Understanding India’s Tax System – How It Differs from China

India’s tax system differs significantly from that of China in structure, administration, and compliance requirements. This article explains these differences, covering direct and indirect taxes, governance models, and practical implications for cross-border investors.

As businesses expand across Asia, understanding the tax landscape of key markets becomes critical for strategic planning and compliance. This article aims to provide a clear comparison between India’s tax system and China’s, highlighting the structural differences, regulatory frameworks, and practical implications for foreign investors. By examining these contrasts, investors can better anticipate challenges, optimize tax planning, and make informed decisions about cross-border operations.

Tax structure overview

Both India and China divide their tax systems into two major categories: direct taxes (on income) and indirect taxes (on transactions). Corporate income tax (CIT) and individual income tax (IIT) form the main body of direct taxes in both countries, while goods and services tax (GST) in India and value-added tax (VAT) in China serve as the primary forms of indirect taxes.

Direct taxes

In both countries, CIT and IIT are the core direct taxes.

• India: CIT is levied on a company’s net profit. The most common rate for domestic companies is 25.17 percent and can rise to over 30 percent depending on turnover, while foreign company branches are subject to a higher rate of 36.4 percent to 38.22 percent. India also grants concessional rates to enterprises meeting specific scale or industry criteria.
• China: The standard CIT rate is 25 percent, which applies to most enterprises, regardless of their ownership structure. However, China offers various preferential rates available based on the entity type, size, sector, or locations, such as the 20 percent rate (temporarily further reduced to 10 percent) on income derived by non-resident enterprises without establishments in China or the 15 percent rate on qualified high and new technology enterprises.

India’s IIT adopts a progressive rate structure and, similar to corporate taxation, includes additional levies such as surcharge and the health & education cess. China also uses a progressive IIT system, but generally does not impose surcharges or additional levies.
Both countries collect IIT primarily through withholding at source, followed by annual filing or reconciliation, and determine tax liability based on residency status.

Indirect taxes

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Unlike the United States, where sales tax applies only at the final stage of transactions, both China and India have, through multiple rounds of reform, merged most goods and service transaction taxes into a unified VAT/GST framework, similar to that used in the European Union and Commonwealth economies. Under this model, taxes apply at each stage of the supply chain — from production to final sale — based on value addition.

India’s 2017 GST reform consolidated most indirect taxes into a single, nationwide goods and services tax. This reform created a uniform market tax structure, ensuring that goods and services across the country are subject to consistent rates and input credit mechanisms, thereby minimizing cascading taxation and interstate rate disparities.

India’s GST operates in three main forms:

• CGST (Central GST) and SGST (State GST): Applied to intra-state transactions, shared equally between the central and state governments; and
• IGST (Integrated GST): Applied to inter-state transactions and imports, levied by the central government and later distributed between the center and destination states based on consumption.

For example, for a domestic consulting service within a state, the invoice shows two tax lines: CGST (9%)  and SGST (9%). For inter-state services, the invoice shows a single line of IGST (18%).

These three GST types are not freely creditable against one another. IGST credit may be cross-utilized to offset CGST or SGST liabilities, whereas CGST and SGST credits cannot be cross-utilized between themselves. All utilization must follow the statutory sequence set out in Section 49 and Rule 88A of the Indian CGST Rules.

China, on the other hand, established a VAT-based system in 1994 and completed the business tax to VAT reform around 2016, unifying goods and service taxation under one framework. VAT is centrally administered by the State Taxation Administration (STA), and revenues are shared between central and local governments through fiscal allocation, not separate legislation. For example, a consulting service in China, whether intra-provincial or cross-provincial, applies the same six percent VAT rate, without rate differentiation.

In practice, both countries’ central-local revenue-sharing ratios for VAT/GST are roughly 50:50.

Governance structure

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India operates under a federal taxation structure, with both central and state governments having taxation authority. Although Indian states constitutionally retain certain taxing powers, since the 2017 introduction of GST, most indirect taxes on goods and services (CGST, SGST, IGST) have been unified under the GST Council, where both levels of government jointly set policies and rates. States can no longer unilaterally alter GST rates or rules. Their remaining independent taxing powers primarily cover non-GST taxes such as professional tax, stamp duty, property tax, and local surcharges.

In contrast, China is a unitary state, where all major taxes, including VAT, consumption tax, CIT, and IIT, are legislated and controlled by the central government. Provincial and local tax authorities are administrative executors without independent lawmaking or rate-setting powers.
Local autonomy is limited to minor taxes such as property tax, urban land use tax, vehicle and vessel tax, and local education surcharges, all of which have centrally defined limits and scope.

As a result, China’s tax regime is fully unified nationwide, with consistent rates and enforcement practices. Local governments primarily play roles in administration and revenue sharing, whereas India’s states maintain constitutional-level fiscal autonomy, especially outside the GST framework.

