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Taxes are one of the funniest parts of serious business. They are sometimes uncertain, interpretative, dynamic or beneficial to a taxpayer (many more adjectives or attributes could be used). One tax and many forms, often make taxes as one of the complex subjects to understand. Even Albert Einstein laid down his arms before taxes and tagged it as one of the toughest things to understand. My job in this article is to simplify the concept of return of income with specific reference to the foreign company returns. For the flow, I am not going to make any references to technical sections of the Income-tax but an attempt to explain the logic of tax returns in a lucid language.
Why does one need to file tax returns?
Every person who earns income pays taxes as and when the income is earned. Few examples of such tax payments are advance taxes and TDS (withholding taxes). Such taxes are often paid on an as-you-earn basis. When the year ends, often one would have paid higher than required, lower than required or exact amount of taxes to the government treasury. This is when a need for assessment of your income is felt to actualise and declare the taxes to be paid to the government. Such a self-assessment and declaration of income earned is done through the filing of return of income where one declares to the government the income that is earned during the financial year and also declares the calculated taxes. This process is like submitting your examination paper to your examiner. Like an examiner, the government through its tax wing assesses and checks the income earned and taxes paid and accordingly passes an order of intimation, refund or demand.
My foreign company does not have any business in India, whether a return needs to be filed?
India as a country follows source + residence rule of taxes. Which means, if a company is a resident (established) in India, the company would pay Tax on its total income earned worldwide (residence rule) and if the company is a foreign company and has earned income from India, then the foreign company would pay source based taxes in India limited to the tax on incomes earned in India (source rule).
Examples of source incomes could be:
- Royalty received by the foreign company (say Google Inc) from Google India
- Fees for consultancy and technical services received by the foreign company
- Dividend income received by the foreign company
- Interest income received by the foreign company on debt given
- Guarantee fees on Corporate guarantees provided by foreign parent companies
- Any other service fee payment
The discussion is restricted only to the service income, as such incomes are specifically brought in the purview of source rule taxation. Expenditure and payment against goods would be taxable as source rule only if the foreign company has a permanent presence in India.
A person who earns income becomes a taxpayer in India and is liable for withholding taxes and advance taxes as per the provisions of the Act. While any expenditure is booked against the payment to be made against the foreign company, taxes are deducted by the payer and deposited in the name of such foreign company (taxpayer). It is imperative to note that if the foreign company intends to do continuous business with Indian companies, such foreign companies should obtain Permanent Account Number (PAN) in India. Such taxes would be deducted as per the Double tax Avoidance treaties or the Income-tax act, whichever is favourable to the taxpayer.
Now adopting the analogy given in answer to the first question, such foreign company being a taxpayer then such taxpayer needs to file the return of income in India to enable assessment and declaration of Income. If the income of the foreign company is earned through a related party in India, a declaration on related party transactions, commonly known as transfer pricing compliance and transfer pricing return needs to be filed along with the return of Income.
Non-filing of return of Income could lead to serious penalty implications on the foreign companies and also may lead to enquiries with the Indian companies who have made the payment, if the companies belong to the same group. This may lead to business disruption and credibility loss.
Therefore, through a legal and substantive interpretation of the Indian law, any person ( including individual, firm or company) (Indian or foreign) is liable to file the return of Income in India.
Hope the snapshot and the logical provisions in India on return filing are well understood. In case anyone needs additional clarifications on the position or further discussions, you may like to contact me on my coordinates mentioned below.
CA. Akshay kenkre
Author of books on BEPS | Tax Anti-Avoidance | Transfer Pricing