Tax cut for foreign companies will benefit only a few, say experts

Government proposes to cut tax rates for foreign companies

The budget proposal to cut tax corporate tax on foreign companies to 35 percent from 40 percent would benefit only select companies, experts have said.

The move will improve ease of doing business for foreign companies, finance minister Nirmala Sitharaman said on July 23 presenting the Budget. Foreign companies operating in infrastructure and Engineering, Procurement, and Construction (EPC) space will be the principal beneficiaries.

The move is unlikely to have a bearing on large multi-national companies, which have full-fledged operations in India through a subsidiary structure. All the large MNCs have their Indian arm registered as with Ministry of Corporate Affairs (MCA) as regular companies and currently they are taxed on par with other domestic companies.

"The tax rate cut for foreign companies will directly benefit the foreign company having branch offices. Operation of business through branch offices / project office is quite a standard operating procedure for exploration companies and companies undertaking EPC contracts in India," said Amit Singhania, founder, Areete Law offices.

It will, however, bring parity in the tax rates applicable to various foreign companies.

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At present, there are two tax rates for foreign companies in India – the ones, which have permanent establishment (PE) in India, and the ones, which don’t. Until now, foreign companies used to avoid getting the PE tag due to a higher tax rate of 40 percent. If they don’t have PE status, the rate drops to 25 percent, creating an arbitrage of 15 percent for companies not to register as PE. The budget cuts the arbitrage to 10 percent.

The proposal aims to encourage more foreign companies to take up permanent establishment in India. Legal experts said the government should relax other compliance conditions applicable for PEs to encourage more foreign companies to take that route.