Mapping and comparing major tax categories between China and India

To clearly illustrate the similarities and differences in common tax types, applicable rates, and collection mechanisms in China and India, the following table provides a comparative overview:

Note: The above table summarizes the principal tax types in both countries. Additional taxes, such as China’s vehicle and vessel tax, resource tax, and environmental protection tax, and India’s entertainment tax and mining royalty, are not covered here.

Main features of tax administration

Following the introduction of the GST, India established a comprehensive system of tax filing and invoice management to ensure the authenticity of both tax collection and the input credit chain.

Once a business registers on the GST Network (GSTN) platform, it is generally required to complete three filings or reconciliations each month:

• GSTR-1 – submission of outward (sales) invoice data;
• GSTR-2A / 2B – review and adoption of inward (purchase) data from suppliers; and
• GSTR-3B – summary return based on finalized accounting records.

During busy compliance periods, a GST-registered entity may file three times a month, once per quarter, plus an annual return – adding up to over 30 filings per year, which is far more frequent than China’s VAT general taxpayer system (12 monthly filings plus one annual reconciliation).

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This high-frequency filing enables the tax authorities to monitor real-time transactions between sellers and buyers, ensuring that each buyer’s input claim matches the seller’s output declaration. If discrepancies arise, input tax credit (ITC) may be questioned or denied.

To further strengthen invoice control, India launched the e-Invoice system in phases starting in 2020. Companies with annual turnover exceeding a specified threshold are required to generate B2B e-invoices through the GST system, each carrying a unique Invoice Reference Number (IRN) and QR code. This allows tax authorities to obtain transaction data instantly, similar in spirit to China’s VAT invoice control system.

Through electronic invoicing and interconnected filings, Indian tax authorities can efficiently detect false invoicing, fraudulent credits, and other compliance violations.

For the penalties and tax audits, the GST law imposes strict penalties for non-compliance:

• Late filing: INR 100 per day (Approx. RMB 8) for ordinary returns, INR 50 (Approx. RMB 4) per day for nil returns.
• Late payment: Interest at an annualized rate of 18 percent.
• Serious offences: Deliberate tax evasion involving large amounts can lead to criminal prosecution, with fines and imprisonment for responsible individuals.

In recent years, the Indian tax department has significantly intensified audits of large enterprises. There have been cases where well-known Chinese companies operating in India were fined and required to pay large sums in back taxes. This reflects a global trend toward stricter tax enforcement. While India’s high-frequency filing and electronic verification make evasion more easily detectable through data matching, the authorities also conduct special audit campaigns regularly.

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China’s tax administration also attaches great importance to invoice verification but relies mainly on real-time monitoring through the VAT invoice control system and big-data alerts. Generally, as long as invoices and accounts are consistent and filings are timely, Chinese enterprises face fewer physical audits.

In summary, India’s GST enforcement framework combines technology (GSTN, e-Invoice), high-frequency filings, and strict penalties, forming a relatively tight tax compliance system.
This approach has effectively improved tax compliance but also imposes substantial compliance costs and workload on taxpayers. This is why many multinational and Chinese enterprises describe the Indian tax environment as “high-pressure compliance.”

Nevertheless, the Indian government continues to simplify GST procedures and reduce the burden on small and medium-sized enterprises (SMEs). After multiple rounds of reform and stabilization since the system’s introduction, GST operations in India have gradually become more predictable and efficient.

By comparison, China’s VAT system is more mature and well-understood by enterprises, though it also requires careful invoice management – since any mismatch or missing invoice could result in disallowed input credits or tax risks.

Challenges and trends ahead

Since the GST reform, India’s tax framework has become increasingly modern and internationally aligned. The GST and VAT mechanisms now share the largest indirect tax base between the central and state governments, while direct taxes are administered nationally under a progressive individual income tax structure. However, due to differences in economic structure, federal governance, and administrative style, significant disparities remain between China and India in tax rates, administrative procedures, and the design of specific tax types.

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Under India’s dual-layer central–state taxation system, enterprises face complex challenges in tracking cross-state transactions and ensuring compliance with the system. Although GST consolidated multiple indirect taxes, administration remains multi-centered, with both central and state authorities playing active roles. India’s digitized management systems for invoice verification, ITC matching, reverse charge mechanism (RCM), and tax deducted at source (TDS) each introduce specific compliance requirements that differ from China’s unified system.

For Chinese finance and tax professionals, understanding these differences is crucial, both for compliance when managing Indian operations and for strategic tax planning in cross-border investment decisions.

Looking ahead, India is preparing new direct tax code reforms and continuing to refine its GST system. Similarly, China is expected to implement its new VAT law and further optimize the overall tax environment. Both countries are moving in the same direction: simplified structures, broader tax bases, and stronger administration. This overview and comparison aim to provide readers with a clear framework for understanding India’s tax system in relation to China.

In upcoming articles, we will explore specific topics, including GST design logic and mechanisms, practical filing workflows, and special provisions under direct and indirect taxes, providing a more comprehensive view for cross-border practitioners.

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