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Permanent Establishment (PE) is a crucial concept in international taxation, determining when a foreign company becomes liable to pay taxes in a host country.
In
India, the concept of PE holds significant importance, given its thriving
economy and attraction as a business destination. Understanding the rules and
implications of PE is vital for multinational corporations operating in India.
This
article provides an overview of Permanent Establishment in India, including its
definition, its types, and the impact of setting up PE in India.
In
India, a company incorporated within its borders is subject to taxation on its
global income based on the "residential
base" taxation principle.
Moreover,
India has the authority to tax the income of foreign companies to the extent
that the source of that income lies within India.
According
to the Indian Income Tax Act, if a foreign company's income is received,
accrued, or arises in India, India can tax such income under the "source
base" taxation principle.
When
a foreign
company sets up a long-term business presence in India, the income from
that presence is taxed in India. This is where the term "Permanent Establishment" (PE) comes from.
In
India, there are several types of Permanent Establishments recognised under the
tax laws. These types of PEs determine when a foreign company becomes subject
to taxation in India. Here are some common types of PEs in India:
This
refers to a physical location, such as an office, branch, factory, workshop, or
other fixed premises, where the foreign company carries out its business
activities in India.
Criteria
for fixed place PE in India: Fixed and consistent location, availability to
foreign entities, and conducting proper commercial activity.
* Fixed and
consistent location: For a foreign enterprise to have a fixed place
PE in India, the business location must be stable and consistent over a
reasonable period, excluding passing or casual activities. Consistency and
regularity are essential factors.
* Availability
to foreign entities: The foreign entity must have access to the
location, even if it is within another company's premises, provided the access
is regular. In such cases, the premises may be deemed as a PE in India.
* Conducting
proper commercial activity: A proper commercial activity must be
conducted from the designated location.
When
a foreign company engages in construction, installation, or assembly projects
in India for a specified duration, it establishes a Construction PE. If the
project exceeds a prescribed threshold period, the company becomes liable for
taxation in India.
This
type of PE is applicable to foreign companies involved in significant
construction activities within the country, ensuring their income generated
from such projects is subject to Indian taxation.
A
Service PE is established when a foreign company provides services within India
through its employees or personnel for a specific period. This can include
activities such as consultancy, technical assistance, or other services
rendered within India.
The
presence of a Service PE in India may subject the foreign company to taxation
on the income attributable to the services provided in accordance with India's
tax laws and relevant double taxation treaties.
Dependent
Agent PE refers to a situation where a foreign company conducts business in
India through an agent who negotiates contracts and has the authority to secure
orders on behalf of the company regularly.
The
agent must be legally dependent on the company and act exclusively or almost
exclusively for the company, leading to the establishment of a taxable presence
for the company in India.
The
presence of a subsidiary company in India does not automatically constitute a
Permanent Establishment (PE) for the parent company.
The
subsidiary becomes a PE only if the parent company's operations are conducted
through the subsidiary, meeting the criteria outlined in the PE provisions.
Once
a foreign firm is deemed to have a PE in India, the profits associated with its
activities in the country will be subject to taxation as "Business Income" as per the
provisions of Article 7 in tax treaties.
* Profits
Attribution: The
profits attributable to the PE are calculated based on what the PE would have
earned if it operated independently under similar conditions as the rest of the
company.
* Maintenance
of Books of Accounts: Companies with a PE in India are required to
maintain books of accounts in compliance with Indian accounting standards.
* Registration
and Compliance: Foreign companies with a PE in India must
apply for Permanent Account Number (PAN)
and Tax Deduction and Collection Account Number (TAN). They should also register under the regulations of indirect
taxes such as Goods and
Services Tax (GST).
* Tax-Deductible
Expenses:
Expenses incurred for the business purposes of the PE, whether in India or
elsewhere, are allowed as tax-deductible expenses for determining the PE's
earnings.
* Taxation of
Net Profits: The
net profits of the PE, after deducting allowable expenses, will be subject to
taxation as per the applicable tax rates and laws in India.
* Withholding
Tax (WHT) Compliance: Foreign companies with a PE in India must
comply with the mandatory withholding tax requirements on payments made to
non-residents, such as royalties, interest, dividends, or fees for technical
services.
Permanent
Establishment (PE) is a crucial concept in international taxation, particularly
in India, a thriving economy and attractive business destination. Various types
of PEs, such as Fixed Location PE, Construction PE, Service PE, Dependent Agent
PE, and Subsidiary PE, determine when a foreign company becomes liable to pay
taxes in India.
