“CHALLENGES IN IMPLEMENTATION OF GST IN INDIA”

FINAL DRAFT SUBMITTED IN THE COMPLETE FULFILLMENT FOR THE COURSE

OF TAXATION LAW-II FOR THE ATTAINING DEGREE OF B.B.A., LL.B
(HONS.).

SUBMITTED BY:

ADITI CHANDRA (1806)

B.B.A., LL.B. (Hons.)

SUBMITTED TO:

DR. G.P. PANDEY

FACULY OF TAXATION LAW- II

CHANAKYA NATIONAL LAW UNIVERSITY, NYAYANAGAR-

MITHAPUR, PATNA 800001
 CONTENTS

1. DECLARATION...............................................................................................................2

2. ACKNOWLEDGEMENT................................................................................................3

3. INTRODUCTION...................................................................................................................4

A. ..........................................................................SECTION 6(3)(I) : INDIAN COMPANY

.................................................................................................................................5

B. . .SECTION 6(3)(II) :  A FOREIGN COMPANY (WHOSE TURNOVER/GROSS RECEIPT

IN THE PREVIOUS YEAR IS MORE THAN RS. 50 CRORE .........................................5

C. ...SECTION 6(3)(III) : A FOREIGN COMPANY (WHOSE TURNOVER/GROSS IN THE

PREVIOUS YEAR IS RS. 50 CRORE OR LESS)...........................................................5

4. THE POEM TEST AND RECENT DRAFT GUIDANCE...........................................................8

5. CASE LAWS RELATING TO RESIDENTIAL STATUS OF COMPANIES AND POEM...........11

6. THE DIRECT TAXES CODE AND ITS EFFECT ON RESIDENCE TEST FOR FOREIGN
COMPANIES.......................................................................................................................17

7. SPECIFIC IMPLICATIONS, COMMENTS AND SUGGESTIONS............................................20

8. CONCLUSION.....................................................................................................................23

9. BIBLIOGRAPHY..................................................................................................................25

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 DECLARATION

I hereby declare that the work reported in the B.B.A., LL. B (Hons.) Project Report entitled
“CHALLENGES IN IMPLEMENTATION OF GST IN INDIA” submitted at Chanakya
National Law University is an authentic record of our work carried out under the supervision of
Dr. G.P. PANDEY I have not submitted this work elsewhere for any other degree or diploma. I
am fully responsible for the contents of my Project Report.

NAME OF CANDIDATE:

ADITI CHANDRA (1806)

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

2
 ACKNOWLEDGEMENT

I have taken efforts in this project. However, it wouldn’t have been possible without the kind
support of many individuals and institutions. I would like to extend my thanks to all of them.

I thank God for providing us with everything I required in completion of this project.

I am highly indebted to my faculty for his guidance and constant supervision as well as providing
necessary information regarding the project and also for his support in the completion of this
project.

I would like to express my gratitude towards my parents for their kind cooperation,
encouragement and guidance regarding this project.

Also I would like to thank my friends and batch mates who willingly helped me out in the
development of this project.

THANK YOU

ADITI CHANDRA (1806)

COURSE: B.B.A., LL.B. (HONS)

SEMESTER: VIII

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 INTRODUCTION

The taxation of the income of individuals, companies and other entities is governed by the
Income Tax Act, 1961. The Act specifies the entities to be taxed, the kinds of incomes subject to
tax (or exempt from tax), and the tax rates to be imposed on them. It lays out a system by which
taxes are to be assessed and collected and specifies a procedure by which disputes with tax
authorities are to be addressed.

Section 6 of the Income tax Act, 1961 provide for conditions in which residence in India is
determined in case of different category of persons. Section 6(3) deals with conditions to be
satisfied for a Company to be treated as resident in India in any previous year. Prior to the
introduction of the concept of POEM, a Company was said to be resident in India in any
previous year if it was an Indian company or during that year, the control and management of its
affairs was situated wholly in India. The Finance Act, 2015 amended the above provision so as to
provide that a Company would be resident in India in any previous year if it is an Indian
company or its Place of Effective Management (POEM) in that year is in India. The POEM was
defined to mean a place where key management and commercial decisions that are necessary for
the conduct of the business of an entity as a whole are in substance made. In order to bring
clarity about the applicability criteria of certain Income tax provisions, the concept of POEM has
been deferred for one year the same has been made applicable w.e.f. previous year 2016-17.1

The concept of POEM is important to determine the residential status of a foreign company
operating in India. For Example, a foreign company fulfilling the conditions of POEM will be
deemed as Indian Resident and the global income of such foreign company is taxable in India.

