The Central Board of Direct Taxes (CBDT) on Friday clarified that rules under Place of Effective Management (POEM), which require firms that are controlled from within the country to pay taxes in India, will not apply to companies with an annual turnover of Rs 50 crore or less. The rules will come into effect from the next fiscal.
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In January, the tax department had said as much in a press release after the POEM rules were announced. However, the exemption to companies with a turnover of less than Rs 50 crore didn’t find a mention in the circular released subsequently.
Last month, the tax department had come out with the long-awaited POEM rules that will require foreign companies in India and Indian firms with overseas subsidiaries to pay local taxes based on where the business if effectively controlled.
In a clarificatory circular, the CBDT said the provision of POEM “shall not apply to a company having turnover or gross receipts of Rs 50 crore or less in a financial year”.
While issuing the POEM rules, CBDT had said the intent is to target shell companies and those which are created for retaining income outside India though real control and management of affairs are located in India.
Experts welcomed the move, saying that the circular provided much-needed clarity on the issue. “This circular re-emphasises that the government intends to contain avoidable litigation by placing a cap on a category of companies for which POEM can be invoked,” Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP, said.
Nangia and Co managing partner Rakesh Nangia said the circular intends to provide clarity that POEM can be invoked only in case of companies with a turnover of more than Rs 50 crore as the first circular did not clearly mention the threshold.
“This circular re-emphasises that the government intends to contain avoidable litigation by placing a cap on category of companies for which POEM can be invoked,” he said.
With FE & PTI Inputs