Israel – India Tax Treaty

Business Activity in India

India is currently one of the world’s largest economies and has consistently been among the fastest-growing major economies. In 2022, India’s GDP reached $3.5 trillion, making it the sixth-largest economy globally. Some of the most popular sectors in India include services, manufacturing, agriculture, and technology. The services sector is a significant contributor to India’s GDP, accounting for a major portion of economic activity and employment. It includes subsectors such as information technology, telecommunications, banking and finance, tourism, healthcare, and professional services. The services sector contributes over 50% to India’s GDP and has an estimated growing rate of 9.1% in fall 2023.

India also has a prominent manufacturing industry which has proven to be a critical component of their economy. Products such as automobiles, textiles, pharmaceuticals, chemicals, engineering goods, and consumer durables contribute 17% to the country’s total GDP. Though declining, the agriculture sector, as of 2022, contributes 17% of the country’s GDP, and the technology sector is thriving as hubs such as Bengaluru often get compared to Silicon Valley and other opportunistic cities.

In November 2024, India’s business activity surged to a three-month high with the Purchasing Managers’ Index rising to 59.5 from 59.1 in October, marking continued robust expansion. The services sector was the key driver, followed by the manufacturing sector. This growth was fueled by increased domestic and international demand, leading to the fastest rate of job creation since 2005.

Bilateral Agreements Between India and Israel

• International Investment Agreement
• Double Taxation Agreement

Reciprocal Promotion and Protection of Investments

The Reciprocal Promotion and Protection of Investments (RPPI) was signed on January 29, 1996, and went into effect on February 17, 1997.  The RPPI is an agreement between Israel and India that is designed to encourage and safeguard investments made by individuals and companies from each country in the territory of the other. These agreements typically include provisions related to non-discrimination, compensation for expropriation, dispute resolution, and the transfer of funds.

While the Treaty was terminated on 23.3.2017, protections for existing investments are still in force until 23.3.2031.

To read the agreement in English, click here.

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and India regarding the avoidance of double taxation was signed on January 28, 1996, and entered into force on the first of December 31, 1993.

To read the agreement in English, click here.

Applicability of the MLI

Both India and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework.

Israel signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019. India as well, affixed its signature to the MLI on the 7th of June 2017, and its provisions became effective as of the 1^st of October, 2019.

Residency for Tax Purposes in India

Residence of an Individual

An individual is considered a resident for tax purposes in a given year if they meet either of these conditions:

1. They stay in India for 182 days or more during the tax year (182-day rule), or
2. They stay in India for at least 60 days in the tax year and a total of 365 days or more over the previous four years (60-day rule).

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

A company is considered a resident of India for any previous year if:

1. It is an Indian company, or
2. Its Place of Effective Management during that year is located in India.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in India

India Tax Authority is called the Income Tax Department of India

Income Taxation: 0% to 30%

Taxation of Companies and Branches: 30% and 40%

VAT: 5% to 28%

Capital Gains Tax: 10%, 15%, 20% and 40%

Withholding Tax

Inheritance Tax in India

India does not apply an inheritance tax.

Relocation to India

With a strong economy, India can attract numerous expatriate professionals seeking employment opportunities. These individuals may relocate to India to establish their own businesses, set up branch offices, or tap into the country’s emerging sectors. They are drawn by the potential for growth, access to a skilled workforce, cost-effective operations, and the opportunity to serve the Indian market.

India remains a popular destination for digital nomads. These individuals have the flexibility to work from anywhere and may choose to move to India due to its lower cost of living. Furthermore, many wealthy individuals tend to migrate to India due to their favorable tax laws for wealth transfer-related cases such as inheritance, estate, and gift tax. In summary, India hosts a very strong economy backed by the world’s second-largest population.

In 1996, Sergio DellaPergola, a demographer from Hebrew University, estimated that India had between 4,900 and 7,000 Jews. Most of them lived in Mumbai and nearby areas like Thane. Smaller Jewish communities could also be found in cities such as Kolkata, Kochi, New Delhi, and Bangalore.

