Finance ministry may tweak foreign taxation rules to widen tax base

The Ministry of Finance (MoF), India is all set to revamp its foreign tax provisions in the new direct tax code. This remodelling will widen the corporate tax base in India and prevent other countries from taking a significant portion of profits earned in India, by the multinational companies.

An officer aware of the matter has recently said that a government task force is studying the Income Tax Act to identify the norms that need to change and propose amendments to the MoF. The new provisions will apply to profits of foreign companies in India, as well as the Indian companies abroad.

The task force is expected to propose amendments to the MoF by the end of May, after which the legislative work on the new tax code will start.

This move will reset the balance of taxation powers between India and the developed countries concerning cross-border investments. It may also ask for business strategy changes by the Indian companies investing abroad and non-resident firms doing business in India without a subsidiary.

The government officials are reviewing the international taxation provisions in the Income Tax Act. Protection of the tax base is the essential subject globally. However, there are different ways of protecting it by the developed countries and developing nations.

For instance, the US wants to tax the profits of its entities that are earned in other markets whereas India wants to tax as much of the profits made in India.

These changes in the international taxation norms could strengthen tax-related provisions for the international companies who have access to Indian markets as well as for Indian firms with global operations. The whole idea of the government behind these amendments is to make sure that every business pays its fair share of taxes.

Non-resident firms with business income in India other than in the form of a subsidiary are currently subject to a 40% tax on their profits earned in India. The primary focus is to ensure that the profits earned in India are in line with the actual profits margins from Indian operations.

The second area of focus is to strengthen India’s ‘place of effective management’ rules. These rules determine whether a foreign entity is a resident for tax purposes in India, based on the location of its effective management.