by Julie Martin
India’s Budget 2016–17, offered today by Finance Minister Arun Jaitley, includes a number of tax measures of interest to international business, according to tax specialists.
Among the proposals favorable to foreign investors is an extension of the 10 percent concessional tax rate currently applicable to long term capital gains from stock sales by nonresidents, said Sanjay Sanghvi, a partner with Khaitan & Co. Under the budget proposal, sales of private companies would qualify for the lowered tax rate, Sanghvi said.
“This is a good move to attract investments in private companies,” he said.
Also favorable to taxpayers is a budget announcement proposing to reduce from three years to two years the holding period required for an investment in an unlisted company to qualify as a long term capital asset, said Rajesh Simhan, a partner with Nishith Desai.
AIFs and tax treaties
Simhan said that the budget also contains goods news for the fund industry. The government last year permitted foreign investment into domestic alternative investment funds (AIFs) under the automatic route, Simhan said. While the regulatory hurdle was crossed, on the tax front it was unclear how to treat distributions made to foreign investors by the Category I and Category II AIFs since the tax provisions provided for a 10 percent withholding tax, he said.
The budget has now proposed that benefits under tax treaties will be extended to nonresidents with respect to distributions from an AIF to such nonresidents, Simhan said.
“This announcement will bring a lot of clarity to all Indian [general partners] looking raise funds and take advantage of the liberalized regime announced last year,” he said.
POEM, indirect transfers
A highlight of the budget for foreign investors is the government’s decision to defer the implementation of the place of effective management (POEM) rules for determining tax residency by one year, said Mukesh Butani, managing partner of BMR Legal. The new POEM rules, originally proposed to be effective April 1, shall now be applicable from April 1, 2017, Butani said.
“The focus of the budget has also been to reduce litigation and offer stability and a predictable tax regime to the taxpayers,” Butani said. A key development is the Finance Minister’s proposal to set up a high level committee to oversee any new cases where revenue authorities propose to assess or reassess income in respect to indirect tax transfers, he said.
Further, to provide an opportunity to past cases under the retrospective amendment, a one-time dispute settlement scheme has been proposed wherein the case can be settled by paying only tax arrears and interest and penalty would be waived off, Butani said.
In this manner the budget “buries the bogey of retrospective tax,” Butani said.
Ajit Kumar Jain, a partner with BMR Advisors, said that the minimum alternative tax (MAT) controversy with respect to foreign companies finally “has been put to rest.” A clarification has been provided that MAT would not be applicable to foreign companies with effect from April 2001 if the foreign company does not have a permanent establishment under the relevant double taxation avoidance agreement or a place of business in India, Jain said.
Patent Box
The government has also proposed a patent box, following the international practice of many countries, noted Mansi Seth of Nishith Desai. Under the scheme, royalties derived by Indian residents from patents developed and registered in India would be taxed at a rate of 10 percent, Seth said.
Seth, who heads her firm’s New York office, added that it remains to be seen, though, whether firms will be able to make use of this provision, given the timelines associated with obtaining a patent in India.
Seth also noted that the budget provides that India’s general antiavoidance rules will be effective from April 1, 2017. “Hopefully clear rules for their application with objective checks and balances to ensure tax payer protection will be notified in this regard,” she said.
Equalization levy for B2B e-commerce
Not everything in the budget is good news for business. The government also proposed introduce of an ‘equalization levy’ of 6 percent on consideration received by nonresidents that provide online advertising and other services announced by the government, Sanghvi said.
The tax would be payable if the nonresident providing the services does not have a permanent establishment in India and such income would not be subjected to further tax in the hands of the nonresident, he said.
Sanghvi said the levy would only be applicable when payments are received from a person resident in India that is carrying out a business or profession and nonresident payers who have a permanent establishment in India.
Seth said that the equalization levy is based on OECD/G20 base erosion profit shifting (BEPS) work on the digital economy. She said that in the BEPS discussions it was recommended the application of an equalization levy be limited to situations in which the income would otherwise be untaxed or subject only a very low rate of tax. “These exceptions have not found their way in the Indian proposals,” she said.
Country-by-country reporting
Jain also said that Finance Bill 2016 adopts the recommendations of BEPS action item 13, which provides for revised standards for transfer pricing documentation including country-by-country reporting. The information required to be disclosed is consistent with the template prescribed in BEPS action item 13 on documentation, Jain said.
He added detailed rules and notifications have not yet been provided for the master file.
– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
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