H P Agrawal: Taxing times for foreign firms

FOREIGN ENTERPRISES

With two weeks to go to Budget 2005, most of the business lobbies have had their say. However, the foreign companies and individuals doing business in India go almost unrepresented. Let's spare a few thoughts for them:

Additional dividend tax

The dividend income is entirely free of tax in the hands of recipient. But, an 'additional income-tax' is levied on the dividend distributing company at the flat rate of 12.5 per cent on the amount declared, distributed or paid by such company by way of dividends.

This "additional" tax is payable in addition to the normal income-tax chargeable on the income of the company.

The levy of the additional income-tax which effectively reduces the quantum of dividend declared by a domestic company directly hits a foreign investor because the tax does not qualify for the underlying tax credit in the investor's home country.

The reason is simple: additional income-tax is paid by the Indian domestic company (and not by the shareholder). The credit for tax will be available only of the taxes which are paid in India by the shareholder himself.

It is, therefore, advisable that a suitable amendment be made in the Income-Tax Act to ensure that non-resident shareholders can avail of tax credit for the additional income-tax paid by the Indian domestic company.

Needless to mention, such an amendment will directly benefit foreign investors without any impact on Indian tax revenues.

Filing of IT returns

The income-tax rates in India are amongst the lowest in developing countries. This advantage is, however, undone by the complexity of tax laws multiplied by the bureaucratic hurdles that invariably lead to delays in settlement of tax cases.

Foreign companies are required to file their returns on income earned in India.

Even if the maximum amount of tax has been deducted at source, a foreign company is still obliged to file its return of income and undergo the tedious process of assessment.

If, however, the income of foreign company comprises only of dividend and interest, no tax returns are necessary.

Why should filing of return be necessary when no remittance can be made out of India without deduction of tax at source?

Updating tax treaties

A large number of tax treaties were drafted by India prior to the policy of economic reforms. The income-tax laws have, however, substantially changed since then.

It is therefore, necessary that the government should update all the tax treaties so as to synchronise them with the current tax provisions.

Rate of tax on royalty

The tax rate in respect of income by way of royalty, fees for technical services etc. was reduced from 30 per cent to 20 per cent in 1997 with the then finance minister, P Chidambaram, by observing, "There has also been a demand from the corporate sector that the tax rate of 30 per cent on royalty and technical services fees payable to foreign companies is too high and acts as a hindrance to the transfer of technology.

I, therefore, propose to reduce this rate to 20 per cent."

In 1997, the foreign companies were taxed at 55 per cent. However, despite reduction of corporate tax from 55 per cent to 42 per cent, there has been no change in the rates for royalties, etc.

There is another reason for reducing the 20 per cent royaty tax. In most of the tax treaties India has signed with other countries after 1993, the tax on royalty and fees for technical services has been prescribed at 10-15 per cent as against the rate applicable in other cases at 20 per cent.

This discrimination is unreasonable and uncalled for.

agar@nda.vsnl.net.in