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Tax Exporting

Reviewed by Annapoorna | Updated on Sep 30, 2020



What is Tax Exporting?

Tax exporting involves one jurisdiction imposing tax burdens on the residents of another jurisdiction. It refers to taxes that crosses any boundary, from towns to international borders. Tax exporting takes many forms and equally fulfils many objectives.

In some cases, the practice is to transfer the tax liabilities to individuals belonging to another country. They may be engaged in the economy of a given country and pay taxes at the rates equal to the rates charged for local taxpayers.

In certain other cases, a tax law may be intentionally framed in a manner to impose a higher tax burden on outsiders when compared to the locals. The intention could be to generate some extra revenue for a local government or to discourage a particular business practice or behaviour.

In other cases, the tax imposition could be a political machine targetting another jurisdictions leadership.

Tax exporting need not necessarily involve only direct taxation of foreign residents. It can also function through alternative economic channels, like the price changes.

Who is eligible to pay?

Under the Indian direct taxation, any foreign national earning income from Indian source is expected to file an income tax return and pay tax on that income. This tax may be reduced by a tax treaty between the foreign country and India. Different countries follow these treaties to varying degrees.

A corporation based overseas will be subject to income tax under the Indian Income Tax Act if its source is in India. Income tax will be applied if such entity earns regular and routine income from Indian business or India-controlled overseas business, even if through an intermediary.

Under the indirect tax laws of India, there are certain specific duties under the customs law which imposes safeguard duties, protection duties or anti-dumping duties on import of certain items or the exporting entities.

The Customs Tariff Act, 1975 prescribes the anti-dumping duty in certain cases. It is imposed when the goods imported into India are at an export price which is less than the normal value of the 'like' articles in the exporters domestic market. Anti-dumping duty is usually charged when such dumping of goods in the Indian market is materially threatening the local industry in India. The duty is calculated as the difference between the export price and the normal value of such dumped goods.

Similarly, the protective duty is charged to protect the Indian domestic industry from becoming unattractive against cheap imported duties. These are levied for a brief period only until the local industry revives and becomes competitive enough.

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