35 Questions About Indian Taxation for Foreign Companies

Why Foreign Companies Must Understand Indian Taxation Before Market Entry

India's tax framework for foreign companies is a multi-layered system spanning corporate income tax, withholding tax, GST, transfer pricing, and treaty-based provisions. Getting it wrong does not just mean overpaying — it can mean penalties of 100-300% of the tax shortfall, prosecution, and in severe cases, attachment of assets. The new Income Tax Act 2025, effective from 1 April 2026, reorganises many of these provisions, making this an essential time to understand the landscape.

This guide answers the 35 questions we hear most frequently from foreign companies operating in or considering entry into India. Every answer reflects the law as of March 2026, verified against current rates and regulations. For strategic guidance, see our complete tax guide for foreign companies in India.

Corporate Tax Rates and Structure

1. What is the corporate tax rate for foreign companies in India?

Foreign companies are taxed at 35% on their business income in India. This is the base rate. Additionally, a surcharge applies: 2% for income between INR 1 crore and INR 10 crore, and 5% for income exceeding INR 10 crore. A 4% Health and Education Cess is levied on the tax plus surcharge. The maximum effective tax rate for a foreign company is approximately 38.22% (35% + 5% surcharge + 4% cess). This is significantly higher than the rate for domestic companies, which can be as low as 22% (Section 115BAA) or 25.17% (effective rate for companies with turnover up to INR 400 crore).

2. Can a foreign company benefit from the lower 22% or 15% domestic tax rate?

No, not directly. The concessional rates under Section 115BAA (22%) and Section 115BAB (15% for new manufacturing companies) (now sunset — only grandfathered companies that commenced manufacturing by 31 March 2024 continue at 15%; new entrants use Section 115BAA at 22% / 25.17% effective) are available only to domestic companies. However, if a foreign company incorporates an Indian wholly owned subsidiary (which is a domestic company), that subsidiary qualifies for these lower rates. This is one of the key reasons most foreign companies choose to operate through a Private Limited Company subsidiary rather than a branch office. At 22% base rate plus surcharge and cess, the effective rate for a domestic subsidiary is approximately 25.17% — a saving of over 18 percentage points compared to a branch office.

3. What is MAT and does it apply to foreign companies?

Minimum Alternate Tax (MAT) ensures that companies with book profits but low or zero taxable income still pay a minimum tax. MAT is levied at 15% of book profits. However, MAT does not apply to foreign companies that do not have a Permanent Establishment (PE) in India. If a foreign company does have a PE in India, MAT is applicable on the PE's book profits. For domestic subsidiaries of foreign companies, MAT applies at 15% but companies that have opted for the concessional rate under Section 115BAA are exempt from MAT.

4. How are capital gains taxed for foreign companies?

Capital gains taxation depends on the asset type and holding period:

Note: From FY 2024-25, the indexation benefit for computing long-term capital gains has been removed for assets acquired on or after 23 July 2024, and a uniform LTCG rate of 12.5% applies.

5. Is there a dividend distribution tax in India?

No. Dividend Distribution Tax (DDT) was abolished with effect from 1 April 2020. Dividends are now taxed in the hands of the recipient shareholder at applicable rates. For a foreign company receiving dividends from its Indian subsidiary, withholding tax (TDS) is deducted at 20% under the Income Tax Act, or at the rate specified in the applicable DTAA, whichever is lower. Common DTAA rates for dividends: USA — 15% (if the recipient owns 10%+ of voting stock) or 25%; UK — 15%; Singapore — 15%; Netherlands — 10%; Japan — 10%; Germany — 10%.

Permanent Establishment

6. What creates a Permanent Establishment in India?

A PE is created when a foreign company has a taxable presence in India. Under Indian domestic law ("business connection") and tax treaties, PE can arise from: (1) A fixed place of business — office, branch, factory, warehouse, or any place where business is wholly or partly carried on; (2) A dependent agent — a person who habitually exercises authority to conclude contracts on behalf of the foreign company; (3) A service PE — if employees or personnel provide services in India for more than 90 days (or the period specified in the relevant DTAA) in any 12-month period; (4) A construction or installation PE — if a project continues for more than 6 months (or the treaty-specified period); (5) Significant economic presence — if the foreign company derives revenue exceeding INR 2 crore from transactions in India or engages with more than 3 lakh users. The landmark Supreme Court ruling in the Hyatt International case (July 2025) confirmed that operational oversight from abroad can create a PE even without physical premises.