Real Estate Taxation in India

Property Tax

Property tax is imposed by the local governing authority where the property is located. The tax rate varies across cities in India and is typically based on the current market value of properties in each area.

Stamp Duty

 Stamp duty is a tax imposed on property transfers or sales during registration, varying across states. It is usually a percentage of the property value or sale deed amount. Rates may differ for residential and commercial properties. Property document registration is commonly conducted at the Sub-Registrar’s Office.

Goods and Services Tax (GST)

Goods and Services Tax is a comprehensive indirect tax applicable to various goods and services in India, including real estate. Under Good and Service Tax, the sale of under-construction properties attracts tax at a specified rate, which varies depending on the nature and location of the property. However, Good and Service Tax does not apply to completed and ready-to-move-in properties or the sale of land.

Other

Starting from April 1, 2017, if a person receives money or property without paying for it or pays less than its value, and the amount exceeds 50,000 rupees, they must pay income tax on it under “Income from Other Sources.”

Transfer of Funds from Israel to India

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

 As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in India

Sole Proprietorship – the simplest and most common form of business entity. It is owned and operated by a single individual. In this structure, the owner has complete control over the business and is personally liable for its debts and obligations.

Partnership – a business structure involving two or more individuals who agree to operate together. It can be registered or unregistered. Partners contribute capital, share profits, and losses, and have collective liability for business debts. A partnership deed outlines the partnership’s terms and conditions.

Limited Liability Partnership (LLP) – a hybrid form of business entity that combines elements of a partnership and a company. It offers limited liability protection to its partners. LLPs are governed by the Limited Liability Partnership Act, of 2008. The partners have limited liability for the debts and obligations of the LLP and are not personally liable for the actions of other partners.

Private Limited Company – a distinct legal entity registered under the Companies Act, 2013. It needs at least one shareholder (can have up to fifty shareholders) and can have a minimum of two and a maximum of fifteen directors, with specific regulatory obligations. Shareholders’ liability is limited to their shares, and the shares can’t be traded publicly.

Public Limited Company – similar to private limited companies, but they can raise capital from the public through share issuance. They have a minimum of three directors and higher capital requirements. Being listed on stock exchanges, they have more extensive compliance and disclosure obligations.

Incentive Laws in India

India has implemented various incentive laws and policies to promote investment, economic growth, and specific sectors. These incentive laws aim to attract domestic and foreign investment, increase industrial development, and encourage specific activities. Some of the key incentive laws and policies in India are the:

Foreign Direct Investment (FDI) Policy – India’s FDI policy sets rules for foreign investment in different sectors, including permissible sectors, allowed foreign equity percentages, and investment procedures. Recent liberalization efforts aim to attract foreign investment in manufacturing, infrastructure, services, and startups.

Special Economic Zones (SEZs) – SEZs are designated areas promoting exports and industrial development through incentives and facilities. They offer tax exemptions, duty-free imports, simplified regulations, and infrastructure support. SEZs attract investments in manufacturing, IT/ITES services, and other sectors, regulated by the SEZ Act, 2005.

Export Promotion Schemes – India has export promotion schemes like MEIS, SEIS, EPCG, and Duty Drawback. These schemes provide incentives such as duty exemptions, tax refunds, and financial benefits to boost exports.

Make in India Initiative – The Make in India initiative was launched to encourage domestic and foreign companies to invest in manufacturing in India. It focuses on improving the ease of doing business, simplifying regulations, providing infrastructure support, and offering fiscal incentives in sectors such as automobiles, textiles, electronics, defense, and renewable energy.

Start-up India Initiative – The Start-up India initiative supports start-ups in India by providing tax exemptions, labor law relaxation, funding support, and streamlined compliance procedures. It promotes innovation, entrepreneurship, and job creation.

India Double Tax Treaties