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India follows the tax residency rule. The global income of a resident Indian is taxed in India. However, if any income arises to a non-resident in India, it will be taxed only to the extent it arises in India. It implies that all income arising from a non-resident in India will be taxed in India. The income earned by a non-resident in a foreign country will not be taxed in India. In this blog, you will be reading about the tax considerations for foreign businesses in India. The most preferred form of business structure in India is a company. So the discussion relates to the tax considerations of a foreign company in India.
Table of Contents
Companies are taxed in India as per their residential status. A foreign company will be taxed only on the income received, accrued or arising in India.
Foreign Businesses having a Permanent Establishment (PE) or a Branch or Project Office in India or it has a Place of Effective Management in India (POEM) then it will be taxable at the flat rate of 40%, excluding surcharge and cess. The surcharge applicable to a foreign business varies depending upon the total income of the business, which has been described below in a tabular form:
The Education cess applicable on corporate income tax is 4% of income tax after the surcharge.
A company is required to pay tax on income as per the provisions of the Income Tax Act, 1961 (IT Act). Earlier, companies were earning profits as per their profit and loss account and declaring dividends to their shareholders but were showing NIL or negative income. Such companies are termed Zero Tax Companies.
Zero Tax companies had a negative impact on revenue. To curb this detrimental effect, MAT was introduced to ensure no taxpayer with substantial income could avoid tax liability.
MAT provisions apply to foreign companies if their total income is derived from shipping business, business of aircraft, exploration of mineral oils, civil construction in turnkey projects and income that is required to be taxed as per specific provisions of the IT Act. MAT provisions are inapplicable to companies that have no permanent establishment in India or if any capital gain is arising or accruing to a foreign company from the transfer of securities, interest, royalties and fees for technical services. Further, MAT is inapplicable to companies’ residents of a country or a specified territory with which India has a DTAA or the central government has entered into any agreement. And with those companies which do not have any DTAA or agreement, MAT will not be applicable in cases where the companies are required to seek registration under any law in India.
In what cases a foreign business will be treated as a resident?
There are two instances where a foreign business will be treated as a resident and will be taxed in India:
Capital gains tax is imposed on the transfer of capital assets. However, there are certain exemptions that apply where a capital asset is transferred by a holding company to its subsidiary or vice versa and also where the capital asset is transferred in amalgamation or a demerger. Any income which accrues or arises to non-residents either directly or indirectly by transfer of capital assets situated in India will be taxable in India. When an asset of a foreign company (other than shares) is held for more than 3 (three) years, then it is treated as a long-term capital asset. When a long-term capital gain (LTCG) arises to a foreign company in India from the transfer of assets, then it is taxed at the rate of 20.8%, 21.22% or 21.84%. Short-term capital gains (STCG) shall be taxed at normal income tax rates. The surcharge and cess applicable on the LTCG and STCG will be the same as above.
Dividends if received by an Indian company from a foreign company having 26% or more equity holding, are taxable at the rate of 15%, exclusive of surcharge and cess. The Education cess rate is fixed i.e. 4% however, the surcharge rate applicable varies with income.
In addition to this, there is no Minimum participation requirement or minimum holding requirement for domestic as well as foreign companies in India for dividends.
India has entered into treaties with more than 90 countries. The DTAA usually prevails over the domestic tax provisions. However, if the domestic tax provisions are beneficial to the taxpayer, then they may apply. The foreign tax paid will be credited against the Indian tax on the profits but only to the extent of the amount of Indian tax payable on the foreign income.
International withholding tax rates
Tax on royalties and fees for technical services depends if the foreign company has a PE in India or performs professional services through a fixed place situated in India. Where the foreign company has a PE or a fixed place of the profession in India, and the right, property or contact is effectively related to such PE or fixed places of business, such income shall be taxed under section 44DA at the rate of 40% after deduction of expenses but before surcharge and cess. Where the foreign company does not have a PE or fixed places of the profession, then the income from royalties and fees for technical services shall be taxed under section 115A at the rate of 10% without any deduction of expense and exclusive of surcharge and cess.
The interest paid by a non-resident is subject to withholding tax. In certain circumstances, the interest income earned by a non-resident is taxed at a rate of 5% exclusive of surcharge and cess.
Whenever any goods are imported into India, customs duty is imposed. The primary legislation on customs duties in India is the Customs Act of 1962. The tax rate applicable is specified under the Customs Tariff Act of 1975. The tax rates may vary depending upon specific exemptions or concessions issued by the Government or due to the Free Trade Agreements applicable in force at that time.
Taxation of foreign companies in India is complex so it is better to seek professional advice on tax considerations before doing business in India. However, certain key things to remember are:
1) Tax on foreign companies is levied only on the income which is received, arises or accrues in India.
2) Foreign companies can obtain a tax credit in their home country against the taxes paid in India.
3) Income of a foreign company in India is subject to corporate tax at a flat rate of 40%. But dividends from Indian subsidiaries to the parent company are exempt from corporate tax.
Read our Article: India’s Legal and Regulatory Environment for Foreign Companies in the Indian Market
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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