This article begins with exploring the routes of foreign investment in India. There are primarily two ways. These are the automatic and approval route. Foreign Direct Investment is one of the most important positive drivers in the Indian economy.

The Indian economy is a very vast economy which is spread across 29 states and 9 union territories and all of them come under a single tax regime. Foreign investments however, come under the purview of FEMA and FIPB. FEMA (Foreign Exchange Management Act) is the regulatory Act and FIPB (Foreign Investment Promotion Board) is the regulatory body which oversees the foreign investments.

Then, an introduction is given about the ECB (External Commercial Borrowings). These enable an Indian resident to borrow from overseas. The article also deals with the corporate tax system that is followed in the country and also with the Double Taxation Avoidance Agreement. In India the system of taxation is governed by the provisions mentioned under the Income Tax Act, 1961.

This article discusses in detail about how the DTAA protects the foreign investors from the double taxation system. Over 85 countries have signed the DTAA with India. It is anticipated that the study of this article will give the readers a brief idea about the investment mechanisms in India and also a brief understanding about the taxation laws.

Introduction:
The Indian economy is in a state of expansion as the population increases. This results in more and more companies looking to set up shop in the country. Even a number of businesses are attracted by the options being offered in India. In India, we have a very strong and well developed legal system, a skilled workforce, and ultimately a low-cost base. India is a very vast country comprising 1.3 billion people divided into 29 states and 9 union territories. And yet, we have just one direct tax regime. The indirect tax is governed by the GST. The Foreign Exchange Management Act, 1999 is the gateway of investment into India and the trade between India and the rest of the world.

The corporate tax system in India is governed by the Income Tax Act of 1961, which also lays down various provisions which governs the taxpayers. It also states the punishment which is to be inferred upon a person who involves himself in the act of tax evasion or tax crime of similar nature. The corporate tax is levied upon the net income of the companies; it does not include the salary income.

The Double Taxation Avoidance Agreement is a part of the corporate taxation system in our country; it protects the foreign investors from the clutches of double taxation. It is a tax treaty which is entered into by the two countries, that is, the source country and the origin country. The Organization for Economic Co-operation Development (OECD), in its model convention (1977), lays down the general principles that are to be followed by the two contracting countries. Let us further see the various regulations and their compliance requirements along with their repercussions, in detail.

Regulation:

FDI plays a very important role in the growth of the development of the economy in India. It not only impacts the economy in a positive manner but it also brings about foreign talents into the local arena. The government has put forth a very transparent policy. In many sectors, 100% of paid-up capital is allowed which was not so before. Some of the sectors which are still not coming under the FDI radar are retail trading, atomic energy, and lottery/ gambling. The opening up of sectors to FDI has been the best thing that the government has decided to do.

There are two primary routes via which Investments can be made in India from abroad: The automatic route and the approval route.

Automatic Route:

In the case of the automatic route, the investors are required to notify the relevant regional office of the RBI within 30 days of inward remittances. The appropriate documents have to be filed. Some examples in this route are, software services and marketing, etc.

Approval Route:

This route is a little more stringent than the automatic route. Approval has to be obtained before FDI can flow in the country. An example may be given at this point. Taking the telecommunications industry, the investment may be allowed for up to 49% under the automatic route. For more shares, it is subject to the approval of the FIPB.
It is important for the government to bring the amount of money being invested in the radar. This filters out any possibilities for any malpractices which might happen. Also, the amounts here are usually in thousands of crores. It is in the best interest of people that the amount coming from outside the country is subject to regulations.

Publishing Industry:

Hundred percent of foreign investment has been allowed for non-news publications like scientific magazines/specialty journals/ periodicals which have to take the approval of the FIPB and which also have compliance requirements under the Ministry Of Information and Broadcasting. As per the MIB guidelines, the specific approval of a ministry is to be required for investments in India. And this approval is usually only granted when the foreign company proposes to incorporate a company in India. MIB’s approval requirements are quite stringent in nature.

As per a survey[1], for many foreign companies, India has emerged as a very lucrative outsourcing destination like Butterworth Heinemann UK and USA, Cambridge University Press, etc. These companies have outsourced content management services to India. India has been considered quite an attractive destination in many cases by many companies. The factors for this have been mentioned in the introduction paragraph.

Business Presence By Foreign Companies:

One of the most important decisions which an entrepreneur has to make is the decision regarding the selection of the most appropriate form of business entity. All these have to be coordinated and have to be organized in a formal pattern of the relationship which ultimately requires control and then ownership. A foreign company can set-up it’s operations in a variety of modes, e.g, setting up a subsidiary company or a liaison office.

This decision that the entrepreneur makes, is quite crucial for the health of the business which he intends to run. Hence, there is no one form of business that is considered the best for all forms of business as the objectives may vary. There can be an example for this at this point. If a company wants to enter India for a long period of time, it is much better for the company to set up a wholly-owned subsidiary than setting up a liaison office in India. Hence, ultimately the entrepreneur has to consider the nature of the business, expected life of the business and many other factors before venturing into business.

Exchange

India’s exchange control is governed by the Foreign Exchange Management Act, 1999. It is the legislation which governs inbound and outbound investments in India. For current account transactions, if the payment is made in foreign exchange, it actually does not require any prior permission. However, permission is required in case of transactions which are specified.

Overseas borrowings by Indian residents are regulated through the External Commercial Borrowing Guidelines. Not only Indian residents, but Indian companies as well. ECB’s have a lot of restrictions as well. ECB’s above 20 million dollars need to have an average maturity of 5 years and below 20 million dollars need an average maturity of 3 years.

There are certain restrictions for the end use of the funds also. The companies may use it for expansion however; they cannot use it for onward lending or for any existing loans. The companies need to be very cautious with the use of ECBs as they strictly fall under the purview of a scanner of the government.

Similar to FDIs, they have to go through two routes that is the automatic and the approval routes. The same conditions with regards to obtaining the RBI approval for specific sectors all apply. It can be seen that the Indian government has scrutinized this area well and placed some well-intended restrictions as well. All of this, in the end, helps the economy.

Corporate Tax System In India

In India the income of the people are taxed in consonance to the provisions laid down by the Income Tax Act, 1961. This Act applies to the whole of India and is to be followed in order to pay and collect tax in a legal manner. The Act also accommodates the provisions for punishment in case of tax evasion or violation. The tax is levied upon the income accrued by the people and is collected at the end of the financial year (a period of 12-months starting from the 1st of April till the 31st of March).

Corporate tax is a taxation system which is levied upon the income earned by a company and the same is imposed, upon the companies, by the Income Tax Act, 1961. There are two-kinds of companies: domestic companies and foreign companies.

A domestic company is a company whose business has its origins rooted in India and is registered under the Companies Act, 1956. A foreign company is a company that has its origins elsewhere but has a place of business situated in India, for example, Amazon is a foreign company whose headquarters is situated in the United States of America, but it also has a place of business set-up in India.

The income accrued by the companies are adjusted by setting-off and carrying forward the losses, as mentioned under Section 79 of the Income Tax Act 1961, to arrive at the total gross income. After the total gross income is calculated the deductions specified under Chapter VI-A, are applied and the net income is derived. The tax is then imposed on the net income calculated. Salaries are not included in the company’s income.

Ideology Of DTAA

Double Taxation Avoidance Agreement is a tax treaty (an agreement or a conclusion arrived upon by two countries to resolve the problems arising out of double taxation of incomes. These treaties, generally determine the tax amount that can be enforced by a country upon its taxpayer’s income, asset or wealth[2]), between two countries to eliminate double taxes, which are paid by the taxpayer.

To avoid this system of double taxation, the countries get into an agreement as to who holds a right to tax such people; this is where the Double Taxation Avoidance Agreement plays a crucial role. The general principles of these agreements were laid down by the Organization for Economic Co-operation and Development (OECD); these principles are tailored according to the needs of both the contracting countries.

The OECD model draft of 1977 is a by-product of the first bi-lateral convention formulated by the League of Nations in 1928, followed by a series of similar model conventions. A three-judge bench in the case of Laxmipat Singhania v. CIT,[3] held, It is a fundamental rule of the law of taxation that, unless otherwise expressly provided, income cannot be taxed twice. The main reason why these forms of agreements came into force was because of the people who glean their income from one country and reside in another country.

In such situations that particular person is liable to pay taxes to both the countries, that is, the country from which he derives his income and the country in which he resides. Over 85 countries in the world have signed the Double Taxation Avoidance Agreement (DTAA) with India, due to which a separate branch for DTAA was formulated in the Indian law of taxation.[4]

Conclusion:
From all the data which has been presented above, it is to be concluded that foreign direct investment is quite an important source of upliftment for the Indian Economy. Not only is the foreign talent pool being brought to India but also their way of doing things mixed with ours should give us a fairly streamlined and efficient system of taxation.

Taxes have been levied upon people for centuries, from the king’s rule till today and will continue for years to come. The only thing that will keep changing are the percentage of tax levied upon the earning class people of the society. Although the double taxation agreement is quite a new phenomenon, it attests to the international cooperation of various countries to the agreements, that is, the laws are being made flexible in order to protect and increase the foreign investors and their investments while also keeping an eye out for any suspicious activities against which the regulations provide safeguards against.

The nations in the present era have understood that business interests, if they have to be realised to their full potential, cooperation between nations is absolutely mandatory. Else, the whole system will be rigged for failure which is not the intended consequence of these agreements and regulations imposed.

Consequently, the matter in hand is quite serious when it comes to fraud and malpractice detection. It is for the detection and eradication of such practices that such stringent rules are in place which have to be religiously followed by the stakeholders involved, as the rules and regulations imposed are made keeping in mind their own safety.

End-Notes:

1. NASSCOM—McKinsey report
2. https://www.investopedia.com/terms/t/taxtreaty.asp.
3. (1969) 72 ITR 291 (SC).
4. Chapter IX of the Income Tax Act, 1961

Written By:

1. Vijay Sudharshan - SASTRA Deemed to be University, Thanjavur
2.  Darshan V - SASTRA Deemed to be University, Thanjavur