Introduction to International Taxation
International taxation refers to the set of rules and regulations that govern the taxation of income earned by individuals, companies, and other legal entities across borders. In India, international taxation plays a crucial role in managing the taxation of residents earning income outside the country and non-residents earning income in India.
Residential Status and Tax Liability
The taxation of income in India primarily depends on the residential status of the individual or entity. The residential status is determined by the physical presence of the individual or entity in India. There are two categories of taxpayers:
- Resident : A resident taxpayer is liable to pay Tax on their global income in India.
- Non-resident : A non-resident taxpayer is only liable to pay Tax on income earned in India.
Double Taxation Avoidance Agreements (DTAAs)
Types of DTAAs
To prevent the issue of double taxation, where income is taxed in both the source and residence countries, India has entered into Double Taxation Avoidance Agreements (DTAAs) with various countries. These agreements can be:
- Comprehensive : Covering multiple types of income and taxes.
- Limited : Covering only specific types of income or taxes.
Benefits of DTAAs
DTAAs provide benefits like:
- Tax rates are lower for some forms of income.
- Exemption from Tax in one of the countries.
- Taxes paid in one nation may be offset by taxes payable in the other country.
Transfer Pricing Regulations
India’s transfer pricing regulations aim to ensure that transactions between related parties are conducted at arm’s length, i.e., at the same price as if they were unrelated. These regulations help prevent tax evasion by multinational corporations that shift profits to low-tax jurisdictions.
Withholding Tax
Domestic Payments
Withholding Tax, also known as Tax Deducted at Source (TDS), is applicable to various types of domestic payments, such as salaries, rent, and professional fees. The payer must withhold Tax at specified rates before making the payment to the recipient.
Foreign Payments
Withholding Tax is also applicable to payments made to non-residents, such as royalties, fees for technical services, and interest. The rates of withholding Tax on foreign payments depend on the provisions of the relevant DTAA or the Income Tax Act, whichever is more beneficial to the non-resident.
Equalization Levy
The equalization levy is a tax introduced in India to address the challenges posed by the digital economy. It is applicable to certain specified digital services provided by non-resident companies to Indian residents or businesses. The equalization levy is aimed at ensuring a level playing field for domestic and foreign digital service providers.
Place of Effective Management (POEM)
The Place of Effective Management (POEM) is a concept introduced in India to determine the residential status of a foreign company. If a foreign company’s POEM is found to be in India, the company is treated as a resident and is subject to Tax on its global income. The POEM is generally the place where key management and commercial decisions for the conduct of the company’s business are made.
Indirect Taxation
Goods and Services Tax (GST)
A number of indirect taxes have been replaced by the GST. in India, such as excise duty, service tax, and value-added Tax. GST is applicable when goods are supplied. And services within India and to imports. Exports are zero-rated, which means that exporters can ask for a refund of the GST they paid for inputs.
Customs Duty
A levy imposed on the import and export of commodities is called a customs duty. The rates of customs duty depend on the Customs Tariff Act’s classification of products. In addition to the basic customs duty, various additional duties may also be applicable, such as the Integrated Goods and Services Tax (IGST) and compensation cess.
Tax Treaties and Dispute Resolution
India has entered into tax treaties with various countries to promote economic cooperation and investment. These treaties provide for the resolution of tax disputes through a Mutual Agreement Procedure (MAP), where the competent authorities of the contracting countries negotiate to resolve disputes arising from the interpretation or application of the treaty.
Recent Developments and Future Outlook
India’s international taxation landscape is evolving continuously, with the government taking steps to align its tax policies with global best practices. India has been an active participant in the Base Erosion and Profit Shifting (BEPS) project led by the Organisation for Economic Cooperation and Development (OECD) and has implemented various BEPS recommendations to tackle tax avoidance.
The future of international taxation in India will likely witness further changes to accommodate the challenges posed by the digital economy and to ensure fair competition among domestic and foreign businesses.
Conclusion
International taxation in India has become increasingly complex due to globalization and the digital economy. The government is striving to balance the interests of taxpayers and revenue collection while ensuring a conducive environment for international trade and investment. Understanding the intricacies of India’s international taxation regime is essential for businesses and individuals engaged in cross-border transactions
FAQs
What is the basis for taxation in India?
The basis for taxation in India is the residential status of the individual or entity, which determines the scope of their tax liability.
What is a Double Taxation Avoidance Agreement (DTAA)?
A DTAA is a bilateral or multilateral agreement between countries to prevent the double taxation of income earned across borders.
What are the objectives of transfer pricing regulations in India
The objectives of transfer pricing regulations are to ensure that transactions between related parties are conducted at arm’s length and to prevent tax evasion.
What is the equalization levy?
The equalization levy is a tax on specified digital services provided by non-resident companies to Indian residents or businesses to ensure a level playing field for domestic and foreign digital service providers.
How is the Place of Effective Management (POEM) relevant to international taxation in India?
The POEM is used to determine the residential status of a foreign company for taxation purposes in India. If a foreign company’s POEM is in India, it is considered a resident and is subject to Tax on its global income.