Aiming for more overseas investments: Proposal to slash corp tax on foreign cos to 35% will motivate to set up permanent base

Finance minister Nirmala Sitharaman proposed reducing the tax rate for foreign companies to 35% from 40%, aiming to attract more overseas firms to set up a permanent base in the country and boost foreign inflows. "We want more investment to come into the country that is why it has been brought down," Sitharaman told reporters after the budget.

The government decision will benefit overseas companies looking to open branch offices such as branches of foreign banks and warehouses in India with a permanent establishment tag. It will also help those looking to open project offices for undertaking engineering, procurement, and construction (EPC) contracts.

"When the tax rate for domestic companies was cut, the gap between the two had further widened...so it had to be narrowed," said finance secretary T V Somanathan.


The tax cut along with the scrapping of taxation for foreign shipping companies operating cruises in India, and safe harbour rates for foreign mining companies selling raw diamonds is expected to further enhance the country’s attractiveness as a destination for foreign capital.

“It should also level the playing field between a foreign company looking to set up a branch office in India versus an Indian company to carry out Indian business operations,” Gouri Puri, partner, Shardul Amarchand Mangaldas & Co said, adding the current tax rate for foreign firms is disproportionately higher than those from India. However, large multinationals, which have full-fledged operations in India through a subsidiary structure, and which have their local arms registered with the Ministry of Corporate Affairs (MCA) are unlikely to have any impact, as their tax rate is at par with Indian companies.

"The increased adoption of safe harbour will reduce the burden on audit, assessment and controversy, and improve certainty to MNC taxpayers," said Sameer Gupta, national tax leader at EY India. Foreign companies with branch offices are currently taxed at 40% on ordinary income, higher than domestic firms, and with additional duties and cess, this could rise to as much as 44%.