7. What are the tax consequences of having a PE in India?

If a PE is established, the foreign company must: (1) Pay corporate tax at 35% (plus surcharge and cess) on profits attributable to the PE; (2) File income tax returns in India; (3) Pay advance tax in quarterly instalments; (4) Maintain books of account and get them audited; (5) Comply with transfer pricing requirements for transactions with the head office and associated enterprises; (6) Potentially become subject to MAT on book profits; (7) Register for GST if supplies cross the threshold. The NITI Aayog paper (October 2025) recommended optional industry-specific presumptive taxation for foreign enterprises to reduce PE-related disputes, but this has not yet been legislated.

8. Does having employees in India create a PE?

It depends on their role and duration. A service PE is triggered if employees provide services in India for more than 90 days in a 12-month period (standard threshold in most Indian DTAAs). However, even a single employee can create a PE if they have the authority to conclude contracts on behalf of the foreign company (dependent agent PE). To minimise PE risk: ensure employees in India do not have signing authority, document that contracts are approved and executed outside India, and limit the scope of Indian employees to support functions rather than revenue-generating activities. Always consult a tax advisor before placing employees in India.

9. Can a remote worker in India create a PE for my foreign company?

Potentially, yes. This is a rapidly evolving area of tax law. The OECD issued updated guidance in 2025 on PE risks from cross-border remote work arrangements. In India, if a remote worker habitually exercises authority to conclude contracts, or if the home from which they work constitutes a "fixed place of business" at the foreign company's disposal, a PE risk arises. Practical mitigation: ensure the remote worker's role is limited to support or preparatory activities, do not give them contract-signing authority, and document that the foreign company does not have the right to use the worker's home as an office. Using an EOR or contractor arrangement can reduce but not eliminate this risk.

Withholding Tax (TDS)

10. What is Section 195 and how does it affect payments to foreign companies?

Section 195 requires any person making a payment to a non-resident that is chargeable to tax in India to deduct TDS before making the payment. There is no minimum threshold — TDS must be deducted regardless of the payment amount. The section applies to payments for services, royalties, technical fees, interest, dividends, capital gains, rent, and any other India-sourced income. If TDS is not deducted, the payment is disallowed as a business expense under Section 40(a)(i), and the payer becomes liable for interest and penalties. For Indian subsidiaries paying their foreign parent companies, Section 195 compliance is a critical monthly obligation.

11. What are the standard TDS rates on payments to foreign companies?

The applicable rate is the lower of: the domestic law rate (plus surcharge and cess) or the DTAA rate. If the DTAA rate is applied, no surcharge or cess is added. If the payee does not furnish a PAN, Section 206AA mandates deduction at the higher of the applicable rate or 20%.

12. What is Form 15CA and 15CB?

Form 15CA is a declaration by the remitter (payer) to the Income Tax Department providing details of the payment and tax deducted. Form 15CB is a certificate from a Chartered Accountant certifying the nature of the payment, applicable tax rate, DTAA provisions, and tax deducted. Form 15CB is required when the remittance exceeds INR 5 lakh in a financial year. The process: the CA first issues Form 15CB, the remitter then files Form 15CA online on the Income Tax e-filing portal, and the signed Form 15CA acknowledgment is submitted to the authorised dealer bank for processing the remittance. The bank will not process the outward remittance without Form 15CA.

