Some pre-Budget thoughts

FOREIGN ENTERPRISE

Disputed Demands
Indian tax authorities have an ill-repute for making high pitched assessments and also for collecting excessive tax by coercive means.

The tax officials are extremely keen to increase their tax collections to meet or improve upon their budget targets. Foreign companies which are not used to facing such situations are often forced to pay even highly disputed tax demands.

Taking cognisance of the practical situation in India, a Memorandum of Understanding was signed between India and U.K. which was notified by Instruction No.3/2004 dated 19th March, 2004. The effect of the MOU is that the furnishing of the bank guarantee should be treated as sufficient arrangement to qualify for exercising discretion by the Assessing Officer for extension of time limit for payment of taxes.

It is high time that the Government of India should make similar arrangements with other countries as well. Such bilateral agreements pending, the CBDT may take suo-moto steps and issue instructions to the departmental officers to accept bank guarantee against disputed tax demand.

Tax on expatriate employees
Tax structure relating to foreign employees needs to be rationalised. Their taxation continue to remain complex and complicated, particularly because such employees generally have an income base outside India also. Under the existing provision of Income-tax Act, foreign income of an expatriate will not be taxed in India if his tax status is that of a 'non-resident' or 'not ordinarily resident'.

The Income-tax law was amended by Finance Act, 2003. The effect of amendment made in 2003 is that a foreign employee can claim the status of 'not ordinarily resident' for a maximum period of two years only.

This will certainly discourage expatriate employees to take up Indian assignments for a period of more than two years, which does not help the industry or services where expatriates are engaged. It is, therefore, strongly felt that the amendment made by the Finance Act, 2003 should be withdrawn.

Updation of Tax Treaties
A large number of tax treaties were made by India prior to the policy of economic reforms and global liberalisation. The income-tax law has, however, substantially changed since then. It is, therefore, necessary that the Government should update all the tax treaties so as to synchronise them with the current tax provisions.

Tax on Dividend declared by Domestic Companies
The dividend income is entirely free of tax in the hands of the recipient. But, an 'additional Income-tax' is levied on the dividend distributing company at the flat rate of 12.5 per cent on the amount declared, distributed or paid by such company by way of dividends. The said additional Income-tax is payable in addition to the normal Income-tax.

The levy of 'additional income-tax' which effectively reduces the quantum of dividend to be declared by a domestic company directly hits a foreign investor because the said additional income tax does not qualify for the underlying tax credit in the investor's home country.

The reason is simple: additional income tax is paid by the Indian domestic company (and not by the shareholder). The credit for tax will be available only of the taxes which are paid in India by the shareholder himself.

It is, therefore, advisable that the suitable amendment be made in the Income-tax Act to ensure that non-resident shareholders become entitled to tax credit for the additional income tax paid by the Indian domestic company.

agar@bol.net.in