The CBDT has issued the Final Notification No. 29/2018 dated 22 June 2018 (applicable from AY 2017-18) for exception, modification and adaptation in respect of a foreign company said to be resident in India due to its place of effective management (POEM) being in India, under Section 115JH of the Income-tax Act, 1961 (the Act). This is on the similar lines of the draft notification. Below are the additional key changes incorporated in the final notification:
– If the foreign company is assessed to tax in the foreign jurisdiction and where depreciation is not required to be taken into account for computation of taxable income, then the opening written down value (WDV) on the 1st day of the previous year, shall be calculated as if the asset was installed, utilised and the depreciation was actually allowed as per the provisions of the laws of that foreign jurisdiction
– The brought forward loss and unabsorbed depreciation originally adopted in India shall be revised or modified for the purposes of set off or carry forward, to the extent they are revised or modified in the foreign jurisdiction due to any action of the tax or legal authority
– In a case of carry forward of loss and unabsorbed depreciation, where the accounting year does not end on March 31; the period starting from the date on which the accounting year immediately following the said accounting year begins to March 31 of the year immediately preceding the period beginning with April 1 and ending on March 31 during which the foreign company has turned resident is:
♦ less than six months, it shall be included in that accounting year;
♦ equal to or more than six months, than that period shall be treated as a separate accounting year.
– Where the accounting year followed by the foreign company does not end on 31st March, loss and unabsorbed depreciation as per tax record or books of account shall be allocated on proportionate basis to the respective previous years
– Compliance of the provisions of Chapter XVII-B of the Act, which relate to deduction of tax at source, as applicable to the foreign company prior to its becoming Indian resident shall be considered sufficient compliance to the provisions of said Chapter
– In a case where income is offered to tax in more than one year, credit of foreign tax paid or deducted, shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India in respect of the income to which it relates
– The exceptions, modifications and adaptations referred to in the notification shall not apply in respect of such income of the foreign company which would have been chargeable to tax in India, even if the foreign company had not been resident of India on account of its POEM.
– In a case where the foreign company is said to be resident in India for two succeeding previous years, the exceptions, modifications and adaptations referred to in the notification shall apply to the said previous year, subject to the condition that the WDV, brought forward loss and unabsorbed depreciation shall be taken from last day of the preceding previous year in accordance with the provisions of this notification
– In case of conflict between the provision applicable to the foreign company as resident (on account of its POEM) and the provision applicable to it as foreign company, the later shall generally prevail. Therefore, the rate of tax shall be such which is applicable to a foreign company. However, certain beneficial provisions may still continue to apply to a foreign company.
Under section 4 of the Act, the rate of tax applicable to chargeable income, is determined by the Central Act, i.e. the Finance Act. The Finance Act specifies the rate of tax applicable to companies. A company is differentiated either as a ‘domestic company’ or ‘other than a domestic company’. Higher rate of tax is provided for ‘other than a domestic company’ as its scope of tax is limited to Indian source income as compared to a domestic company which is liable to tax on global income. Thus, the principle seems to be that as the scope of tax widens, the rate of tax to that extent is less, probably on the principles of equity.
Hence, in the case of a foreign company which is resident in India due to POEM regulations, its scope of tax is wider and equivalent to a domestic company, and therefore prescribing higher rate of tax may not be reasonable.