Panel wants tax parity for MNCs, local cos

MUMBAI: The working group on non-resident taxation, set up by the finance ministry and headed by the director-general of income-tax (international taxation), Vijay Mathur, has recommended parity in tax rate between Indian and foreign companies.
At present, foreign companies are taxed at a higher rate (40% plus surcharge) than Indian companies which are taxed at 35% (plus surcharge). Foreign companies’ here refer to foreign registered companies. Major foreign banks would come under this category.The prevailing disparity is founded on the premise that shareholders in India pay tax on dividends. The disparity should be eliminated if the Kelkar recommendation to eliminate dividend tax is implemented, the working group pointed out.
The working group, which was set up by the finance ministry to advise it on matters of taxation on non-residents, however maintained that even if dividend continues to be taxable, parity in tax rates between domestic and foreign companies should be introduced by introducing a ‘branch profit-distribution tax’ to act as an equaliser, according to the report.
Another important recommendation is the removal of the status of Not Ordinarily Resident (NOR), which allows the benefit of not being taxed in India on global income ( income earned outside India) to a person who has not been in India for 730 days or more in the last seven years. A person with NOR status is taxed only on the income generated by him in India.
The working group says that such a concession is against the principle of residence-based taxation. The group points out that NORs often escape taxation or get away with marginal tax payments in other countries where income is generated, taking advantage of the treaties signed between India and over 65 countries. Ergo, a person with NOR status is not paying tax at the full rate in either country, the group points out.
The group also seeks amendment to the definition of ‘business connection’ provided under section 9 of the I-T Act. This section is intended to tax non-residents on the basis of their business connections in India.
The group seeks to include persons acting on behalf of a non-resident in the tax net. Such persons are known as ‘Agency PE’ and India has incorporated this concept in many a tax treaty.
The meaning of business connection, the report says, should include a person acting on behalf of a non-resident who has the authority to conclude a contract on behalf of the non-resident. However, it could also include a person with no such authority, but who habitually maintains in India a stock of goods or merchandise on behalf of the non-resident or a person who habitually secures orders in India wholly or almost wholly for the non-resident.
Senior tax consultant T P Ostwal told ET, “the suggestion to include agency PE is a recommendation with wider implications. This needs to be studied thoroughly.�
The reports suggests that agency PE should not be established if the non-resident is carrying the business through a broker or general commission agent, provided that such a person is acting in the ordinary course of his business and is not acting exclusively for the NRI.
The group has also suggested extension of benefit of amortisation to foreign banks for that portion of VRS expenditure, which remain unabsorbed, following business restructuring.
In another recommendation, the group sought deduction of expenditure incurred while computing “fees for technical services,� in the case of a non-resident carrying out business in India through a PE. Such expenditure, wherever incurred, should be wholly and exclusively for the purpose of business. And such allowance should be allowed only if the accounts are in order. However, no deduction should be allowed in respect of amount paid or charged by PE to the head office or any of its other offices .
The group has made an important suggestion on withholding tax. Under the provisions of section 195 of the I-T Act, any sum payable to a non-resident and chargeable to tax requires tax withholding by the payer. The deductor or recipient can apply for NOC from the I-T department for making such payment. However, usually the NOCs are issued after long delays. To avoid this, the group suggests that 80% of the amount sought to be remitted be allowed provided the assessee submits a certificate from banks for withholding 20% of the balance amount.
Dinesh Kanabar, partner, RSM, told ET that “allowing remittance of 80% on withholding of 20% is a major step.