Setting
up a PE in India has implications such as taxation of profits, maintenance of
books of accounts, registration and compliance requirements, tax-deductible
expenses, taxation of net profits, and withholding tax compliance.
Understanding
the rules and implications of PE is essential for multinational corporations
operating in India to ensure compliance with Indian tax laws.
Don't
let PE complexities boggle your global expansion plans - contact your financial
advisor or tax advisor today, and get expert guidance tailored to your unique
business needs.
Source: https://www.linkedin.com/pulse/permanent-establishment-international-taxation-ca-manish-gupta/
Imagine, for
a moment, you're at the helm of a multinational enterprise, steering the ship
through the tumultuous waters of global business.
As a business leader, you must ensure that your enterprise navigates these waters successfully and complies with the myriad of international tax regulations. One such critical regulation is Transfer Pricing, a concept that often proves to be as complex as it is crucial.
This article
simplifies this concept and highlights the importance of Function, Asset, and
Risk (FAR) Analysis in maintaining Transfer
Pricing compliance, particularly within the Indian context.
Now, let's
delve into the world of Transfer Pricing and FAR Analysis, where understanding
and adhering to these rules could mean the difference between smooth sailing
and rough seas.
Neglecting a
robust FAR Analysis could lead to severe consequences, such as hefty penalties
and a tarnished reputation.
Transfer pricing
refers to the pricing of transactions between associated enterprises. It is a
regular part of the operations of a multinational company but needs careful
attention due to varying tax laws across countries.
The arm's
length principle, which suggests that transactions between related parties
should be conducted as if they were unrelated, forms the basis of most
countries' transfer pricing rules, including India's.
At the heart
of transfer pricing is the concept of FAR analysis - Functions performed,
Assets used, and Risks assumed.
It is a vital
tool used in transfer pricing studies to compare the functions performed,
assets employed, and risks the tested party assumes with those of independent
enterprises engaging in comparable uncontrolled transactions.
In simpler
terms, the functions refer to each entity's activities in the transaction, the
assets to the resources they employ, and the risks to the uncertainties they
assume. Understanding the FAR profile helps identify comparable uncontrolled
transactions, which are then used to determine the arm's length price.
Rule 10B of
the Income Tax Rules underscores the importance of FAR Analysis in determining
whether a transaction is at arm's length. This rule mandates the use of FAR
Analysis in the process of identifying comparable uncontrolled transactions.
Understanding
the theoretical concept of FAR analysis is one thing, but witnessing its
application in real-world scenarios truly underscores its importance.
Let's
consider the Supreme Court case of Morgan Stanley and Company Inc., a U.S.
investment bank, which entered into an agreement with its group company in
India for certain support services.
The question
was whether Morgan Stanley had a permanent establishment in India, and if so,
what income was attributable to it.
The Supreme
Court held that the employees sent on deputation constituted a service PE of
the assessee, and the income of the non-resident assessee was taxable in India
to the extent of income attributable to the activities carried on by the
non-resident through its permanent establishment in India.
This case
illustrates the importance of a detailed FAR analysis in determining an
international transaction's arm's length price.
Further, the
cases of Hoganas India and Wrigley India showcase the application of FAR
Analysis in real-life scenarios. These cases underscore how an in-depth FAR
Analysis can help businesses avoid disputes and achieve compliance with
transfer pricing regulations.
A thorough
FAR analysis played a crucial role in determining the correct transfer pricing
in these cases.
Transitioning
from the intricacies of Transfer Pricing and FAR Analysis, here are the key
takeaways from the article:
FAR analysis
is not just a compliance requirement. It is a powerful tool that can help
businesses to set prices that reflect the economic reality of their
transactions, thereby reducing the risk of double taxation and potential
penalties.
It helps
companies to identify the most suitable comparables for their transactions,
allowing them to benchmark their prices against the market and ensuring that
they comply with the arm's length principle.
As such, it
should be seen as an integral part of the transfer pricing strategy of any
multinational business operating in India.
Starting a business can be an exciting adventure full of hopes for success and wealth. Aspiring entrepreneurs across the globe are increasingly drawn to the diverse and vibrant market of India, which offers tremendous opportunities for growth and expansion. However, navigating the complex landscape of incorporating a company in India can be a hectic task, riddled with potential pitfalls.
