Taxation Aspects of Multinational Corporations in India

Foreign non-resident business entities may have business activities in a variety of ways. In its simplest form this can take the form of individual transactions in the nature of exports or import of goods, lending or borrowing of money, sale of technical know how to an Indian enterprise, a foreign air-liner touching an Indian airport and booking cargo or passengers, etc. various tax issues arise on accounts of such activities.

The government wants to encourage foreign enterprises to engage in certain types of business activities in India, which in its opinion its desirable for achieving a balanced economic growth. This takes us to the last aspect of activities which enjoy tax incentives in India. The related issues about the taxation of the Multinational Corporations (MNCs) are as follows:

1. Taxation of Transactions and Operations of MNCs in India

Taxation of transactions and operations of MNCs fully depends on the definition of income that is taxable in India, qualification of taxable income and the tax rates.

Income that is taxable in India

All Income accruing or arising whether directly or indirectly through or from any business connection in India

  1. Salary is deemed to be earned in India if it is either payable for services rendered in India or payable by Indian Government to a citizen of India for services rendered outside India.
  2. Dividend paid by Indian Company outside India
  3. Income by the ways of interest by Indian Government.
  4. Income by the way of Royalty
  5. Income by the way of fees for technical services.
Read the rest

Objectives of International Taxation

The main objectives of International Taxation are the Neutrality and Equity.

Tax Neutrality

A neutral tax is one that would not influence any aspect of the investment decision such as the location of the investment or the nationality or the investor. The basis justification for tax neutrality is economy efficiency. World welfare will be increase if capital is free to move from countries were the rate of return is low to those where it is high. Therefore, if the tax system distorts the after-tax profitability between two investments or between two investor leading to a different set of investments being undertaken, then gross world product will be reduced. Tax neutrality can be separated into domestic and foreign neutrality. Domestic neutrality is an compasses the equal treatment of any citizen investing at home and citizen investing abroad. The key issues to consider here are whether the marginal tax burden is equalized between home and host countries and whether such equalization is desirable.

Foreign neutrality: The theory behind Foreign neutrality in international taxation is that the tax burden placed on the foreign subsidiaries of domestic companies should equal that imposed on foreign-owned competitor operating in the same country.

Tax Equity

The basis of tax equity is the criterion that all tax payers in a similar situation be subject to the same rules. All Companies should be taxed on income, regardless of where it is earned. This, the income of a foreign branch should be taxed in the same manner that the income of a domestic branch is taxed.… Read the rest

Double Taxation Relief

One of the major risk in the International Business is the payment of taxes in both the countries i.e. the country in which the business is actually effected and in the country where the MNC is having its head office. This type of double taxation will definitely impede the growth and development of the MNCs in multiple ways. So the provisions are made to avoid the double taxation (Double Taxation Relief) between the two countries through two types of relief namely Bilateral Relief and Unilateral Relief.

Bilateral Relief

Under this scheme, relief against the burden of double taxation is worked out on the basis of mutual agreement between two countries. There are two types of agreements. In one type, the two concerned countries agree that certain incomes which are likely to be taxed in both countries shall be taxed only in of them or that each of the two countries should tax only a specified portion of the income. In the other type, the income subject to tax in both the countries but the assessee is given a deduction from the tax payable by him in the other country, usually the lower of the two taxes paid. This is called bilateral relief.

Unilateral Relief

There is no agreement under this scheme. Under unilateral relief, if any MNC who is resident in India in any previous year proves that, in respect of its come which accrued or arose during that previous year outside India, it has paid in country with which there is no agreement for the relief or avoidance of double taxation, income tax by deduction or otherwise, under the law in force in that country, it shall be entitled to the deduction from the Indian Income Tax payable by him of a sum calculated on such double taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.… Read the rest

Residential status and Tax liability

The scope of total income is determined on the basis of residential status of the assessee. For the purposes of this Act, there can be three residential status. Residential status is determined on the basis Basic conditions and Additional conditions

  1. Resident and ordinarily resident
  2. Resident but not ordinarily resident
  3. Non resident.

RESIDENTIAL STATUS OF AN INDIVIDUAL

Resident and Ordinarily Resident [ROR]

                An individual is said to be resident in India if he satisfies anyone of the basic conditions and both of the additional conditions.

Resident but Not Ordinarily Resident [RNR]

                An individual is said to be resident but not ordinarily resident in India if he satisfies anyone of the basic conditions but does not satisfies both of the additional conditions.

Non Resident [NR]

                If an individual does not satisfies any of the basic conditions he is said to be non resident in India

Basic conditions

Additional conditions

A stay of 182 days or more during the current previous year 2008-09

OR

A stay of 60 days or more in the current PY 2008-09 and a total stay of 365 days or more in the 4 years immediately preceding the current PY He should be resident in India in at least 2 out of 10 years immediately preceding the current PY

AND

A stay of 730 days or more during the 7 years immediately preceding the current PY 2008-09

Basic Conditions:

                    (a)   He is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or

                    (b)   He has been in India for a period or periods amounting in all to three hundred and sixty-five days or more within the four years proceeding the previous year, and has been in India for a period or periods amounting in all to sixty days or more in the previous year.… Read the rest

Introduction to Income Tax

The word tax was derived from the Latin word ‘taxore’ meaning to estimate, appreciate or value. Tax is a price which each citizen pays to the state to cover his share of the cost of the general public services which he will consume. It indirectly provides employment opportunities. Taxes are compulsory contributions imposed by the government on its citizens to meet its general expenses incurred for the common good, without any corresponding benefit to the tax payer.

In 1860, the British government firstly introduced tax in India. The present law of income tax is contained in the income tax Act,1961 as amended up to date; the income tax rules 1962 as amended up to date and finance Act passed by the parliament every year. Income Tax Act came into force with effect from 1-4-1962 and extends to the whole of India.

Assessee [Sec 2(7)]

                  Assessee means a person by whom any tax or any other sum of money is payable under this Act, and includes;

  1. Any person who is liable to pay tax, interest or penalty
  2. Any person who is deemed to be assessee as per the Act
  3. Any person who is considered as default assessee by the Act
  4. Any person who is entitled to get refund of tax

Types of assessee:

                There are three types of assessee;

  1. Ordinary assessee:- Any person who is liable to pay tax, interest or penalty
  2. Deemed assessee:- also known as representative assessee. He in not only responsible for his income but also responsible for income of other person to whom he acts as a representative.
Read the rest

Features of Goods and Services Tax (GST)

Goods and Services Tax (GST) is consumption tax that charged the buyers to pay for a wide range of domestic & international products, goods and services. In some countries it is also called Value Added Tax. It is a multi-stage tax on domestic consumption levied on taxable supplies of goods and services. GST imposed on every level of a product from raw materials all the way to finished goods. Consumers still need to pay income tax as GST and income tax is totally different. It is a consumption tax charged on imports items and also value added to goods and services provided by a business to the end user. Goods And Services Tax will be borne by the end-user or consumer and is not intended to add burden to businesses.

Benefits of Goods and Services Tax (GST) Eliminates cascading effects

GST also enable the minimization of distortions, therefore GST is preferable. The simple excises or the turnover taxes results in the unintended effect of taxing an output together with its input content more than once. Furthermore, it is also applying a tax on the earlier paid input tax leading to cascading. It causes producers to move their capital or resources away from the production of one output to another one which does not suffer from cascading. GST gives credit for input tax earlier paid, avoid the distortion as represented by misallocation or redirection of resources from one economic activity to another.

In addition, GST is the only tax that offers positive alternatives to the negative impact of indirect taxation.… Read the rest