 Residential Status of Companies under the Income tax Act, 1961:

Section 6(3) of the Income tax Act, 1961 provides that a Company is said to be resident
in India in any previous year if:
The Company is an Indian Resident; OR
Its place of effective management, in that year, is in India.

1
https://taxsummaries.pwc.com/india/corporate/corporate-residence

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 Place of Effective Management (POEM) means a place where key management and
commercial decisions that are necessary for the conduct of business of an entity as a whole
are, in substance made. 2

I) SECTION 6(3)(I) : INDIAN COMPANY

o Always Resident in India.

An Indian company is always resident in India. Even if an Indian company is

controlled from a place located outside India (or even if shareholders of an Indian
company controlling more than 51 per cent voting power are non-resident and/or
located outside India), the Indian company is resident in India. An Indian
company can never be non-resident.

II) SECTION 6(3)(II) :  A FOREIGN COMPANY (WHOSE TURNOVER/GROSS RECEIPT IN

THE PREVIOUS YEAR IS MORE THAN RS. 50 CRORE

o It will be resident in India if its place of effective management (POEM),
during the relevant previous year, is in India

A foreign company (with effect from the assessment year 2017-18) is resident in
India if its place of effective management (POEM), during the relevant previous year,
is in India. For this purpose, the place of effective management means a place where
key management and commercial decisions that are necessary for the conduct of the
business of an entity as a whole are, in substance made. For this purpose, a set of
guiding principles (to be followed in determination of POEM) have been issued by
the Board in Circular No. 6/2017, dated January 24, 2017.

III) SECTION 6(3)(III) : A FOREIGN COMPANY (WHOSE TURNOVER/GROSS IN THE

PREVIOUS YEAR IS RS. 50 CRORE OR LESS)

o Always Non-Resident in India

Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or
gross receipts of Rs. 50 crore or less in a financial year – Circular No. 8/2017, dated
February 23, 2017. In other words, a foreign company (whose annual turnover/gross
2
https://www.mondaq.com/india/corporate-tax/456070/poem-new-criteria-for-corporate-tax-residence-in-india

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 receipts is Rs. 50 crore or less) cannot be resident in India from the assessment year
2017-18 onwards.

1) In case the Company is registered under the Companies Act, 2013 or any other
previous Company law is termed as Indian Company and the principles of POEM are
of no relevance for such Company since an Indian Company is always an Indian
Resident.
2) Determination of whether the Place of Effective Management (POEM) is India for
any Company is relevant for foreign company since the residential status will
determine the vicinity of income which will be taxable in India. For Example, in case
of a foreign company is having POEM in India, then the global income of such
Company will be treated as “taxable in India”.
3) The percentage of tax rate will not be determined by the residential status but
Company needs to check whether it is a Domestic Company or not. In case the
Company is a Domestic Company (i.e. Indian Company or any other Company which
has made prescribed arrangements for declaration and payment of dividend within
India), then the lower rate of tax i.e. 30% or 29% or 25% (as the case may be will be
levied) otherwise the income will be taxable at higher rate of 40%. Needless to
mention that the tax is further increased by Surcharge and Cess as applicable.
4) The POEM is required to be determined each year since the residential status is
required to be ascertained each year.
5) Circular 8/2017 dated February 23, 2017 issued by CBDT has clarified that the
provisions of POEM will not be applicable to a Company having turnover of Rs. 50
crores or less in a financial year.3

3
https://www.lawctopus.com/academike/taxation-companies/#_edn24

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STATEMENT OF PROBLEM

To understand and study in detail the concept of GST and the challenges faced in its
implementation throughout the country.

