Tax treatment of a foreign company in India

on

 21. Explain the tax treatment of a foreign company in India.

A foreign company in India is taxed only on income that is received, accrued, or arises (or is deemed to arise) within India. Its base corporate tax rate is 35%, which can escalate to approximately 36% to 43% after applicable surcharges and health and education cesses. [1, 2, 3]



1. Corporate Income Tax Rates [4]
For business profits attributable to an Indian branch or Permanent Establishment (PE), the foreign company is subject to the standard corporate tax rate of 35%.
  • Surcharge: 2% for income between ₹1 crore and ₹10 crore; 5% for income exceeding ₹10 crore.
  • Cess: 4% Health and Education Cess is applied to the tax and surcharge. [8, 9, 10]
2. Special Income Tax Rates
Certain streams of passive or specialized income are taxed at concessional, flat rates (gross basis) without allowing typical business deductions:


  • Royalties & Fees for Technical Services (FTS): 20% (plus applicable surcharge and cess).
  • Dividends: 20%.
  • Interest: Ranges between 5% and 20% based on the specific nature of the debt and approvals. [11, 12, 14]
3. Minimum Alternate Tax (MAT)
Foreign companies operating through a PE or branch in India are subject to Minimum Alternate Tax (MAT) if their standard tax liability is lower than 14% to 15% of their adjusted book profits. However, MAT does not apply if the foreign company's income is solely derived from specific shipping/infrastructure businesses or taxed under presumptive taxation schemes. [5, 8, 15, 16]


4. DTAA (Double Taxation Avoidance Agreements) [2]


Foreign companies can significantly reduce their Indian tax burden if they are residents of a country that has an active DTAA with India. Under a treaty, the tax rates on royalties, interest, and technical fees are often lowered (e.g., down to 10% - 15%) and business profits are only taxed if the foreign entity crosses the threshold of having a physical PE. To claim treaty benefits, companies must submit a Tax Residency Certificate (TRC) and Form 10F. [17, 18]


5. Compliance and Digital Levies
  • Equalization Levy: Foreign e-commerce operators and online advertisers are subject to a digital tax ranging from 2% to 6% on specific Indian transactions.
  • Withholding Tax (TDS): Indian payers are legally required to deduct taxes at source at the time of making payments to foreign entities.
  • Returns & Audits: Foreign companies making taxable supplies or having a PE are required to obtain a Permanent Account Number (PAN), maintain local books of accounts, and file annual income tax returns (typically via ITR-6). Transfers between the head office and Indian branch require strict transfer pricing documentation. [2, 8, 19, 20, 21]




Comments

Post a Comment