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.
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Direct and Indirect Taxes

Taxes are classified as direct tax and indirect tax. But the meaning of these two types of taxes is not clear. For a long time economists interpreted these two types in different ways. For instance, one group of economists considered taxes on production as direct taxes and those on consumption as indirect taxes. J.S. Mill distinguished these two types of taxes in terms of the ability to shift the tax. Any person on whom the tax is imposed, if he himself pays the tax, it is called direct tax and if he is able to shift the tax to somebody who ultimately pays it then it is called indirect tax. For example, income tax is paid by a person as it is levied on the income earned by him, so it is a direct tax. On the other hand the sales tax imposed on the seller is shifted to the buyer. Now-a-days the distinction between direct and indirect taxes is explained with reference to the basis of assessments and not on the point of assessment. Hence, taxes assessed on the basis of income are called direct taxes and those assessed on the basis of expenditure are called indirect taxes. However, even this classification is not free from difficulties. For instance, when one man’s income is treated as another man’s expenditure, tax on one man’s income may become the tax on another man’s expenditure. Hence, till date there has been no satisfactory distinction between direct and indirect taxes. However, in practice this distinction is retained more for the purpose of grouping the different taxes.… 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

Minimum Alternative Tax (MAT) and Computation of Book Profits

Provisions of MAT for payment of tax by certain companies (Section 115JB]

Tax payable for any assessment year cannot he less than 15% of book profit: Where in the case of a company, the income-tax payable on the total income as computed under the Income-tax Act, is less than15% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income (book profit) shall be the amount of the income-tax at the rate of 15%.

Allowing tax credit in respect of tax paid on deemed income under MAT provisions against tax liability in subsequent years (Section 115JAA]

Where any amount of tax is paid under section 115J B (1) of Income Tax Act by a company for any assessment year beginning on or after 1-4-2006, credit in respect of the taxes so paid for such assessment year shall be allowed on the difference of the tax paid under section 115J8 of Income Tax Act and the amount of tax payable by the company on its total income computed in accordance with the other provisions of the Act.

The amount of tax credit so determined shall be allowed to be carried forward and set off in a year when the tax becomes payable on the total income computed under the regular provisions. However, no carry forward shall be allowed beyond the seventh assessment year immediately succeeding the assessment year in which the tax credit becomes allowable.… Read the rest

Nature and Evaluation of Service Tax

Nature of service tax

As per section 65 (95) of finance act , 1994  ,’sevice tax ‘ means tax leviable under the provision. Section 66 of Finance Act, 1994 is the charing section  of service tax. Section 66 provides that there shall be levied a tax (service tax) @12% of the value of taxable service referred to in various clauses of section 65(105).It will be collected in a manner as may be prescribed. Though the tariff rate is 12%, the effective rate is 10% w.e.f 24-2-2009.Thus; total service tax payable is 10.30%w.e.f.24-2-2009.

In respect of each type of  service , it is necessary to determine two things namely

(a) Taxable Service and

(b) Value of taxable service.

Taxable Service – As per section 66 of Finance Act, 1994, service tax is payable on taxable service. Service 65(105) of Finance Act 1994 defines what “taxable service” is. The definition is different for each class of service, e.g. in case of stock broker, any service provided by stock broker to investor in connection with sale or purchase of securities listed on a recognized stock exchange will be “taxable service”.

Service tax can be collected by  service provider from service recever – Service tax  is on indirect tax. Though liability is on provider, the tax can be collected by him from service receiver.

Excise  and service tax are independent taxes– Though excise and  service tax are administered by same department ,both are independent taxes. Payment of excise is not same thing as paying service tax .… Read the rest

Features of Service Tax

The salient features of levy of service tax are:

1.  Scope: It is leviable on taxable services ‘provided’ or ‘to  be provided’ by  a service provider. The services ‘to be provided’ in future are taxed only if payment in its respect is received in advance.

Two separate persons required  Payment to employees not covered: For  charge of service  tax, it is necessary that the service provider and service recipient should be two separate persons acting  on ‘principal to principal basis’. Services provided by an employee to his employer are not covered service tax and, therefore, salaries or allowances paid to them cannot be charged to service tax.

2.  Rate: It is leviable @ 12% of the value of taxable services. Education Cess @ 2% and Secondary and  Higher Education Cess @ 1 % are chargeable on the amount of service tax, thus, making the effective  rate of service tax at 12.36% of the value of taxable service.

3.  Taxable services: Service tax is leviable only on the taxable services. Taxable services mean the  services  taxable under section 65(105) of the  Finance Act, 1994.

4.  Value: For the levy of the service tax, the value shall be computed in accordance with section 67 read  with Service Tax (Determination of Value) Rules, 2006.

5.  Free services not taxable : No service tax is leviable upon the services provided free of cost.

6.  Payment of service tax : The person providing the service (i.e. the service provider) has to pay  service tax in such manner and within such period as is prescribed in the Service Tax Rules, 1994.… Read the rest