As the global economy continues to expand and trade barriers
are lifted, foreign companies are increasingly exploring business opportunities
in India. When a foreign company operates in India, it becomes subject to
Indian tax laws and regulations. One crucial aspect of tax compliance is filing
a company tax return. In this article, we will provide a comprehensive guide to
help foreign companies navigate the process of filing tax returns in India.
The Income-tax Act, 1961 (‘Act’) seeks to charge tax on the total income of every ‘person’. The Act contains separate codes for determining the income taxable in India, the rate of tax thereon, etc. as well as a separate code of procedural requirements like registration with the Indian Revenue Authorities, obligation to file annual returns, etc.
While a person resident of India is liable to tax in India on income earned anywhere across the global, a non-resident (including a foreign company) is taxable in India only on the income accruing or arising in India or received in India. The income earned in India is then subjected to tax based upon various criteria. In a few cases, the income is eligible for exemption from taxation too – either under the Act itself, or under the terms of Double Taxation Avoidance Agreement (‘DTAA’/ ‘Treaty’) entered into with various countries.
On the procedural aspect, the Act requires every company to furnish an annual return of income. A ‘company’ is defined to include a foreign company. In this background, one of the issues which has been of wide interest and contemplation is, whether a foreign company is liable to file an annual return of income in India.
Foreign companies operating in India are liable to pay taxes
on income earned from Indian sources. The tax liability is determined based on
the company's residency status and the type of income generated. Indian tax
laws classify foreign companies into two categories:
Resident Foreign Companies: A foreign company is considered
a resident in India if its place of effective management (POEM) is located
within the country. In such cases, the company is taxed on its global income,
similar to Indian companies.
Non-Resident Foreign Companies: Foreign companies that do
not meet the POEM criteria are classified as non-residents. These companies are
only taxed on income generated from Indian sources.
Foreign companies, regardless of their residency status,
must file their tax returns annually. The filing deadline for foreign companies
is the same as that for Indian companies, which is typically on or before
September 30th following the end of the financial year (April to March).
Company tax returns for foreign companies in India must be
filed electronically through the Income Tax Department's official website. The
tax return form applicable to foreign companies is Form ITR-6. It is important
to note that the tax return must be filed in the prescribed format and any
supporting documentation should be submitted along with it.
The income of a foreign company in India is computed in a manner similar to Indian companies. The taxable income is determined after considering various factors such as revenue from operations, expenses, depreciation, and deductions available under the Indian tax laws.
Foreign companies are required to maintain books of accounts
and prepare financial statements in accordance with Indian accounting standards.
These financial statements, along with audited reports, need to be submitted as
part of the tax return filing process.
Section 139(1) of the Act requires every company to furnish a return of its income for the previous year. Section 2(17) of the Act defines a ‘company’ to mean ‘any body corporate incorporated by or under the laws of a country outside India’, amongst others. Thus, under the Act, a company includes a foreign company. Consequentially, strictly reading Section 139(1) with Section 2(17), every foreign company is required to furnish a return of its income. This requirement of filing a return of income, however, has to be read with Sections 4 and 5 of the Act. That is, if a foreign company does not have any income accruing or arising in India, then, no purpose is served by asking a foreign company to file a return of income in India. To extend it further, even if the Legislation casts an obligation on a company not having any connection in India, to file a return of income in India, non-compliance of such regulation would have no equitable or practical remedy. The moot question, however, is whether a foreign company is liable to file a return in India. when the foreign company has earned income from India, but the income is not liable to tax, either because of an exemption under the Act or on account of the beneficial provisions of the DTAA.
To partly resolve this controversy, sub-section (1C) of Section 139 of the Act was introduced by Finance Act, 2011 (w.e.f. 1.6.2011), empowering the Central Government to exempt any class or classes of persons from the requirement of furnishing a return of income. Pursuant thereto, the Central Government has, vide Notification No. 119 dated 11.10.2021, exempted certain class of persons from the requirement of furnishing a return of income under section 139(1) of the Act from assessment year 2021-2022 onwards, subject to the fulfilment of certain conditions.
It is highlighted that the transactions and the income earned therefrom referred to in the aforesaid notification are exempt from income-tax under the Act. That is, the Central Government has done away with the requirement of filing of return in the certain cases of income which are in fact not liable to tax in India. The question that therefore arises is whether the corollary to this also holds true i.e., whether where a foreign company which has earned income in India, but such income is not liable to tax in India by virtue of some exemption, the foreign company is liable to file a return of such income in India.
Independent of this exemption, sub-section (5) of Section
115A of the Act, which prescribes rate of tax on dividends, royalty and
technical service fees in the case of a foreign company, exempts a foreign
company from furnishing a return of income if the following conditions are
satisfied:
· The assessable income under the Act, during the previous year, consists only of income from dividend, interest, royalty or fees for technical services, and
To avoid double taxation, foreign companies can take
advantage of tax treaties between India and their home country. India has
entered into Double Taxation Avoidance Agreements (DTAA) with numerous
countries, which provide relief from paying taxes twice on the same income.
Foreign companies can claim treaty benefits by providing the necessary
documentation and complying with the relevant provisions of the tax treaty.
In view of Section 115A(5) of the Act, the question that arises is whether a foreign company is liable to file a return of its income comprising of dividend, interest, royalty or fees for technical services even if the said incomes are exempt from taxation under the DTAA or where the tax has been deducted as per the rate of tax under the DTAA which is lesser than rate of tax prescribed under Section 115A(5) of the Act.
Foreign companies in India are also required to make advance
tax payments during the financial year. Advance tax is paid in installments
based on the estimated tax liability for the year. The tax liability is
calculated after considering the income generated from Indian sources.
Non-compliance with Indian tax laws can result in penalties and legal consequences. Foreign companies failing to file their tax returns within the prescribed deadline may be subject to penalties, which can include monetary fines and prosecution
It is essential for foreign companies to maintain accurate
and up-to-date records, comply with all tax obligations, and seek professional
assistance to ensure full compliance with Indian tax laws.
Filing a company tax return is a vital aspect of complying with Indian tax laws for foreign companies operating in India. Understanding the tax residency status.
Created & Posted by Suraj Kumar
Accountant at TAXAJ
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