US Corp Subsidiary in India - Tax Question

As far as Income tax is concerned you can open a subsidiary in India but you cannot just pay them salary and not have any profit in India.

As per transfer pricing rules you have to keep some profit in India which could be anywhere between 10-20%.

Other than tax of around 25% on this profit there would be only 1 tax liability i.e. dividend if you wish to take out the profit i.e. 20% tax on such dividend.

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Thank you.

Hello,

Scenario 1: Only Salaries Paid from US Corp to Indian Subsidiary

• GST: The Indian subsidiary not have a GST liability in this scenario.

• Transfer Pricing: Transfer pricing rules apply to determine an arm's length price for any services provided by the Indian subsidiary to the US parent corporation.

• Profit Retention: As mentioned, it's essential to retain an appropriate level of operating profit margins in India as per transfer pricing rules, typically around 12-22%.

Scenario 2: Software Developed in India and Sold to US Parent Corp

• GST: If export of services criteria are met, the software sale not in subject to GST.

• Transfer Pricing: Transfer pricing rules apply to determine the arm's length price for the software sale. Proper documentation is crucial.

• Profit Retention: As in Scenario 1, you should retain an appropriate level of profit in India in compliance with transfer pricing rules.

Regarding the use of a VPN by Indian employees to access the US-based server, this generally doesn't have a direct impact on GST or income tax liabilities.

Hope you find the information helpful. You are free to contact me for further discussion.If you could spare two minutes of your time to write a review, It would be really grateful and very happy to read it.

Thank you.

Shubham Goyal

I understand your query. The Indian subsidiary in both scenarios would operate as back office company for the US company. 

Scenario 1: The Indian entity even though it would be cost centre, it needs to pay the taxes on Arm's length profit margin on cost (i.e. what an unrelated entity would have made the profit if it would have provided the services to another unrelated entity.). This can be determined using the benchmarking analysis under the transfer pricing regulations, which is usually around 10-20% of the operating costs. The GST would not be applicable as this would be considered as export of services under the GST law. However, you need to obtain the letter of undertaking for the same. 

Scenario 2: Here as well the profits earned by the Indian entity should be benchmarked as per the Transfer pricing regulations. The GST would not be applicable here as well provided you obtain the letter of undertaking. 

In both the situations, there would be tax at the rate of 25% on domestic companies plus to withdraw the amount dividend would be taxed in the hands of the parent company. 

 For detailed consultation, please book telephonic consultation. 

Income Tax 

- Under both the scenario, Transfer Pricing provisions would be applicable  

GST

Scenario 1: GST would not be applicable as it is a reimbursement of cost but it may be subject to litigation

Scenario 2: GST would be applicable on sale of software from Indian Co. to USA Co.

For detailed discussion you may opt for phone consultation

Scenario 1 answer

- Any amount receive as markup of expenses shall be subject to tax in india, need to take GST Registration in India and under LUT no GST is payable

Scenario 2 Answer

- from taxation perspective tax will only come to profit earned so irrespective of nature of income if there is profit in the indian books of accounts the tax will apply and under GST also answer remains same as scenario 1