A: Scope of Taxability on Foreign companies in India

In India, companies are taxed on their income according to their residential status. A company with residential status in India will be taxed on its global income whether earned in India or outside India whereas a non resident company will be taxed only on income received, accrued or arise in India.

As per Section 6(3), Residential Status and scope of total income, A company is said to be resident in India in any previous year, if

(i) It is an Indian company; or

(ii) Its place of effective management, (P.O.E.M.) in that year, is in India. Place of effective management means a place where key management and commercial decisions,  that are necessary for the conduct of the business of an entity as a whole are, in substance made.

However the provisions of Section 6(3)(ii) are not applicable on companies with turnover upto INR 500 million in a financial year.

SectionType of companyResidential StatusTaxability
6(3)(i)Indian companyAlways resident in IndiaTax on global income
6(3)(ii)A Non resident company whose turnover exceeds INR 500 millionWill be deemed to be a Resident in IndiaGlobal Income attributable to the company will be taxed in India.
6(3)(ii)A Non resident company whose turnover is upto INR 500 millionAlways Non resident in IndiaTax only on Income received, accrued or arise in India

B:Taxation Rate

  • Non resident or foreign companies are taxed at 40% of the total income
  • Plus: An additional surcharge @2% of tax where total income exceeds INR 10 million but do not exceed INR 100 million or additional surcharge @5% of tax if total income exceeds INR 10 million
  • Plus: Health & Education Cess: An additional cess of 4% of such tax and surcharge shall be added.

C: Minimum Alternate Tax

MAT provisions are not applicable to foreign companies that do not have a permanent establishment (PE) in India. However, the Finance Act, 2018 has provided that MAT provisions shall not apply to foreign companies where their total income is solely derived from shipping business, exploration of mineral oils, business of aircraft, civil construction in turnkey projects and income thereon is offered to tax as per specific provisions provided under the Act.

Capital gains from transfer of securities, interest, royalties, and fees for technical services accruing or arising to a foreign company (which has a PE in India) have been excluded from chargeability of MAT if tax payable on such income is less than 15% (exclusive of surcharge, education cess, etc.). Further, expenditure, if any, debited to the profit and loss account corresponding to such income shall be added back to the book profit for the purpose of computation of MAT.

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