The government is toying with the idea of lowering the tax rate of foreign companies to bring them on par with India Inc in the forthcoming Budget, in a bid to project India as an attractive investment destination and low-tax regime.
Since, the government is looking at bringing down tax rates for Indian companies, there is a case to bring them down for foreign companies as well, a source told ET. The foreign companies having branch offices or representative offices face a tax rate of 40%, besides 2.5% surcharge and 2% education cess, which makes the effective rate 41.8%.
For Indian companies, the effective tax rate works out to 33.66%, with corporate tax rate of 30%, surcharge 10% and cess 2%. A subsidiary of foreign company attracts rate applicable for Indian companies.
If the dividend distribution tax or corporate tax for domestic companies is reduced, then in that case, similar reduction should be made in the tax rate for foreign companies to maintain parity between the two, KPMG director Vikas Vasal said.
With infrastructure weighing heavy on its agenda, the government wants to woo foreign expertise into the sector. Since, some foreign companies work on a project basis, they prefer setting only representative office for that duration. Having a low tax regime could bring in not just investments, but also technical expertise. The funding requirement for infrastructure over next five years is pegged at $350 billion.
A large number of foreign investors may look at India only for medium-term basis. They would prefer to keep a full control over the project and not like to float a subsidiary since it involves various other costs, an official with a multinational company said.
Prime Minister Manmohan Singh and finance minister P Chidambaram have hinted at moderation in tax rates.