AIMS AND OBJECTIVES

1) To grasp the concept of GST.

2) To assess the advantages and challenges in implementation of GST

RESEARCH METHODOLOGY

In this project Doctrinal Method of Research is used. Doctrinal Methods refer to Library
research, research or processes done upon some texts writings or Documents, legal propositions
and Doctrines, Articles, Books as well as Online Research and Journals relating to the subject.
This project is an intensive one so this method is sufficient to address the findings and to arrive
at concrete conclusion.

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 THE POEM TEST AND RECENT DRAFT GUIDANCE

Till 2015, a foreign company would have been considered resident in India (and taxed on
worldwide income) only if it was 'wholly' controlled and managed in India. From April 1, 2015 a
foreign company may be treated as an Indian resident if its place of effective management
(POEM) is in India. POEM refers to the place where key management and commercial decisions
necessary for the business as a whole, are in substance made.

The draft guidance emphasizes that the test of POEM is one of substance over form and will
depend on facts and circumstances of each case. While a company may have more than one
place of management, it can only have one place of effective management at any point in time.

The guidance contemplates different tests for companies with active and passive businesses
outside India. An active business is one where less than 50% of the income is passive and less
than 50% of its employees are situated in India, with payroll expenses on such employees being
less than 50% of total payroll expenses. Passive income covers dividends, interest, royalties,
capital gains, rent and income from related party transactions.4

The POEM for an active company is presumed to be outside India if the majority of its Board
meetings are held outside India. This presumption would not apply if management authority is
exercised by a person other than the Board, who is resident in India. This determination will be
made based on data over the past 3 years, or lesser if the company has been in existence for
lesser than 3 years.

To determine the POEM of passive companies, the persons who actually make key management
and commercial decisions for the business as a whole will be identified, followed by identifying
the place where decisions are actually taken.

The following guiding principles would be considered while determining POEM of a company:

 Location where the Board regularly meets, provided it retains and exercises governing
authority over the company and in substance takes key management and commercial
decisions.

4
https://taxguru.in/income-tax/residential-status-companies-concept-place-effective-management-poem.html

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  The place where key decisions are in fact taken would have more relevance than where
formal Board meetings are held.

 If the Board routinely ratifies decisions made by senior management, executive

committee or any other person, the place where such person takes decisions will be
considered as POEM.

 The location of a company's head office is an important factor and the following facts
have to be considered in this regard: (i) Location where the company's senior
management and support staff are based and which is held out to the public as its
headquarters. (ii) In a more decentralised company, the head office would be the place
where the senior management is predominantly based, normally return to after travel, or
meet when formulating key strategies or policies for the company as a whole. (iii) If
senior management permanently operate from different locations, and participate in
meetings via telephone or video conferencing, the location of the highest level of
management such as the managing or financial director will be considered as the head
office. (iv) The head office would not be of much relevance in a highly decentralised
company where it is not possible to determine its location with reasonable certainty.5

 Day to day routine operational activities of junior or middle management are not relevant
for determining POEM.

 With the use of modern technology, physical location of meetings may not be where the
key decisions are in substance made. In such situations, place of residence of majority of
directors or decision making persons may also be a relevant factor.

 As secondary factors, place of main and substantial activity of the company and place
where accounting records are kept may be considered if the primary factors are
inconclusive.

 Ownership of a foreign company by an Indian company, residence of some of the

directors of the foreign company in India, location of local management of a foreign

5
https://www.taxmann.com/datafolder/news/News9103.htm

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 company in India and existence of support functions of preparatory or auxiliary character
in India will not be conclusive of POEM in India.

 The above principles are only for guidance and no single principle will be conclusive.
Activities performed over a period of time during a financial year should be considered
rather than a 'snap shot' approach. If POEM is found to be in India as well as outside, it
will be presumed to be in India if it has been predominantly in India.

 The tax officer will require prior approval from the Principal Commissioner or the
Commissioner while treating a foreign company as a resident based on POEM, after
providing an opportunity of being heard.

