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 (current US dollars), making it the sixth-largest economy globally. Some of the most popular sectors in India include services, manufacturing, agriculture, 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 (IT), 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, chemical, 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. Overall, India has a strong economy that is backed by its enormous population and diversity of trade.

Bilateral agreements between India and Israel

Several agreements were signed between Israel and country:

1. International Investment Agreements
2. Double Taxation Agreements
3. Double Taxation Agreements (Protocol)

International Investment Agreements

India and Israel signed International Investment Agreement to promote and protect bilateral investments between the two countries, fostering economic cooperation and providing a framework for resolving investment-related disputes. The Treaty was signed on 29.1.1996 and was effective 18.2.1997. However, the treaty was terminated by India on 23.3.2017. Protections for existing investments are still in force until 23.3.2031. To see the full treaty click here.

Double Taxation Agreements

The Double Taxation Agreements was designed to solve disputes regarding double taxation. The treaty was signed 29.1.1996 and was effective 1.1.1994. In respect of taxes withheld at source – shall have effect from 1.7.1996. To see the full agreement click here.

The updated Double Taxation Agreements was designed to optimize double taxation from the previous treaty. The treaty was signed 14.10.2015 and was effective 1.1.2017. To see the full agreement click here.

Applicability of the MLI

India and Israel have signed the MLI, which means that there is an automatic exchange of information between the two countries. India and Israel signed the MLI in 2017 and both countries ratified the MLI in 2019.

Residency for tax purposes in India

Residence of an individual

Residency for tax purposes in India is determined based on the residential status of an individual in a particular financial year (April 1 to March 31). The residential status is determined by considering the individual’s physical presence in India during the financial year and the preceding years. The following are the different categories of residential status for tax purposes in India:

Resident and Ordinarily Resident (ROR):

• An individual is considered a Resident and Ordinarily Resident (ROR) in India if:
  • They are present in India for 182 days or more during the financial year, or
  • They are present in India for 60 days or more during the financial year and have been in India for 365 days or more during the preceding four financial years.
• ROR individuals are liable to pay taxes in India on their global income.

Resident but Not Ordinarily Resident (RNOR):

• An individual is considered a Resident but Not Ordinarily Resident (RNOR) in India if:
  • They are a Resident in India in at least two out of the preceding ten financial years, and
  • They are present in India for 729 days or less during the preceding seven financial years.
• RNOR individuals are taxed on income earned or accrued in India and income received or deemed to be received in India.

Non-Resident (NR):

• An individual who does not meet the criteria to be considered a Resident or Resident but Not Ordinarily Resident is treated as a Non-Resident (NR) for tax purposes in India.
• Non-Residents are taxed only on income earned or accrued in India or income received or deemed to be received in India.

Residency of a company

The tax residency of a company in India is determined by its place of incorporation or registration and the control and management of its affairs. Here are the key factors that determine the residency of a company for tax purposes in India:

1. Indian Resident Company – Indian Resident Companies are companies incorporated in India under the Companies Act, 2013, or earlier Indian company laws. They are taxed on their worldwide income, encompassing both income earned within India and income earned abroad.

2. Foreign Company – Foreign companies in India are Non-Residents for tax purposes, except if their control and management are in India during a financial year. In that case, they are deemed to have a “Place of Effective Management” (POEM) in India and are treated as Indian Resident Companies, subject to global income taxation.

The tax system in country

The country Tax Authority is called the Income Tax Department

Click here for the official website of the country tax authority.

Income taxation:0-30%

Taxation of companies and branches:40%

VAT: 5-28% (18% on most goods and services)

Capital gains tax: 10/20%, 15/40%; 10/20/15%

Withholding Tax

Inheritance tax and estate tax in India

There is no inheritance tax nor estate tax in India. A Wealth tax used to be implemented until it was abolished on April, 1 2016. In addition, India abolished the Gift Tax in 1998 but reinstituted it in 2004 under a new format.

Relocation

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.

Nonetheless, it is worth noting that net migration has decreased in India mainly due to overpopulation or foreign employment opportunities. From 2019-2023 net migrations has decreased by roughly 3% each year and has no signs of slowing down. With that being said, 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. Although net migration has been on the fall for the last 4 years, India remains an attractive destination for many.

Real estate taxation in India

Real estate taxation in India involves various taxes and levies imposed on property transactions and ownership. Here are the key aspects of real estate taxation in India:

Property Tax

Property tax, also known as “house tax” or “municipal tax,” is levied by local authorities based on the annual rental or assessed value of the property. Rates and calculation methods vary across Indian states and cities. Property owners must pay this tax annually to the relevant municipal corporation or local governing body.

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.

Capital Gains Tax

Capital gains tax applies when a property is sold, with liability determined by the holding period and classification as short-term or long-term capital asset. Short-term gains (held < 2 years) incur one tax rate, while long-term gains (held ≥ 2 years) incur a different rate. Tax rates for capital gains can vary based on property type and other factors.

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 GST, the sale of under-construction properties attracts tax at a specified rate, which varies depending on the nature and location of the property. However, GST does not apply to completed and ready-to-move-in properties or to the sale of land.

Transfer of funds from Israel to India

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduces or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Types of business entities in India

 In India, there are several types of business entities that individuals or groups can choose from when starting a business. Here are the main types of business entities commonly formed in India:

1. 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.
2. 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.
3. 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, 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.
4. 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 minimum of two and a maximum of fifteen directors and, with specific regulatory obligations. Shareholders’ liability is limited to their shares, and the shares can’t be traded publicly.
5. 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.
6. One Person Company (OPC) – allows a single individual to establish a limited liability company. It provides the benefits of limited liability while allowing sole ownership and control over the company.

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, boost industrial development, and encourage specific activities. Some of the key incentive laws and policies in India are the:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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: