Indian tax system for Canadian companies

In India, both domestic and foreign corporations are required to pay corporate taxes as per the Income-tax Act, 1961. To determine the corporate tax, corporations are classified as either domestic or foreign.

Domestic corporations are duly registered under the Indian Companies Act, operating their business and management exclusively within the territorial bounds of India. Conversely, foreign corporations are entities not registered under the Indian Companies Act, with their base and management situated outside India.

Foreign corporations are liable for corporate taxes within India solely on income generated within the country. On the other hand, domestic corporations are subject to taxation on their global income.

Corporate residence

A company is regarded as a resident of India in any given fiscal year if:

• It is an Indian company, or
• Its place of effective management in that year is in India.

Modes of establishing presence in India

Foreign companies have long been drawn to India's swiftly expanding market. However, the complexity of registration often deters them due to paperwork. Yet, the Indian government has notably improved the business environment with streamlined processes like online single-window clearances.

Presently, foreign entities can establish themselves in India through two main avenues: as a foreign company or as a wholly Indian entity.

For the foreign company route, three options exist: setting up a liaison office, a branch office, or a project office.

Alternatively, if a foreign entity aims to operate purely as an Indian entity, it can do so by either forming a wholly owned subsidiary (WOS) or a limited liability partnership (LLP).

Canadian enterprises face taxation

Canadian enterprises face taxation on their business income derived from India at a rate of 40% (along with relevant surcharges and cess) on a net basis, provided that the Canadian enterprise conducts its business activities in India through a fixed base or a permanent establishment (PE). This is applicable under the condition that a tax treaty exists between India and the country of residence of the foreign entity, specifically Canada.

Tax rates for Wholly Owned Subsidiary (WOS) (Company)

WOS companies typically face taxation at around 34%, which includes surcharge and cess (if the net income exceeds INR 4 billion). However, for WOS companies with a total turnover that doesn't surpass INR 4 billion, the applicable tax rate has been lowered to 25% (resulting in an effective maximum rate of 29.12% with surcharge and cess). This adjustment aims to encourage medium and small enterprises to transition to company structures and to create a more feasible taxation framework for them.

Under the 2019 amendment, WOS companies have the option to be taxed at an effective rate of 25.17% (including surcharge and cess) under section 115BAA of the Income-tax Act. To avail this option, companies must meet certain conditions, such as not claiming certain deductions and exemptions under the Act and not being allowed to set off current or carry forward losses or depreciation attributable to these deductions. Companies can claim depreciation as prescribed under the Act but cannot claim additional depreciation under section 32(1)(iia).

Health and education cess

The amount of income tax and the applicable surcharge shall be further increased by health and education cess calculated at the rate of 4% of such income tax and surcharge.

Tax rates for Limited Liability Partnership (LLP)

A partnership firm, LLP, or a local authority must pay income tax at 30%^{Footnote *} of average taxable Income.

Tax rates for Branch Office (BO)

A PO (Project Office) or BO (Branch Office) is treated as an Indian PE of its foreign headquarter. Therefore, it is taxable in respect of its Indian profits at a rate of 40%.^{Footnote *}

Tax rates for Liaison Office (LO)

A LO is generally not subject to income tax in India, as it cannot conduct business activities and earn profits on account of Indian exchange control regulations.

Withholding taxes (WHT)

Canadian enterprises are also subject to Indian withholding taxes at applicable rates for the following income streams:

• Royalties
• Fee for technical/Included services
• Interest
• Capital gains, etc.

Minimum Alternate Tax (MAT)

According to Section 115JB of the Minimum Alternate Tax Act, all companies, whether domestic or foreign, are obligated to pay MAT. This measure was implemented to prevent any taxpayer with a substantial economic income from evading a significant tax liability through exclusions, deductions, and credits.

MAT is exclusively applicable to companies and does not extend to individuals, HUFs, partnership firms, and similar entities. MAT provisions do not extend to foreign companies without a PE in India.

Further, the Finance Act of 2018 stipulates that MAT provisions shall not be applicable to foreign companies if their total income solely arises from shipping business, mineral oil exploration, aircraft operations, civil construction in turnkey projects, and related income, subject to specific provisions under the Act.

Under the MAT concept, a company's tax liability is the higher of two values:

1. The company's tax liability is calculated according to the normal provisions of the Income-tax Act, i.e., tax is computed based on the company's taxable income using the applicable tax rate. This is termed as the normal tax liability.
2. Tax is computed at a rate of 15% (plus surcharge and cess, where applicable) on book profit.