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Higher rate of tax on foreign companies
October, 10th 2006
The various tax treaties which India has made with a large number of countries invariably contain a provision of non-discrimination against foreign enterprises. The non-discrimination clause in effect provides that a foreign enterprise in India will not be subjected to any taxation which is more burdensome than the taxation to which Indian enterprises are subjected to under similar conditions. The aforesaid non-discrimination clause is on the lines of an article contained in the UN Model of tax treaties, which reads as under: Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nations of that other State in the same circumstances are or may be subjected. This provision shall, notwithstanding the provisions of article 1, also apply to persons who are not residents of one or both of the Contracting States. Despite the above internationally accepted position it is surprising that Explanation to Section 90 of the Income-tax Act provides that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge of levy of tax in respect of such foreign company. The true effect of the aforesaid explanation is that a higher rate of tax can be imposed on a foreign company in India compared to the tax chargeable from an Indian company. It has been pointed out in these columns earlier also that the aforesaid explanation to Section 90 will have a far reaching implication on foreign companies operating in India because by operation of law a higher rate of tax will not be regarded as a discrimination against the foreign companies. A recent case of Chohung Bank vs Deputy Director of Income-tax (2006) 102 ITD 45 is a glaring example of the above mentioned provision of law. In the said case, a banking company based in Korea had a branch in India. The said branch (called assessee-company) was involved in normal banking activities including financing of foreign trade and foreign exchange transactions. The assessee claimed that the tax rate as applicable to Indian companies carrying on similar business should be applied in its case instead of the tax rate applicable to non-resident companies and in this regard relied upon article 26 of the Agreement for Avoidance of Double Taxation between India and Korea. Accordingly, the foreign banks income was taxed at the rate of 48% instead of at the rate applicable to a domestic company i.e. 35% as claimed by the assessee company. The ITAT Mumbai after considering Section 90 of the Income-tax Act and the non-discrimination clause in the Tax Treaty with Korea, ultimately held that the provision of non-discrimination has nothing to do with the rate of tax. The tribunal further observed that a tax treaty does not prevail over the Finance Act; hence, over the tax rates. The tribunal took all the pains to justify their decision that if a foreign company is made to pay tax at higher rate as compared to a domestic company, this does not amount to any less favourable discrimination against the foreign company. This may be a brilliant argument, but is certainly devoid of justice. If foreign enterprises are discriminated against by imposing higher rate of tax, it is certainly a question mark on India's commitment to the tax treaties made with other sovereign States. H P Aggarwal
 
 
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