WITH Indian Prime Minister Narendra Modi’s recent visit to Malaysia highlighting closer economic ties between the two countries, India’s growing importance to Malaysian businesses is hard to ignore.
Now the world’s fourth-largest economy, with gross domestic product exceeding US$4 trillion (RM15.64 trillion) and growth expected to remain above 6% in 2026, India offers scale and long-term opportunities few markets can match. Its expansion is driven largely by domestic consumption, infrastructure spending and regulatory reforms, rather than exports, making it more resilient to global economic swings.
For Malaysian companies considering entry into India, a clear understanding of the highly complex tax and regulatory framework coupled with a sophisticated tax bureaucracy is extremely important because an adverse outcome can completely derail your business in India. Before you enter the Indian market you should be aware of the basic tax rules.
India’s multi-layered tax framework
India operates under a federal tax structure, where taxation powers are shared between the central and state governments. The central government handles income tax, customs and Central Goods and Services Tax (CGST), while states manage State Goods and Services Tax (SGST), stamp duty and profession tax (up to 2,500 rupees – about RM107 – annually per employee). There are also local property taxes.
Corporate income tax
Corporate income tax in India depends on entity type and presence. Domestic companies or subsidiaries face an effective rate of around 25-30% (22% base plus surcharge and 4% cess). Foreign branches are taxed higher, at about 40% (35% base plus surcharge and cess). Companies without a physical presence are generally not taxed unless they create a permanent establishment (PE), in which case profits from Indian activities become taxable.
Dividend taxation
Dividends are now taxed in shareholders’ hands as “Income from Other Sources”, with TDS (tax deducted at source) at 10%. For Malaysian shareholders, withholding is 20% plus surcharge/cess, but the India-Malaysia Double Taxation Avoidance Agreement (DTAA) caps it at 5% (ownership must exceed 10%).
Customs duties
Imports into India attract basic customs duty (varies by product), social welfare surcharge and Integrated Goods and Services Tax (IGST) applies to interstate transactions (5–28%).
Goods and Services Tax (GST)
India’s GST applies to the supply of goods and services. The rates range from 0% to 28%, depending on the nature of the goods or services. GST is divided into CGST, SGST and IGST. Businesses can claim input tax credits, reducing overall tax cost. For Malaysian companies setting up locally, GST planning is critical for cash flow and pricing.
Transfer pricing
Transactions between related parties must comply with India’s transfer pricing rules under the arm’s length principle. India maintains strict enforcement, though Advance Pricing Agreements and safe harbour provisions reduce uncertainty.
Foreign exchange
Foreign exchange rules regulate capital inflows and repatriation. It is extremely important to keep track of money flows and the paper trail so that repatriation of funds will not be hindered.
Choosing the right entry structure
When entering the Indian market, Malaysian companies can choose from several structures, each with different tax and regulatory implications. Exporting into India without a physical presence generally avoids Indian corporate tax unless a PE is created, though certain payments may attract withholding tax under the India-Malaysia DTAA.
For long-term expansion, incorporating an Indian subsidiary is the most common route, offering operational flexibility with an effective corporate tax rate of around 25-30%, while branches and project offices are taxed at significantly higher rates of close to 40%. Liaison offices are limited to non-revenue activities and are typically tax-neutral if properly structured.
Other options, such as limited liabiity partnerships or joint ventures, may suit specific commercial needs. Importantly, businesses must manage PE risks carefully, as unintended taxable presence can arise through agents, personnel, or fixed business locations, triggering Indian tax and transfer pricing obligations.
India is not a low-tax jurisdiction, but it is increasingly transparent, rules-based and predictable. Challenges from the authority leading to disputes is common and can be time-consuming. The availability of tax and legal advice is plentiful in India.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
