be claimed on such expenditure.

Rates of depreciation under the amended Companies Act, used to determine a company's profits and dividends for shareholders, are not linked to the above rates, which are applicable for income tax purposes only.

Other deductions: Full deductibility is permitted for professional fees for tax services and for payments to employees under voluntary-retirement schemes.

* Non-residents may not deduct expenses incurred in earning income from royalties, technical-service fees (unless permitted under the relevant tax treaty) and interest.

* Deductions for head office expenses for non-resident firms are limited to 5% of adjusted total income. Fees received by non-resident companies from royalties and technical services used to carry out business in India are taxable, except for specially approved projects connected with the security of India.

* Bad debts. Indian tax laws do not permit a deduction for a general bad- debt reserve, except in the case of banks and financial institutions. However, specific bad debts are deductible if they are written off in the account books.

* Minimum alternate tax (MAT). The MAT provisions were changed effective April 1st 2000. In case the tax payable on regular tax computation of a company is less than 7.5% of book profits, then 7.5% (excluding a 10% surcharge) of book profits would be deemed to be the tax payable for the year. For computation of book profits, any profits derived by an undertaking situated in any free trade zone, electronic hardware technology park, software technology park or special economic zone or undertakings registered as 100% export oriented units will be excluded. Also export profits derived by undertakings from export of goods and merchandise or computer software or film software would also be excluded.

Further, MAT paid with effect from April 1st 2000 would not be allowed to be carried forward for credit against future regular tax liability. However, any MAT paid before April 1st 2000 would be eligible for carry forward and set off against future regular tax liability for a period of five years from the year in which such MAT is paid.

Tax credits and incentives: The government has been replacing the host of fiscal incentives and concessions once available to companies with straightforward cuts in the basic tax rates.

Other tax incentives include tax holidays for corporate profits; exemptions from dividends; accelerated depreciation allowances; and deductibility of certain expenses.

The deadline for a tax holiday applied to new industrial undertakings engaged in the generation and distribution of power has been extended from March 31st 2000 to 2003 and has been extended to include undertakings involving the transmission or distribution of laying a network of new transmission or distribution lines after April 1st 1999 but before March 31st 2003.

Enterprises undertaking to build roads, bridges, airports, rail and mass rapid transit systems, expressways, bus and truck terminals, inland ports, inland waterways, inland depots (including container freight stations), approved housing projects, housing projects that include housing and other facilities as an integral part of the project such as subways, water supply projects, irrigation projects, sanitation, sewerage systems, industrial parks or that are engaged in providing telecommunications services (basic or cellular), including radio paging, domestic satellite service or trucking network are entitled to a 100% tax holiday for five years and a 30% tax holiday for the following five years during any continuous period of ten years within twenty years from the commissioning of the infrastructure facilities.

Local taxes: Municipalities in India are empowered to levy moderate taxes on immovable properties, motor vehicles and freight traffic, while the states levy tax on employment and professional services. All states also levy sales taxes, which generally range from 4% to 10%.

* Expenditure tax. A 10% levy applies to any expenditure in a hotel in which room charges amount to Rs2000 or more per day per individual.

* Interest tax. interest tax Act has been repealed with effect from April 1st 2000 and no interest tax is payable from this date.

National indirect taxes: Excise duty is now known as central value added tax (CENVAT). It is levied on all excisable goods produced or manufactured in India at the rates set forth in the schedule to the Central Excise Tariff Act. For most goods, the duty VAT rate is 16%. Some items are still taxed at the varying rate of 8%, 16% and 24%.

With effect from July 1st 2000, excise duty is levied on the basis of transaction price, that is, the price actually paid for such goods as against the earlier scheme where duty was paid on the normal or wholesale price charged by a manufacturer in the course of trade.

* Customs duty is levied by the central government on all imports and exports from India as per the rates prescribed in the Customs Tariff Act. As a step toward rationalizing the customs tariff structure, five rates of 5%, 15%, 25%, 35% and 40%, the highest rate has been dropped.

A 10% surcharge of basic customs duty continues except on certain specified exemptions.

A special additional customs duty of 4% has been extended to goods imported for the purpose of retailing in India. They were earlier exempted from this levy.

* Service tax. There is a 5% tax on services. It is levied on such transactions as brokerage, insurance, engineering consultants (onshore), manpower supply agencies, telephone services (including pager services), advertising, taxi, courier and air travel agents, management consultants, real estate agents, chartered accountants and credit rating agencies. The exemption available to software engineering consultants from the service tax levy continues. Fees received in convertible foreign exchange for any taxable service rendered in India are exempt from service tax provided such fees are not remitted out of India.

Tax treaties: India has double-taxation agreements covering all sources of income with many countries. New tax treaties have been entered into with New Zealand and Trinidad and Tobago and Portugal. India has treaties with Australia, Austria, Bangladesh, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hungary, Indonesia, Israel, Italy, Japan, Kazakhstan, Kenya, Libya, Malaysia, Malta, Mauritius, Mongolia, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portugal, Romania, Russia, Sierra Leone, Singapore, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Syria, Tanzania, Thailand, Turkey, Turkmenistan, United Arab Emirates, United Kingdom, United States, Uzbekistan, Vietnam and Zambia.

In addition, India has agreements limited to air-transport profits with Afghanistan, Ethiopia, Iran, Kuwait, Lebanon, Oman, Pakistan, and Yemen, and a treaty with Bulgaria confined to shipping. Agreements with Finland and Oman have been signed, but not officially implemented.

The pacts with Austria, Belgium, Denmark, Italy and Norway are based on the method of exclusion, i.e. the income from sources allocated to one country is not taxed in the other, though such income can be taken into account for purposes of determining the tax rate if the laws of the other country require it. The agreements with Japan, the UK and the USA are based on the tax-credit method; the two countries levy taxes according to their respective laws, but each country gives tax credits for the tax payable in the other. The German, Finnish and Swedish treaties use a combination of the two methods.