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 CASE LAWS RELATING TO RESIDENTIAL STATUS OF COMPANIES AND POEM

Discussed here are some landmark cases where the problem before court was to decide the
residential status of foreign companies and the nature of effective control mentioned in section 6
of the Act.

 Narottam and Parekh Ltd. v. C.I.T6

The question for consideration in this appeal was whether the assessee company is a resident
company.

Facts.

The company is a subsidiary company of the Scindia Steam Navigation Co. Ltd. and its
business is stevedoring in Ceylon. It is registered in Bombay and its registered office is also
in Bombay. The meetings of the Board of Directors are held in Bombay and also the
meetings of the shareholders.

Section 6 (3) (c) tells us that in the eye of the law is a residence with regard to a company.

In order that a company’s income should be subjected to tax as a resident, it has got to be
established that the control and management of its affairs are situated wholly in the taxable
territories in India.

“Control and management” is a compendious expression which has acquired a definite

significance and connotation. It is also necessary that the control and management of the
affairs of the company should be situated wholly in the taxable territories in India.

Therefore, if any part of the control and management is outside the taxable territories in
India, then the company would not be resident.

In this connection, it is pertinent to look at the converse definition of a Hindu undivided

family, firm or other association of persons.

In their case, they are resident unless the control and management of its affairs are situated
wholly outside the taxable territories.
6
Narottam and Parekh Ltd. v. C.I.T AIR 1954 Bom 67

11
In construing the expression “control and management” it is necessary to bear in mind the
distinction between doing of business and the control and management of the business.
Business and the whole of it may be done outside India and yet the control and management
of that business may be wholly within India.

The contention of the Appellant

The whole of the business of the company is done in Ceylon and the whole of the income
which is liable to tax has been earned in Ceylon.

Secondly, the affairs of the company in Ceylon are managed by managers having power of
attorney to do any act. This power of attorney effectively vests control of the company in
managers residing in Ceylon.

The reasoning of the Court

The legislative intent is not about the place of business of earnings which is accruing to the
company.

It is entirely irrelevant where the business is done and where the income has been earned.

 “Control and management” referred to in S. 6 point out the central control and management.

The control and management contemplated by this section is not the carrying on of day to
day business by servants, employees or agents.

It is that authority to which the servants, employees, and agents are subject, it is that
authority which controls and manages them, which is the central authority, and it is at the
place where the central authority functions that the company resides.

It may be in some cases that, like an individual, a company may have a residence in more
than one place. It may exercise control and management not only from one fixed abode, but it
may have different places.

That would again be a question dependent upon the circumstances of each case.

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 But the contention which is entirely unacceptable that a company controls or manages at a
particular place because its affairs are carried on at a particular place and they are carried on
by people living there appointed by the company with large powers of management.

In the present case, two managers under two powers of attorney look after all the affairs of
the assessee company in Ceylon. The widest possible power and authority has been conferred
upon these two managers under this power-of-attorney.

But it is equally clear from the minutes of the meetings of the Board of Directors which are
also before us that the central management and control has been kept in Bombay and has
been exercised by the directors in Bombay.

The minutes deal with various matters which are delegated to these two managers and yet the
directors from a proper sense of responsibility to the company have retained complete control
over these matters and have from time to time given directions to the managers as to how
things should be done and managed.

What we have to consider in this case is not the power or the capacity to manage and control,
but the actual control and management, or in other words, not the ‘de jure’ control and
management but the ‘de facto’ control and management, and in order to hold that the
company is resident during the years of account, it must be established that the company ‘de
facto’ controlled and managed its affairs in Bombay.

Four principles which were enunciated in Swedish Central Railway Company Limited v.
Thompson7 were laid down, in this case, to determine residence for taxation purposes.

The four principles are:

(1) Control and management signifies in the present context, the controlling and directive
power, the head and brain as it is sometimes called, and situated implies the functioning of
such power at a particular place with some degree of permanence, while wholly would seem
to recognise the possibility of the seat of such power being divided between two distinct and
separate places.

7
Swedish Central Railway Company Limited v. Thompson (1925) 9 Tax Cas 342

13
 (2) Mere activity by the company in a place does not create residence.

