In our today's times, one sees several businesses where foreign companies have made their presence felt and done some great business in India for a very long; and also some of the so-called 'sunrise sectors' where constantly the foreign or multinational companies are trying to catch up. Thus, it has an increasing amount of business interest fuelled by Administration's efforts to make India a great business place. However, amid all this Euphoria, has remained constant over a long time a perception that Indian taxes are highly complex - courtesy to several factors and developments. Therefore, emerges a very commonly asked question by the foreign businesses - What are the Tax Things that we have to be mindful of in India?
Indian tax regime is a wide spectrum of several Direct and Indirect tax laws - governed by the different arms of Indian Federation i.e. the Union and the States. Thus, on one hand we see direct taxes such as Income tax and wealth tax levied and administered by the Centre/ Union, there are indirect taxes such as excise laws, customs and services tax which are again Centre/ Union levies. The Indian states levy taxes such as Vat or sales tax, professional tax and municipal taxes etc - which comes in their domain. Thus, the state levied taxes differ from state to state depending upon its policies. These taxes impact any and all foreign and /or indigenous business in several of the ways.
The taxes have their inherent pay out costs - which could be very high at times; and also its compliances - which could be quite cumbersome to deal with. Like it happens everywhere, the taxes remain dynamic and they do change - sometimes for good, sometimes for not, depending on several factors. Thus, taxes cause business: a) a cost - in the form of payout to respective Governments, b) comply with statutory procedures and requirements and c) also make businesses fight disputes whenever emerges with the regulators. Not to mention, it also makes business predict the future and remain prepared to deal with the changes in taxes.
Talking specifically about the Indian Income tax, a foreign business, which has a presence in India but not in the form of an Indian incorporated company or firm or otherwise, would be subject to tax at 40% in respect of its Indian operations. However, if the foreign company incorporates a company or a firm in India and has effective management in India, then such Indian operations are subject to tax alike any other Indian company or firm - typically at tax rate of 30%. Closure of such companies or firms or any other business formed in India and winding up of operations would obviously involve procedures. However, having a business presence / permanent establishment in India or working in a globally prevalent model of 'consortium' would continue to have the tax exposure applicable to foreign businesses in India. There are several forms in which a foreign business can set up its base in India. Also, for businesses set up in prescribed sectors such as software, oil and gas, dredging etc, or for businesses set up in Indian backward states, tax exception are provided.
Talking about the tax impact involved in payments to overseas and also repatriation of capital, then declaration and payment of dividends in India would involve an additional cost of 20% dividends distribution tax. Payment to overseas in form of royalty and fees for technical services, interest etc would be subject to tax withholding in India. If the PAN is obtained, then the beneficial rate of tax treaty, if any prescribed, can be availed. India has signed tax treaties with several of the countries and it grants benefits such as capital gains tax exemption, restricted definition of royalty and fees for technical services etc under various treaties such as Mauritius, Cyprus, Singapore and others. Transactions between two associated parties would also need to be at arm's length from transfer pricing perspective.
The employees deputed /seconded by the foreign company to its Indian business remain subject to tax in their individual capacity. Thy would have to bear the tax cost and also copy with tax filing and other prescribed requirements. Such individuals would also be eligible for tax treaty benefits if applicable.
The Indian indirect taxes such as exise - relevant for manufacturers and service tax - applicable on service providers (typically at 14% rate) comes to play in each and all business transactions performed by any enterprise. Sometimes, when the services are obtained from overseas service providers, the recipient has to discharge service tax on the same under a reverse charge mechanism. Customs, of course, is applicable at the time of import of goods into India. The Indian indirect tax laws follow a Harmonised System of Nomenclature or the HSN system of classification of goods which is as per the internationally accepted standards of classification of goods for excise or customs purposes, however classification of goods and services in various of the prescribed categories remain a matter of dispute - no different than rest of the world. There are some exemptions granted to specified businesses and business transactions under the Indian Indirect tax laws. The indirect taxes have its own prescribed rules for tax filings and other procedures etc
Talking about the state taxes, mostly it is Vat and/or octroi, entry tax and some municipal taxes - whose impact is mostly felt in the movement of goods from one Indian state to another or while selling goods. There could be professional tax etc levied on hiring of employees in few of the states. The state levied taxes have their own set of administration, filing requirements and other prescribed procedures. Indirect taxes, as per their basic nature can be passed on to the ultimate consumer.
As we have seen, right from the basic decision of whether and in what for me to perform business to performance of business procedures and even later thereon, taxes do make a significant impact - sometimes as grave as Vodafone's tax situation in India. Even in big decisions involving stake sale, mergers, acquisition etc, tax impact could be huge.
Thus, taxes requires a serious and effective consideration and ought to work in consonance with the business and legal teams to define the basic and ever changing strategies of any business. Since the stakes could be high and managers might have to face serious charges from the tax administrators, one has to constantly assess the tax risk/ position proactively and do necessary forecasting in here.
Indian taxes could be uncertain, sometimes work in an irregular way or subject to dispute /litigation. Thus, a call / position would have its inherent risk and would have to pass the test of time. Thus, comes the need of outside experts to help with the proper advices.
Thus, when any business is trying to find out an answer to the question of what are the tax things one has to be mindful of, it ultimately need to alleviate it's tax function to work proactively with business and legal teams, where it's 'tax things' could be assessed well every single time and it makes an informed decision always.