13. How do I determine if a payment to a foreign company is taxable in India?

The taxability analysis follows this sequence: (1) Is the income deemed to accrue or arise in India under Section 9 of the Income Tax Act? — payments for services used in India, royalties for rights used in India, and interest paid by Indian entities are generally deemed to accrue in India; (2) Does the applicable DTAA override domestic law? — if the foreign company's country has a DTAA with India, the treaty provisions may exempt or reduce the tax; (3) Is there a PE in India? — business income is taxable only if there is a PE; (4) What is the characterisation of the payment? — the same payment can be characterised as business income (not taxable without PE), royalty (taxable), or fees for technical services (taxable), with significantly different tax outcomes. Incorrect characterisation is one of the most common causes of tax disputes with the Indian Revenue.

Transfer Pricing

14. What are India's transfer pricing rules?

India's transfer pricing framework, governed by Sections 92 to 92F of the Income Tax Act (reorganised under Chapter 10 of the new Income Tax Act 2025), requires all international transactions between associated enterprises to be conducted at arm's length price (ALP). Associated enterprises include parent-subsidiary relationships, companies with 26% or more common ownership, and entities where one has effective control over the other. The accepted methods for determining ALP are: Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), Transactional Net Margin Method (TNMM), and any other method as prescribed. TNMM is the most commonly used method in India.

15. What documentation is required for transfer pricing?

Companies with international transactions must maintain: (1) Master File — overview of the multinational group's business, transfer pricing policies, and global allocation of income; (2) Local File — detailed information on specific transactions, comparability analysis, and ALP determination; (3) Country-by-Country Report (CbCR) — if the group's consolidated revenue exceeds INR 5,500 crore (approximately EUR 750 million). Additionally, an independent accountant's report in Form 3CEB must be filed by October 31 of the assessment year (moved from November 30 under the new provisions). The penalty for non-compliance is 2% of the value of international transactions under Section 271AA. For detailed compliance requirements, see our transfer pricing services.

16. What are Safe Harbour Rules?

Safe Harbour Rules (SHR) allow taxpayers to declare income at prescribed margins, which the tax authorities accept without further scrutiny. The CBDT updated SHR through notification No. 21/2025 (March 2025), applicable for AY 2025-26 and AY 2026-27. Key provisions: the transaction value threshold has been increased from INR 200 crore to INR 300 crore for eligibility. The arm's length tolerance ranges prescribed under notification No. 157/2025 (November 2025) are: 1% for wholesale trading transactions and 3% for all other cases — applicable exclusively to AY 2025-26. SHR can significantly reduce the compliance burden and litigation risk for qualifying transactions.

17. What is an Advance Pricing Agreement?

An Advance Pricing Agreement (APA) is a binding agreement between the taxpayer and the CBDT on the transfer pricing methodology for a specified period (typically 5 years, extendable by 4 rollback years). India has signed 815 APAs cumulatively as of March 2025, with 65 bilateral APAs signed in FY 2024-25 alone — the highest in any year. APAs are available in three forms: Unilateral (UAPA — between the taxpayer and CBDT only), Bilateral (BAPA — involving the foreign tax authority), and Multilateral (MAPA — involving multiple foreign authorities). Processing time: UAPAs take 12-18 months, BAPAs take 24-36 months. The APA programme has been a major success in reducing transfer pricing disputes in India.

18. What is the Block Transfer Pricing mechanism introduced in 2025?

The Finance Act 2025 introduced Block TP Assessment, which allows the ALP determined in a particular assessment year to be applied to similar transactions in the following two assessment years — creating a three-year block. This is at the taxpayer's discretion and applies to repeat transactions with the same associated enterprise. The benefit: once the ALP is determined and accepted for Year 1, the same pricing can be used for Years 2 and 3 without fresh benchmarking. This reduces the compliance burden and provides pricing certainty for routine intercompany transactions. It does not apply to new transaction types or transactions with different associated enterprises.

GST for Foreign Companies

19. When must a foreign company register for GST in India?

GST registration is mandatory for foreign companies in these scenarios: (1) Non-resident taxable persons — must register regardless of turnover; (2) E-commerce operators supplying to consumers in India — mandatory registration; (3) If the Indian entity (subsidiary/branch) crosses the turnover threshold — INR 40 lakh for goods (INR 20 lakh in special category states) or INR 20 lakh for services (INR 10 lakh in special category states); (4) If making inter-state supplies — mandatory regardless of turnover. A non-resident taxable person must appoint a tax representative in India and register at least 5 days before making taxable supply. The registration is valid for 90 days at a time (extendable) for non-residents. Indian subsidiaries register under normal provisions.

