Recently, the Lok Sabha (lower House of the Parliament of India) has passed the Finance Bill 2013 after incorporating various amendments to the original Bill which was presented by the Finance Minister on 28th February, 2013. Some of the amendments proposed in the Bill are very relevant for foreign investors who have already invested or are contemplating to invest in Indian stocks/mutual funds/debt. This tax alert explains the said amendments. 1. Tax Residency Certificate (TRC) enough to claim treaty benefits In the original Finance Bill, it was proposed to include a clause which said that a TRC was necessary but not a sufficient proof for claiming treaty benefits. This provision received considerable brickbats and had an immediate impact on the Indian stock markets. Bowing to the pressure, the Government has now proposed to amended the provisions relating to TRC, whereby a certificate “of his being resident” (of the other country) would be accepted as proof of residency in order to claim treaty benefits. Thus, now, the TRC is not required to be in any particular format. This is an important development as earlier, because of specific information being asked for in the TRC, several investors were facing a problem because not all countries were willing to change the format of their respective TRCs. 2. Additional information to be furnished for claiming treaty benefits While the requirement of TRC to contain prescribed information has now been done away with, it has been simultaneously proposed to incorporate a new requirement in sections 90 and 90A whereby, a non resident would need to provide “such other documents and information, as may be prescribed”  in order to claim treaty benefits. What this effectively means is that instead of asking for the prescribed information in the TRC itself, the Government of India could ask for the same separately. This is also a welcome development since, as mentioned above, investors from some countries were facing a problem because their governments were refusing to amend the format of the TRC merely to suit the Indian Government’s requirements. In all such cases, the concerned investor can now submit separate documents/proof for the additional requirements. Of course, one would have to wait for the documents and information to be prescribed by the Government of India. However, it is likely that for this purpose, the information that may be prescribed would be similar to the information that was prescribed in Rule 21AB. In brief, the said information is:

It is possible that the Government of India may notify the same information to be furnished by the non resident investor for the purpose of claiming treaty benefits.

3. Foreign Institutional Investors (FII) and Qualified Foreign investors (QFI) to be taxed at a lower rate in respect of interest income

 A new section 194LD has been introduced with respect to withholding tax applicability for interest income earned by FIIs and QFIs. The said section comes into effect  for the interest paid or or after 1st June 2013 but on or before 1st June 2015. The interest so earned should be from rupee denominated bonds of an Indian company or from a government security. The withholding tax rate would be 5% instead of the existing 20%. It is further provided that this provision would apply only when the interest paid does not exceed the rate as may be notified by the Government in this behalf.

This is also a very welcome development and is significant for foreign investors who are considering investment into Indian debt market. Presently, there is a considerable arbitrage between interest rates in India and elsewhere. In addition to this, now, there is a huge tax concession in terms of a lower tax rate of 5%. Both these facts would certainly boost foreign investment into Indian debt. In particular, the QFI regime which has seen very little activity till date is likely to see greater movement now. This is on account of the fact that in case of corporate bonds, the payer company would be withholding tax @ 5% from the payment made out. Consequently, the Qualified Depository Participant (QDP) is spared the trouble of withholding tax from such payment. This will make the process simpler and will definitely motivate the QDPs to take greater interest and initiative in starting off the QFI regime which, till date, was being hampered because of various tax related issues.

4. PAN not mandatory for interest income of non residents from long term infrastructure bonds

Currently, if any person to whom an amount has to be paid and which amount attracts the withholding tax provisions, the deductor has to withhold tax at a specified percentage. This percentage gets mandatorily increased to 20% if the payee does not possess a Permanent Account Number (PAN). This meant that any non resident investor wanting to invest in India had to necessarily obtain a PAN. This was considered an unnecessary irritant and show stopper. Now, it has been proposed that non residents earning interest income on long term infrastructure bonds referred to in section 194LC of the Income-tax Act will not be covered by this special provision. This means that a non resident who does not have a PAN and who earns interest on long term infrastructure bonds referred to in section 194LC of the Income-tax Act will not suffer a higher withholding tax of 20%.

This is another significant development and will be welcomed by foreign investors. At the same time, if the same amendment had also been made applicable to interest referred to in section 194LD, it would have been even more welcome.

5. Trading in commodity derivatives not to be treated as speculative business

Any eligible transaction in respect of trading in commodity derivatives carried out in a recognized association shall not be deemed to be a speculative transaction. This amendment brings trading in commodity derivatives at par with trading in equity derivatives. Of course, for most FIIs this is not relevant since FIIs treat gain/loss on sale of derivatives as capital gains/loss. This amendment is more relevant for domestic players.

SKP’s Comments

The various changes made in the Finance Bill, 2013 insofar as they related to or affect foreign investors are most welcome Foreign investors are likely to heave a sigh of relief at the TRC related amendments. It is more than likely that the stock markets and debt markets will see increased investment activity from foreigners. One also hopes that the QFI regime will now attract greater action.

It may be noted that the revised Finance Bill 2013 has only been approved by the lower House of the Parliament. The same would now be approved by the Upper House of the Parliament and then finally be signed by the President of India before it becomes an Act.  Past experience shows that these are not expected to be delayed.