In this article, we will shed light on the top mistakes that aspiring entrepreneurs often make while incorporating a company in India. By addressing these pain points, we aim to provide valuable insights and practical guidance to help you navigate the incorporation process smoothly.
Registering
your corporation with the government is the final step. It's a crucial step
that can help you gain credibility, access funding, and start doing business
legally. But, to ensure that your company registration is successful, you must
follow every step precisely. Any mistake could lead to serious consequences and
even cause your business to fail. Here are some mistakes that most people often
make while incorporating a company in India.
One of the top mistakes to avoid while incorporating a company in India is inadequate research and planning. Insufficient understanding of the legal, regulatory, and business landscape can lead to costly consequences.
Entrepreneurs should thoroughly research and familiarize themselves with the necessary procedures, compliance requirements, and tax obligations. Without proper planning, companies may face delays, legal complications, and financial setbacks.
It is crucial
to invest time in gathering information, consulting professionals, and
developing a comprehensive business plan that considers all aspects of company
incorporation in India.
Another common mistake to avoid while incorporating a company in India is choosing the wrong business structure. Choosing the right business structure is very important when registering your company. There are different options to consider, such as:
Each
structure comes with legal restrictions and opportunities. Therefore, it's
important to weigh the advantages and cons of each structure and match it to
your business goals, expansion plans, and operations.
India has a
robust regulatory framework that imposes various statutory compliances on
businesses. These include:
Failing to comply with these requirements can lead to severe penalties, legal consequences, and reputational damage. It is essential for entrepreneurs to familiarize themselves with the specific statutory compliances relevant to their industry and diligently fulfill them to operate within the bounds of the law.
Incorrect
share capital determination in India can lead to significant complications
during the incorporation process. Share capital represents the value of a
company's shares and plays a crucial role in determining its financial
structure and legal obligations.
Incorrectly assessing the share capital can result in legal and compliance issues, delayed registration, and potential penalties.
It is essential to carefully calculate and allocate the appropriate share capital, taking into account factors such as business needs, future growth, and regulatory requirements to avoid unnecessary complications and ensure a smooth and legally compliant incorporation process in India.
Another task
when establishing a startup company is to decide on a unique name for Company Registration. However, this
seemingly simple task can lead to potential problems if not done correctly. The
Companies Act, 2013, Trademark Act, 1999, and the Names and Emblems Act, 1950,
all govern the naming of a company. The Company Incorporation Rules, 2014, also
lays down specific guidelines for the same.
The name selection process should adhere to these guidelines, ensuring it is unique, relevant, and compliant with trademark laws. Neglecting these considerations can result in delays, additional expenses, and potential damage to the company's reputation.
Therefore, careful thought and research should be invested in selecting a suitable and legally compliant name for your company in India.
Insufficient
documentation is a common mistake made during the company incorporation process
in India. The Memorandum of Association (MoA) and Articles of Association (AoA)
are vital documents that outline the company's objectives, rules, and
regulations. Additionally, various supporting documents must be filed with the
incorporation application to the Registrar of Companies (ROC).
These supporting documents include proof of identity, proof of address, and PAN (Permanent Account Number) of the applicant director. If the office premises are rented, a rent agreement and a No Objection Certificate (NOC) from the owner are necessary. Alternatively, if the office space is owned by the company owner, property documents and an NOC from the owner are required.
Failure to provide the complete and accurate documentation can lead to delays, rejections, and legal complications during the incorporation process. Thus, it is essential to submit the ROC application with all required documentation.
Memorandum
and Articles of Association (MOA and AOA) serve as the foundation of the
company's structure and define its purpose, rights, and responsibilities.
Failing to provide clear and concise information in the MOA and AOA can lead to
confusion and disputes down the line.
It is essential to ensure that these documents accurately reflect the company's objectives, shareholding structure, and operational guidelines, leaving no room for ambiguity.
Intellectual
property refers to a business’s creative ideas, innovations, designs, and
inventions. Failing to protect it can lead to someone stealing an idea and
claiming it as their own, resulting in potential financial loss and damage to
your reputation.
Even micro-businesses must protect their intellectual property to ensure their product remains rightfully and legally theirs. It's essential to comply with Intellectual property law and avoid copying another business’s logo, watermark, or copyright.
Copyrighting ideas is an effective way to protect intellectual property. Requesting an attorney to make an inventory of the business’s intellectual property can also help ensure that it's protected from infringement.
Failure to
obtain necessary licenses and permits can be a critical mistake while
incorporating a company in India.
