Tax Treatment of a Foreign Company, Tax Treatment of a Foreign Company in India, tax implications on Indian Subsidiary, Foreign Company in India, Ebizfiling

All you need to know on Tax Treatment of a Foreign Company in India

Tax Treatment of a Foreign Company in India, Planning and Strategy for tax implications on Indian Subsidiary

Section 139(1) of the Income Tax Act in India describes who must file a tax return. Every business must submit its annual tax return within a specific amount of time. This article focuses on the Tax Treatment of a Foreign Company in India, Planing and Strategy for tax implications on Indian Subsidiary, and forms that are applicable to the Foreign Company in India.

 

Introduction

While a non-resident company will only be taxed on income received, accumulated, or arising in India, a company having residential status in India will be taxed on all of its worldwide income, whether earned in India or outside of India. Every foreign company that establishes operations in India is regarded as an Indian subsidiary, so compliance with income tax laws is crucial for foreign businesses.

Tax Treatment of a Foreign Company in India

Regarding the taxation of foreign subsidiaries in India, there are a few important considerations. First, the corporate tax rate that is often applied to foreign-owned businesses in India is 40%. This tax is levied on the income of international enterprises.

 

However, in a few exceptional circumstances, this rate might be decreased. For instance, the tax rate could be lowered to 20% if the international company had it’s headquarters in India. Additionally, the tax rate maybe lowered to 15% if the foreign business has made sizeable investments in India.

 

The requirement for Indian subsidiary companies to withhold taxes on profits sent to their parent companies should also be taken into account. The standard withholding tax rate is 15%. However, if the parent firm is located in a nation with which India has a double taxation agreement, it might be decreased.

 

It is also important to note that there are a number of exclusions and deductions that can be used to reduce the tax that is owed by foreign companies in India. For instance, foreign businesses may not be required to pay taxes on earnings from the export of goods or services. Deductions might also be possible for costs like interest payments or research and development.

Forms that are applicable to the Foreign Company in India

Form

Provided by

Details in the Form

Form 26AS

Income Tax Division (You can access the TRACES portal by logging into the e-Filing portal or Internet Banking first.)

  • Advance Tax / Self Assessment Tax

  • TDS (Tax Deducted at Source)

  • Demand / Refund

  • Specified Financial Transaction

  • Complete Proceeding / Pending

Form 16A

Deductor to Deductee

A Tax Deducted at Source (TDS) Certificate, or Form 16A, is a document that is produced quarterly and records TDS payments made to the Income Tax Department, their nature, and their amount.

Form

Submitted by

Details in the Form

Form 3CA-3CD

Taxpayer who is required to undergo a mandatory audit under another law and who must have his accounts audited by an accountant according to Section 44AB. To be provided by September 30th of the Assessment Year, or earlier.

According to Section 44AB of the Income Tax Act of 1961, a Report of Audit of Accounts and Statement of Particulars must be provided.

Form 3CE

Non-resident taxpayers and foreign companies conducting business in India who receive certain incomes from certain people are required by section 44DA to acquire a report from an accountant. To be provided at least 1 month before to the 30th September of the Assessment Year, which is the deadline for filing returns under section 139(1).

Accountant’s report on receiving royalties or fees for technical services from the government or an Indian company

Form 29B

Taxpayer who is required by Section 115JB of the Income Tax Act of 1961 to seek a report from an accountant. The same must be provided at least one month prior to the deadline for submitting a return under Section 139.

Report verifying that the book profit has been calculated in accordance with Section 115JB in the case of a Company to whom that section applies.

Form 10CCB

Taxpayer who is needed by Sections 80(7), 80-IA, 80-IB, 80-IC, and 80-IE of the Income Tax Act of 1961 to seek a report from an accountant in order to claim deductions.

A mandatory requirement to claim a deduction under Sections 80-I(7), 80-IA, 80-IB, 80-IC, and 80-IE is an Audit Report in Form 10CCB. It must be submitted one month before the ITR under section 139 filing deadline.

Tax implication of Foreign Company in India  

Indian taxes of foreign subsidiaries can affect firms in a number of ways. To make sure that your company is compliant, it is critical to grasp the tax laws and regulations.

 

One of the main effects is that branch profits taxation is applied to foreign subsidiaries. The profits of the subsidiary, which are ascribed to the Indian operations, are subject to this tax. The net gains after subtracting expenses are subject to a 20 percent tax rate.

 

It therefore follows that a foreign subsidiary’s dividend payments to its Indian parent firm are subject to Dividend Distribution Tax (DDT). DDT is charged at a rate of 15% and is due on the total amount of dividends that the subsidiary has declared.

 

The taxation of foreign subsidiaries may also affect the parent company’s overall tax obligation in India. This is because the income of the subsidiary will be included in the taxable income of the parent company. The amount of tax owed by the parent business is determined by both the profit attributable to the Indian subsidiary and the parent company’s overall tax rate.

Planning and Strategy for tax implications on Indian Subsidiary

The recent changes made by the Indian government to the tax regulations governing overseas companies are a step in the right direction for encouraging investment and national economic development. To make the tax system more business-friendly, there are still a few problems that need to be resolved.

 

The difficulty in deducting costs incurred by foreign companies in India is one of the major problems. According to present law, only costs “incurred primarily for the purpose of producing revenue from sources in India” maybe written off. It is a particularly onerous clause that contradicts the fundamentals of international taxation, which support a more lax approach to deductions.

 

The requirement that foreign subsidiaries deduct taxes from dividend payments made to their foreign parent corporations is another problem. This burdensome barrier makes it challenging for international businesses to invest in India. The government should think about exempting foreign businesses from this requirement or at the very least offering a procedure for getting back taxes that have already been withheld.

 

In general, the recent modifications to the tax legislation regulating overseas subsidiaries are a positive step. However, more changes are required to make the system more welcoming to investors and supportive of economic expansion.

Section 115 (5) of the Income Tax Act

If each of the following criteria are satisfied, foreign corporations do not need to file their tax returns in India:

  • If the company’s revenue in India came exclusively from:

    • Interest paid by the government or an Indian business for borrowing funds in another currency.
    • Dividends that are not referred in the Section 115O of the Income Tax Act.
    • Government-issued bonds and securities, interest on investment fund units, and revenues from foreign exchange on currency units.
    • interest accrued from an infrastructure debt fund.
  • The payer of income (an Indian corporation), in accordance with the terms of the Indian Income Tax Act, has deducted tax at the source and submitted it to the Indian government.

If both of the requirements described above are satisfied, the foreign corporation is exempt from filing a tax return in India.

Conclusion

It might be challenging to tax foreign subsidiaries in India. However, there are a few important considerations. The Foreign Tax Credit scheme, which is a specific tax regime for foreign businesses, is the first provision in Indian tax legislation. Through this method, foreign businesses can deduct the taxes they paid in their home nations from the taxes they pay in India. Second, India’s corporation tax applies to all income derived from foreign subsidiaries. Dividend payments from foreign subsidiaries to their parent businesses, however, may occasionally be excluded from corporate tax.

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Author: zarana-mehta

Zarana Mehta is an MBA in Finance from Gujarat Technology University. Though having a masters degree in Business Administration, her upbeat and optimistic approach for changes led her to pursue her passion i.e. Creative writing. She is currently working as Content Writer at Ebizfiling.

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