Imports without agent
Imports without representation in India (in the
form of an agent, employee or salesperson, branch sales subsidiary,
etc.) do not normally subject the foreign exporter to Indian income
tax if the sale is concluded in India, a part of the profits
attributable to the sale is subject to Indian tax. If the sale
proceeds are received in India, the profit embedded in the receipts
liable to Indian tax. However, treaties restrict tax to profits
attributable to a permanent establishment.
Unrelated agent, sole agent, employee /
salesperson, branch
If the foreign company has an agent in India, the
part of the profit attributable to the activities of the agent is
liable to tax if a business connection is established. "Business
connection" is an involved legal concept that postulates business
activities in India through or in connection with which the
nonresident earns profits, and each case is determined on its fact.
Agents or salespersons with authority to conclude contracts will
amount to a business connection. However, an unrelated Indian
canvasser who cannot bind the principal may no lead to a tax exposure
if the terms are carefully stipulated. Employees, sales persons and
branches are extensions of the foreign company and are subject to tax
on profits attributable to their activities.
Sales subsidiary
A subsidiary is not per se an agent or permanent
establishment; and if it purchases at arm's length from its foreign
parent company for resale in India, the tax implications to the
foreign company be the same as outlined above under "Import
without agent." However, a subsidiary may, if its activities
result in a business connection or if the a treaty situation it is a
dependent agent or a permanent establishment, expose the foreign
company to tax.
Under treaties, a branch of a foreign company is
a permanent establishment and the profits attributable to the branch
are subject to tax determined as if the branch were an independent
enterprise engaged in the same or similar activities under the same
or similar conditions. Branches of foreign companies of nontreaty
countries are taxed on income that is received in India or that
arises or is deemed to arise in India. If both the manufacture and
sale are in India, the entire profits is taxed in India. When goods
manufactured abroad are sold in India, only the pat of the profit
attributable to the selling activity is taxed in India, unless in a
nontreaty situation the sale proceeds are received in India. However,
no income is deemed to accrue or arise in India from operations
confined to the purchase of goods in India for the purpose of export.
For computing taxable income, the rules relating to deductibility of
expenses are the same as those applying to resident companies. There
is a limit on deduction of the general administrative expenses of the
foreign head office, as indicated under "Intercompany
charges". However, this is overridden by some (but not all)
treaties.
Except in special cases, a foreign company may
general have a liaison office or a project office. The taxable income
of such a project office may be determined on the same basis as above
unless it does not constitute a permanent establishment under a
treaty.
In certain cases, taxable profits are determined
at a specified percentage of receipts unless treaty provisions
override.
Transfer of branch profits
A branch of a foreign company is liable to
corporate tax at the rate applicable to a foreign company and is not
liable to any additional branch tax or withholding tax upon
remittance of profits to the head office.
Dividends
Tax is withheld at 20 percent or a lower treaty
rate (see Appendix IV) from dividends paid to foreign companies.
Interest
Certain interest is exempt from tax. Tax is
withheld at 20 percent from other interest paid to foreign companies
if the borrowing or debts incurred are in foreign currency. A lower
treaty rate may prevail.
Royalties and fees for technical services.
Tax is withheld from royalties and fees for
technical services paid to foreign companies by Indian concerns
(under post-March 31, 1976 agreements that are either approved by
Indian government or in accordance with declared industrial policy)
at 30 percent on the gross amount or a lower treaty rate (see
Appendix IV). Some treaties exempt fees for technical services
rendered abroad or specifically provide for deduction of expenses.
Capital gains
Gains on transfer of assets situated in India
(including shares in Indian companies) are subject to tax in India
at 55 percent in the case of short term capital gains and at 20
percent in the case of long-term capital gains.
Management fees
Management fees are rate and generally not
permitted except in special cases. They normally stand on the same
footing as fees for technical services.
Rentals
Rental of equipment is treated on the same
basis as royalties in many treaties. Otherwise, tax may be withheld
from rentals at 55 percent of the net income. Ten percent of the
rental earned by nonresidents from supplying plant and machinery on
hire that is used or to be used in the prospecting for or extraction
or production of mineral oil is treated as taxable profit and
subject to withholding tax at 55 percent.
Dividends, interest, royalties, and capital
gains earned as portfolio income are treated in the same manner as
income received from Indian subsidiaries. A reduced treaty rate is
often prescribed for dividends where the foreign company hold more
than a specified percentage of shares in the Indian company (see
Appendix IV). Concessional tax rates apply for foreign
institutional investors. The provisions for computation of capital
gains in foreign currency and indexation of capital gains as
applicable to other taxable entities are not applicable in the case
of foreign institutional investors.
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International financial
center
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It is not common for nonresident corporation
to locate center in India to conduct a headquarters-type operation
on a worldwide basis. Although not prohibited, it may be difficult
due to exchange controls. No special tax concessional are
available.
General Section
