India: Lower Rates for Foreign Companies, IFSC Concessions, and New Penalties

With Union Budget 2024- 2025, India is proposing changes impacting foreign companies, financial firms in the International Financial Services Centre (IFSC), and non-resident liaison offices. Here are the key proposed changes:

NO PROPOSAL ON PILLAR TWO / GLOBAL MINIMUM TAX IMPLEMENTATION

Background

• India has not made a specific proposal regarding the implementation of Pillar Two or the Global Minimum Tax.

REDUCTION IN CORPORATE TAX RATE FOR FOREIGN COMPANIES

Background

• The current corporate tax rate for foreign companies in India is 40%.

Proposed Amendment

• The corporate tax rate for foreign companies will be reduced from 40% to 35%, plus applicable surcharge and cess.

• This amendment is set to take effect from 1 April 2024.

INTEREST LIMITATION RULES NOT TO APPLY TO FINANCIAL COMPANIES OPERATING IN IFSC

Background

• To address base erosion involving interest deductions, the Finance Act 2017 introduced Section 94B under the Income-tax Act, 1961, aligning with BEPS Action 4.

• This provision disallows interest payments on debt issued by a non-resident associated enterprise (AE) if it exceeds the lower of (a) actual interest paid to the non-resident AE or (b) total interest paid exceeding 30% of EBITDA.

• The disallowed amount can be carried forward for up to eight years.

• Currently, these rules do not apply to Indian companies or permanent establishments engaged in banking or insurance, or specified non-banking financial companies.

Proposed Amendment

• The exemption from interest limitation rules will be expanded to include finance companies located in the IFSC that meet conditions specified in the IFSCA (Finance Company) Regulations, 2021.

• This amendment will take effect from 1 April 2024.

INTRODUCTION OF PENALTY PROVISIONS FOR NON-FILING BY NON-RESIDENT LIAISON OFFICES

Background

• The Income-tax Act, 1961, mandates certain financial information filings to enhance transparency and compliance.

• Form 49C, an annual statement, must be filed electronically by non-residents with liaison offices in India within 60 days from the financial year-end.

• Currently, there is no penalty for non-compliance.

Proposed Amendment

• A new penalty provision will be introduced for non-compliance in filing annual statements by liaison offices.

• Penalties will include daily fines of INR 1,000 for up to three months, followed by a fixed penalty of INR 1 lakh thereafter.

• This amendment will be effective from 1 April 2024.

SOURCES/RECOMMENDED READ: 

• https://www.indiabudget.gov.in/
• EY Union Budget 2024