Taxation of Permanent Establishment (PE) in India

4.0

02 Dec, 2021

7 min read

929 Views

icon
Article 5(1) under the Income Tax act of India mentions the Permanent establishment of a firm and the tax levied on its operations. Read this blog to know the Taxation of Permanent Establishments (PE) in India.

Article 5 (1) of the Income Tax of India talks out the Permanent Establishment stating it is a fixed place from where business enterprises wholly or partly carry out their operations to generate revenue.

The permanent Establishment is considered the most crucial financial instrument in international fiscal law. The world is speeding its business activities under the garb of globalization, where it is necessary for all the nations to implement taxation rules for smooth functioning. The Organization for Economic Co-operation and Development (OCED), United Nations (UN), and United State of America (USA) have agreed to pursue Permanent establishment as the conventional model for taxation.

India is a developing country and has been carrying out various economic activities in domestic and international environments. The economic activities also include international collaborations, where foreign entities have made investments in India to generate revenues. Unlike other nations, the Indian government also levies taxes on such economic activities via permanent establishment.

Permanent establishment (PE) was thus formulated to levy taxes on the income generated. There are two major grounds for Permanent Establishment taxation

  • Residential taxation – The permanent establishment rule under residential taxation says that if an individual in India is earning revenues by carrying out business activities globally, they are liable to pay taxes under residential taxes.
  • Sourced Taxation – The permanent establishment rule under sourced taxation mentions that if a foreign business or entity is partially or wholly operating any economic activities in India to generate income, they are bound to pay taxes under sourced taxation.
 

Types of Permanent Establishments (PE) in India

There are various types of permanent establishments in India according to the nature and operational activities of a business entity. For example –

1. Fixed Place Permanent Establishment – The Fixed Place permanent establishment for a  foreign business entity is based on sourced taxation. However, there are certain parameters that need to be confirmed before labelling it as Fixed Place permanent establishment.

  • The company must have a physical office for its operations, the property can be owned, rented, or leased by the company depending upon their choice.
  • In case, if the foreign business operational activities are carried out from the residence of the foreigners or the natives of the country, the residential place will be regarded as the Fixed Place permanent establishment.
  • The company must have operated for a specific time period, a short-term or casual financial transactions do not come under permanent establishment.
  • Office, factory, workshop, Sales Outlet, warehouses, mines, quarry, etc come under permanent establishment.

2. Construction Permanent establishment– India is a part of the tax treaty with various nations worldwide under which a foreign enterprise is liable to pay permanent establishment taxes for constructional activities only when the project has extended the prescribed time. The company mentions a specific time period required for construction activities during approval. When the company extends the time period, they are levied taxes and charges. In most of the tax treaties, if the below-mentioned activated are carried for more than six months, charges are implied upon the company. The treaties also mentioned a threshold limit for the completion of a project.

  • The Tax treaty is deciding factor whether the planning period spent by the supervisory team in the country should be taken into the account and charged under Construction permanent establishment.
  • For constructional and installation activities, foreign companies can also outsource local labor and contractor for the completion of the project.
  • Constructional activities include bridges, roads residential societies, etc 
  • The installations projects of machinery, pipelines, technical network, etc come under Construction permanent establishment.

3. Dependent Agency Permanent Establishments (DAPE) – DAPE recognizes native citizens acting or representing foreign businesses as foreign entities. International companies hire Indians as their representatives in India to eliminate taxation on the permanent establishment, however, the Income Tax clearly specifies that –

  • If an individual is economically dependent on a foreign enterprise, acts as the representative of the company with an authority to enter into contracts and regulate its terms and conditions on behalf of the foreign enterprises, the foreign enterprise will be charged under Dependent Agency permanent establishment (DAPE)

4. Subsidiary permanent establishment – The word subsidiary means a branch from the main or the parent company. Any foreign parent company that carries out its operational activities via a subsidiary company by fulfilling the provisions of permanent establishments will be taxed under Subsidiary PE.

Major Concerns with PE establishment in India

There are various concerns that business entities have to contemplate upon before the establishment of PE in India –

  • After establishing a PE in India, the company is liable to pay taxes according to the revenue generation and profit acquisition. Article 7 of the Tax Treaty terms permanent establishment taxation as the ‘business income’ of the country.
  • The profit margins of foreign enterprises reduce in permanent establishment comparatively from independent operations. The enterprise has to mandatorily maintain books of accounts and records.
  • The foreign enterprise will have to register themselves for PAN card, TAN, and other Indirect Taxes
  • The Net Profit of the foreign enterprises operating in India is liable for taxation under permanent establishment. The Net Profit also excludes the tax-deductible expenses.
  • The foreign enterprise will also have to take care of the Retention Tax popularly known as Withholding Tax (WHT) 

Conclusion

Permanent establishment taxation is one of the most crucial instruments for the financial growth of a nation. The concept promotes globalization and individual growth by contributing to the financials of the countries. This taxation scheme provides exposure to the foreign enterprises in the sourced countries, helping them to strategize their investment model and goals accordingly.

How would you rate this blog?

Comments (0)

Add Comment

Related Blogs

  • icon

    Lenskart Startup Story:...

    29 Mar, 2022

    6 min read

    READ MORE
  • icon

    Investors Walk Away from...

    27 Oct, 2021

    7 min read

    READ MORE
  • icon

    How Does Bitcoin Mining Work

    21 Jan, 2022

    7 min read

    READ MORE
  • icon

    Taxation in 2022:...

    11 Apr, 2022

    7 min read

    READ MORE
  • icon

    What is Guerrilla Trading?

    01 Nov, 2021

    7 min read

    READ MORE
  • icon

    LIC IPO: Benefits for Policyholders

    18 Feb, 2022

    7 min read

    READ MORE
  • icon

    Exploring Ed-Tech Giant...