20. What are the current GST rates?

India operates a multi-tier GST structure:

Most B2B services (consulting, IT, legal, accounting) fall under 18%. Import of services by an Indian entity from its foreign parent triggers reverse charge mechanism (RCM) — the Indian entity must self-assess and pay GST at 18% on the import value.

21. What is the reverse charge mechanism and how does it affect foreign companies?

Under the reverse charge mechanism (RCM), the recipient of goods or services (rather than the supplier) is liable to pay GST. For foreign companies, this is relevant in two scenarios: (1) Import of services — when an Indian subsidiary receives services from its foreign parent company (management fees, technical services, royalties), the Indian subsidiary must pay GST at 18% under RCM on the value of services. This is in addition to any withholding tax under Section 195; (2) Specified domestic transactions — purchases from unregistered suppliers, legal services, and transport of goods by road. RCM GST paid is available as input tax credit for the Indian entity, so the net cost impact is typically neutral for businesses that have significant output GST liability.

Double Taxation Avoidance

22. How do DTAAs benefit foreign companies operating in India?

India has DTAAs with over 90 countries. Key benefits include: reduced withholding tax rates on dividends, interest, royalties, and technical service fees; PE protection — the DTAA defines the threshold for when a PE is created, which may be more favourable than domestic law; business income protection — profits are taxable only if there is a PE in India; and capital gains relief — some treaties exempt capital gains on sale of shares (though India has renegotiated several treaties to remove this benefit). To claim DTAA benefits, the foreign company must obtain a Tax Residency Certificate (TRC) from its home country and submit Form 10F to the Indian tax authorities.

23. What is a Tax Residency Certificate and when do I need it?

A Tax Residency Certificate (TRC) is issued by the tax authority of the country where the foreign company is a tax resident. It certifies that the entity is a resident of that country for the purposes of the DTAA. A TRC is required every time you claim a DTAA benefit in India — whether it is a reduced withholding tax rate, PE protection, or capital gains exemption. Without a valid TRC, the Indian payer must deduct TDS at domestic law rates (which are invariably higher). The TRC must be accompanied by Form 10F, which provides additional information including the taxpayer's status, nationality, and period of tax residency. Both documents must be furnished before the payment is made for the lower DTAA rate to apply at source.

24. What happens if India and my home country both tax the same income?

This is exactly the scenario DTAAs are designed to address. Relief is provided through two methods: (1) Exemption method — income is taxed only in one country (typically the country of residence), and the source country exempts it; (2) Credit method — income is taxed in both countries, but the home country provides a credit for taxes paid in India (or vice versa). Most of India's DTAAs use the credit method. If your home country does not have a DTAA with India, Section 91 of the Indian Income Tax Act provides unilateral relief — you can claim credit for Indian taxes against your home country tax liability, subject to your home country's rules. For US companies, the Foreign Tax Credit mechanism under the US Internal Revenue Code generally allows credit for Indian taxes paid.

Specific Tax Situations

25. Is the Equalisation Levy still applicable?

No. The Equalisation Levy has been completely abolished. The 2% levy on non-resident e-commerce operators was removed effective 1 August 2024, and the 6% levy on online advertising was scrapped effective 1 April 2025. This means foreign digital companies no longer face this additional tax layer on Indian revenue. The abolition was aimed at aligning Indian tax rules with evolving global norms and reducing trade friction, particularly with the United States. Revenue impact: India is estimated to lose over INR 3,000 crore annually from this removal, but it eliminates a significant compliance burden for foreign digital companies.

