June 14, 2024

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What is Cross Border Taxation and How It Works?

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With the world turning into a global village, the commercial activities of several businesses are no longer limited to their home country. One vital aspect of expanding your business overseas is taxation. Check out this post to know how taxation works on such cross-border transactions.

Now more than ever, businesses in India are setting sights on expanding their operations overseas. As one of the fastest-growing economies in the world, foreign businesses are also keen on investing in India.

While the opportunities for such cross-border expansions are increasing, businesses should focus on taxation before getting involved in such endeavours. From compliance to the cost of conducting such overseas operations, taxation is one aspect that could significantly impact your commercial enterprise.

Here is a brief overview of cross border taxation in India-

Types of Cross Border Transactions

With regard to taxation, business transactions can be divided into two categories- inbound and outbound. Inbound transactions are ones that foreign corporations conduct in India. Outbound transactions are conducted by Indian businesses with a foreign individual or entity. Both transactions are taxable as per the IT laws in the country.

The Indian government also reserves the legal right to levy taxes on the income generated by domestic businesses and citizens, irrespective of where they do business or live. The same rule applies to foreign entities generating income in India. This often leads to the problem of double taxation.

What is Double Taxation and DTAA?

Double taxation is an event wherein a business or citizen is required to pay taxes on the generated income in the home country as well as the foreign country from where the income is generated. The DTAA (Double Taxation Avoidance Agreement) has been put in place to avoid double taxation.

Currently, India has signed DTAAs with more than 80 countries, including the USA, the UK, Saudi Arabia, Canada, Singapore, and Australia. However, the terms of the agreement vary between countries. For instance, the resident country might fully or proportionally exempt the foreign income or provide grants against the taxes already paid in a foreign country.

How are Foreign Corporations Taxed in India?

Foreign companies or non-residents generating income from India are taxed at 40% as per the cross-border taxation laws of the country. If the income is above INR 10 million but below INR 100 million, an additional surcharge of 2% is applicable. If the income is above INR 100 million, a surcharge of 5% is applicable. Additionally, there is also a health and education cess at 4% of the tax amount.

MAT (Minimum Alternative Tax) provisions are not available for foreign companies that do not have PE (Permanent Establishment) in India. As a result, many foreign entities wanting to expand in India consider having a PE here as it often leads to significant tax savings.

Understanding Cross Border Taxation in India

To attract foreign businesses, the Indian government has introduced several different provisions. But a detailed understanding of the tax system and the recent provisions is a must to take maximum advantage. Professional assistance from a tax advisory firm is generally the go-to choice of businesses wanting to conduct commercial operations in India.

 The knowledge and expertise of such advisory firms can help foreign entities ensure compliance and conduct their business in the most tax-efficient manner.

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