IMPACT ON NON-RESIDENT INDIANS
The Indian Finance Minister recently announced the Indian Budget for 2016-17 and while there were plenty of oohs and aahs for the crowd, there were some interesting provisions which could have a far reaching impact on the Indian economy and on the way the world in general and expatriate Indians in particular view India and more importantly doing business/ earning income in India. Some provisions which will have an impact on non-residents are discussed below:
The Tax Deducted at Source (TDS) – Permanent Account Number (PAN) unfairness syndrome
- Non-Resident Indians (NRIs) were being treated unfairly, when it came to TDS on many instruments, particularly fixed deposits. An NRI had to pay in excess of 30 per cent as TDS on interest earned on Non-Resident (Ordinary) (NRO) deposits, unless of course the relevant double taxation treaty documents were submitted. NRIs without PAN were being unfairly treated with higher tax rate. The Union Budget 2016-17 proposes that TDS shall not be deducted at a higher rate in case of NRIs not having PAN, subject to prescribed conditions. This is a welcome move, as TDS is severe for NRIs. So, NRIs can gain on NRO Deposits.
[Note: there is no question of TDS with respect to interested earned on Non-Resident (External) (NRE) Deposits since these do not attract any tax at all.]
- An NRI is defined as a citizen of India who stays in India for more than 182 days during a financial year (April to March). These NRIs tend to open either NRE or NRO accounts, and/or NRE or NRO fixed deposits. For receiving domestic payments, a NRO Account is a must. For example, if the NRI has rental income in India, then he/she has to open a NRO account for receiving such income. If this account has some balance, it will attract interest, which is subject to TDS of over 30 per cent. In the case of a domestic resident savings account, there is no TDS, if the interest income is below Rs 10,000 in a savings banks account. This is not applicable for NRO accounts and hence there are disparities. The Union Budget 2016-17, has taken a positive step to make it fair, by ensuring that on satisfying certain conditions, they would not be subject to a harsh TDS.
- As recommended by The Easwar committee, now NRIs who do not have PAN cards would not be subjected to a higher TDS of 20% if they submit their Tax Identification Number.
The Residential status POEM
- The concept of deeming a foreign company to be a resident in India if its place of effective management (POEM) in that year is in India was introduced in the Budget of 2015 effective from assessment year 2016-17.
- To provide clarity with respect to implementation of POEM-based rule of residence for a foreign company that has not been assessed to tax in India as well as a transitional mechanism for such companies, it is proposed to defer the effective date of implementing this provision to assessment year 2017-18.
The new Equalization levy – Google tax anyone?
- A new equalization levy of 6% has been introduced to address challenges of the “digital economy” on the amount of consideration received by a non-resident for any specified services.
- The equalization levy is to be charged at 6% of the amount received by a non-resident for specified services provided to a resident in India or a non-resident having a permanent establishment (PE) in India.
- “Specified services” cover online advertisements, provision for digital advertising space or any other facility or service for the purpose of online advertisements or any other notified services.
- Equalisation levy is to be deducted by the payer from the amount paid/ payable to the non-resident service provider, except where the aggregate consideration for the specified service is less than INR 100,000.
- The levy will impact the bottom lines of giants like Google, Yahoo and their ilk, that earn ad revenue from business entities in India. In professional circles, this is being dubbed as `Google tax’. Its introduction is the outcome of a pitched battle which India faced during the Base Erosion and Profit Shifting project (BEPS) discussions, a project spearheaded by the OECD. The project aims to bring G20 countries on a single platform to introduce measures to ensure tax transparency and curb tax avoidance by multinationals (MNCs) through aggressive tax planning.
- The double-whammy for such MNCs is that this is not an income-tax levy. So it would be difficult for foreign companies to claim a tax credit in home country for the equalization levy withheld in India or to get a reduced rate under a tax treaty.
- The Budget proposals prescribe that Indian payers who do not deduct equalisation levy against payments made by them and do not deposit it with the government will be disallowed such expenditure from computing taxable profits. In simple words, their taxable income will be higher by the amount of disallowed expenditure, which will mean a higher tax bill.
Getting foreign companies off the MAT
- Provision of Minimum Alternate Tax (MAT) will not apply to a foreign company if-
- It is resident in a country with which India has a Double Tax Avoidance Agreement (DTAA) and does not have a PE in India; or
- It is resident in a country with which India does not have a DTAA but the foreign company is not required to register under any law applicable to companies.
- This Amendment is to be applied retrospectively from assessment year 2001-02.
