As globalization continues to reshape the way companies operate, more and more Indian businesses are stepping onto the international stage. Whether it’s exporting services, entering into cross-border joint ventures, or receiving foreign investments, international taxation is a critical area that every business needs to understand and navigate wisely.
At Malhotra Rajiv & Co. (MRC), we specialize in international taxation and cross-border investment planning, helping businesses remain compliant, tax-efficient, and strategically sound. In this blog, we break down the essentials of international taxation and what Indian businesses should know before expanding globally.
What Is International Taxation?
International taxation refers to the set of tax rules that apply to transactions, investments, or activities that cross national borders. For Indian businesses, this typically includes:
- Income earned from foreign sources
- Payments made to or received from foreign entities
- Establishing operations or subsidiaries abroad
- Foreign collaborations and joint ventures
Understanding how these activities are taxed—both in India and in the foreign jurisdiction—is essential for legal compliance and avoiding double taxation.
Key Concepts in International Taxation
Residential Status of the Entity
Under Indian tax law, a company’s residential status determines its tax liability:
- Resident companies are taxed on their global income.
- Non-resident companies are taxed only on income sourced from India.
Double Taxation Avoidance Agreement (DTAA)
India has DTAA treaties with more than 90 countries. These agreements ensure that the same income is not taxed twice—once in India and again in the foreign country. DTAAs provide mechanisms such as:
- Tax credits
- Exemptions
- Reduced withholding tax rates
Withholding Taxes
When Indian businesses make payments (e.g., royalties, fees for technical services, interest, dividends) to non-residents, they are required to deduct tax at source under the Income Tax Act. The applicable rate can often be reduced if a DTAA is in place. Proper documentation and compliance under Section 195 is essential to avoid penalties.
Transfer Pricing
Transfer pricing applies when an Indian company transacts with a related foreign entity (e.g., subsidiary, parent company). These transactions must be priced at arm’s length to prevent profit shifting and tax evasion. Businesses must maintain documentation and file Form 3CEB to report such transactions.
Foreign Tax Credit (FTC)
If an Indian resident pays tax on income earned abroad, they may be eligible for a Foreign Tax Credit in India. The credit helps avoid double taxation and is governed by Rule 128 of the Income Tax Rules. Timely filing of Form 67 is crucial to claim this credit.
Common International Tax Challenges for Indian Businesses
- Incorrect interpretation of DTAA provisions
- Lack of proper documentation in transfer pricing cases
- Double taxation due to missed FTC claims
- Complex compliance with both Indian and foreign laws
- Risk of litigation with tax authorities
Conclusion
International taxation is no longer optional knowledge—it's a necessity for any Indian business aiming to grow globally. Understanding key principles and seeking professional guidance can save your company from costly mistakes, penalties, and missed opportunities. Whether you're already operating internationally or planning to expand, Malhotra Rajiv & Co. (MRC) is here to support you every step of the way with expert insights, strategic tax planning, and seamless compliance.