On February 28th, the Indian Budget proposal for the year 2013 was presented in New Delhi. Immediately after, KPMG India started to analyze the impact of the proposed changes in the Indian Tax law on multinational companies doing business in India. In summary the proposed changes include the details below.
Tax rate on Royalties and Fees for Technical Services (FTS)
The tax rate on Royalties and FTS is increased from 10.51% to 27.03 % on gross basis. This will have significant impact on such payments where treaty benefit is not available. In case the treaty benefit is available, the withholding rate as per the treaty would apply (Swiss-India treaty 10%). It would become necessary for foreign companies earning royalties and FTS from their Indian subsidiaries to ensure they provide necessary documentation to be eligible to treaty benefits. Bear in mind that every foreign company asking for treaty benefits have to register for a Permanent Account Number (PAN).
Tax Residence Certificate (TRC)
For non-residents, submission of TRC containing in prescribed particulars is made necessary retrospective from financial year 2012-13. Post budget, the Government has issued a press release in this regard clarifying that TRC satisfies only residence test and not the criteria of beneficial ownership; in case of Mauritius Circular 789 remains in force. The TRC will be accepted as evidence of residency of the assessee and the tax authorities in India will not go behind the TRC and question the residential status. The concern in this regard will be addressed suitably when the Finance Bill would be taken up for consideration.
General Anti Avoidance Rules (GAAR)
In the backdrop of the recommendation of the Expert Committee and Industry at large, the GAAR provisions are modified and made operative from financial year 2015-2016 as against financial year 2013-2014. Key highlights of modifications are as under:
- An arrangement to be treated as an impermissible avoidance arrangement only if the main purpose is to obtain tax benefit as against the earlier provision where one of the main purposes to obtain tax benefit resulted in such classification
- Factors like time period of the arrangement, payment of taxes (directly or indirectly) and exit route to be relevant but not sufficient from commercial substance perspective
- An arrangement deemed to lack commercial substance if it has no significant effect on the business risks or net cash flows of any party to the arrangement other than tax benefit attached
- The Approving Panel to now comprise of a Chairperson who is current or ex judge of a High Court, one member of Indian Revenue Service not below the rank of Chief Commissioner of Income-tax and another member to be of an academic or scholar having special knowledge of matters, such as direct taxes, business accounts and international trade practices.
Buy back of Shares
Under the existing scenario, Buyback of own shares by the subsidiary from the Foreign parent shareholders was claimed to be not liable to capital gains tax in India in the hands of parent company. Given the fact that this option was used by foreign parent shareholders to repatriate the post tax profits of Indian subsidiaries, an amendment is sought to provide that unlisted domestic company would be liable to additional income-tax at the rate of 22.66% to the extent of distributed income paid to the shareholder in a buy back scheme for purchase of its own shares. Distributed income is defined to mean consideration paid by the company on buy back of shares as reduced by the amount which was received by the company for issue of such shares. This additional income-tax payable by the company to be the final tax on similar lines as Dividend Distribution Tax. Thereby, the income arising to the shareholders in respect of such buy back to be exempt for Indian tax payers, but at the cost of buyback tax as stated above.
Filing tax returns – obligations of assesses
A recent news article in one of the business dailies in India on 12th February 2013, states that Tax authorities are set to crack down on those not paying their due taxes and will soon send out letters to such assessees seeking to know why they have not filed tax returns. The Finance Ministry on Monday again issued a stern warning to taxpayers to disclose their true income and pay taxes or be ready to face action, and that it has information on over 12 lakh non-filers. Please bear in mind that every foreign company registered for a PAN has to file an annual income tax return in India. As per the Indian income-tax law, the last date for filing of income-tax returns for income earned in India during the tax year “1 April 2010 to 31 March 2011” is 31 March 2013. Generally speaking, the Indian law, inter alia, requires that a return of income be filed even when the “Indian sourced income” has suffered Indian withholding tax.
A company engaged in the manufacture or production of any article or thing and making investment of more than INR 1 billion in acquisition and installation of new specified plant and machinery during the FY 2013-14 and 2014-15 to be eligible to an investment allowance of 15 percent in these two years once the investments exceeds the said threshold. Eligible plant and machinery excludes ship, aircraft, those used in office premise or residential accommodation (including guest house), office appliances including computer software, vehicles, etc. The plant and machinery before its installation should not have been used either within or outside India by any other person. Further, its whole costs should not have been allowed as deduction in computing business income. The deduction claimed to be taxed as income if the new asset is sold or otherwise transferred (except pursuant to any amalgamation and demerger scheme, within a period of five years from the date of its installation).
Upcoming important changes
Next important changes in the tax environment will be the introduction of a national VAT and the Direct Tax Code. New drafts are expected soon.