Continuing its course of encouraging foreign investment and as reaction to OECD’s BEPS plan, the Indian government announced at the annual Union Budget Day 2016 a number of reforms, especially addressing various pending tax issues and introducing new tax initiatives.
At the Union Budget Day on 29 February 2016, the Indian Finance Minister Arun Jaitley addressed various issues regarding foreign investment in India especially from a tax point of view. A number of reforms were announced, taking into account the developments at OECD level, i.e. the BEPS project, which in general should have a positive effect on investment into India.
Some of the changes proposed are the following:
Withholding taxes – Easing of the PAN requirement
Today, non-residents who want to benefit from a reduced withholding tax rate according to the respective double tax treaty in connection with e.g. royalty payments need to provide their Permanent Account Number (“PAN“), otherwise they are subject to the higher withholding tax rate of 20% or the maximum applicable rate under the Income Tax Act (“ITA”). In order to avoid delays in the payment due to a time consuming process of applying for the PAN, the government has now proposed that non-residents may alternatively provide other documents (e.g. a tax identification number issued by their country of residence) to the Indian counterparty (detailed requirements to be defined). However, such easing does not basically affect any obligation to file a tax return in India, for which a PAN is still required.
Tax holidays for start-ups
Eligible start-ups should be exempted from income tax for any 3 consecutive years out of the first 5 years after the incorporation of the start-up. However, they will not be exempt from the Minimum Alternative Tax (“MAT”) of 18.5% in those years. Start-ups are eligible if they are incorporated on or after 1 April 2016 but before 1 April 2019, their annual turnover does not exceed INR 250m (about USD 4m) and they involve innovation, development, deployment or commercialization of new products.
Introduction of a patent box regime
A new patent box regime in line with the recommendations of the OECD BEPS project (action 5) is expected to be introduced. Under this regime, royalty income in connection with a patent developed and registered in India should be subject to tax on a gross basis at a rate of 10% (plus surcharge and CESS). No expenditures or allowance on this income will be granted.
Also in line with the OECD BEPS project (action 1) an „Equalization Levy“ will be introduced in order to tax e-commerce transactions of non-residents. The Budget proposes to impose a 6% tax on payments in excess of INR 0.1m (about USD 1,500) for any „specified services“ (e.g. online advertisement, any provisions for digital advertising space) received by non-residents from Indian residents or non-residents with a permanent establishment (“PE“) in India.
- In light of the announcement last year to reduce the corporate tax rate from 30% to 25% over a period of 5 years (read article Confidence and economic growth in India), the corporate tax rate is proposed to be lowered to 29% (excluding surcharge and CESS) for domestic companies whose turnover in the FY2014/15 has not exceeded INR 5 crores (USD 800k)
- Long-term capital gains tax rate levied on the sale of shares of unlisted private companies should be reduced from 20% to 10% for foreign investors (holding period requirement reduced from 3 to 2 years)
- Abolishment of the dividend distribution tax (“DTT“), levied on dividends to Real Estate Trusts and Infrastructure Investment Trusts
- No MAT should be levied on foreign companies unless they have a PE in India. This should apply with retrospective effect from 1 April 2001.
- General Anti-Avoidance Rules (“GAAR”) should be applicable from 1 April 2017
- Indian residency will be determined through the place of effective management (POEM) applicable from FY 2016/17
- Country-by-country reporting in line with BEPS action 13 should be effective from April 1, 2017
The proposed reforms are internationally oriented, include the latest developments at the OECD level, and it is expected that they will bring some easing for foreign investors. However, the focus of those reforms lies mainly on promoting local business initiatives. In this connection, please also refer to other government campaigns like “Make in India”, “Digital India”, “Skill India” and “Start-up India” as stated in the publication “India soars high”.