26. How are royalties taxed when paid to a foreign company?

Royalties paid to a foreign company are taxed at 20% under domestic law (plus applicable surcharge and cess). If a DTAA exists, the rate specified in the treaty applies — typically 10-15%. For example: USA-India DTAA caps royalties at 15% (10% for use of equipment); UK-India at 15% (10% for equipment); Japan-India at 10%; Singapore-India at 10%; and Germany-India at 10%. The Indian payer must deduct TDS at the applicable rate before making the payment and ensure Form 15CA/15CB compliance. An important distinction: software payments are a frequent area of litigation — the Indian Revenue often classifies software licence fees as royalties, while the payer argues they are business income (not taxable without a PE). The Supreme Court ruled in Engineering Analysis Centre of Excellence (2021) that software licence payments are not royalties under many DTAAs.

27. How is interest income taxed for foreign lenders?

Interest paid by an Indian company to a foreign lender is taxable in India. Under domestic law, the TDS rate is 20% (plus surcharge and cess). DTAA rates are typically 10-15%. For External Commercial Borrowings (ECBs), a concessional TDS rate of 5% applies under Section 194LC for borrowings from foreign sources up to 30 June 2025 (this benefit has been extended multiple times and may be further extended). Interest paid to a foreign company on money borrowed in foreign currency for the purpose of business in India is deductible as a business expense, subject to thin capitalisation rules under Section 94B — interest deduction is capped at 30% of EBITDA for interest payments to associated enterprises exceeding INR 1 crore.

28. What is the Significant Economic Presence test?

Introduced by the Finance Act 2018, the Significant Economic Presence (SEP) provisions create a tax nexus for foreign companies that have substantial engagement with India even without a physical presence. SEP is established if: (1) Revenue from transactions in India exceeds INR 2 crore in a financial year; or (2) The foreign company engages in systematic and continuous soliciting of business from more than 3 lakh users in India. Once SEP is established, income attributable to the Indian activities is taxable in India. However, SEP provisions apply only if the applicable DTAA does not prevent taxation — and most of India's existing DTAAs do not include SEP. The new Income Tax Act 2025 retains SEP provisions, and India is actively pursuing treaty modifications to include SEP-like concepts.

29. What are the implications of the new Income Tax Act 2025?

The Income Tax Act 2025, effective from 1 April 2026, replaces the 1961 Act. Key changes for foreign companies include: (1) Transfer pricing provisions reorganised under Chapter 10 with enhanced alignment with OECD principles; (2) Block TP assessment introduced (three-year blocks for repeat transactions); (3) Definitions of associated enterprises and international transactions updated to cover digital assets, platform economies, and innovative financing; (4) PE provisions largely retained but with updated commentary; (5) TDS provisions consolidated and streamlined; (6) Penalty framework rationalised with clearer escalation. The substantive tax rates, DTAA application, and fundamental principles remain largely unchanged — it is primarily a reorganisation and modernisation rather than a policy overhaul.

Tax Planning and Compliance

30. What is the advance tax schedule for foreign companies?

Foreign companies with a PE or tax liability in India must pay advance tax in quarterly instalments: 15% of estimated annual tax by 15 June, 45% by 15 September, 75% by 15 December, and 100% by 15 March. Failure to pay advance tax attracts interest under Section 234B (for shortfall in total advance tax — 1% per month) and Section 234C (for deferment of individual instalments — 1% per month for 3 months). Foreign companies without a PE generally do not need to pay advance tax because their income is typically subject to TDS at source. However, if any income escapes TDS (e.g., capital gains on share transfers), advance tax must be paid.

31. When must a foreign company file its India income tax return?

The due date depends on the company's audit requirements: October 31 for companies requiring audit under the Companies Act or transfer pricing audit under Section 92E; November 30 for companies requiring transfer pricing documentation (Form 3CEB filing). Most foreign companies with PE operations in India will have October 31 as their due date. Belated returns can be filed until December 31 of the assessment year but attract interest and penalty. The return must be filed electronically using the Income Tax e-filing portal (e-filing.incometax.gov.in). A digital signature of the authorised signatory is required.

