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India notifies rules for income tax computation for foreign firms
June, 28th 2018

The government has notified rules for computation of income tax for foreign companies if they have place of effective management in the country. According to tax experts, it brings clarity on various aspects of the new place of effective management (POEM) regime.

Central Board of Direct Taxes (CBDT) has notified a mechanism for calculation of written-down value, and computation of brought-forward loss and unabsorbed depreciation.

It has said a company would continue to be treated as a foreign company even after it becomes resident in India.

"The notification has provided clarity to the foreign companies which shall be considered as a resident in India owing to its POEM being in India,” said Rakesh Nangia, managing partner at tax consultancyNSE 0.00 % Nangia Advisors LLP. “It provides guidance in case any conflict arises in the application of provisions of the Act to such foreign company qualifying as a resident company vis-à-vis a domestic resident company,” he said.

But there could be some challenges for companies, experts said.

"These are procedural guidelines, applicable to a foreign company where POEM is established in India,” said Vikas Vasal, national leader – tax at professional service firm Grant Thornton in India. “Companies need to take cognisance of the same as some of the aspects like applicability of withholding tax provisions, as specified, may pose some practical challenges,” he said.

In 2015, the FinanceNSE -0.92 % Act amended Section 6(3) of the Act to provide that a foreign company would be considered to be a tax resident of India if its POEM was found to be situated in India (the ‘POEM Test’). When introduced, the POEM Test was slated to come into effect from April 1, 2015. However, because the draft guidelines were released a mere three months before the end of 2015-16, it left taxpayers with very little time to set their affairs in order. The Finance Act, 2016 therefore deferred its entry into force by a year to April 1, 2016.

But, Section 115JH of the Act, which provides the special provisions applicable to foreign company said to be resident in India, required the government to provide the condition for computation of total income of such foreign company considered as resident in accordance with POEM.

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