Foreign firms with no India set-up exempt from minimum tax

Ahead of Prime Minister Narendra Modi’s meeting with US investors, India on Thursday gave a major tax concession to foreign companies that don’t have a permanent set-up in India but operate out of countries with which New Delhi has double tax avoidance treaties.

Technically, the ministry of finance has decided to amend the Income Tax Act, 1961, with effect from April 1, 2001, in a manner that provisions of Section 115JB shall not apply to a foreign company if it is a resident of a country having a tax treaty with India.

In cases where the country of domicile of the foreign company does not have a tax accord with India, this exemption shall not apply, provided the Companies Act, 2013, exempts it from having a registered office in India.

In both cases, the foreign companies also should not have a permanent establishment in India.

The amendment is important in terms of minimum alternate tax called for by the Income Tax Act, which seeks to bring under the tax net companies that declare substantial profits in books but show their taxable incomes below what is otherwise due.

Earlier, a similar concession was extended to foreign funds from April 1 this year.

“An appropriate amendment to the Income Tax Act in this regard will be carried out. Earlier, issues relating to taxation of foreign companies, having no permanent establishment in India, have been under consideration of the government,” an official statement said on Thursday.

“The government has now considered the issue of applicability of minimum alternate tax under Section 115JB of the Income Tax Act to foreign companies having no place of business or permanent establishment in India,” the statement added.

The concession to the foreign funds was extended based on the recommendations of the A.P. Shah Committee. The government has extended the same to foreign companies as well.

The move comes just ahead of Modi’s business meetings during his ongoing visit to the US. He is set to push for some of his pet projects involving domestic and foreign investors, such as “Make in India”, “Digital India”, “Skill India” and “Start-up India”.

Last week, just before leaving for Singapore and Hong Kong, Finance Minister Arun Jaitley declared that all tax disputes will be put to rest over the next few days, and that this was a “work in progress” along with steps to make it easier to do business in India.

“Since May 2014, a number of tax disputes have been put to rest,” the finance minister said and added: “We are trying over the next few days itself (to look at pending disputes) so that many others can be put to sleep — either by a judicial resolution or some executive resolution.”

The global investors have been concerned over the provisions of the Income Tax Act, especially on minimum alternate tax, since they had to compute their income tax liabilities based on two sets of provisions — under normal circumstances and under Section 115JB.

A tax liability was raised even if they merely had a representative office in India.