SKP Budget Primer
24 February 2015 | Budget 2015 | Volume 4

SKP International Tax Wish List

The industry expects that this second budget of the newly elected government will be a reformist budget. Recently, the government has initiated movements like 'Make in India', the red carpet for global investors and Prime Ministerial meetings with various Heads of States to strengthen bilateral trade relations. With expectations soaring, it would be interesting to see if the budget meets the expectations of everyone including non-residents willing to invest in India.

In the upcoming budget, we hope to see appropriate measures taken to clear the air of uncertainty associated with Indian tax laws. In the ensuing paragraphs we discuss our wish list for the Budget 2015.

Taxation for non-residents
  • The tax rate applicable to foreign companies (which is 40%) needs to be brought at par with the rate applicable to domestic companies (which is 30%). However, to stimulate growth and boost the Indian economy, the overall tax rates for corporates need to be reduced from 30% to 20%-25%.
  • Currently, taxability in the hands of a foreign company arises if the shares of the foreign company, which derive 'substantial' value from assets located in India, are transferred. An appropriate percentage of value of assets which will be treated as 'substantial' value of assets should be defined. By defining a threshold for such transfers, litigation in genuine cases of transfers would be avoided.
  • Clarifications are required on aspects such as withholding tax, tax credits, etc. on (i) indirect transfers and (ii) the transactions which are chargeable to tax in India when both the parties are non-residents.
  • Presently, the concessional rate of taxation on dividends (i.e. 15% instead of 30%) received from foreign subsidiaries is available only to Indian companies. Recently, the Reserve Bank of India has permitted Limited Liability Partnerships (LLPs) to invest overseas. In light of this development, similar benefits should be extended to the dividend received by such LLPs from their overseas investments.
  • The General Anti Avoidance Rules (GAAR) is proposed to be effective from 1 April 2015. However, in order to clear uncertainty in the tax regime and invite foreign investment, the implementation of GAAR should be deferred by two years i.e. made effective from 1 April 2017.
  • Further, currently, a taxpayer is not considered a defaulter for non-deduction or short-deduction of taxes with respect to payments made to a resident, where the resident pays taxes on that income, files a tax return for this income and furnishes a certificate from an accountant. Similar benefits should also be extended to payments made by a taxpayer to a non-resident, subject to compliance of the conditions prescribed. The CBDT should also clarify the nature of the above mentioned provisions on whether it would be applicable prospectively or retrospectively in order to avoid litigation in this matter.
  • There should be explicit provision on the non-applicability of MAT provisions for Foreign Portfolio Investors (FPI) and Foreign Institutional Investors (FII) as they are not required to maintain their books of accounts in India.
  • Reduction in the Securities Transaction Tax (STT) rates is required to encourage inflows in capital markets.
  • As per the current tax law, every company with a Permanent Account Number (PAN) is required to file a tax return in India. For administrative convenience, a threshold limit should be prescribed for foreign companies whereby they are not required to file the tax return in India with respect to income taxable at special rates (royalty, fees for technical services, etc.) where appropriate taxes have been withheld on the same. Alternatively, the government should prescribe separate forms for non-residents earning any special income such as royalty, fees for technical services, or interest in certain cases.
  • Further, the tax rate on royalty payments and fees from technical services should be brought down from 25% to 10-15% (i.e. in line with most of the tax treaties signed by India).
  • For liaison offices of foreign companies, clarification is needed on whether return of income is required to be filed in addition to Form 49C.
  • Further, due to automation of various processes by the Indian revenue authorities, various FPIs and foreign companies including liaison offices in India have started receiving defective notices from the CPC for failing to update profit and loss accounts and balance sheets in the return of income. Clarification is required if liaison offices, FPIs or foreign companies who offer tax on gross basis or who file 'NIL' returns are also required to give details in relation to their profit or loss statements and balance sheets in India.
  • The uncertainty over the renegotiation of the India-Mauritius Double Taxation Avoidance Agreement has adversely affected the inflow of new foreign investors into the Indian stock markets. The government must soon end this impasse and conclude the renegotiation process fairly and amicably.
  • The government should apply the law on taxability of indirect transfer of shares prospectively.
  • This government has greatly emphasised on infrastructural development. For this purpose, usually a consortium is formed to carry out specific infrastructure projects which inter-alia includes some foreign companies as well. Currently, tax authorities treat it as an 'Association of Person' (AOP) and a portion of the income could get taxed at 40% due to the involvement of foreign companies. The government should clarify the position in this regard based on several favourable judicial precedents that this development does not constitute an AOP.
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