The Central Board of Direct Taxes (CBDT) has issued a draft notification detailing the computation process for various parameters involved in arriving at the tax liability of a foreign company, in case the company qualifies to becomes a resident in India for the first time under the rules of Place of Effective Management (PoEM). Despite becoming a resident of India, the foreign company will continue to be treated as a foreign entity in the first year of the residency. This means that the tax rate in case of foreign company, which is 40%, will continue to ensure no revenue is lost. “The circular has dealt in details with the issues that a foreign company is likely to face in its first year of constituting a resident in India owing to its PoEM being in India,” Rakesh Nangia, managing partner, Nangia & Co, said. The notification details the methodology for arriving at total income, unabsorbed depreciation, set off or carry forward and set off of losses, collection and recovery and special provisions relating to avoidance of tax for such foreign entities.“CBDT has ensured that the computation provisions are in place to give a meaningful implementation to the provisions of PoEM, which will also help in avoiding unwarranted litigation on these issues,” Nangia added.
For instance, the tax record of such a company filed in its country of residence will be taken as the basis for arriving at the written down value (WDV) of the depreciable assets. However, if the company is not assessed to tax by the jurisdiction of its residence, the WDV will be the same as that in the company’s books.