THE Finance Bill, 2016 was introduced in the Parliament on 29 February 2016. This article discusses some of the important Income Tax proposals made in the Finance Bill, 2016 applicable to non-residents. The amendments discussed below are proposed to be effective from 1 April 2016 (from assessment year 2017-18) unless stated otherwise.
Deferral of provisions relating to Place of Effective Management
The Finance Act, 2015 had introduced the concept of Place of Effective Management (PoEM) to determine the tax residency of foreign companies in India. The said provisions were to be effective from 1 April 2015 onwards.
It is proposed to postpone the applicability of provisions relating to PoEM by one year to be effective from 1 April 2016. The rationale for deferment of provisions relating to PoEM is to provide clarity in respect of implementation of PoEM-based rules of residence and also to address concerns of the stakeholders.
It is also proposed that where a foreign company is said to be resident in any previous year and such foreign company has not been resident in India in any of the preceding previous year, then provisions relating to computation of total income, treatment of unabsorbed depreciation, set off or carry forward and set off of losses, etc. shall apply with such exceptions, modifications and adaptions on fulfilment of such conditions as may be notified by the Central Government. The benefit of the notification will not be available to the foreign company in case of failure to comply with the prescribed conditions. It also provides for transition provisions which would cover any subsequent previous year upto the date of determination of PoEM in assessment proceedings.
Non-applicability of MAT provisions to foreign companies prior to 1 April 2015
In view of the recommendation of the Justice A. P. Shah Committee and to provide certainty in taxation of foreign companies, it is proposed to provide that with effect from 1 April 2001, the provisions of Minimum Alternate Tax (MAT) shall not be applicable to foreign company if:
– Foreign company is a resident of a country or territory with which India has entered into a Tax Treaty or Tax Information Exchange Agreement (TIEA) and the foreign company does not have a PE in India; or
– Foreign company is a resident of a country with which India does not have an agreement as referred above and the foreign company is not required to seek registration under any law for the time being in force relating to companies.
The provisions are proposed to take effect retrospectively from 1 April 2001 and will accordingly apply in relation to assessment year 2001-02 onwards.
Exemption from requirement of furnishing PAN
As per the current Income tax provisions, PAN is required to be furnished by all the taxpayers including non-residents to the deductors to avoid higher withholding tax than the prescribed rate on the income on which tax is deductible.
In order to reduce compliance burden, it is proposed to exempt the non-residents from furnishing of PAN subject to such conditions as may be prescribed. As per Finance Minister’s Budget speech, higher withholding tax rate will not apply on furnishing of alternative documents.
The above amendment is proposed to be effective from 1 June 2016.
Definition of the term ‘unlisted securities’ for rate of tax for long-term capital gains
As per the current Income Tax provisions, long-term capital gains arising from transfer of a capital asset, being unlisted securities, to a non-resident shall be taxable at 10 percent. A debate had arisen whether shares of private company are securities or not.
In order to clarify the position, it is proposed to amend the provisions so as to provide that long-term capital gains arising from the transfer of a capital asset being shares of a company not being a company in which public are substantially interested, shall be chargeable to tax at the rate of 10 percent.
The above provisions are proposed to be effective from 1 April 2017 and shall accordingly apply in relation to assessment year 2017-18 onwards. The issue remains open and debatable for the tax rate on long-term capital gains on sale of unlisted securities for the period 1 April 2012 to 31 March 2016.
Tax benefits in relation to Rupee Denominated Bond
To provide relief to non-resident investor who bears the risk of currency fluctuation, it is proposed to provide that the capital gains arising in case of appreciation of rupee between the date of issue of rupee denominated bond and the date of redemption against the foreign currency in which the investment is made shall be exempt from tax on capital gains.
The CBDT vide press release dated 29 October 2015 provided that withholding tax at the rate of 5 percent shall be applicable on the interest income on rupee denominated bond which will be in the nature of final tax. It also stated that amendment will be proposed through the Finance Bill, 2016. However, no such amendment finds place in the Finance Bill, 2016.