(3)  The central management and control of a company may be divided, and it may keep
house and do business in more than one place.

(4) In the case of dual residence, there may be two centers of management.

But the important principle which applies to the present case is the one that has been first set
out and which emphasizes the fact that what we have to consider in order to determine the
residence of a company is as to where its head and brain is, and the head and brain of the
company will be where its controlling and directive power functions.

Secondly, we take it that the word ‘affairs’ must mean affairs which are relevant for the
purpose of the Income-tax Act and which have some relation to income.

It is not any business that the company does which has got to be considered.

In order to determine the head and brain of the company, we are not to concern ourselves
with any other work that the company does except its business which yields profits.

 In this particular case, we have got to consider where the head and brain of the company is
with regard to the stevedoring business in Ceylon which has yielded the income.

Applying that test, the only logical conclusion is that the head and brain of the company with
regard to this particular business or with regard to its affairs was in Bombay and not in
Ceylon.

Therefore the assessee company is resident in India for the purpose of Income Tax act as its
affairs are managed by persons who are based in India and not in Ceylon. The fact that the
affairs of the company are being managed by managers independently in Ceylon is of no
consequence for determining the question of residence as effective control is situated in
India.

 Bhimji Naik v. Commissioner of Income-tax, Bombay8

8
Bhimji Naik v. Commissioner of Income-tax, Bombay; AIR 1945 Bom. 271

14
 The question, in this case, was whether the control and management, as contemplated
under Section 6  was a ‘de facto’ or a ‘de jure’ control.

In that case, one Mr. Naik carried on business in South Africa.

In 1912 he returned to India leaving his business in the hands of three managers.

In 1937 he executed a partnership deed by which he admitted these three managers as

partners.

Under the partnership deed, he retained to himself the full control of the business and
even the right to dismiss any of the three partners.

The Income Tax Appellate Tribunal found that the firm was resident in British India as
the legal right to control and manage vested in Naik and he was resident in British India
and it was not shown that he had not exercised any control in the management of
company affairs.

On appeal, the High Court drew a distinction between the case of a partner and the case
of an agent or an employee.

Since the business was being managed by the partners of Naik in South Africa, the
question of ‘de facto’ management had to be considered.

It was held that the question whether the assessee is resident within the meaning of S. 6 
is a question of fact.

It was stated that :

“As it is difficult to apply the test of physical residence to an association of persons or a

firm, the test is held to be: where the central control and management actually abides. 
The expression “control and management” means where the central control and
management actually abides, and not where the business of the company is carried on by
persons appointed by the company.”

 Talipatigala Estate v. Commr.of Income Tax9

9
Talipatigala Estate v. Commr.of Income Tax; AIR 1950 Mad.781

15
 In this case affairs of a rubber estate in Ceylon was managed by the assessee firm
consisting of two partners, one of whom was resident in British India, and the estate was
managed by an agent holding a power-of-attorney from the partners.

The question for consideration was whether the assessee firm had any part of the control
and management within British India.

The Court was concerned to determine whether any part of the control and management
was within British India and notwithstanding the fact that the rubber estate was managed
by an agent holding a power-of-attorney, it was found that there was the exercise of
control and management by the partners from British India.

It was held that not only the right to exercise control and management over the firm’s
affairs in Ceylon vested with the partner resident in British India but some amount of
control and management of the firm’s affairs was actually exercised in British India and
the assessee firm was therefore resident in British India within the meaning of S. 6.

THE DIRECT TAXES CODE AND ITS EFFECT ON RESIDENCE TEST FOR FOREIGN
COMPANIES

The direct taxation of the income of individuals, companies and other entities is governed by the
Income Tax Act, 1961.  The Direct Taxes Code seeks to consolidate the law relating to direct
taxes.  The Bill will replace the Income Tax Act, 1961, and the Wealth Tax Act, 1957.  The Bill

16
widens tax slabs, and lowers corporate tax rates.  It removes a number of exemptions and
grandfathers some others.

