Foreign companies operating in India could see a substantial increase in their tax liability in the country with the draft Direct Taxes Code seeking to tweak their definition. The code, unveiled by finance minister Pranab Mukherjee on Wednesday, proposes that a foreign company ?will be treated as a resident of India if, at any time in the financial year, the control and management of its affairs is situated wholly or partly in India?.
In contrast, the Income-Tax Act, 1961, deems foreign companies as residents only if the control and management of its affairs is wholly in India during a fiscal. In effect, the new definition, which is expected to come into effect from April 1, 2011, would regard any multinational company as a domestic one if any part of its management and control were to be in the country. So, for instance, if the board of directors of a foreign company meets in India even once during a year, it would be considered a resident company and its entire global income would be liable to corporate tax in India.
Additionally, it would also be expected to pay a dividend distribution tax in the country and would not be eligible for the benefits of any double-tax avoidance agreement signed with its country of origin. For non-resident foreign companies, the code seeks to levy a 25% corporate tax on income from Indian operations in addition to a 15% branch profits tax. The total tax liability of such companies would be much lower, at about 38% of their income from India.
?This definition is a paradigm shift. The burden will now be on the company to show that the control and management is not in India. More importantly, if a foreign company is held to be a resident of India, its tax exposure would significantly increase,? said Deloitte senior director SP Singh.
Ironically, contrary to the objectives of the Code to simplify tax laws and reduce disputes, the provision is also likely to expand the scope of litigation as it would be up to the assessing officer to decide if a foreign company is indeed a resident one. ?Unless, situations describing ?part management and control? in India are clarified, this could have significant implications for a foreign company?s operations in India,? said PricewaterhouseCoopers associate director Sandeep Ladda.