Obtaining the right licenses and permits is crucial for ensuring legal compliance and avoiding potential penalties or legal disputes. From business registrations to sector-specific licenses, such as environmental clearances or food licenses, each industry has its own set of requirements. Ignoring or neglecting these obligations can lead to operational disruptions, hefty fines, or even closure of the business.
Therefore, it is essential to thoroughly research and diligently obtain all the necessary licenses and permits to ensure a smooth and legally compliant business operation.
Starting out
with a corporate vision and mission is crucial. Without a clear goal, it's hard
to make strategic decisions, attract investors, and establish a powerful brand.
By explicitly stating your company's goals, you set a course for success, align your staff, and lay the groundwork for development and sustainability.
When
incorporating a company in India, it is crucial to be aware of and avoid common
mistakes. By recognizing and avoiding those above pitfalls, entrepreneurs can
enhance their chances of successfully establishing a company in India. Proper
preparation, adherence to regulations, and seeking expert advice are key to
navigating the complexities of the incorporation process and setting a strong
foundation for business growth and compliance in the Indian market.
In this video, I have shared Pvt. Ltd Company vs. LLP: Which Structure Offers More Benefits?
Are you planning to expand your business internationally? In this video, I have shared to the concept of benchmarking in transfer pricing compliance and🔍 why it is crucial before entering into international markets.➡️Don't let your business miss out on potential growth and profits in the global market.
Are
you an exporter looking to stay competitive in the global market?
With
the implementation of the Goods and Services Tax (GST) in India since July
2017, navigating the export landscape has become more complex.
How
can you ensure that your business meets all necessary compliance requirements,
including laws and regulations, tax and duty payments, and quality and safety
standards?
For those opting for the Letter of Undertaking (LUT) scheme, the GST refund process may seem daunting.
Therefore,
this article offers valuable insights into the potential challenges and
pitfalls during the GST refund process and highlights reasons why the tax
department might not process Input Tax
Credit (ITC) refund applications.
Get
ready to discover key strategies for streamlining your GST refund experience
and ensuring a successful outcome!
Let's
explore some of the common reasons why applications for refunds of ITC do not
get processed in the tax department.
One
of the common reasons why GST return applications for exports may not be
processed in the department is due to a failure to reconcile GST returns for
the concerned period.
* GSTR-1 with
GSTR-3B: Reconciling
GSTR-1 with GSTR-3B is important. Failing to do so can result in a show-cause
notice from the GST authorities and create difficulties in processing of GST
refund applications. Therefore, it is crucial for exporters to perform
reconciliation from time to time to avoid any discrepancies.
* GSTR-2A with
GSTR-3B: Another
crucial step in the GST return process for exports is the reconciliation of ITC
claimed in GSTR-3B with one reflecting in GSTR-2A. This exercise enables
businesses to claim the full Input Tax Credit (ITC) and rectify any excess ITC
claimed. By performing reconciliation before filing GSTR-3B, exporters can
avoid any potential demand notices from the tax authorities, thereby making it
an essential step to easy processing of refunds.
It
is crucial for exporters to ensure that the details in the shipping bill align
with those in the invoice to avoid any issues with refunds. If there are
discrepancies between the two, the refund may be withheld by the department.
Therefore,
it is important for taxpayers to enter correct details such as Shipping Bill
number, Shipping Bill date, Port Code, etc., and file them in their subsequent
Form GSTR-1.
Business
owners should not take a field visit by a GST officer lightly and should ensure
that someone from the company is present at the premises during the visit.
The
officer may ask for documents related to the business, such as sale invoices,
purchase invoices, bank statements, and details of goods. Therefore, it is
crucial for exporters to have proper documents readily available to show the
officer during the visit.
The
officer's primary objective is to verify that the business premises are
actually functioning and in compliance with GST regulations. Being prepared
with the necessary documents can help ensure a smooth and hassle-free field
visit, making it easier to process refunds.
It
is important for exporters to note that capital goods are not eligible for ITC
claims if exports are made through LUT, and their claim may be denied in the
GST refund. Despite this, many exporters file GST return applications to claim
refunds against ITC of these goods.
Therefore,
it is essential for exporters to exclude these goods before filing their
applications to avoid any issues with the processing of their refunds.
By
excluding these goods, exporters can ensure that their claims for eligible
goods are processed quickly and without any issues.
Exporters
should regularly check the status of their refunds to ensure that the process
is moving smoothly. In some cases, the tax department may issue deficiency
memos or show cause notices against the refund application if they find any
discrepancies or issues.
