Companies having permanent establishment in India will be taxed on their technical services fees at marginal tax rate
The finance ministry is hoping to recover about Rs 10,000 crore from non-resident service providers to oil and gas explorers in India. Finance Minister has inserted a clarification in the Finance Bill 2010-11 that will stop these companies and other service providers who had so far used a simpler tax regime to claim a lower tax rate.
The new clause in the Bill states that those companies that have set up a permanent establishment in India will now be taxed on their fees for technical services at the marginal rate of tax applicable to foreign companies. The rate at present is 42%.
Life for companies that have not set up any such establishment will continue unchanged. They will be taxed at the presumptive rate of taxation at the rate of 10% of their total earning from these services.
According to Rajiv Garg, executive director, and tax expert on oil and gas sector at PwC, the change was dynamic and in the offing.
The government has found that the provision was widely abused by overseas service providers who claimed this benign tax regime benefits (under Section 44BB of the Income Tax Act) for even royalty payment and technical services that do not require huge capital expenditure. Once a design is sold to an Indian client, the non-resident service provider may have to send some experts here to help in its implementation, which any way cannot cost as much as providing plant, machinery or vessels.
Those non-resident entities, that have a permanent establishment or a fixed place of business in India, are now to be taxed on the basis of their books of accounts (Section 44DA).
For entities that do not have a permanent establishment in India, Section 115A specifies the rate of taxation depending on when the technology partnership was signed. Royalty or technical service fee from deals signed before May 31, 1997 is taxed at 30%, while it is 20% for deals signed subsequently up to June 1, 2005. Income from newer deals are taxed at 10%