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Dual tax rate under scanner

CMA Gul S , Last updated: 12 September 2007  

Amid the hype about India and the rush of foreign investors, the government is dealing with a simple question: Why are tax rates lower for Indian companies, while foreign companies are subjected to a higher burden?
The question, said officials, is getting louder by the day with the issue having cropped up again during the recent visit of the Japanese delegation which included some 200 companies. The "dual tax rate'' system has also been raised by some countries which are negotiating trade and investment agreements with India.

Investment consultants said they had to deal with the question all the time and a lot of investors looking to invest in India —and whose number is increasing by the day— were raising the issue. Officials too conceded that they have had to deal with the question on many occasions.

At present, Indian companies or, rather, those registered under the Companies Act, have to pay 30% corporation tax, while foreign companies have to shell out 40% on the income generated in India.

In addition, there is a surcharge for both domestic and foreign companies. On royalty and technical fees, 50% tax is paid by foreign companies.

When asked to explain the difference in tax rates, most revenue department officials said they did not know the reason. Officially, however, the reason cited is the application of dividend distribution tax to local companies, while foreign companies do not face any such liability since the dividend is paid overseas.

Privately, sources said, there was no real reason to apply two rates. "The government has done this for years. It dates back to before DDT was introduced. The idea is to encourage companies to register in India,'' said an official.
Besides, sources pointed out that paying dividend was not compulsory for Indian companies.

"The law does not mandate that dividend should be paid. In fact, the better companies first focus on consolidating their business instead of spending money trying to impress shareholders,'' said a source.

While India has adopted a policy which provides a more favourable dispensation to domestic companies, foreign players were till recently subjected to lower rates in China. It was only recently that the policy was altered and a single rate was put in place.

Officials, however, said that the government could always change the rates and in any case, it was reviewed every year before the budget.

"If there was a pressing reason to alter the policy we would have done it years ago. But there is no serious reason to change it nor is there any major demand for a new system,'' said an official.

In fact, the government is on the hunt for companies which are not registered in India but are transacting business through liaison officers in the country. Chief commissioners have already been alerted by the Central Board of Direct Taxes about the presence of such arrangements, an official said.
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