Therefore,
it is crucial for exporters to monitor the status of their refunds regularly
and address any issues promptly to avoid any potential delays or complications
in the process.
By
staying on top of their refund status, exporters can ensure that they receive
their refunds in a timely and hassle-free manner.
Exporters
must be aware that if the tax department cancels a vendor's GSTIN, the exporter
cannot claim ITC on purchases made from that vendor. Therefore, it is essential
for exporters to identify such vendors and avoid claiming ITC credit for their
purchases.
This
is because the tax department will not provide a credit or refund for purchases
made from vendors with cancelled GSTINs.
By
being proactive in identifying such vendors and avoiding ITC claims, exporters
can ensure that their GST refund applications are processed quickly and without
any issues.
Exporters
should be aware that there is a time limit for filing GST refund applications.
The relevant date for determining the time limit is the date on which the
taxpayer exports the goods or delivers the services.
The
application for a refund must be filed within two years from the relevant date.
Exporters who miss the deadline to file their refund applications risk having
their applications rejected by the tax department.
Therefore,
it is crucial to ensure that the refund application is filed within the
designated time frame to avoid any delays or rejections.
Exporters
must ensure that they obtain the Bank Realization Certificate (BRC) and Foreign
Inward Remittance Certificate (FIRC) for the full value of the exported goods
or services.
These
certificates serve as proof of payment for the goods or services exported and
are essential for claiming the GST refund.
Therefore,
it is important to ensure that the BRC and FIRC received from the bank match
the invoice amount and payment received. In case of any discrepancies, the
exporter must take corrective action with the bank and obtain the correct
certificates before filing the refund application.
This
will ensure that the tax department does not reject the refund application due
to missing or incorrect BRC/FIRC.
Correct
invoicing is crucial for claiming GST refunds, and the HSN code on the invoice
must match with Annexure B. Any discrepancies or mismatches can result in the
rejection of the GST refund application.
Therefore,
it is important to ensure that the HSN code mentioned in the invoice is
accurately reflected in Annexure B, which is a statement of inward supplies
filed by registered taxpayers. This can help avoid any unnecessary delays or
rejections in the GST refund process.
When
it comes to GST refunds, a lack of coordination with the GST officer can cause
delays or even rejections.
While
the process of filing for a refund is primarily online, the process of
verifying and approving the refund is often manual and requires coordination
with the GST officer.
This
means that if there is a lack of coordination between the taxpayer and the
officer, it can lead to misunderstandings and delays in the refund process.
It
is important for taxpayers to communicate clearly and provide all necessary
information to the officer in a timely manner so that the officer can process
the refund application efficiently.
In
order to claim a GST refund for a particular period, it is mandatory to file
the GST returns for that period. If the returns are not filed, refund
application could not be filed and obviously there will be delays and in GST
refund.
It
is crucial for exporters to be aware of the filing deadlines and ensure the
timely submission of returns to avoid delays in receiving refunds.
Additionally, proper documentation and accurate information are key factors in
facilitating a smooth refund process.
Circular
125, issued by the GST authorities, provides guidelines and clarifications on
the GST refund process. It is important to comply with the circular while
filing the GST refund application, as it specifies the necessary documents and
information that need to be submitted.
Non-compliance
with the circular may lead to the rejection of the refund application.
Therefore, businesses should carefully review the circular and ensure that all
the requirements are met before filing the GST refund application.
Proper
shipping of goods is crucial for successful exports. It is important to ensure
that the goods are shipped thorough proper channel under custom authorities. It
is not advisable to ship through private courier companies. These modes do not
qualify for taking GST refunds from the department.
Navigating
the GST refund process for exports can be complex due to various compliance
requirements and potential issues.
Some
common reasons for unprocessed refund applications include unreconciled GST returns, discrepancies
in shipping bills and invoices, ineligible ITC claims, and lack of coordination
with the GST officer.
To
ensure a smooth refund process, it's crucial to maintain accurate
documentation, regularly check refund status, adhere to compliance guidelines,
and maintain open communication with the GST officer.
For
professional assistance in managing your GST refund process, don't hesitate to
reach out to a qualified expert who can guide you through the intricacies and
ensure timely and hassle-free refunds.
Source: https://www.manishanilgupta.com/blog-details/navigating-the-complexities-of-gst-refunds-for-exports
From July 2015 to this incredible moment, our journey has been one of dedication and perseverance. Today, we proudly unveil our new office ...
