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Clarity on taxation of non resident

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The issue of applicability of certain tax provisions to non-resident has always been a matter of debate and led to controversy in Indian tax administration. Bringing clarity in taxes, reducing litigation is one of the prime objective of the present Government.

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Clarity on taxation of non resident

  1. 1. Clarity on taxation of non-resident ~ few steps to overarching theme of ease of doing business in India
  2. 2. 2 The issue of applicability of certain tax provisions to non-resident has always been a matter of debate and led to controversy in Indian tax administration. Bringing clarity in taxes, reducing litigation is one of the prime objective of the present Government. To achieve the said objective, the Government has taken few steps in the proposed Budget 2016, and has provided clarity on some of the issues faced by the non- resident. Exemption from requirement of furnishing Permanent Account Number [PAN] In order to ensure that more people come under the tax net, the Finance (No. 2) Act, 2009 had introduced section 206AA under the #IncometaxAct. This section provided for higher withholding tax rate of 20%, if the payee does not provide the PAN, with an exception for non- resident in respect of payment of interest on long-term bonds as referred to in section 194LC. In order to reduce compliance burden for non- resident, it is now proposed that with effect from 1 June 2016, in addition to interest on long-term bonds, the provisions of section 206AA shall not apply to a non-resident in respect of any other payments subject to such conditions as may be prescribed. This is a welcome relaxation as most of then on-resident tax payers having one time transactions may not have PAN.
  3. 3. Minimum Alternate Tax [MAT] on foreign company Whether foreign companies are liable to pay #MAT has been a controversy coupled with conflicting judicial pronouncements on the issue. The #FinanceAct, 2015, amended the MAT provisions to exclude capital gains, interest, royalty and fees for technical services earned by the foreign company from the purview of MAT. However, since the amendment was applicable from assessment year 2016- 17, the Indian tax authorities started issuing tax notices to foreign companies / FIIs/FPIs to levy and collect the MAT for the period prior to 1 April 2015. On 24 September 2015, the Government issued a press release stating that the MAT provisions shall not be applicable to foreign company with effect from 1 April 2001, if it does not have a PE in India under the tax treaty or a place of business in India. The Hon'ble Supreme Court in the case of Castleton Investment Ltd1 affirmed the position clarified in the press release. With a view to provide certainty and put an end to litigation, in line with the press release, necessary amendments have been proposed to be made in the MAT provisions. Generally, foreign companies enjoy concessional/nil tax rate on income in the nature of capital gains, interest, royalty and fees for technical services. Applying MAT provision on these income was defeating the whole purpose of taxing these income at concessional/nil tax rate. The clarity on MAT provisions will provide a big relief and certainty to the foreign taxpayer. 3
  4. 4. Residence rule based on Place of Effective Management [PoEM] The Finance Act, 2015 amended the provision of section 6(3) to provide that a company would be resident in India in any previous year if it is an Indian company or its PoEM in that year is in India. The PoEM was defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made. Implementation of PoEM based residence rule has given rise to various issues on applicability of current provisions of the Act to the foreign company. In order to provide clarity in respect of implementation of PoEM based rule of residence and also to address concerns of the stakeholders, the applicability of PoEM has been proposed to be deferred by one year, hence it will be applicable from 1 April 2017. Further, section 115JH is proposed to be introduced to provide that where a foreign company is said to be resident in India for the first time, then the provisions of the Act relating to the computation of total income, treatment of unabsorbed depreciation, set off or carry forward and set off of losses, collection and recovery and special provisions relating to avoidance of tax shall apply with such exceptions, modifications and adaptations as may be specified in the notification for the said previous year. The said transition provisions would also cover any subsequent years upto the date of determination of PoEM in an assessment proceedings. One has to wait and watch how the PoEM based residence rule will be administered and to what extent Government would provide exemption and reliefs to such foreign companies. Nevertheless, the deferral and transition provisions will give some breathing space to such a foreign company as well as tax authorities to prepare for the new tax rule. 4
  5. 5. Equalisation levy In the current technology driven environment, the supply and procurement of digital goods and services have undergone exponential expansion worldwide, including India. Currently in the digital domain, business may be conducted ignoring the national boundaries and without having link to a specific location. The digital business fundamentally challenges physical presence based PE (i.e. place of business, location, and permanency). The Organization for Economic Cooperation and Development [OECD], in Base Erosion and Profit Shifting [BEPS] project under Action Plan 1 has recommended several options to tackle the direct tax challenges which includes imposition of equalisation levy on consideration received by a non-resident for certain digital transactions. Moving in line with BEPS action plan, the Government has proposed to insert a Chapter on Equalisation Levy which will be effective from date to be notified by the Central Government. Equalisation levy of 6% will be levied on the consideration exceeding INR 1 lacs received by a non-resident not having PE in India for online advertisement, for provision of digital advertising space or any other facility or service for the purpose of online advertisement and such other services as may be notified. The collection and recovery of equalisation levy is on the payer by way of deduction from the amount paid or payable to the non- resident in respect of specified services. In order to ensure effective compliance, it provides for disallowance of expenses, interest, penalty and prosecution in case of defaults. The income subject to equalisation levy would be exempt in the hands of recipient. The e-commerce companies catering to Indian customers have faced significant litigation in this respect, especially in relation to characterisation of income (i.e. business income or royalty or fees for technical services) and withholding taxes. Though clarity would be required on some issue such as availability of tax credit for equalisation levy in home country, taxability under the tax treaty etc., the taxpayers would certainly welcome the move as by paying 6% tax, the litigation can be put to rest. 5
  6. 6. Concessional tax rate for non-residents Presently, the concessional tax rate of 10% (plus applicable surcharge and cess) applies to non-residents in respect of long-term capital gains arising on unlisted securities. There has been controversy as to whether the concessional rate can be applied to shares of a private company. A view has been taken by the courts that shares of a private company are not "securities" as defined under the Securities Contracts (Regulations) Act. In order to provide clarity, it is proposed to apply the concessional tax rate to shares of a company not being a company in which public are substantially interested. This should put an end to litigation on this issue. Certain exceptions to the taxability of non-resident In the case of a non-resident, the taxation of income takes place only if the income accrues or arises in India or is deemed to accrue or arise in India or is received in India. The Government has proposed to provide the following exceptions to the taxability of the non- resident from the assessment year 2016-17 and onwards: • In the case of foreign mining companies, 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 Notified Zone. • Any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India shall be exempt from tax, if such activities are notified or approved by the Central Government. While one needs to wait for the Finance Bill to be approved by the houses of the Parliament and the President of India for it to come into force, the proposed clarity should decrease the disputes between the taxpayers and the tax authorities and create certainty in the minds of the foreign investors. The move of government will certainly create positive waves and boost economic growth. 6
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