Keeping in mind the global commercial environment and the shift from ‘brick and mortar’ to faceless websites, a need was felt to stop the sand from escaping the tight clutches of the tax department.
In the Finance Bill of 2015, the definition of Indian resident company under the Income Tax act was sought to be amended. The objective was to ‘deter creation of shell companies which are incorporated outside but controlled in India’. This was in line with the DTAA (Double Taxation Avoidance Agreement) and that the treaties recognized and accepted the ‘tie breaker rule’. Hence, this is recognized by OECD (Organization of Economic Cooperation and Development). The draft guidelines are also available on line.
The idea is to tax passive incomes like, interest, royalties and rentals. In any case, Indian companies are treated as resident and the global incomes are taxed here. For those companies, owned by Indians, but not in India, foreign companies will be taxed depending upon the ‘Place of effective management’.
This would have led to a substantial increase in compliance and litigation cost, fortunately this has now been postponed by a year.
We have been dealing with Board meetings through Video Conference. The Secretarial recordkeeping and hygiene would have been critical to reach any conclusion on, place of effective management, hence, taxability. India, with its push to create a billion customers emarket, cannot afford to have PoEM as it will push the companies (read Snapdeal, Flipkart) outside our geographical territories.
Also, the Direct Tax Code had proposed CFC (Controlled Foreign Company). This could not be introduced since UPA government, since it affected the super rich club of India. The concept of CFC is to recognize the foreign company, set up outside India by Indian resident shareholders and tax the deferred but passive income, in the hands of the Indian shareholders. The dividend received from foreign corporate by Indian shareholders is incentivized by a tax at 15%. The double taxation of any deferred but passive income should also qualify for tax rebates/ set off, in state of residence. This is not the case right now. This takes away the assessment of foreign company in India and restricts its jurisdiction to the shareholder.
The stand taken by the Government is ‘to allow companies to prepare accounts according to their place residency under the new norm” hence, deferred till April 2017 and will come into effect with GAAR (General Anti Avoidance Rules). Similarly, ‘company considered resident under PoEM guidelines will not have obligations of TDS or Advance Tax’. The final guidelines are not yet in place. We need to wait and see how this will affect the ease of doing business.
Entrepreneurs nightmare and an accountants dream!
