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
- 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.
- Dividend paid by Indian Company outside India
- Income by the ways of interest by Indian Government.
- Income by the way of Royalty
- Income by the way of fees for technical services.
- Income embedded in the transaction of supply of machinery or plant to an Indian Company.
Qualification of Taxable Income
The following are the provisions of the Qualification of Taxable Income.
- In case of a business of which all the operations are not carried out in India, only that part of the income as is reasonably attributable to the operations carried out in India can be treated as income accruing or arising in India.
- In computing the income of an Indian operation, the deduction in respect of expenses incurred by the head office outside India is allowed to the extent of an amount equal to 5% of the adjusted total income of the branch. Adjusted total income means the amount of total income of the assessee for the previous year computed before deducting any carried forward business loss or unabsorbed depreciation of earlier years.
- No deduction in respect of any expenditure or allowance as stipulated in the act for computing income for business or profession shall be allowed in respect of royalty or fees for technical services rendered, received from government or an Indian concern.
- In respect of an non – resident assessee engaged in the business of operation of ships, a sum equal to 7.5% of the amount paid or payable to assessee on account of the carriage of passengers, mails, goods, livestock shipped shall be treated as treated as business income and taxed accordingly.
- Any non – resident assessee engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, in the prospecting for, or extracting mineral oils will be deemed to have earned a profit of 10% of the amount paid or payable to the assessee on account of the services and facilities in connection with the supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India.
- In case of an assessee, being MNCs, engaged in the business of civil construction or the business of erecting of plant or machinery, a sum equal to 10% of the amount paid or payable shall be deemed to be the profit and gains of the such business chargeable to tax.
The following are the tax rates for the non – resident assessees i.e. MNCs.
- Income by the way of interest or money borrowed 20%
- Income from approved mutual fund 20%.
- Income from capital gain arising from sale of units Unit Trust of India 10%.
- Income from interest on bonds under the schemes of central government 10%.
- Long term capital gain arising from transfer of such bonds 10%
- Income accruing to a foreign institutional invest or from listed securities 20%
- Short term capital gain arising from transfer of such securities 30%.
- Long term capital gain arising from transfer of such securities 10%.
2. Representative Assessees
For the purpose of taxation the income tax act treats the agent of the MNCs as the representative assessees. The following persons are considered as representative assessees. Any person:
- who is employed by or on behalf of the non-resident or
- who has any business connection with the non-resident or
- from or through whom the non-resident is in receipt of any income, whether directly or indirectly or
- who is the trustee of the non-resident and also includes any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India.
3. Tax Incentives
As the tax incentives, the income of the MNCs from the following sources is not treated as the income of the MNCs.
- Income from interest on such securities or bonds including premium on redemption of such bonds as the Central Government may specify in the official gazette.
- Income from royalty or fees for technical services received from government or an Indian concern in pursuance of any agreement made by the foreign company with the government or the Indian concern.
- Income arising to such MNCs the Central government may, by notification in the office gazette, specify in this behalf by the way fees for technical services received in pursuance of the agreement entered into with that government for providing services.
- Interest payable to any bank incorporated in a country outside India and authorised to perform the functions of Central Bank in that country on any deposits made by it.
4. Advance Ruling
Being the MNCs are based upon the residence of the other countries, there is a major problem in the payment of tax or assessing the income for tax by the country in which they have their operation. The MNCs may not know about the manner in which the country is going to have its interpretation about the calculation of tax and the provisions of income tax. Practically speaking, there is no provision and mechanism to understand about the above said problem and doubt in advance. To avoid this terrible problem, the facility of advance ruling exclusively for the MNCs has been introduced. Under this scheme, MNCs can make an application in the prescribed form to the authority for advance ruling, a committee located at Delhi comprising of the chairman, who is a retired judge of supreme court, an officer of Indian Revenue Service who is qualified to be a member of the Central Board of Direct Taxes and an officer of the Indian legal service who is qualified to be an additional secretary to the Government of India.
The applicant has to state the question on which the advance ruling is sought. The above mentioned authority can either allow or reject the application after the examining the application and other relevant records. The authority can give an opportunity to the applicant to be heard before rejecting the application and should give the reasons for the rejecting in the order.