In what is potentially seen as having far-reaching implications, the new direct tax code seeks to revamp the tax regime for non-residents doing business in India. The code’s thrust on clarity, certainty and an effective dispute resolution is quite salutary and should go a long way in boosting India’s image as a friendly investment destination.
However, there are many areas which would be of great concern to foreign investors, and this article seeks to highlight some of them.
Tax residency
Taxability of a foreign company is linked directly to its tax residence. A non-resident foreign company is taxed only in respect of income from Indian sources. On the other hand, if a foreign company is regarded as an Indian resident, it would be taxable on its worldwide income, as against merely on income from Indian sources.
Under the current regime, a foreign company is regarded as a resident only if the control and management of its affairs is situated wholly in India.
Also Read Ketan Dalal’s earlier columns
The code proposes that even when the place of control and management of a foreign company is partly situated in India, the foreign company will be regarded as an Indian resident. The place of control and management has not been defined under the code.
Illustration: Jayachandran / Mint
What is not clear is the rationale for this change.
However, the way this is worded, it could hit even operating companies abroad. Further, partial control does not have any threshold. For example, is 40% holding partial control? Even if there is a low shareholding, will not the tax department seek to contend that there will be some management and control from India?
Further, although that does not seem to be the intent, what about India being the regional headquarters of a foreign multinational? Will those companies within, so to speak, an Indian oversight role, be deemed to be residents in India? Clearly, this seems to be very sweeping and needs a relook, especially considering the consequences of being an Indian resident, that is, global income taxation.
In case of expatriate individuals, the code proposes to eliminate the not ordinarily resident (NOR) status. Thus, an expatriate would be regarded as an ordinary resident if his stay in India exceeds 183 days in a financial year. However, the code does protect his overseas income from Indian taxation for a limited period of two years. This was earlier available for a period of at least three years under the resident but not ordinarily resident (RNOR) status.
There will be various issues arising out of this, including the interplay with the tie-breaker clause of residents under tax treaties and in any case, this seems to be too harsh since it will have the implication of exposing the global income of expatriates to Indian tax.
Also, the global mobility of Indian managers to international posting in most cases does not attract such treatment in those countries. Should not India look at this aspect?
Treaty applicability