• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

T. C. A. Ramanujam

The Finance Bill, 2002 proposals on the taxation of foreign companies should offer them cheer, says T. C. A. Ramanujam

IN PARA 162 of his Budget speech, the Finance Minister, Mr Yashwant Sinha, observed: "There is disparity between the rates of corporation tax applicable to foreign companies and domestic companies. This disparity arose in the past partly due to certain levies like surcharge being applicable to domestic companies but not to foreign companies. To correct this, I propose to reduce the rate applicable to foreign companies from 48 per cent to 40 per cent per cent."

The Parathasarathy Shome committee had recommended abolition of the higher tax rate on foreign companies. The Raja Chelliah Committee had recommended a difference of not more than 10 per cent between domestic and foreign companies. That was nearly a decade back. But with global competition on the rise, foreign entities now choose to do business in jurisdictions with minimum tax rates. This has forced countries to make their tax rates competitive. The OECD has included setting competitive rates as among the harmful global tax practices. Mr Sinha has chosen to keep the difference between the rate applicable to domestic and foreign companies at 5 per cent.

There was a controversy about whether the tax rate included surcharge too. In the Bank of America case, the Income-Tax Appellate Tribunal (ITAT) had ruled that as per a proper interpretation of Article 14 (2) of the Indo-American Double Taxation Avoidance Agreement (DTAA), the tax rate on the American bank should exclude the surcharge.

The Authority for Advance Ruling had held that Article 26(2) of the Indo-French Agreement cannot be construed to mean that no tax can be levied on a foreign company at a rate higher than that payable by an Indian company. The AAR was interpreting the non-discrimination clause in the Indo-French DTAA in the case of a French bank (1999 151 CTR AAR 35).

Chapter IX of the I-T Act, 1961, dealing with double taxation relief, was recast in the Finance Act, 2001. The Explanation at the end of Section 90 declares (with the retrospective effect from April 1, 1962) that the charge of tax in respect of a foreign company at a rate higher than at which a domestic company is chargeable shall not be regarded as a less favourable charge or levy of tax in respect of the foreign company. Section 90(2) also lays down that wherever the DTAA applies, the provisions of the I-T Act shall apply to the extent that they are more beneficial to the foreign company. If the DTAA provides for a lesser rate of tax, then that rate will apply in preference to the one prescribed by the Finance Act.

The Finance Bill, 2002 has ended the controversy about the levy of surcharge on foreign companies and has proposed that the tax payable by both domestic and foreign companies would be enhanced by a surcharge, at 5 per cent of the tax payable for the purposes of the Union. This means that foreign companies would, henceforth, suffer tax at around 42 per cent and domestic companies, at 36.75 per cent.

The subsidiary of the foreign company will be taxed on a par with domestic companies. Apparently, it looks as if having a subsidiary would be advantageous. But a scrutiny of fiscal laws will show that subsidiaries of foreign companies have to pay an additional 15 per cent withholding tax.

They are also obliged to transfer 10 per cent of their profit to the compulsory reserve. Branches have no such obligations. The liability for the subsidiary can exceed 50 per cent.

MNCs prefer to have closely-held subsidiaries, probably because it is an easier route to bring in latest technology and invest in brands. Of late, MNCs have been buying up shares from the Indian market to have more control over their subsidiaries.

They have even chosen to delist their shares for this purpose. This has affected the sentiment of the capital market. The latest changes may reverse this trend and foreign entities will definitely welcome the sizeable reduction in the corporate tax rate.

Send this article to Friends by E-Mail

Stories in this Section
Fog over foreign stake

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line