Tax experts said many companies had been served similar notices for not filing returns. The notices were despatched by post to where these companies are based. Many of these companies are in the services sector such as engineering services, according to people privy to the notices.
These companies could have received fees from Indian customers. The tax authorities would have received this data and subsequently raised the demands. “It is not clear as to what is the selection methodology for such cases… Taxpayers can expect notices for next years as well considering that AY 2011-12 is just the start,” said Amit Maheshwari, a partner at Ashok Maheshwary & Associates. He said the authorities require returns to be filed even if there are exemptions under tax treaties. The problem goes back as far as 2010-11, he said.
Rajesh H Gandhi, a partner at Deloitte Haskins & Sells, acknowledged that many of his clients had received such notices. Tax authorities have sent out notices to foreign companies under Section 148 of the Income Tax Act, asking them to file returns in India based on information obtained from Indian payers, he said.
“This will result in additional compliance burden for foreign companies, which might otherwise not have any taxes due because the entire tax liability is deducted at source by the Indian payer. This could also result in transfer pricing compliance issues if the payer is a related party in India such as a subsidiary,” Gandhi said.
The issue becomes more sensitive because the recent budget amendment enables authorities to initiate prosecution proceedings for not filing tax returns, which has foreign companies worried, experts said. Foreign companies that face withholding tax are required to file returns.
Some companies that received notices have a subsidiary that is excluded from the revenue of parent company. The notice is not for the subsidiary but for the parent. Maheshwari said if MNCs are required to file returns in all similar cases, it would result in a large number of them having to comply and make them apprehensive about doing business in India .