India has emerged as one of the world's fastest developing countries in recent years, with an increase in economic activity owing to huge influxes of international investments and technological collaborations. All this has increased the challenge of charging tax on foreign entities.
The tax on foreign entities in India is based on different aspects such as place of income, source of income and presence of the entity in India. So with the increase of global business presence in India, the concept of PE has gained importance.
If a company is incorporated in India, its earnings are subject to Indian taxation. India has the authority to tax a company's global income on the basis of the "residential base" of taxation. India also has the power to tax the foreign company's income to the extent that the source of income is in India. According to the Indian Income Tax Act, if a foreign company's income is received or deemed to be received in India, or is accrued/ arisen or deemed to have accrued/ arisen in India, the source of such income is said to be in India, and India has the right to tax such income under the principle of "source base" taxation. If a foreign company has a long-term presence in India for the purpose of conducting business, the revenue received by such company, to the extent that it is due to their presence in India, becomes taxable in India. The concept of Permanent Establishment (PE) is derived from this rationale.
Permanent Establishments can be of the following types:
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Fixed Location PEWhen the following criteria are met, a foreign enterprise's fixed place PE exists in India.
In the case of construction or installation projects, a taxable event will occur in India only if a foreign enterprise's operations in India form a "construction PE". When a construction site or installation project is carried out over a period longer than the specified duration under the respective tax treaty with that country, it is referred to as a Construction PE.
Service PE
If a foreign enterprise delivers services (other than Fees for technical services) in India through workers or other persons for a period of time that exceeds a threshold limit, a Service PE exists.
Dependent Agency PE
If a person residing in India represents or acts on behalf of a foreign enterprise, his presence in India may be construed as the foreign enterprise's presence in India, triggering the establishment of a PE in India.
Subsidiary PE
The mere presence of a subsidiary company in India does not automatically make it a PE of the parent company. To make a subsidiary a PE, the parent company's operations must be conducted through the subsidiary company, as defined by the other PE provisions.
Consequences of establishment of PE in India
Once it is determined that a foreign firm has a PE in India, profits linked to its activities in India will be taxed as "Business Income" in accordance with Article 7 of the treaties.
(Ruchika Bhagat is the managing director (MD) of Neeraj Bhagat & Co. an ISO 9001: 2008 UKAS certified organization, founded in 1997. Ruchika graduated in 1996, a member of the Institute of Chartered Accountants of India (ICAI) since 1998. She specializes in Business Advisory, Tax, Regulatory and Risk Advisory. She is a strategic adviser in setting up businesses in India for foreign companies and taking care of its compliances.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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