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.

Taxation of Multinational Corporations

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.
  6. 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Tax Rates

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.

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