Currently only dividends given by such companies are taxed at the rate of 15 per cent in the hands of Indian shareholders. So if for instance a South American company controlled by an Indian resident, say Kumar Manglam Birla, earns profits but does not distribute dividends, then also it will be taxed if CFC provisions are introduced.
Such a provision will have the effect of increasing the costs of such companies and will act as a disincentive for the global plans of Indian companies. They will reduce their competitiveness by subjecting them to more than one layer of taxation. Firstly, these companies will have to pay the taxes to the local government.
Then they will be taxed at the hands of the Indian government. Then the income will be taxed for the third time in the hands of the shareholders when they receive it as dividends.
However the provisions in Budget 2012-13 are likely to allow for tax credits on taxation of dividends, as is the practice in other countries where the CFC already exists.