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TMI BlogResidency Reclassification and Tax Implications for Foreign Companies : Clause 220 of the Income Tax Bill, 2025 Vs. Section 115JH of the Income Tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... parative analysis with Section 115JH and Notification No. 29/2018. The discussion aims to elucidate the continuity and evolution of the law, the interplay between statutory provisions and delegated legislation, and the impact on foreign companies, tax authorities, and the broader regulatory landscape. Objective and Purpose The principal objective behind Clause 220 and its predecessor, Section 115JH, is to ensure a fair, orderly, and administratively feasible transition for foreign companies that become Indian residents due to the application of the PoEM test. The legislative intent is twofold: 1. To prevent hardship: The abrupt application of the entire Indian income tax regime to foreign companies that become residents due to PoEM could result in significant practical difficulties, such as recalculating depreciation, losses, and compliance obligations retroactively. The law seeks to provide a framework for exceptions, modifications, and adaptations to mitigate these hardships. 2. To prevent tax avoidance: The PoEM test was introduced to curb the practice of foreign companies artificially shifting their place of management to low-tax jurisdictions. By treating such companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming and being granted benefits/exemptions under sub-clause (1), fails to comply with any of the conditions specified in the notification: - The benefit/exemption/relief is deemed to have been wrongly allowed. - The Assessing Officer may recompute the total income as if the exceptions/modifications did not apply. - The provisions of section 287 (presumably the rectification/amendment section in the new Bill) shall apply, with the limitation period of four years reckoned from the end of the tax year in which the failure occurred. Key Points: - There is a clear mechanism for withdrawal of benefits and recomputation in case of non-compliance. - The limitation period is aligned with the date of failure, ensuring administrative efficiency. 4. Sub-clause (4): Parliamentary Oversight Every notification issued under this section must be laid before each House of Parliament. Key Points: - This ensures legislative oversight over the exercise of delegated powers. - It provides a check against arbitrary or excessive use of executive discretion. Practical Implications The practical implications of Clause 220 are significant for various stakeholders: For Foreign Companies - Transi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Scope of Exceptions/Modifications To be notified by Central Government To be notified by Central Government Extension to Succeeding Years Applies to tax years ending before assessment completion Similar, applies to previous years ending before assessment completion Non-Compliance Consequences Benefit deemed wrongly allowed, AO may recompute, reference to sec. 287 (presumably rectification section) Benefit deemed wrongly allowed, AO may recompute, reference to sec. 154 (rectification) Parliamentary Oversight Notification to be laid before Parliament Same Key Observations: - The core structure and intent remain unchanged. - The references to specific sections for rectification (Section 287 in the Bill vs. Section 154 in the Act) reflect the reorganization of the new Bill. - The language has been modernized, but the substance is retained. 3. Notification No. 29/2018: Operationalizing the Exception Regime Notification No. 29/2018 is the practical instrument through which the exceptions, modifications, and adaptations contemplated in Section 115JH (and now Clause 220) are specified. Its key features include: - Depreciation and WDV: Recogni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliefs. Practical Implications: Stakeholder Analysis Foreign Companies - Transition Management: Companies must maintain detailed records of depreciation, losses, and accounting periods in both home and host jurisdictions to comply with Indian requirements. - Risk of Benefit Withdrawal: Any lapse in compliance with notification conditions can result in significant tax liabilities, including interest and penalties. - Strategic Planning: The potential for PoEM-based residency requires careful planning of board meetings, management decisions, and documentation. Tax Authorities - Increased Oversight: The provisions require tax authorities to scrutinize the factual matrix of PoEM, accounting periods, and compliance with notification conditions. - Capacity Building: Assessing officers must be equipped to handle complex cross-border accounting and tax issues. Regulatory and Policy Implications - Policy Evolution: The move from Section 115JH to Clause 220 reflects the evolution of Indian tax policy toward greater sophistication in dealing with international businesses. - International Alignment: The regime aligns with OECD/G20 BEPS recommendations and global trends in anti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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