Exemption of income from storage and sale of crude oil stored as part of strategic reserves
As per the current Income tax provisions, the storage of crude oil by foreign national oil companies (NOCs) and multinational companies (MNCs) and its sale in India creates tax liability exposure.
In order to encourage the NOCs and MNCs to store their crude oil in India and to build up strategic oil reserves, it is proposed to provide exemption to foreign company from the activity of storage of crude oil in a facility in India and sale therefrom to any person resident in India if such storage or sale is in pursuance of an agreement or arrangement with Central Government that is notified.
The provisions will apply in relation to assessment year 2016-17 onwards.
Exemption relating to diamond display activity in “Specified Notified Zone”
As per the current Income tax provisions, activity of foreign mining companies (FMC) of mere display of rough diamonds even with no actual sale taking place in India may create business connection exposure.
In order to facilitate the above activity of display of uncut diamond (without any sorting or sale), it is proposed to provide that in case of FMC engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to display of uncut and unassorted diamonds in a Special Zone notified by the Central Government.
The provisions will apply in relation to assessment year 2016-17 onwards.
Tax incentives to International Financial Services Centre
To incentivise the growth of International Financial Service Centres (IFSC) into a world class financial services hub, it is proposed to provide exemption from tax on capital gains to the income arising from transaction undertaken in foreign currency on a recognised stock exchange located in an IFSC even when the securities transaction tax is not paid.
It is proposed to levy MAT at the rate of 9 percent in case of a company, being a unit located in IFSC and deriving its income solely in convertible foreign exchange. Further, it is proposed to exempt the above referred company from DDT for the amount declared, distributed or paid out of its current income, both in the hands of the company or the person receiving dividend.
It also proposes to amend the provisions for exempting the above transaction from levy of securities transaction tax and commodities transaction tax. The amendment for securities transaction tax and commodities transaction tax are proposed to be effective from 1 June 2016.
Exemption from DDT on distribution made by an SPV to Business Trust
As per the current Income Tax provisions, d ividend distributed by a Special Purpose Vehicle (SPV) to business trust [ Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust (Invit)] is subject to DDT. Dividend subject to DDT is exempt in the hands of the business trust and when distributed to its investors.
It is proposed to provide exemption from DDT in respect of distributions made by SPV to the business trust. It also proposes that such dividend received by the business trust and its investors shall not be taxable in the hands of trust or investors. The exemption from DDT would only be in the cases where the business trust either holds 100% of the share capital of the SPV or holds all of the share capital other than which is required to be held by any other entity as part of any direction of any Government or specific requirement of law. Further, the exemption from DDT would only be in respect of dividends paid out of current income after the date when the business trust acquires the whole of the share capital as referred above in the SPV. The dividends paid out of accumulated and current profits upto the above date shall be liable to DDT.
The above amendment is proposed to be effective from 1 June 2016.
Relaxation in certain conditions of off shore investment funds
In order to facilitate location of fund managers of offshore funds in India, the Finance Act, 2015 provided that no business connection shall be constituted for the eligible investment fund in India where its fund management activity is managed by an eligible fund manager in India subject to fulfillment of prescribed conditions. One of the conditions prescribed was that that the eligible investment fund should be a resident of a country or territory with which India has entered into a Tax Treaty or TIEA.
In order to rationalize the regime and to address stakeholders concern, it is proposed to provide that the eligible investment fund shall also mean a fund established or incorporated or registered outside India in a country or a specified territory notified by the Central Government. It further proposes to provide that the condition of fund not controlling and managing any business in India or from India shall be restricted only in the context of activities in India.
Withholding tax on payments by Category-I and Category-II AIFs to its investors
As per the current Income Tax provisions, withholding tax at the rate of 10 percent needs to be deducted by Alternative Investment Funds (AIFs) on the income credited or paid to its investors. The current provisions of obtaining lower or nil deduction certificate from the tax officer as applicable to taxpayers does not cover the above payments.
