I-T dept to appeal against tribunal order on foreign firms' tax

The Income Tax Department is likely to appeal against the recent order by the Income-Tax Appellate Tribunal (ITAT) stating that the department cannot levy tax on a foreign company at a rate higher than that applicable to a similarly placed Indian entity.

Indian companies pay a flat 35 per cent corporate tax plus 2.5 per cent surcharge, while foreign firms are taxed at 40 per cent plus 2.5 per cent surcharge if not be registered under the Indian Companies Act.

The I-T department is unlikely to accept the ITAT order because it is a question of law. Under the Finance Act 2001, the government justifies a higher rate of tax for foreign entities where the company has not made any arrangement for declaration and payment of dividends in India out of the income generated domestically.

"The I-T department is unlikely to accept ITAT's decision and may appeal in the high court. The 2001 amendment made in the law to justify the discrimination in taxation is also likely to be strengthened to get over the problems associated with the same," PricewaterhouseCoopers' executive director Vivek Mehra said.

The government amended the I-T Act under section 90 which states that a higher rate of tax for foreign companies is justified where unless companies have made arrangements for the distribution of dividends.

This amendment is a fall out of the fact that Sterling Tea companies were mostly incorporated in the United Kingdom but owned tea estates in India.

As they made arrangements to pay dividends in India, the I-T department found the need to incorporate this ammendment to the Act.

Most foreign companies no longer operate as a branch. Many have formed local subsidiaries and, hence, registered under the Indian Companies Act, are taxed at 35 per cent plus surcharge.

Foreign banks as well as offshore oil companies such as British Gas and Shell, having entered into production sharing contracts through branches will stand to gain through ITAT's ruling if the same is upheld by the IT department.