The Central Board of Direct Taxes (CBDT) will issue detailed guidelines to ensure that non-resident companies holding a board meeting or two in India do not get any tax demands on their global income on account of New Delhi’s new wider definition of a resident company.

Sources said the new definition of tax residence introduced in Finance Bill 2015 was primarily aimed at preventing companies incorporated in India from escaping taxes on their worldwide income by holding one or two board meetings abroad and claim non-resident status.

Such escape from tax domicile status was possible because the existing definition of a resident company required its control and management to be wholly in India ‘throughout’ the financial year.

The Finance Bill brought within the definition of tax residence any company, the ‘place of effective management’ of which was in India at any time of the relevant financial year. Such place of effective management includes a place from where the key management and commercial decisions necessary for running the company are, in substance, made. This raised fears that non-resident multinational companies that wish to hold a board meeting here to showcase the country’s business potential to its stakeholders might come under India’s definition of a tax resident.

If that happens, the global income of such company would become taxable here.

Unlike countries like the US, India levies tax on the worldwide income of only resident companies. If non-resident companies have operations in India, they need to pay tax only on income from such local operations, not from their worldwide operations. If the Indian operations of a non-resident is organised in the form of a subsidiary company, the subsidiary is treated as a resident but not the parent.

A person privy to discussions in the finance ministry said that the proposed clarification will make it clear to all field officers of the Income-Tax Department that the amendments to Section 6 of the Income Tax Act were not aimed at taxing the global income of non-resident companies for the sole reason that a few board meetings are held here.

“The CBDT will issue detailed guidelines so that there is no arbitrary exercise of power and it becomes transparent as to what constitutes effective management. So far as a foreign company that has no business in India is concerned, it cannot be taxed in India just because a board meeting is held here,” said the person, adding the new definition was internationally accepted.

“The expected guidelines will provide the much-needed clarity, soothe the nerves of foreign investors and help avoid a narrow interpretation being used by the tax officers against the spirit of the lawmakers,” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.