Stating that the efforts of Indian companies, which are investing overseas by setting up manufacturing and other facilities through joint ventures and subsidiaries need to be supported by removal of fiscal hurdles, industry chamber CII has outlined measures that the government can undertake in the Union Budget 2007-08.
With an increasing outflow of investment from India, CII has said that repatriation of income back home needs to be encouraged. There are no fiscal incentives available currently in relation to the inflow/repatriation of funds into India in convertible foreign exchange as the dividends received by an Indian company from a foreign company either its subsidiary or a joint venture are fully taxable.
CII has suggested that dividends received from such entities in convertible foreign exchange should be in line with the dividends received from any domestic company.
Section 90 (2) of the Income Tax Act provides that if the Indian government has entered into an agreement with the government of any other country under sub-section (1) for granting tax relief, or as the case may be, avoidance of double taxation is an option available to the assessee to apply either to the provisions of domestic law or the treaty law, whichever is more beneficial to him.
CII observed that despite this option, the domestic law does not have a provision to grant tax relief against double taxation and the assessees have no option but to apply to the provisions of treaty law. The chamber has suggested that relevant provisions be incorporated in the domestic law to provide a mechanism for allowing full tax credit in such cases.
CII further noted that there exists some inherent inefficiency in treaties entered into with some countries concerning credit for foreign taxes requiring governments attention. Certain major treaties, like the one with Canada and UK provide a restrictive tax credit. As a result, credit is allowed only as a proportion of the income taxed in the foreign country on the total income of the assessee.
While facilitating repatriation of income by domestic companies abroad, CII has also asked for overcoming the fiscal hurdles for inflow of FDI in the country. The chamber noted that foreign companies having income from royalty should also be excluded from filing returns in India, provided tax has been deducted at source just as is the case with dividend and interest income under Section 115A of the Income Tax Act.