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Govt mulls tighter international tax norms
February, 14th 2011

The government is considering tightening taxation norms for Indian companies having intermediary holding entities in overseas locations, as part of its efforts to increase its tax revenues.

"With very limited scope left on domestic front to widen tax collection due to inflationary pressure, the Finance Ministry is looking at ways to mop up additional revenues from international taxation front," a source told.

A proposal to this effect is expected to be announced by the Finance Minister Pranab Mukherjee in the annual Union Budget to be presented on February 28, sources said.

The government may propose strict norms for disclosure by Indian companies and individuals to tax department about investments and interests in overseas entities, especially those with a holding company structure.

The income from these investments and interests would be taxed accordingly, they added.

The government is as such not in favour of increasing the tax burden on individuals due to inflation.

Similarly there is unlikely to be any increase in corporate taxes on domestic businesses as high input expenses and increased borrowing costs are adversely affecting the companies' profitability.

Besides, a larger overhaul of tax structure is already lined up through the Direct Taxes Code, which is expected to come into effect from April 2012.

However, sources said, some of the DTC proposals related to international taxation could be advanced to the fiscal beginning April this year and an announcement to this effect could be made in the Union Budget.

As per one of such proposals, a foreign company based in a country with lower tax rate, and where one or more Indian residents hold management control, would be treated as a Controlled Foreign Company (CFC) and taxed accordingly in India.

This provision can be advanced in the Budget, sources added.

Consultancy major Deloitte said that the new CFC regime might work against Indian companies with operations abroad, as their competitiveness would be hurt.

"If you prevent Indian companies from becoming global, then their ability to compete with foreigners will be much less," Deloitte India Tax Partner-Outbound Services Vipul Jhaveri said.

The DTC seeks to replace the five-decades-old Income Tax Act, 1961, and will come into effect from April 1, 2012, one year later than promised earlier.

The DTC was introduced in Lok Sabha on August 30, 2010.

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