Kelkar has recommended a reduction of tax rate, applicable to foreign companies, from the existing 42 per cent to 35 per cent. However, no recommendation has been made regarding the tax rate in respect of income by way of royalty, fees for technical services, etc, which are presently taxed at 20 per cent of the gross amount.
This rate was introduced in 1997 when the foreign companies were taxed at the rate of 55 per cent. Despite the reduction of corporate tax rate from 55 per cent to 42 per cent, the rates applicable for royalties and fees for technical services remain unchanged.
There is yet another strong reason for reducing the aforesaid tax rate of 20 per cent. In the majority of tax treaties, which India signed with other countries after 1993, the tax on royalty and fees for technical services was prescribed at 10 per cent to 15 per cent as against the normal rate of 20 per cent. This discrimination is unreasonable and uncalled for.
More From This Section
Updation of tax treaties
A large number of tax treaties were made by India prior to the policy of economic reforms and liberalisation. Such treaties naturally contained references to those provisions of law which prevailed at that time. Most of the tax provisions have since been substituted and/or modified. Even otherwise, Income-tax Act gets amended almost every year.
Unless the changes made in Income-tax law are reflected in tax treaties, it is difficult for a foreign enterprise to take advantage of the various tax incentives offered to tax payers.
Tax treaties usually provide that if any substantial changes are made in the tax laws of a country, the competent authorities should notify each other of such changes. However, it is unfortunate that this is not being done in India. It is, therefore, necessary that the Government should take up the task of updating all the tax treaties to synchronise them with the current tax provisions.
Assessment procedure
Income tax rates in India are amongst the lowest in developing countries. Foreign, entrepreneurs, therefore no longer complain about the high tax incidence here. This advantage is, however, inundated by the complexity of tax laws multiplied by bureaucratic hurdles, which invariably result in long and tiring delays in settlement of tax cases.
Further, even in those cases where maximum amount of tax is deducted at source, a foreign company is still obliged to file its return of income in India and undergo the tedious process of assessment. Where, however, the income of foreign company consists of dividend and interest only, no return needs to be filed.
Practically, in all cases the foreign companies doing business in the country are obliged to file a return of income. Why should filing of return be necessary when no remittance can be made out of India without deduction of tax at source?
Settlement of disputes
Assuming that disputes will arise in the interpretation of tax laws, there should be an effective mechanism to settle them fast. While an assessment is to be made within two years, the appellate proceedings can take ten to 15 years, up to High Court level and 15 to 20 years, up to Supreme Court level. This time lag is not only a big irritant but also a strong disincentive for foreign investment in India.
The formation of separate tax courts for foreign companies is long overdue, and must be implemented without any further loss of time.