Do Indian Subsidiaries In India Have To Pay Taxes? | Ebizfiling

  Introduction 

 

The question is whether a foreign company has to pay taxes in India or not. The answer is Section 139(1) of the Income Tax Act, 1999 in India which describes who should file a tax return. Every business must submit its annual tax return within the time frame. The definition of a foreign company incorporated outside India is covered under section 2 (42) of the Companies Act, 2013. So every online company registered in India as a subsidiary company also has to comply with the filing of income tax returns.

 

A foreign company is a non-resident company that will only be taxed on income received, accumulated, or arising in India, a company having residential status in India will be taxed on all of its worldwide income, whether earned in India or outside India. Every foreign company that establishes operations in India is regarded as an Indian Subsidiary Company, so compliance with income tax laws is crucial for foreign businesses. But before learning about the tax returns to be filed by foreign companies, let us first take a brief look at setting up a foreign company in India. Later we will look into the taxation of foreign subsidiary companies and tax exemptions for the same.

 

The process to set up an Indian subsidiary company in India

 

Listed below are the 5 simple steps that a parent company or foreign nationals have to follow for Indian Subsidiary Company registration :

 

Step 1: Collect all the Documents

 

Step 2: Decide the name for the Subsidiary Company

 

Step 3: Drafting of AOA and MOA for the Subsidiary Company

 

Step 4: Application for subsidiary registration in the prescribed form i.e. SPICe+ Form:

 

Spice+ is divided into two parts:

 

• Part A: Apply for the name reservation of the company in Part A of the form Spice+. it can be used for taking the name approval of the proposed Company and also for filing Company registration in one go.

• Part B: In Part B of the Form Spice+, apply for the following services:

 

1. Incorporation

2. DIN allotment

3. Mandatory issue of PAN

4. Mandatory issue of TAN

5. Mandatory issue of EPFO registration

6. Mandatory issue of ESIC registration

7. Mandatory issue of Profession Tax registration(Maharashtra)

8. Mandatory Opening of Bank Account for the Company and

9. Allotment of GSTIN (if so applied for)

 

Step 5: Open a Bank Account in India under the name of the company.

 

 Foreign subsidiary company taxation 

 

In the taxation of foreign subsidiaries in India, there are a few necessary considerations. First, the corporate tax rate that is generally applied to foreign-owned businesses in India is 40%. This tax is imposed on the income of international enterprises.

 

However, in a few exceptional circumstances, this rate might be decreased. For instance, the tax rate could be lowered to 20% if the international company had its headquarters in India. Additionally, the tax rate may be lowered to 15% if the foreign business has made sizeable investments in India. The requirement for Indian subsidiary companies to withhold taxes on profits sent to their parent companies should also be taken into account. The standard withholding tax rate is 15%. However, if the parent firm is located in a nation with which India has a double taxation agreement, it might be decreased.

 

It is also important to note that several exclusions and deductions can be used to reduce the tax that is owed by foreign companies in India. For instance, foreign businesses may not be required to pay taxes on earnings from the export of goods or services. Deductions might also be possible for costs like interest payments or research and development.

 

 Tax implication of foreign subsidiary company in India 

 

Indian taxes on foreign subsidiaries can affect firms in several ways. To make sure that your company is compliant, it is critical to grasp the tax laws and regulations.

 

One of the main effects is that branch profits taxation is applied to foreign subsidiaries. The profits of the subsidiary, which are ascribed to the Indian operations, are subject to this tax. The net gains after subtracting expenses are subject to a 20 percent tax rate.

 

It follows that a foreign subsidiary’s dividend payments to its Indian parent firm are subject to Dividend Distribution Tax (DDT). DDT is charged at a rate of 15% and is due on the total amount of dividends that the subsidiary has declared.

 

The taxation of foreign subsidiaries may also affect the parent company’s overall tax obligation in India. This is because the income of the subsidiary will be included in the taxable income of the parent company. The amount of tax owed by the parent business is determined by both the profit attributable to the Indian Subsidiary Company and the parent company’s overall tax rate.

 

 Tax exemption on the foreign subsidiary companies in India 

 

If each of the following criteria is satisfied, foreign corporations do not need to file their tax returns in India under some circumstances. They are as follows:

 

• If the company’s revenue in India came exclusively from:

 

• Interest is paid by the government or an Indian business for borrowing funds in another currency.

• Dividends that are not referred to in Section 115O of the Income Tax Act.

• Government-issued bonds and securities, interest on investment fund units, and revenues from foreign exchange on currency units.

• Interest accrued from an infrastructure debt fund.

 

• The payer of income (an Indian corporation), by the terms of the Indian Income Tax Act, has deducted tax at the source and submitted it to the Indian government.

 

If both of the requirements described above are satisfied, the foreign corporation is exempt from filing a tax return in India.

 

 Conclusion 

 

We will conclude by saying the foreign subsidiary company that receives in income is mandated to file tax and comply with tax laws and regulations. There are two possible opinions about the filing of income tax returns one in which there is a specific tax regime for foreign businesses i.e., a foreign tax credit scheme. On the other hand, India’s company tax applies to all income derived from foreign subsidiaries. Dividend payments from Indian subsidiaries to their parent businesses, however, may occasionally be excluded from corporate tax.