A major change of far-reaching importance is being brought about by the Direct Taxes Code Bill
with regard to the treatment of foreign companies carrying on business in India. The original
draft had proposed that a company incorporated abroad will be treated as resident of India if, at
any time in the financial year, the control and management of its affairs is situated “wholly or
partly” in India. The present law requires such control and management to be wholly in India to
treat the foreign company as resident in India. The use of the term “wholly or partly” in India can
give rise to controversies. The term “partly” sets a very low threshold for treating a foreign
company to be treated as resident in India. Even a single meeting of the board of directors of a
multinational company, if held in India, can convert such foreign company into an Indian
resident. To avoid uncertainty in taxation, the revised draft has omitted the term “wholly or
partly” and instead applies the test of “place of effective management” or place of “central
control and management”. This is a compromise between the liberal approach of the Income-Tax
Act, 1961 and the stiff definition sought to be applied under the original proposal of the DTC.
Most foreign countries apply the test of ‘place of effective management' for deciding residence
of foreign companies.10

Place matters

Section 314 (192) defines the expression ‘place of effective management'. This is where the
board of directors or its executive directors make their decisions. This will mean the place where
such executive directors or officers perform their functions. The Revised Discussion Paper points
out that our tax treaties recognised the concept of “place of effective management” for
determination of residence as a tiebreaker rule to avoid double taxation. Simultaneously, the
DTC Bill also introduces for the first time in India ‘controlled foreign corporation' (CFC)
provisions to tax passive income earned by a foreign company which is controlled directly or
indirectly by a resident in India and where such income is not distributed to shareholders
resulting in deferral of taxes. Such income shall be deemed to have been distributed and become
taxable in India in the hands of resident shareholders as dividend received from foreign
companies. This provision can have serious consequences. Companies and individuals will have
10
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to furnish details in the return about details of assets held abroad. A company may be set up in a
high tax jurisdiction. If it is controlled by Indian residents it can be taxed in India under the CFC
Rules. The DTC defines a territory with a lower rate of taxation as a country in which the
amount of tax paid by the company is less than half the tax payable in India. This can affect
companies in Singapore where the effective tax rates can come down to 7 per cent, Ireland (12.5
per cent), Switzerland (5.7 per cent) and the Netherlands (10 per cent). Tax policy with regard to
foreign companies is in a flux. An Expert Group on foreign investment has recommended a
residence-based tax system in the place of the source-based system. The US follows this system
and taxes resident companies on their global income. Such a system can lead to problems in
taxing capital gains and other passive incomes.

Impact of other laws

It has been truly said that the income-tax law represents the confluence of all laws. The
Companies Act plays a vital role in interpretation of the provisions of the tax law. (The ruling in
the Apollo Tyres case is now incorporated in Section 115JB of the I-T Act, 1961.) A recent order
of the Tribunal has held that MAT (Minimum Alternate Tax) will not be applicable to banks
which are governed by the Banking Regulation Act. At one stroke MAT has been shelved with
regard to insurance, banking and electrical companies. Luckily, for the Government, even as the
DTC Bill is being discussed in Parliament, the Companies Bill is also on the anvil. The Bill will
classify companies as foreign owned and controlled or Indian owned and controlled. There is no
definition of the term “controlling interest” in any of the laws. The Companies Bill seeks to fill
in the lacunae and defines controlling interest. An entity will have control in a company if it
happens to be the single largest shareholder. The Supreme Court had occasion to go into this
question in CIT vs Jeewanlal limited (24 ITR 475). In order to have a “controlling interest”, the
person or persons having majority of voting shares need not necessarily have beneficial interest
in such shares. They may hold the shares as trustee and be accountable to beneficiaries. It is
necessary that the impact of various other laws on the definition of the effective control and
management of company must be take into account and harmonized before the DTC Bill is
finally passed into law

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 SPECIFIC IMPLICATIONS, COMMENTS AND SUGGESTIONS

 Re-think POEM: The mere fact that POEM is prevalent in other countries is not a
justification for introducing it in India. In most of these countries the tax system is not
adversarial to the tax payer and the risk of litigation is lower than in India. Companies do
not generally consider POEM as a risk factor while managing their global operations as
for a long period jurisprudence there is well settled. Countries such as the US focus on

