Taxability of Income Earned by Foreign Companies Investing in India

TAXABILITY OF INCOME EARNED BY FOREIGN COMPANIES INVESTING IN INDIA

Any foreign company investing in India is required to file income tax return if it has earned, accrued or received any money in India. Foreign income refers to:

  1. Income received or deemed to be received in India.
  2. Income accrued or deemed to accrue in India.

The following income is deemed to accrue in India:

  1. Income which accrues directly or indirectly, through or from any business connection in India.
  2. Income which accrues through or from any property, asset or source of income in India.
  3. Income which accrues through the transfer of capital assets situated in India. If a tax treaty exists between India and the country of residence of the foreign company, one of the following will apply (whichever is more beneficial):
  4. The provisions of domestic law.
  5. The provisions of the tax treaty.

TRANSFER PRICING

Under the Taxation laws in India, “Transfer Pricing” refers to the pricing of international transactions between two associated enterprises. Due to the special relationship between the related parties, the transfer price may be different than the price that would have been agreed between unrelated parties. A price between unrelated parties is known as “arm’s length” price.

Transfer pricing regulations are applicable to all the enterprises that enter into an ‘International Transaction’ with an ‘Associate Enterprise’. Therefore, it generally applies to all the cross border transactions entered into between associated enterprises. The aim is to arrive at the comparable price as available to any unrelated party in open market conditions and is known as the Arm’s Length Price (ALP).

Section 92A of the Income Tax Act, 1961 defines ‘Associated Enterprise’ as an enterprise which:

  1. Participates directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
  2. In respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management, control, or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.The Central Board of Direct Taxes (CBDT) is empowered to get into business understanding pertaining to advance pricing for determining ‘arm’s –length’ price in accordance to business dealings done globally by an individual for a duration under the norms prescribed under the advance pricing arrangement, which should not exceed 5 years in continuation.Guidelines pertaining to transfer pricing in India, require no close contact between parties at domestic and international levels while executing business dealings in the country. Tax payer wanting to enter into any business dealing at the global and domestic level is required to provide the relevant documentation with a tax accountant’s report, including all the relevant details.Foreign investors doing business in India are provided with varied taxation incentives in the form of ‘taxation rebates, deductions, tax holiday’. These incentives are provided by the government with an objective to act as stimulus in the growth of the Indian economy.

TAXATION INCENTIVES PROVIDED TO ENTERPRISES IN THE FOLLOWING SECTORS

  1. Infrastructure Sector: Enterprises involved in infrastructure projects like roads, airports, railways, transport terminal have been excluded from the scope of taxable services of commercial or industrial construction service and works contract service. Enterprises engaged in such projects are entitled to a 100% rebate from profits and gains for the first 10 years, out of the 20-year time duration.
  2. Energy Sector: 100% tax holiday is provided to an enterprise engaged in the business of generation of power or generation and distribution of power. Tax holiday is also available to enterprises engaged in the business of transmission and distribution of power by laying a network of new transmission. Such enterprises are entitled to a 100% rebate from profits and gains for the first 10 years, out of the 15-year time duration.
  3. Incentives and facilities offered to foreign businesses located within a Special Economic Zone (SEZ) include duty free import and domestic procurement of goods for the manufacturing and assembly of its products within the SEZ; 100 percent Valued-Added Tax (VAT) rebates upon export of components sourced in India; and income tax exemptions (these vary dependent upon the business scope and location in India, but can be substantial).
  4. Enterprises conducting business activities in specific geographical regions, such as the North East region are entitled for the deduction of 100 percent of business profits for a period of 10 years for manufacturing, producing goods, or undergoing substantial expansion between <April 1, 2007> and <March 31, 2017> and providing eligible services between <April 1, 2007> and <March 31, 2017>.
  5. Enterprises carrying out business activities that are investment driven are front runners for obtaining tax deductions. The following tax exemptions are available in different sectors, and allow for deductions of 100 percent profits for:
    • The development, operation, and maintenance of an industrial park or SEZ.
    • Establishment and operations relating to inland container depots or container freight station in accordance with the notification issued by the Indian Customs Act.
    • Undertakings in certain notified areas or in certain thrust sector industries in the North-eastern states and Sikkim.
    • Undertakings set up in certain notified areas or in certain thrust sector industries in Uttaranchal and Himachal Pradesh.
    • The export of articles or software by undertakings in Free Trade Zones (FTZs), electronic and hardware technology parks, and software technology parks.
    • The export of articles or software by 100% export oriented units.
    • Undertakings engaged in the integrated business of handling, storing, and transporting food grains.
    • Undertakings engaged in the commercial production or refining of mineral oil.
    • Undertakings from the export of wood-based handicrafts.
    • Construction and maintenance of affordable housing under the affordable housing plan of the governments at the centre or state level.

INTELLECTUAL PROPERTY RIGHTS IN INDIA (IPRs)

Numerous developing countries recently have undertaken significant strengthening of their IPRs regimes in order to facilitate FDI. A strong IP regime would certainly include realistic protection to IPRs together with a robust mechanism for the enforcement of rights in case of infringement of the same. Intellectual Property assets account for more than one-third of the net value of multinational corporations globally, making protection of valuable Intellectual Property critical for many investing companies in India. In India the intellectual property like patents, trademark, copyright, design, geographical indications and plant varieties, have been provided legal protection. India does not provide specific protection to trade secrets and also do not have a proper law for the data protection. India being an important signatory to the Agreement on Trade-Related aspects of Intellectual Property Rights (TRIPS), which being an international agreement prescribes minimal guidelines for the enforcing and safeguarding IPRs in nations that are World Trade Organisation (WTO) members.

IMPACT OF GOODS AND SERVICES TAX ON FDI IN INDIA

Goods and Services Tax (GST): To bring about uniformity in the prevailing taxation structure in the country, the Indian government introduced the GST. Under the GST regime, all the prevailing taxes have been clubbed under one umbrella to introduce one single tax on the supply of goods and services, right from the manufacturer to the consumer throughout the whole nation.

The GST opens up more opportunities for doing business in India, as the business environment will be enhanced in the following aspects:

  1. Removing cascading tax effect.
  2. Higher threshold for registration.
  3. Online procedure for GST.
  4. Lesser compliances.
  5. Increased efficiency in logistics.
  6. Regulating the unorganised sector.

GST implementation is a significant tax-reform in relation to Foreign Direct Investments in India. Increased tax compliance will ensure reduced litigations and increased investor confidence. In a growing economy like India, GST will provide the required leverage to international trade and FDI, which will result in the economic growth of the country. GST, is a destination based tax, which will make the business easier for multinational corporations in India. The country will finally become one common market, with uniform pricing across states and optimal allocation of resources making goods more competitive. Stable and a transparent tax regime will encourage local and foreign investment in India creating significant job opportunities.

Content Source – India Law Offices

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