Several foreign companies are involved in varied types of operations in India, from manufacturing to trading to services. Most companies choose to set up a domestic Indian presence (held by the overseas company) rather than setting up a “foreign company” presence in India (via branch office or project office).
For a domestic company, the tax rates are usually upwards of 30% (i.e. a base rate of 30% applied to the profits, plus a surcharge and cess). For a foreign company, this rate is usually upwards of 40% (base rate of 40% plus surcharge and cess.)
If the income that a foreign company receives is received as fees for rendering technical services after due approval of the Central Government, then the tax rate of 50% is applicable.
The Income Tax Act provides for calculation of taxable profit with a method different from book profit. However if the tax on taxable profit is lower than 18.5% of book profit, the minimum alternate tax (MAT) of 18.5% on book profit is payable. There are certain exceptions to this rule for sectors such as power that the Government may want to encourage. Further this applies only to business income and not to gains from sale of securities, interest income, etc. MAT is also not applicable if the assessee is from one of the countries which has an agreement with the Indian government for avoidance of double taxation.
India has double taxation avoidance agreements (DTAA) with most countries in the world. These agreements define various points such as tax residency, calculation of taxes on various kinds of income, the permissibility of double taxation relief, etc. It is extremely important for foreign companies to consider how this impacts them.
Additionally, transfer pricing regulations (under the Income Tax Act) also apply to foreign companies that have transactions with their group companies in India. These regulations ensure that there is no misreporting of profits in either tax jurisdiction. Again, as the scrutiny and summary assessments for transfer pricing are on the rise, it is critical to put the right pricing mechanisms in place.
India’s tax system is more complex and less intuitive than most jurisdictions globally. It is therefore important that foreign companies do not chart their India strategy without first consulting an independent international tax advisor in India.