    02 Mar, 2022

    8 min read

    READ MORE
  • icon

    Exploring top Retirement...

    08 Oct, 2021

    7 min read

    READ MORE
  • icon

    Tax Free Bonds: Tax Saving...

    08 Jun, 2022

    5 min read

    READ MORE
  • icon

    Upcoming IPO in Nov-2021

    08 Nov, 2021

    8 min read

    READ MORE
  • icon

    SEBI revises risk...

    07 Dec, 2021

    8 min read

    READ MORE
  • icon

    The Success Story of Jack...

    22 Oct, 2021

    5 min read

    READ MORE
  • icon

    Is Google a Good Investment?

    11 Nov, 2021

    8 min read

    READ MORE
  • icon

    Futures Options Strategy Guide

    19 Jan, 2022

    8 min read

    READ MORE
  • icon

    What Happens to Bitcoin...

    14 Feb, 2022

    6 min read

    READ MORE
  • icon

    Invesco drags Zee to NCLT

    06 Dec, 2021

    8 min read

    READ MORE
  • icon

    ​​Dhirubhai Ambani’s Success Story

    07 Mar, 2022

    7 min read

    READ MORE
  • icon

    Long-Term Investments

    28 Jan, 2022

    7 min read

    READ MORE
  • icon

    An Introduction to Trading...

    10 Nov, 2021

    7 min read

    READ MORE
  • icon

    Should You Invest in...

    10 Oct, 2021

    8 min read

    READ MORE
  • icon

    Blue Chips Fuel Record

    25 Oct, 2021

    6 min read

    READ MORE
  • icon

    Taxation Rules for Bond Investors

    03 Jan, 2022

    4 min read

    READ MORE
  • icon

    Ashneer Grover Biography -...

    28 Feb, 2022

    5 min read

    READ MORE
  • icon

    5 Stocks to Watch Out for...

    05 Jan, 2022

    8 min read

    READ MORE
  • icon

    Raamdeo Agrawal: How...

    13 Jan, 2022

    10 min read

    READ MORE
  • icon

    What Is Double Taxation?

    11 Jan, 2022

    7 min read

    READ MORE
  • icon

    ​​Sugar Stocks Down as Sensex Falls

    29 Oct, 2021

    7 min read

    READ MORE
  • icon

    Paytm IPO

    08 Nov, 2021

    7 min read

    READ MORE
  • icon

    What is Cryptocurrency?

    09 Oct, 2021

    7 min read

    READ MORE
  • icon

    Cryptocurrency Insurance,...

    08 Nov, 2021

    6 min read

    READ MORE
  • icon

    Success Story of Vijay Kedia

    21 Oct, 2021

    8 min read

    READ MORE
  • icon

    Stock Trading Bot

    03 Nov, 2021

    7 min read

    READ MORE
  • icon

    What is Pre-Market...

    10 Feb, 2022

    6 min read

    READ MORE
  • icon

    Ratan Tata's Youngest...

    15 May, 2022

    4 min read

    READ MORE
  • icon

    IRCTC Stock and Share Split

    03 Dec, 2021

    7 min read

    READ MORE
  • icon

    10 Ways to Profit in a Bear Market

    30 Nov, 2021

    8 min read

    READ MORE
  • icon

    Double Taxation Hangs On...

    01 Dec, 2021

    8 min read

    READ MORE
  • icon

    LIC IPO Details: Should...

    18 Feb, 2022

    6 min read

    READ MORE
  • icon

    What Are the Risks of...

    19 May, 2022

    7 min read

    READ MORE
  • icon

    India’s top 10 favourite...

    22 Dec, 2021

    8 min read

    READ MORE
  • icon

    Basics of Algorithmic...

    21 Feb, 2022

    7 min read

    READ MORE
  • icon

    Understanding Taxation on...

    26 Oct, 2021

    7 min read

    READ MORE
  • icon

    How To Use a Moving...

    07 May, 2022

    6 min read

    READ MORE
  • icon

    Capital Gains Tax

    23 Mar, 2022

    5 min read

    READ MORE
  • icon

    Nirmala Sitharaman’s Success Story

    26 Mar, 2022

    5 min read

    READ MORE
  • icon

    Understanding Different...

    09 Mar, 2022

    8 min read

    READ MORE
  • icon

    Top 5 IPOs of 2021

    01 Feb, 2022

    6 min read

    READ MORE
  • icon

    Top 5 eco-friendly cryptocurrencies

    21 Dec, 2021

    9 min read

    READ MORE
  • icon

    Preference Shares:...

    17 Mar, 2022

    6 min read

    READ MORE
  • icon

    Environmental Impact of...

    09 Nov, 2021

    7 min read

    READ MORE
  • icon

    Crypto Ban in India?

    25 Jan, 2022

    6 min read

    READ MORE
  • icon

    Nykaa Success Story -...

    22 Dec, 2021

    8 min read

    READ MORE
  • icon

    Welfare Loss of Taxation

    28 Oct, 2021

    7 min read

    READ MORE
  • icon

    Sundar Pichai: Success...

    31 Mar, 2022

    6 min read

    READ MORE
  • icon

    Foreign Investment Funds...

    02 Feb, 2022

    6 min read

    READ MORE
  • icon

    Deadweight Loss Of Taxation

    31 Jan, 2022

    7 min read

    READ MORE
  • icon

    Top 10 Most Inspirational...

    27 Apr, 2022

    7 min read

    READ MORE

Translate the power of knowledge into action. Open Free* Demat Account

* T&C Apply

Latest Blog

Ready To Trade? Start with

angleone_itrade_img angleone_itrade_img

Subscribe to #SmartSauda Newsletter

Open an account