19
 the place of incorporation and do not bother about whether a non-US company is
effectively controlled in the US.
 Risk of Double Taxation: Unilateral approaches often result in double taxation since
there is no guarantee that the other country will accept India's determination of a
company's POEM. This risk is more significant for US companies founded or held by
India based entrepreneurs since the US tax treaty does not recognize the concept of
POEM. The US is likely to remain a major partner for investment and transfer of
technology and the risk of double taxation could have serious consequences. It would be
in-appropriate for India to unilaterally disregard a tax residency certificate provided by a
foreign country based on its determination of a company's POEM. It seems that the only
way to guarantee that there will be no double taxation is for the Indian Government to
enter into specific agreements (either as a treaty protocol or through mutual agreement
procedure) with each country to clarify the scope of POEM.
 Risks for fund managers: Overseas funds, including those based in Mauritius and
Singapore, usually have investment committees based in their relevant jurisdiction that
makes decisions regarding investments and exits. However, there is risk that they may be
taxed as Indian residents if they are seen to routinely approve recommendations by fund
managers based in India. The relief provided in the Finance Act 2015 for broad based
funds outside India does not provide sufficient protection against this risk of global
taxation posed by POEM.
 Making India Inc. non-competitive: Indian MNCs and start-ups now have to carefully
factor the risk of global taxation of their overseas subsidiaries (and double taxation) to the
extent there is management and oversight from India. This can complicate globalization
efforts, increase costs of managing overseas subsidiaries or holding companies and
reduce global competitiveness.
 Brain drain: With the implementation of POEM, there is further incentive for Indian
companies to relocate founders and senior management overseas to minimize the
additional tax exposure and risk of double taxation. In recent times, there has been a
noticeable exodus of top fund managers from India. This can thwart the Government's

20
 active efforts to promote the much celebrated 'Make in India' initiative, since subjective
rules like POEM makes it more difficult to do business in India and with India.11
 Subjectivity and litigation risks: Litigation risks in India have been a sore point for
investors and the Government has in the recent past made some positive attempts to reign
in high pitched and frivolous tax assessments. The root cause for uncertainty and
litigation is subjective and ambiguous tax rules. With provisions such as the general anti-
avoidance rules ("GAAR") dealing with cases of taxpayer abuse, it may be difficult to be
too objective. But, something as fundamental as a company's residence should not be a
matter of subjectivity. There is no sense in replacing the earlier 100 year old rule for
corporate residence that ensured maximum certainty without creating double taxation
outcomes for companies. The draft guidance provides in-sufficient clarity for companies
to plan their affairs. The distinction between active and passive companies has limited
rational nexus with corporate residence. The location (or existence) of a head office,
residence of directors and other factors are irrelevant in a technology enabled world that
makes decisions on the cloud.
 Burden of proof: When the POEM of a foreign company is alleged to be in India, it is
important that the burden of proof is primarily on tax department. This may require
analysis and review of stacks of documentation and emails in relation to decision making
which will be impossible to obtain in most cases. Further, much of this information may
be subject to client-attorney privileged communication and hence not subject to
disclosure.
 Separate tools to counter abuse: A number of tools may be deployed by tax authorities
to counter abusive cross-border structures, which include transfer pricing, GAAR, treaty
based anti-cond0uit or limitation of benefits criteria and others. POEM is not such a tool.
For taxing overseas subsidiaries located in tax havens, India may in the future introduce
controlled foreign corporation ("CFC") rules after ensuring full credit for foreign taxes.
 Cost of enforcement and difficulties for tax authorities: The cost of objectively
determining POEM of a foreign company including securing and analysing relevant
information itself can be quite prohibitive. It is also important to consider other costs
which may not be very apparent. For example, overseas funds and financial institutions

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 treated as Indian residents based on POEM may be subject to reporting obligations under
the US-India FATCA treaty and the Government would have to put in place a mechanism
to collect and transmit such information. Subjective rules also makes life difficult for tax
officers since it may result in varying interpretations and there is always a risk of
inquiries from central vigilance if decisions are taken in favour of taxpayers. Costs
associated with litigation will impact the Government as much as the taxpayer.
 Timing is the key: Today, when the Government's focus is to provide a boost to India
Inc. and incentivize globalization efforts, this is not the time to implement POEM or
introduce a CFC rule. There is also a need for more thorough review of these rules in line
with policy objectives. A limited 2 week window is inadequate to assess such rules,
especially considering the serious and widespread ramifications among stakeholders.

