Spare a thought for foreign firms too

The coming Budget is generating large expectations from the government because of an unprecedented robust economy and record collections from direct and indirect taxes. In this stride, the interest of foreign enterprises, whose contribution to the economy cannot be overstated, should not be ignored.

While various business lobbies have had their say, the interest of foreign companies and individuals should not go unrepresented. Let us spare a few thoughts for them.

Tax on expatriate employees: Tax structure relating to foreign employees needs to be rationalised. Their taxation continues to remain complex and complicated. In fact, foreign employees are like ambassadors of their companies in India. They should be treated with utmost care and consideration. The income-tax law was amended by the Finance Act, 2003. The effect of the amendments is that a foreign employee can claim a 'not ordinarily resident' status for a maximum of two years. This will discourage expatriate employees to take up Indian assignments for more than two years, which does not help industry, in particular the services industry, where a large number of expatriates are engaged. It is, therefore, strongly felt that this amendment should be withdrawn.

Additional tax on dividend payments: an 'additional income-tax' is levied on the dividend distributing company at a flat rate of 12.5 per cent (the effective rate after surcharge and e-cess is 14.025 per cent) on the amount declared, distributed or paid by such company by way of dividends. The levy of 'additional income-tax' hits foreign investors directly because the said additional income-tax does not qualify for the underlying tax credit in their home country.

It is, therefore, advisable that suitable changes be made in the Income-tax Act to ensure that non-resident shareholders become entitled to avail tax credit for the additional income-tax paid by the Indian domestic company.

Filing of returns: Foreign companies are required to file returns of their income in India. Even if the maximum amount of tax has been deducted at source, a foreign company is still obliged to file the return and undergo the tedious process of assessment. Where the income of a foreign company consists of dividend and interest only, no return needs to be filed.

Why should filing of return be necessary when no money can be remitted out of India without the deduction of tax at source?

Settlement of tax disputes: Assuming that disputes will arise in the interpretation of tax laws, there should be an effective machinery to settle them fast. While an assessment is to be made within two years, the appellate proceedings can take 10 to 15 years up to the high court-level and 15 to 20 years up to the Supreme Court-level. This time lag is not only a big irritant but also a strong disincentive to foreign investment in India. Formation of separate tax courts for foreign companies is long overdue and must be implemented as expeditiously as possible

Updation of tax treaties: A large number of tax treaties were signed prior to economic reforms and global liberalisation. The income-tax law has, however, substantially changed since then. It is, therefore, necessary that the government updates all the tax treaties to synchronise them with the current tax provisions. Treaties should also be modified on the lines of the UK tax treaty, under which a disputed demand is to be kept in abeyance against furnishing of a bank guarantee.

agar@bol.net.in