In order to rationalise the withholding tax regime, it is proposed to amend the withholding tax provisions to enable the AIFs to deduct tax at the rates in force where the payee is a non-resident. This will be helpful for investors where the income is not taxable under the Tax Treaty. It also proposes to extend the provisions of obtaining lower or nil deduction certificate from the tax officer for the above payments.
The above amendment is proposed to be effective from 1 June 2016.
New Tax regime for securitisation trust and its investors
In order to rationalize the tax regime for securitisation trust and its investors, and to provide tax pass through treatment, it is proposed to substitute the existing special regime for securitisation trusts by a newregime as under:
– Applicable to securitisation trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitisation of standard assets issued by RBI or being set-up by a securitisation company or a reconstruction company in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
– Income of securitisation trust shall continue to be exempt
– Income from securitisation trust would be taxable in the hands of investors
– Securitisation trust to with hold tax at the rates in force in case of payments to non-resident investors
– Facility of obtaining lower or nil deduction certificate will be available
The above amendment is proposed to be effective from 1 June 2016.
Equalisation levy for digital transaction
The new business models adopted by business with respect to supply and procurement of digital goods and services have created new tax challenges including physical presence-based permanent establishment (PE) rules. The Organization for Economic Co-operation and Development (OECD) has recommended in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1, several options to tackle the direct tax challenges.
In order to tap tax on income arising from digital transactions, it is proposed to insert a new Chapter titled “Equalisation Levy” which provides for an equalisation levy of 6 percent of the amount of consideration for specified services received or receivable by a non-resident not having PE in India, from a resident in India who carries out business or profession, or from a non-resident having PE in India. The specified services are defined to mean online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified. These provisions will not be applicable where:
– non-resident providing the specified service has a PE in India and the specified service is effectively connected with such PE;
– consideration for specified services received or receivable by the non-resident does not exceed INR 0.1million in any previous year; or
– payment for the specified service by the person resident in India or the PE in India is not for the purposes of carrying out business or profession.
The proposed chapter provides for the procedure for collection and recovery of equalisation levy, interest, penalty and prosecution in case of defaults. It further provides provisions relating to furnishing of annual statement, rectification of mistake, appeal to Commissioner of Income-tax (Appeals), Appellate Tribunal, etc.
The income arising from the specified services on which equalisation levy is chargeable is proposed to be exempt from income-tax. The proposed provisions also provides for denial of deduction in computing the taxable income of the payer in case of failure to deduct and deposit the equalisation levy. These provisions are proposed to be effective from 1 June 2016.
The provisions of equalisation levy shall extend to whole of India except the State of Jammu and Kashmir and are proposed to take effect from the date appointed in the notification to be issued by the Central Government.
Impact on individuals
There is no change in the tax rate or exemption limit for individuals (including non-resident individuals). However, it is proposed to increase the surcharge rate from 12% to 15% in case of individuals(including non-resident individuals) if the income exceeds INR 10 million.
Others –
Holding period of unlisted companies
As per the current Income Tax provisions, shares of unlisted company is required to held for a period of more than thirty-six months in order to qualify as long-term capital asset. As per the Finance Minister’s Budget speech, it is proposed to reduce the period from thirty-six months to twenty-four months.
General Anti-Avoidance Rule
The provisions of General Anti-Avoidance Rule (GAAR) were introduced by the Finance Act, 2013. The applicability of GAAR was later postponed by two years and further by two more years to be made applicable from 1 April 2017. The Finance Minister in the Budget speech has reiterated the commitment to implement GAAR from 1 April 2017.
Dispute Resolution
It is proposed to provide one time dispute resolution for ongoing cases under retrospective amendment. The taxpayer can settle the case by paying only tax arrears by agreeing to withdraw any pending case lying in any Court or Tribunal or any proceeding for arbitration, medication, etc. under Bilateral Investment Promotion and Protection Agreement. The interest and penalty in such cases is proposed to be waived
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