A: Scope of Taxability on Non resident companies in India
In India, companies are taxed on their income according to their residential status. A company with residential status in India will be taxed on its global income whether earned in India or outside India whereas a non resident company will be taxed only on income received, accrued or arise in India.
As per Section 6(3), Residential Status and scope of total income, A company is said to be resident in India in any previous year, if
- It is an Indian company; or
- Its place of effective management,(P.O.E.M.) in that year, is in India. Place of effective management means a place where key management and commercial decisions, that are necessary for the conduct of the business of an entity as a whole are, in substance made.
However the provisions of place of effective management,(P.O.E.M.) are not applicable on companies with turnover upto INR 500 million in a financial year.
Hence the residential status of a company and its relevant taxability is as follows:
|Section||Type of company||Residential Status||Taxability|
|6(3)(i)||Indian company||Always resident in India||Tax on global income|
|6(3)(ii)||A Non resident company whose turnover exceeds INR 500 million||Will be deemed to be a Resident in India||Global Income attributable to the company will be taxed in India.|
|6(3)(ii)||A Non resident company whose turnover is upto INR 500 million||Always Non resident in India||Tax only on Income received, accrued or arise in India|
B: Taxation Rate
- Non resident or foreign companies are taxed at 40% of the total income
- Plus: An additional surcharge @2% of tax where total income exceeds INR 10 million but do not exceed INR 100 million or additional surcharge @5% of tax if total income exceeds INR 10 million
- Plus: Health & Education Cess: An additional cess of 4% of such tax and surcharge shall be added.
C: Minimum Alternate Tax
MAT provisions are not applicable to foreign companies that do not have a permanent establishment (PE) in India. However, the Finance Act, 2018 has provided that MAT provisions shall not apply to foreign companies where their total income is solely derived from shipping business, exploration of mineral oils, business of aircraft, civil construction in turnkey projects and income thereon is offered to tax as per specific provisions provided under the Act.
Capital gains from transfer of securities, interest, royalties, and fees for technical services accruing or arising to a foreign company (which has a PE in India) have been excluded from chargeability of MAT if tax payable on such income is less than 15% (exclusive of surcharge, education cess, etc.). Further, expenditure, if any, debited to the profit and loss account corresponding to such income shall be added back to the book profit for the purpose of computation of MAT.
|Income *||Indian company||Foreign company (other than exempted)|
|Rate of MAT (%)|
|Basic **||Including surcharge, health and education cess (effective tax rate)||Basic||Including surcharge, health and education cess (effective tax rate)|
|Less than INR 10 million||15||15.6||15||15.6|
|More than INR 10 million but less than INR 100 million||15||16.692||15||15.912|
|More than INR 100 million||15||17.472||15||16.38|
* Surcharge is payable only where total taxable income exceeds INR 10 million.
** Basic rate of MAT is 9% of book profits in case of a corporate and non-corporate taxpayer located in an international financial services centre and deriving income solely in convertible foreign exchange.
D: Taxability of Royalty and fees for technical services in hands of Foreign company
Royalty and fees for technical services are taxed differently than a flat rate of 40% .
Its taxability depends whether the foreign company has a Permanent establishment in India or performs professional services through a fixed place of profession situated in India
- If the foreign company has a P.E. or a fixed place of profession and the right, property or contract in respect of which royalties or fees for technical services are effectively connected with such P.E. or fixed place of profession then such income shall be taxed as per Section 44DA as per which income is taxed @40% (after deduction of expenses )(plus 2% or 5% surcharge) plus 4% education cess
- If foreign company does not have a P.E. or fixed place of profession then such income shall be taxed as per Section 115A taxed @10% (without any deduction of expenses )(plus 2% or 5% surcharge) plus 4% education cess
The author is part of team of M/s One Stop Consultants & Services L.L.P., which specializes in solving the problems faced by non resident investors in matters of accounts, taxation, cross border transactions etc. Determination of P.O.E.M. and taxability of foreign company is a complex exercise and a foreign company should seek professional assistance in determining it. The author can also be reached at [email protected]