globaltaxnews.ey.comSign up for tax alert emailsForwardPrintDownload |
15 May 2018 Indian Government tightens tax return non-compliance penalties and legal proceedings against foreign companies Under Indian Income tax law (ITL), a company, including a foreign company, is required to file an income tax return in India. In the case of a foreign company, the provisions are generally applicable when the foreign company has sufficient nexus or income sourced in India, even if such income is fully subject to withholding tax. The only exception is for specific types of income, provided that the full tax is withheld at source. Until 2016, only a nominal penalty was imposed on the failure to file an income tax return at the discretion of the tax authority, if most or the entire amount of taxes due were otherwise withheld at source. Further, legal proceedings were not applicable unless there was unpaid tax exceeding INR3,000 (US$46). However, this trend has been changed recently. The Indian Finance Act, 2016 amended the penalty provisions applicable for a taxable year beginning on 1 April 2016, increasing the risk of penalty for underreporting of income to 50%1 of the tax liability on income earned in India, even if the tax is fully withheld. The Indian Finance Act, 2018 (the Finance Act 2018) has further amended the legal proceedings for a willful failure to file an income tax return by the due date, effective for tax returns for taxable years beginning on or after 1 April 2017. Under the Finance Act 2018, the principal officer of a company, including a foreign company, may become subject to legal proceedings including prosecutions for failure to file an income tax return, even if final tax due is less than the INR3,000 minimum tax liability. In view of the above amendments and given that the wide coverage related to failure to file income tax returns, a foreign company having sufficient nexus in India and/or earning income in India irrespective of whether the tax was fully satisfied via withholding may be exposed to not only monetary penalties but also legal proceedings for failure to file an income tax return. Due to the above amendments, multinational entities should evaluate their current income tax return filing positions and take appropriate action. Document ID: 2018-5653 |