CONCLUSION

India has a well-developed tax structure with clearly demarcated authority between Central and
State Governments and local bodies. Central Government levies taxes on income (except the tax
on agricultural income, which the State Governments can levy), customs duties, central excise
and service tax. Value Added Tax (VAT), stamp duty, state excise, land revenue, and profession
tax are levied by the State Governments. Local bodies are empowered to levy a tax on properties,

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octroi and for utilities like water supply, drainage etc. All companies whether Indian or foreign
are liable to tax, irrespective of the quantum of income. However, for the purpose of ¬ taxation,
companies are broadly classified as under:

(a) The domestic company in which public are substantially interested i.e., Public
Company

(b) Domestic company in which the public is not substantial. interested, i.e., Private
Company.

(c) Foreign Company which has not made the prescribed arrangement: for declaration
and payment of dividends within India.

The taxable income of companies is computed in the same manner as for other non-corporate
assesses. The income is computed separately under each head and then aggregated to compute
the gross total income. A company, however, can have no income under the head ‘Salary’ for
obvious reasons.

Indian companies are taxable in India on their worldwide income, irrespective of its source and
origin. Foreign companies are taxed only on income which arises from operations carried out in
India or, in certain cases, on income which is deemed to have arisen in India. The later includes
royalty, fees for technical services, interest, gains from the sale of capital assets situated in India
(including gains from the sale of shares in an Indian company) and dividends from Indian
companies. Thus, the tax liability on the income of a company depends upon the residential
status of the company. The liabilities to tax arising under the Income Tax Act are subject to
provisions of the double taxation avoidance agreements between India and a foreign country.
Thus the treaty provisions shall prevail over the income tax provisions.

Indian taxation system has undergone tremendous reforms during the last decade. The tax rates
have been rationalized and tax laws have been simplified resulting in better compliance, ease of
tax payment and better enforcement. The process of rationalization of tax administration is
ongoing in India.

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There is still much thinking to be done in India regarding whether introduction of POEM is a
step in the right direction. The POEM standard should not be enforced in a hurry especially
considering that the draft guidance has been released almost after 3 quarters of the financial
year have passed. It will place an unreasonable burden on taxpayers and tax officials, both in
terms of maintaining data relating to corporate decision making and reviewing enormous
volumes of data at the time of tax assessments.

There is clearly a strong basis for India to avoid introducing subjective standards like POEM
which can have a serious impact on the business environment. Till there is a more
comprehensive review of the POEM standard, it has to be deferred.

BIBLIOGRAPHY

Websites/Journals/Articles

 https://taxsummaries.pwc.com/india/corporate/corporate-residence

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  https://www.mondaq.com/india/corporate-tax/456070/poem-new-criteria-for-corporate-
tax-residence-in-india
 https://www.lawctopus.com/academike/taxation-companies/#_edn24
 https://taxguru.in/income-tax/residential-status-companies-concept-place-effective-
management-poem.html
 https://www.taxmann.com/datafolder/news/News9103.htm
 https://www.prsindia.org/uploads/media/DTC%20Bill/Final%20DTC%20Brief.pdf
 https://www.mondaq.com/india/corporate-tax/456070/poem-new-criteria-for-corporate-
tax-residence-in-india

Cases

 Narottam and Parekh Ltd. v. C.I.T AIR 1954 Bom 67

 Swedish Central Railway Company Limited v. Thompson (1925) 9 Tax Cas 342
 Bhimji Naik v. Commissioner of Income-tax, Bombay; AIR 1945 Bom. 271
 Talipatigala Estate v. Commr.of Income Tax; AIR 1950 Mad.781

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