India is a top destination for global investors, but understanding its tax system is essential for any foreign company planning to operate here. The Indian taxation landscape is robust and detailed, with specific provisions for foreign-owned entities. This article provides a clear overview of the key taxation elements foreign companies must consider while doing business in India.
1. Corporate Tax Rates for Foreign Companies
Foreign companies are taxed differently than domestic ones. As per the Income Tax Act, 1961, a foreign company is taxed on income that arises or is deemed to arise in India. The current corporate tax rate for foreign companies stands at 40% plus applicable surcharge and cess.
This rate applies to:
Income from business operations in India
Royalties or fees for technical services
Capital gains from assets located in India
2. Permanent Establishment (PE) Concept
If a foreign company has a Permanent Establishment (like a branch or office) in India, it is taxed as per Indian corporate tax laws. PE status significantly affects how much tax the company owes. In cases where no PE exists, withholding tax rates apply instead.
3. Withholding Tax (TDS) Provisions
When an Indian entity makes payments to a foreign company, Tax Deducted at Source (TDS) applies. Rates vary depending on the nature of the transaction:
Royalty and Fees for Technical Services: 10% to 20%
Interest Income: 5% to 20%
Dividends: Generally 20% (subject to tax treaties)
These are subject to Double Taxation Avoidance Agreements (DTAA) between India and the country of the foreign entity.
4. Double Taxation Avoidance Agreement (DTAA)
India has signed DTAAs with over 90 countries. These treaties help foreign companies avoid being taxed twice – once in India and once in their home country. To claim DTAA benefits, companies must submit:
Tax Residency Certificate (TRC)
Form 10F
Self-declaration documents
5. Transfer Pricing Regulations
Foreign companies with subsidiaries or related entities in India must comply with transfer pricing rules. This ensures that transactions between related parties reflect fair market value. Documentation and reporting requirements are stringent, including Form 3CEB.
6. Goods and Services Tax (GST)
If a foreign company provides goods or services in India, GST registration may be mandatory. Typically, the Indian recipient is liable under the reverse charge mechanism, but in some cases, foreign entities may also register directly.
7. Filing Requirements and Penalties
Foreign companies must file:
Income Tax Return (ITR-6) annually
TDS returns quarterly
Transfer pricing reports if applicable
Failure to comply can result in hefty penalties, interest charges, and possible prosecution.