In what comes as a huge relief for IT companies, the Finance Ministry has clarified taxation rules for development centers. Over 750 MNCs have development centers at over 1100 locations in India and the income tax (I-T) department until now was questioning the profits attributed to these centers. The finance ministry has finally issued two circulars relating to the same, reports CNBC-TV18's Aakansha Sethi.
These circulars will help companies like Microsoft pay lower taxes possibly if they contract R&D services instead of being subsidiaries for the foreign companies. Considering the cost competitiveness and the availability of skilled labour in India, several foreign companies setup captive entities in India especially in pharma R&D, IT product development and automobile R&D sectors.
The I-T department says that these companies are paying low tax because they contribute a significant amount to the value chain in terms of the product development. However, the profit is not attributed, their return is not equivalent to the work that they are doing and hence, they end up paying lower tax.
One of the circulars gives certain conditions which will make a captive entity a contract service provider instead of a subsidiary. These conditions are- if it contributes significant economic value to the product that is being developed, if it is working under the direct supervision of the foreign parent or if it is creating products that are creating property rights.
The second circular tells how profit between the foreign parent and Indian subsidiary will be divided. With this step, there will be more clarity.