“Make in India” is an initiative of the Government of India to encourage companies to manufacture in India. The program includes major initiatives designed to facilitate investment, foster innovation, protect intellectual property and build best-in-class manufacturing infrastructure. The new Budget will set India off on a faster trajectory of growth while opening up more avenues for NRIs to contribute to the Nation’s development.
There being enormous changes in the Budget 2015, there is definitely a lot of cheer for the foreign investors and of course an approach to take India to a NEXT LEVEL. Amongst the same, we shall now discuss some of the important proposals made in the Finance Bill which shall be applicable to the non residents.
A. Roll Back of Income Tax Rate on Royalty and fees for technical services:
The major step towards the “Make in India” initiative is the rollback of reduction of the rate of income tax on “Royalty” and “Fees for Technical services” from 25% to 10% (plus applicable surcharge and education cess). However, this lower rate of tax shall be applicable only if the nonresident has a Permanent Account Number [PAN] allotted by the Indian Tax Authorities, meaning thereby in the absence of the PAN, their income shall still be liable to a tax rate of 20%.
The Finance Act 2013 had increased the rate of Income tax on royalty and fees for technical services which were not effectively connected to a permanent establishment from 10% to 25%, in order to reduce the disparity of tax rate as per the Indian tax law and the Double Tax Avoidance Agreement [DTAA].
However, this roll back is definitely a welcoming move, as this reduced rate shall help encourage technological upgradation by import of technology, know how, software etc and boost the domestic production in India. Another major advantage will be the reduction of the burden on the Indian entities which till now were entering into contracts for payment of royalty and fees for technical services on net basis as now they will have to bear less amount of tax on such payments.
B. Clarification regarding the Indirect Transfer:
As per the current regime of the Indian Income Tax, the transfer of a capital asset situated in India is taxable in India. However, in order to dispel the worries of the foreign investors, the Finance Bill 2015 has proposed certain amendments to the existing provisions which shall partially nullify the retrospective amendment made by the Finance Act 2012 as a backdrop to the decision of the Hon’ble Apex Court in the Vodafone case. Stating a few, include defining a threshold limit for value of Indian asset; taxation of proportionate gains; exemption in cases of tax neutral merger and demergers; reporting obligations casted on the Indian parties including a liability to penalty etc.
The proposed amendments are set to provide a clear picture on the provisions related to indirect transfer including clarity on aspects related to computation of gains arising through such taxable transfers more appropriately prescribed in the proposed Rules forming a complete code on taxability of indirect transfers.
C. Freedom from Minimum Alternative Tax (MAT) to the Financial Institutional Investors:
In order to provide a relief to the Foreign Institutional Investors [FII], the income from the transaction securities [other than short –term capital gains arising on transaction not chargeable to STT] arising to a FII shall be exempted from paying MAT. However, there still remains a query as to whether MAT shall be applicable to the foreign companies not having a Permanent Establishment in India or not.
D. Introduction of the concept of “POEM”:
Proposing to amend section 6 of IT act , POEM, a new term introduced in the Budget 2015 refers to the ‘Place Of Effective Management’ i.e identification of a place where the key management and commercial decisions of a company that are essential for the conduct of its business as a whole and in substance shall be made.
If a company has its POEM in India at any time during the year, then it shall be treated as a resident in India and accordingly taxed on its worldwide Income. At present, the law prescribes that a foreign company shall be regarded as a resident in India in any year, if the control and management of its affairs is situated wholly in India during that year. Meaning thereby, even a partial control for the company outside India was sufficient to hold the company as a nonresident.
The principal above being recognized and accepted by the Organization of Economic Cooperation and Development [OECD] is also along the lines of the definition of PEOM indicated in the Direct Taxes Code, 2013.
This amendment shall definitely affect a majority of foreign players who take their key management and commercial decisions in India including the foreign companies having Indian branches, foreign subsidiaries of Indian parent companies, overseas companies having global reporting structure with Indian connection and regional headquarters etc.
E. Deferral of General Anti-Avoidance Agreement [GAAR]:
Another important step taken is the postponement of the implementation of the GAAR to two more years. The provisions of GAAR were introduced by the Finance Act 2013 to be applicable from 1st April 2015, which now have been deferred to two more years to be effective from 1st April 2017.
F. Fund Managers of offshore funds outside India not to constitute a business connection in India:
Currently, the offshore funds managed by fund managers in India constitute a business connection in India by virtue of their fund managers in India even if they are managing the activities with respect to the investments outside India. Meaning thereby, apart from the taxation of the income received by such mangers in lieu of fees for their fund management activity, the income of the offshore funds from investments made outside India is also getting taxed in India due to such activities being undertaken in and from India constituting a business connection.
In order to avoid such situations and to facilitate the location of fund mangers of off shore funds in India, a specific regime has been proposed to modify PE norms with the object that the income of the fund would not be taxable in India solely on the basis that the fund management activity have been undertaken through a fund manager located in India. However, the same shall be subject to fulfillment of certain prescribed conditions.
G. Extension of the eligibility period of lower rate of withholding tax under Section 194LD:
Under the current tax regime, Section 194LD provides for withholding tax rate of 5% (Plus applicable surcharge and education cess) on interest income to Foreign Institutional Investors or Qualified Foreign investors for their investments in Government securities and rupee denominated corporate bonds provided that the rate of interest does not exceed the rate notified by the central government in this regard. The limitation date for the above was up to 31st May, 2015 which now has been extended to 30th June, 2017.
Further, the date with regards eligibility for the benefit of lower rate available U/S 194LC for External Commercial Borrowings [ECB’s] has also been extended from 30th June, 2015 to 30th June, 2017.
H. TDS Returns for foreign remittances whether or not chargeable to tax:
Amongst the changes above, it is also proposed to amend Section 195 of the Income Tax Act wherein now the persons responsible for paying any sum to a non resident, not being a company or to a foreign company, shall be required to furnish the information of the prescribed sum in a prescribed form, in spite of the fact that the same would be chargeable to tax or not. This return is currently required to be submitted only in cases where the sum is chargeable to tax.
Furthermore, in order to ensure submission of accurate information, there has been a proposal for imposition of penalty in case of non submission or submission of incorrect information in the cases referred to above.
Looking at the scenario above, it can be said clearly that the said Budget 2015 is majorly in the favor of the non resident Indians with an overall aim of encouraging the investors to invest into India and sending them an affirmative note that India is an investor friendly country.