- The clarification will end the confusion over the applicability of MAT on foreign companies that invest in India through the foreign direct investment (FDI) or venture capital route, without creating a presence in India.
- With a view to rationalizing the regime and to address the concerns of the industry, it is now proposed to modify the conditions for qualifying as an ‘eligible investment fund’ to include not only those entities that are tax resident in a country with which India has a DTAA but also those established or incorporated or registered in a country or specified territory notified by the Indian Government.
- It is proposed that the earlier condition of the fund not carrying on or controlling or managing, directly or indirectly, any business in India or from India, is now restricted only to any business in India. This amendment will be effective from 1 April 2017.
- There will also be a beneficial withholding tax rate for non-resident investors on income from investment funds regulated by the Securities & Exchange Board of India (SEBI).
Oil and Diamond exemptions
- Exemption shall be available to a foreign company in respect of income arising from sale of crude oil stored in a facility in India, where such sale is made to a resident Indian
- No income shall be deemed to accrue or arise in India to a foreign company from activities limited to display of uncut and un-assorted diamonds in any Special Zone notified by the Indian Government. This amendment will take effect retrospectively from 1 April 2016.
Capital gains tax concession to non-residents
- Presently, there is an ambiguity regarding applicability of concessional rate of 10% on sale of shares of a private company by a non-resident.
- To clarify the position, it is proposed to amend the provisions so as to provide that long-term capital gains arising from transfer of a capital asset, being shares of a private company, shall be chargeable to income-tax at the rate of 10%. This amendment will be effective from 1 April 2016.
- Wholesale cash and carry traders with FDI are now permitted to carry on single brand retail trade (SBRT) in the same entity, subject to conditions.
- FDI in retail trading activities have further been liberalized in respect of sourcing conditions which will now be considered from the opening of the first store. Also, an SBRT entity operating through a brick and mortar store is now permitted to undertake retail trading through e-commerce.
- The Indian Government has allowed 100% FDI in duty free shops under automatic route.
- The Indian Government has also made significant relaxation in respect of FDI in LLP and permitted FDI under automatic route in LLPs operating in sectors/activities where 100% FDI is permitted under the automatic route without any FDI-linked performance conditions.
- Investments by companies, trusts and partnership firms, incorporated outside India which are owned and controlled by NRIs, shall be deemed to be treated as domestic investments at par with investments by resident Indians subject to the condition that investment by such entities is under non-repatriation route.
- Defence – Foreign investment up to 49% now brought under automatic route.
- Broadcasting carriage services – FDI cap enhanced from 74% to 100% across various sub-sectors like Teleports, Direct-to-Home, Cable Networks (Multi-System Operators), Mobile TV, Headend-in-the Sky Broadcasting services – Automatic route up to 49% and Foreign Investment Promotion Board (FIPB) approval beyond 49%.
- Private Banking – Foreign Portfolio Investor (FPI)/Qualified Foreign Investor (QFI) ,permitted to invest up to sectoral limit of 74% in private sector banks, subject to no change of control and management of the investee company.
- Civil aviation – FDI in air transport services up to 49% (100% for NRIs) permitted in regional air transport service under automatic route.
- Agriculture – FDI up to 100% in tea sector.
- Insurance – FDI in insurance sector enhanced from 26% to 49%.
- Transfer of stake from one non-resident to another non-resident without repatriation of investment will neither be subject to any lock in period nor to any approval.
- It is clarified that 100% FDI under automatic route is permitted in completed projects for operations and management of townships, malls, shopping complexes and business centres. Consequent to foreign investment, transfer of ownership and / or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.
- To promote investments in the manufacturing sector, there is a proposal to accord residency status to foreign investors subject to certain conditions. Currently, these investors are granted business visa only up to five years at a time.
RBI relaxations Joint Ventures/ Wholly-Owned Subsidiaries as follows:
- Banks may extend funded and/ or non-funded credit facilities to step-down subsidiaries of Indian companies including to those beyond the first level, to finance the projects undertaken abroad; and
- The immediate overseas subsidiary of the Indian company must be directly controlled by the Indian parent company through any of the modes of control recognised under Indian Accounting Standards, and must directly hold a minimum 51% of its shareholding.
- The remittance limit of USD 125,000 under the liberalized remittance scheme (LRS) has been enhanced to USD 250,000 during the year.
While political winds may blow a certain provision one way or the other, it is clear that while it is not a ‘come hither’ budget, the intention is clearly to steer the ship of the Indian economy in the right direction.
(This article is compiled by Mr. Chaitanya G. Kirtikar, Senior Manager, Offshore and Free Zone Services.)