Concept of Place of Effective Management in India, There have been various issues regarding the taxability of the foreign entities established in India either by way of fully owned subsidiaries or by investments in Indian companies. The companies are now setting up the business according to the amendments in the Act. There are some conditions which need to be satisfied by the country to be resident or non resident in India. The taxability would arise according to the status of the person in India. So these conditions become a very important part of deciding the tax effect on the company. Now check more details for “Concept of Place of Effective Management in India” from below..
Concept of Place of Effective Management in India
Existing Provisions under Income Tax Act 1961
Under Income Tax Act, there are two conditions where the company or any individual or any person would be considered as resident in India, out of which if any one of the conditions is satisfied than it would be regarded as resident in India:
- It is an Indian Company (Company is incorporated in India)
- Control and the management of the company affairs are situated fully outside India
Indian Company is defined as company incorporated under section 2(26) of the act. As foreigners can come here and reside in India, same can the foreign company but there are various provisions which needs to be followed. These conditions become a key factor for deciding the residential status of the company.
Proposed Provisions under Finance Act 2015
The definition of company resident in India has been changed with effect from 1st April 2016. The changes in the definition are as follows:
- It is an Indian Company
- Its Place of Effective Management, at any time in that year is in India
The underlined provisions have been changed which has given rise to many other questions. This amendment in the provision would have a significant impact on the operations of Multi National Enterprises (MNEs) in India. This would have serious impact on the subsidiaries of the foreign companies and also to those companies in India but having subsidiaries outside India.
Definition of Place of Effective Management:
The Place of Effective Management is defined as “It is a place where the core management and the commercial business decisions would be taken which would be affecting the conduct of the business as a whole.”
For example, if the foreign company’s owners are situated or resident in India, then India would be considered as place of effective management in India and the company would be liable for taxation in India.
If the foreign company holds the board meeting or any general meeting or any formal meeting in India then it would be considered as effective place. If the transactions are directly placed or directly transferred to India but it is routed to the country then also it would be considered as effective place for deciding the status of the company.
Consequences of the changes:
The consequences of the changes would be significant as these would be affecting the foreign entities which are owned by Indians and would be taxed at the marginal rates. The department is need of such assessee which is having a very high net worth.