An innocuous provision in the proposed Budget proposals concerning how residential status of companies is determined  is guaranteed to ensure that henceforth, a Multi-national company would think centice (that’s ‘100 times’ – don’t look up the word in dictionary, it may not be there)  to hold its Board of Directors Meeting in India, before finally deciding not to embark on such Tax-hazardous misadventures.

Section 6 of the Indian Income-tax Act, 1961, which lays down the test for residency of corporate tax payers is proposed to be amended to state that a company which has its Place of Effective Management (‘POEM’) in India “at any time” during the financial year would be treated as resident in India. Is it a big deal if you are treated as a resident in India? It sure is! For, resident companies are liable to report and offer to tax its worldwide income in India.

The stated intent behind the above change is to embrace into the tax net those shell companies which are de-facto managed from India, as also to bring the tests of residency in line with International practice. But the use of the phrase “at any time during the financial year” makes the provision very wide-ranging and potentially prone to mis-interpretation.

While, quite arguably, the Treaty override provision available to most foreign companies would mitigate the impact, the problem really is that the provision has potential to lead an ‘arguable situation’ (read litigation) being created on an issue where there is no argument at present.

We argue for dropping of the words “at any time” – and hopefully that would put all arguments at rest.