32. What records must a foreign company maintain in India?

A foreign company with operations in India must maintain: books of account (if total income exceeds INR 2.5 lakh or turnover exceeds INR 25 lakh in any of the preceding 3 years); records of all international transactions with associated enterprises; transfer pricing documentation (Master File, Local File, CbCR if applicable); details of all payments made to non-residents with TDS compliance records; GST invoices, credit notes, and filing records; and financial statements of the Indian PE or branch. Records must be maintained for a minimum of 8 years from the end of the relevant assessment year. For the Indian subsidiary route, the subsidiary maintains its own books under the Companies Act 2013 with audit requirements.

33. Can a foreign company carry forward losses in India?

Yes, with conditions. Business losses can be carried forward for 8 assessment years and set off against business income only. Unabsorbed depreciation can be carried forward indefinitely and set off against any income. Capital losses can be carried forward for 8 years and set off only against capital gains. Key restriction: the return must be filed on or before the due date for the loss to be eligible for carry forward (except unabsorbed depreciation, which can be carried forward even if the return is late). For companies, there is no change-in-shareholding restriction for carry forward — unlike some other jurisdictions, India does not disallow loss carry forward on change of ownership for companies (though closely held companies have specific anti-abuse provisions under Section 79).

34. What are the penalty and prosecution provisions for tax non-compliance?

Key penalties include:

Prosecution (criminal proceedings) can be initiated for wilful failure to furnish returns, TDS non-deposit, and concealment of income. For foreign companies, the authorised representative in India can face personal liability. For compliance support, see our tax advisory services.

35. How should a foreign company structure its India operations for optimal tax efficiency?

The optimal structure depends on your business model, but general principles include: (1) Operate through a wholly owned subsidiary rather than a branch to access the lower 25.17% effective tax rate instead of 38.22%; (2) Structure intercompany transactions at arm's length with robust documentation — consider an APA for high-value recurring transactions; (3) Leverage DTAA provisions by ensuring proper TRC and Form 10F compliance; (4) Capitalise the subsidiary adequately to avoid thin capitalisation issues (Section 94B caps interest deduction at 30% of EBITDA for related-party interest exceeding INR 1 crore); (5) Plan dividend repatriation to minimise withholding tax — many DTAAs offer 10-15% rates versus 20% domestic; (6) Consider applying for Section 115BAA (22% / 25.17% effective) if establishing operations today — Section 115BAB window closed 31 March 2024; (7) File returns on time to preserve loss carry-forward eligibility; (8) Invest in a good FEMA and RBI compliance framework from day one. For country-specific structuring advice, see our USA, UK, and Singapore country guides.

Key Takeaways for Foreign Companies

Indian taxation for foreign companies is complex but navigable with proper planning. The single most impactful decision is your entity structure: operating through an Indian subsidiary (effective rate approximately 25.17%) versus a branch office (effective rate approximately 38.22%) creates an 18-percentage-point difference in tax burden. Beyond structure, the critical success factors are: (1) Invest in transfer pricing documentation from Year 1 — do not wait for a tax assessment to build your defence; (2) Claim DTAA benefits proactively by maintaining current TRCs and filing Form 10F before every relevant payment; (3) Monitor PE risk continuously, especially as remote work and digital business models blur traditional PE boundaries; (4) Pay advance tax on time to avoid automatic interest charges under Sections 234B and 234C; (5) File returns by the due date without exception — late filing forfeits loss carry-forward rights and triggers penalties; (6) Consider an Advance Pricing Agreement for high-value recurring intercompany transactions — the upfront investment of 12-18 months can eliminate years of potential disputes; (7) Engage a qualified Indian tax advisor who understands both Indian domestic law and the relevant DTAA — the interplay between these two regimes determines your effective tax rate on almost every type of payment.

India's tax framework rewards companies that plan ahead and penalises those that treat compliance as an afterthought. The regulatory environment is becoming more sophisticated with each passing year — the new Income Tax Act 2025, block transfer pricing, expanded SEP provisions, and rationalised penalties all point to a system that demands higher standards of documentation and transparency. Foreign companies that invest in robust tax infrastructure from the outset will find India to be a rewarding market with predictable tax outcomes.