The income tax department has unveiled the final guidelines to determine if an entity can be considered an Indian resident and taxed here and has made them effective from April 1, 2016 (FY16), dashing the hopes of industry , which expected their implementation from the next financial year.
Indian multinationals that have set up arms overseas to raise funds or expand business and foreign companies that outsource high-end critical functions in India to contribute to their global value chain will face tighter scrutiny if they are effectively managed in India.
Indian multinationals that have set up arms overseas to raise funds or expand business and foreign companies that outsource high-end critical functions in India to contribute to their global value chain will face tighter scrutiny if they are effectively managed in India.
The Central Board of Direct Taxes released the 10-page final guidelines on Tuesday that will help determine the place of effective management (POEM) of companies, applicable from April 1 of the current financial year. The apex direct taxes body made it clear that the objective is to catch those avoiding taxes. “The intent is not to target Indian multinationals which are engaged in business activity outside India.The intent is to target shell companies and companies which are created for retaining income outside India although real control and management of affairs is located in India,“ the CBDT said in a statement.
Previously , according to section 6 (3) of the Income-Tax Act, 1961, a company was said to be a resident in India in any previous year if it was an Indian company or if during that year, control and management of its affairs was situated wholly in the country .
This was amended by the Finance Act, 2015, to provide that a company would be considered a resident in India in any previous year if it is an Indian company or its place of effective management in that year is in India. The guidelines will help determine the place of effective management.
The norms close the door on tax avoidance opportunities for companies that sought to artificially escape residential status in India by shifting insignificant or isolated events related with control and management outside India.
“This move just ahead of the budget shows the government's conviction to set the rule book right for the tax officer to catch hold of those trying to avoid taxes in India by playing around with their residential status,“ said Rakesh Nangia, Managing Partner at Nangia & Co.
The CBDT said the guidelines are not intended to cover foreign compa nies or to tax their global income merely on the grounds of the presence of a permanent establishment or business connection in India. The final set of guidelines has been issued after consultations with the industry and taking into account representations on the draft norms.
Firms with an annual turnover of less than Rs.50 crore are excluded from the purview of the guidelines and there are safeguards to prevent harassment by tax authorities. They also provide for an `Active Business Outside India' test so as not to cover companies outside India that are engaged in active business. An assessing officer must seek approval from the Principal Commissioner or the Commissioner of Income Tax before initiating an inquiry to determine the resident status of a taxpayer based on POEM. Approval is also needed from the Collegium of Principal Commissioners of Income Tax before holding that the place of effective management of a non-resident company is in India.
“The guidelines strike the right balance between providing certainty to taxpayers as well as ensuring that offshore companies with no substance or activities, which are controlled from India, are subject to Indian tax jurisdiction,“ said Rajendra Nayak, tax partner at EY India.
Girish Vanvari, national head of tax at KPMG in India said the guidelines are `subjective on substance' and can be challenged at many places.
The Economic Times New Delhi,25th January 2017
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