Direct tax code panel calls for branch profit tax on foreign companies

Suggests bringing corporation tax rate on a par with domestic companies

A panel on direct tax legislation has recommended introducing a branch profit tax for foreign companies on the amount repatriated to their overseas partners. The task force suggested reducing the corporation tax rate for these companies to the level applicable to their domestic counterparts (25 per cent).

Branch profit tax will make up for the revenue gap, which the Centre may grapple with if it uniformly brings down the corporation tax rate for all companies, said a person in the know. 

Currently, the basic corporation tax rate is 40 per cent for foreign firms and 25 per cent for Indian firms. The basic corporation tax rate was 30 per cent when the panel submitted its report. However, the government had last week brought the tax rate down to 22 per cent as the basic rate and 25.17 per cent, including surcharge and educational cess. 

“There should be uniform tax rates across the board. While a domestic company is taxed on its universal income, a foreign company is only taxed on the income earned within India, so it is necessary to have one rate," said a person privy to the development. 

The computation of branch profit tax would depend on the amount a company repatriates to its parent company based overseas, the source said, adding that the rate has not been fixed for that, and requires further consultation. 

The panel in the report had given the instances of global tax rates and suggested bringing corporation tax rates for both Indian and foreign companies on a par. For instance, the US had last year reduced its corporation tax from 35 per cent to 21 per cent.

Sources say that the panel also suggested that dividend distribution tax (DDT) be levied at the hands of the recipients rather than companies. Currently, the effective DDT rate is 20.6 per cent (including surcharge and educational cess) at the hands of companies. DDT at the hands of the recipients is levied at the rate of 10 per cent if dividend is in excess of Rs 100,000 a year. 

DDT is levied after a firm has already paid corporation tax, which translates into triple taxation on income from the same source. The task force also recommended that companies be taxed on dividend income that has not been shared with shareholders. 

The direct tax code panel also suggested a mediation panel for tax dispute resolution. The source said that the mediation panel would have an independent mediator appointed by the Central Board of Direct Taxes (CBDT). This mediation panel would open a window for taxpayers who want to settle the matters mutually. For instance, if the tax authorities have finalised a matter and the taxpayer has not agreed to the demand order raised against the assessee, he can opt for a mediator and revise the tax demand suitable for both taxpayer and authorities. "This will simplify the process, time consumption and reduce the burden pending at CIT Appeals and other judicial authorities, said the source cited above. 

The source said that the finance ministry is reviewing the panel report and may give its comments by October-end.  The report, which is yet to be made public, will see some of the suggestions figuring in the next Union Budget.