For the purposes of income tax, a company is a commercial entity that is obliged to pay dividends to its shareholders out of its net profits each year. A domestic company is one that is registered with the Registrar of Companies and complies with the provisions of the Indian Companies Act, 2013. Any company that is not domestic is then considered a foreign company.
India is still considered one of the hottest destinations for Foreign Direct Investment with such inflows increasing by 18% to reach USD 46.4 billion in 2016 according to a Price Water House Coopers report of 2017. Where foreign exchange is concerned, the RBI gets involved to monitor whether the country has enough international currency to meet its trade obligations. The relevant rules under the Foreign Exchange Management Act, 1999.
Any entity whether domestic or foreign triggers a tax event in India if it accrues, earns or accepts any incomewithin the geographical boundaries of this country. These companies then need to file an annual tax return like any other commercial entity. The tax slabs as published by the CBDT are given below.
Income Tax Rates for Assessment Year 2018-19 (Fiscal Year 2017-18):
|Nature of Income||Tax Rate|
|Royalty received from Government or an Indian concern in pursuance of an agreement made with the Indian concern after March 31, 1961, but before April 1, 1976, or fees for rendering technical services in pursuance of an agreement made after February 29, 1964 but before April 1, 1976 and where such agreement has, in either case, been approved by the Central Government||50%|
|Any other income||40%|
- Surcharge on Income tax: To the tax calculated after applying the above tax rate is added a surcharge under the following scheme:
- For annual turnovers lying between INR 1 crore and INR 10 crores the surcharge is 2% of the tax computed previously.
- For annual turnovers exceeding INR 10 crore the surcharge is 5% of the tax computed previously.
For both of these classes, the total amount of tax after accommodating surcharge should not be more than the difference between the turnover and 1 crore and between the turnover and 10 crore respectively.
- Education Cess: To the amount computed in Step 1 is added an education cess at the rate of 2%
- Secondary and higher education cess: To the amount computed in Step 2 is added a secondary and higher education cess at the rate of 1%.
Some Common Taxable Triggers in Indian Law for Foreign Companies
- Sections 90, 90A and 91 of the Income Tax Act, cover the subjects of Double Taxation Avoidance Agreements with consenting countries. Those foreign entities claiming relief under these sections should also e-file their income tax returns either through a CA or at the income tax login portal.
- According to judicial precedent, even those companies that incur losses are obligated to file annual ITRs for the periods during which they operated in the expectation of profit within India.
- Section 115JG mandates that the Indian branch of a foreign bank which is turned into a subsidiary company becomes liable to income tax in India for that assessment year. Further, capital gains resulting from the conversion are to be considered as taxable income and depreciation, loss etc. can be offset according to rules set by the Reserve Bank.
- Where Indian companies receive dividends from equity through a foreign company, taxes shall be computed according to provisions set out in Section 115BBD.
- FII income is subject to taxation as per Section 196D.
- Royalties transferred to a foreign company outside India are subject to Section 44D and those for technical service charges and dividends to be distributed to them by Section 115A.
- Foreign entities engaged in critical infrastructure and construction projects are to pay only 10% of their fees according to Section 44BBB as income from business or profession.
- Failure to comply could result in interest chargeable at 1% of amount due or a fine of Rupees 5000 for failing to meet the due date for e-filing of ITRs. Concealment of income could attract as high as 300% the tax due.