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DTC may have overlooked the rationale
February, 22nd 2012

Corporation tax rate for foreign companies has been reduced from 40 per cent (plus surcharge & cess) to flat 30 per cent. If you thought draftsmen to the Direct Taxes Bill, 2010, (the code) had rationalised the tax rates for foreign companies, you should, maybe, continue reading this article.

While the basic corporate tax rates for Indian and foreign companies have been aligned, a new genre of tax, known as branch profit tax, is proposed to be imposed upon the latter. If the new legislation could see the dawn of day, foreign companies operating in India would be subjected to a 15 per cent tax, on their income attributable to Indian operations. And, this tax would be levied on profits, residual after payment of basic corporation tax rate of 30 per cent, taking the effective tax rate to 40.5 per cent.

The Working Group for Study of Non-Resident Taxation, which first proposed this tax in 2003, had aimed to remove discrimination between domestic and foreign companies. They proposed equalising the burden of dividend distribution tax (levied on Indian firms at the time of declaring dividends to shareholders) with branch profit taxes.
However, the legislators to the Code have implemented their recommendation, overlooking its basic rationale. In its present form, all branches of foreign companies are liable to branch profit tax, irrespective of whether or not profits are repatriated to home jurisdiction. And, discrimination continues to exist, as the base for computing this tax is to be computed, considering even indirectly attributed profits.

Stakeholders have repeatedly made representations before the finance ministry to clarify their stand on the anomaly and there is an urgent need for the ministry to dispel qualms of perplexed foreign investors. It also needs to clarify whether withholding tax provisions shall apply to this new tax and whether its credit shall be available to foreign companies in their home countries.

Kamal Abrol
Associate Director (Direct Tax), PwC India

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