The Indian economy is a complex one and is at a crucial juncture, where sustainable growth is the need of the hour. If India needs to meet its ambitious target of $5 trillion, it would need substantial investment, for which external sources would need to be accessed, both in the form of debt and equity. The tax rates and ease of tax laws are among the most important aspects of any investor decision. While, the operational aspect has definitely improved over the years, lot of gaps still remain to be bridged. The various changes proposed in the Union Budget 2020 are the steps in the right direction of bridging this gap.
Some of the key provisions of the Bill are:
A. Measures to attract Foreign Investments
Removal of dividend distribution tax (DDT)
The government proposes to abolish the existing Dividend Distribution tax @ 15%. Going forward, such DDT will be replaced by a tax deducted at source (TDS) by the company paying dividend. Generally in case of non-residents who are eligible for Treaty benefits, the withholding tax (WHT) rate would be 10-15%.
Exemption to Sovereign Funds
Sovereign funds are one of the key sources of investment across the globe. To attract investment made by such funds, it is proposed that any dividend, interest or long-term capital gains, which may be earned by a wholly-owned subsidiary of Abu Dhabi Investment Authority, or any other sovereign wealth fund (wholly owned and controlled by the government of a foreign country) shall be exempt from tax in India. Such investment may be made either in the form of debt or equity, in a company either developing and/or operating and maintaining any infrastructure facility.
Reduction in corporate tax rate and withholding tax rates
The government has taken several measures, by providing extension of period during which concessional rate of TDS shall be available for following investments by non-residents:
• Benefit of lower TDS @ 5% shall continue to be available on the following securities (issued until July 1, 2023 as against current period ending June 30, 2020)
Rupee denominated bonds
Monies borrowed under a loan agreement
Borrowings by way of issue of long-term bond, including long-term infrastructure bonds
Government securities and Rupee Denominated Bonds of an Indian company subscribed by FII and QFI
• Benefit of lower TDS @ 4% shall be available on Rupee denominated/Long term Bonds on interest payable to non-resident, foreign currency borrowings from a source outside India
• Interest payable to FII and QFI in respect of investment in municipal debt security
Offshore Funds Regime relaxed
To attract setting up of foreign offshore funds to India, the income tax provisions were relaxed to provide that merely if the fund manager is based in India, such fund would not be liable to tax in India. To encourage more offshore funds, it has been provided that an eligible fund manager can contribute to the extent of Rs 25 crore during first three years, and this shall not be included in the limit of maximum corpus of 5% that can be owned by Indian resident. Similar relaxation has also been granted to provide that the fund can achieve a monthly average corpus of Rs 100 crore, within 12 months of end of the month of its incorporation.
B. Ease of Tax compliance
Tax compliance and associated litigation have been a big discontent for the foreign investors. To ease the tax compliance burden of foreign investors, the following amendments have been proposed
• Exemption from filing returns for non-resident deriving only royalty or fees for technical services
• Issue of quantification of taxable Indian profits of non-resident's PE can now be resolved under the Advance Pricing Agreement or Safe Harbor provisions.
To reduce litigation, the government has extended the benefit of Dispute Resolution Panel to non-residents other than foreign companies. Additionally, the newly proposed dispute resolution scheme of the government also provides an avenue to the taxpayers for settling their existing dispute through payment of taxes, without any additional fear of penalties/interest.
C. Widening of tax net
Income from advertisement to Indian customer/data from an Indian resident
The I-T Act has been amended to provide that income from advertisement to a non-resident, through a customer who is a resident of India, or from a person who accesses advertisement through an Indian IP, or from sale of data collected from a person who is a resident in India, or sale of goods or services using such data shall also be taxable in India.
Modification of residency provisions for high net worth individuals
In what could be a significant move for non-resident individuals, the Budget proposes that an Indian citizen, who is not liable to pay tax in any other country/territory by reason of his domicile or residence, will be deemed to be a tax resident in India. He/she will be liable to pay tax on his global income in India. However, the government issued a clarification in this regard on Sunday.
Significant economic presence
The I-T Act provided for taxation of foreign companies, which were selling goods/ providing services / download of software in India, or interacting with a specified number of users, based on them having significant economic presence in India, did not specify the threshold of such transaction, beyond which the non-resident could trigger taxation in India. The Budget has clarified the threshold of users/transaction etc that would be considered as significant economic presence of the non-resident, will be specified in due course and therefore these provision shall be deferred for period commencing on or after April 1, 2021.
TDS on E-commerce Transaction
In order to tackle the leakage of tax due to e-commerce transactions, the Budget proposes an amendment whereby TDS @ 1% shall be deducted by the e-commerce operator, from payment made to a resident, for any goods, or services which are sold by the resident through the digital/ electronic facility or platform provided by the e-commerce operator. This amendment is likely to significantly impact the compliance burden of companies like Amazon, Flipkart, Uber, Ola, Zomato and several others, who provide platforms to large number of small vendors to sell goods/service through the use of their platform.
Overall the Budget has been drafted with a positive intention to facilitate the flow of foreign investment in India, at the same time trying to curb some of the practices that result in evasion of taxes. The abolition of DDT, and settlement scheme for past tax disputes, can be a significant move that can address the long pending disputes, and facilitate remittance of profits by foreign companies.
(Arinjay Kumar Jain and Amit Kumar are chartered accountants with specialisation in international taxation)
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