/ Taxation Policies and Procedures for foreign Companies in India - A Comprehensive Guide
India offers a vast and dynamic market for foreign companies but understanding the country’s complex taxation system is essential for success. In recent years, the Indian government has introduced reforms to improve the ease of doing business, and the Union Budget 2024 has made significant changes in tax policies to attract more foreign investments. These changes include the waiver of Angel Tax for foreign investors and a reduction in the corporate tax rate from 40% to 35%, benefiting taxation policies in India for foreign businesses operating in the country.
Taxation policies in India for Foreign Companies
India’s taxation policies for foreign companies vary based on their residential status. A company’s residential status determines its tax obligations—whether it’s taxed on its global income or only on income arising within India.
- Resident Companies: According to Section 6(3) of the Income Tax Act, an Indian resident company is taxed on its global income, including income earned outside India. A company qualifies as a resident of India if:
– It is an Indian organization.
– Its Place of Effective Management (POEM) is in India. - Non-Resident Companies: For non-resident companies, taxes apply only to income that is earned, accrued, or received in India. A non-resident company’s residential status is determined by its turnover and POEM where such POEM’s existence is determined basis fulfilment of prescribed criteria. POEM provisions become applicable only if the turnover of the assessee company exceeds INR 500 Million (USD 6 million appx). Once the POEM is located in India, the assessee company is deemed a resident and taxed on its global income. For non-residents with turnover under the aforesaid prescribed threshold, only income derived from India is taxable.
Taxation Rates for Foreign Companies
The tax rates for foreign companies in India depend on their income levels:
- Base Tax Rate: The standard tax rate for foreign companies is 35% of their total taxable income.
• Surcharge: An additional 2% surcharge applies if the total taxable income exceeds INR 10 Million (USD 120,134 appx) but is upto INR 100 Million (USD 1,201,345 appx)
• An additional 5% surcharge applies if the total income exceeds INR 10 Million (USD 1,201,345 appx). - Health and Education Cess: A 4% cess is levied on the total income tax, including surcharge.
Additionally, the Indian government offers marginal relief if the total payable amount, including surcharge and income tax, exceeds certain income thresholds, ensuring that the surcharge does not disproportionately burden companies.
Minimum Alternate Tax (MAT)
Foreign companies which trigger a permanent establishment in India also attract Minimum Alternate Tax (MAT) provisions under which the assessee company have to pay a tax at the rate of 15% of their book profits if the normal tax liability is lower than 15% of the book profit. However, MAT does not apply to certain types of income such as:
- Dividend
- Capital gains from the transfer of securities
- Royalty and technical services fees
Foreign companies can avoid MAT if they are residents of countries with a Double Taxation Avoidance Agreement (DTAA) with India and they do not have permanent establishment in India.
Goods and Services Tax (GST)
Foreign companies that supply goods or services to Indian consumers but do not have a fixed place of business in India must obtain GST registration. This applies to foreign businesses involved in the Indian market, ensuring they comply with India’s tax laws when trading.
Waiver of Angel Tax and Corporate Tax Reforms
A major relief introduced in the 2024 Union Budget is the waiver of Angel Tax. This tax is often levied on the excess premium paid on shares by startups. The waiver removes this burden on foreign investors, making it easier for them to fund Indian startups.
Furthermore, the government reduced the corporate tax rate for foreign companies in India from 40% to 35%, a welcome move aimed at making India a more attractive destination for foreign businesses. These tax cuts enhance the ease of doing business and encourage international companies to expand their operations in India.
What Foreign Companies Can Expect from Budget 2025
Looking ahead to Budget 2025, foreign companies can expect several key initiatives designed to further boost business activities in India:
- Supercharging Manufacturing with the PLI Scheme: The government is likely to continue its focus on enhancing India’s manufacturing capabilities by expanding the Production-Linked Incentive (PLI) Scheme. This program aims to incentivize the production of key goods and technology within India, offering lucrative benefits to both foreign companies and Indian businesses, especially in sectors like electronics, textiles, and automotive.
- Simpler Rates of GST: One of the anticipated reforms is the merger of the 12% and 18% GST slabs into one, simplifying the tax structure for businesses. These two slabs cover around 70% of all taxable goods and services in India, and a unified rate would eliminate confusion and ease the compliance burden for foreign companies.
- Amnesty Scheme: To encourage companies to settle pending tax disputes, the government is expected to introduce an Amnesty Scheme offering a 75% waiver on penalties for businesses voluntarily settling outstanding disputes. This initiative aims to clear the backlog of cases and create a smoother, more transparent tax environment. The scheme could be rolled out in phases, with industries like FMCG and textiles prioritized in the initial stages.
- Encouraging Research and Development (R&D): India is lagging behind the world’s most advanced economies in terms of R&D spending, which currently stands at just 0.7% of GDP compared to 4% in leading nations. Budget 2025 is expected to allocate a portion of the PLI incentives specifically for R&D, which could help Indian firms become global leaders in innovation and technology. This is particularly relevant for foreign companies with R&D-focused subsidiaries or those involved in high-tech industries.
These reforms in Budget 2025 will undoubtedly enhance India’s competitiveness on the global stage, providing new opportunities for foreign businesses to invest, grow, and innovate in the country.
Compliance Requirements for Foreign Companies in India
Foreign companies are required to adhere to specific compliance procedures when operating in India. These include:
- Form FC-1: Foreign companies must file this form within 30 days of incorporating their subsidiary in India.
- Document Authentication and Translation: All documents must be authenticated by a practicing lawyer in India and translated into English before submission to the Registrar of Companies (ROC).
- Form FC-3: Foreign businesses must submit this form detailing their financial records to the respective ROC.
- Financial Statements: All financial statements must be submitted within six months of the end of the financial year.
- Form FC-4: This form, which deals with the company’s annual returns, must be filed within 60 days from the end of the financial year.
- Audit of Accounts: Foreign companies must have their accounts audited by a practicing Chartered Accountant.
How Maier Vidorno Altios Can Help
For foreign companies seeking to enter the Indian market, Maier Vidorno Altios offers comprehensive support to navigate India’s complex tax landscape and regulatory framework. With over 25 years of experience, Maier+Vidorno Altios can guide companies through the process of setting up the right structure, including:
- Corporate Tax: Assistance in structuring corporate tax strategies to minimize liabilities and ensure compliance with Indian tax laws.
- Goods and Services Tax (GST): Help with GST registration, filing returns, and ensuring full compliance with India’s indirect tax system.
- Transfer Pricing: Advisory services on transfer pricing policies to ensure that intercompany transactions comply with India’s regulatory standards.
- Withholding Tax: Guidance on managing withholding tax obligations for foreign companies with Indian operations, including income tax, dividend tax, and royalty tax.
- Financial Consulting Support: Maier Vidorno Altios provides tailored financial consulting to optimize business operations, mitigate risks, and maximize profits.
By partnering with Maier Vidorno Altios, foreign companies can ensure they set up the right legal and tax framework in India, avoiding pitfalls and ensuring a smooth transition into one of the world’s most vibrant economies.
In conclusion, India’s tax policies have become more attractive to foreign businesses due to recent reforms like the tax reduction and Angel Tax waiver. Furthermore, the upcoming Budget 2025 promises even greater incentives, particularly in manufacturing, GST simplification, R&D funding, and amnesty for tax disputes. However, navigating India’s complex tax and compliance environment requires expert guidance. Maier Vidorno Altios offers the necessary expertise to help foreign companies establish a strong foundation in India, ensuring compliance and optimized financial performance.