Budgetry changes affecting non-resident taxation

Income of FIIs from transaction in securities to be treated as capital gains:

There have been litigations involving characterization of income of FIIs from purchase and sale of securities - whether the same represents business income or capital gains. Apparently, this uncertainty has also kept away the fund managers from setting up base in India. Accordingly, the Finance( No 2) Bill, 2014 proposes to amend the definition of capital asset in section 2(14) of the Act to make it clear that investments by FIIs in securities in accordance with SEBI regulations will be treated as capital asset and income arising from transfer of such securities will be treated as

capital gains.

Roll back provision introduced in APA:

APA was introduced in introduced by the Finance Act, 2012. In terms of Section 92CC, an agreement can be arrived at specifying the manner in which ALP is to be determined in relation to an international transaction, which is to be entered into by the person. This is valid for 5 financial years. However, this does not apply to prior years.

Considering large-scale litigation involving transfer pricing, it has been provided that the same methodology as adopted in the APA may also be applied in respect of international transactions that had already been entered into prior to the period under the APA.

Deemed international transaction in case of prior arrangement:

Sub-section (2) of section 92B extends the scope of the definition of international transaction to cases where a transaction entered into with an unrelated person can also be treated as international transaction if there exists a prior agreement in relation to the transaction.

Since the present wording has created a doubt as to whether for the transaction to be treated as an international transaction, the unrelated person should also be a non-resident, it has now been provided that in case of a prior agreement as referred to in section 92B, the transaction will be deemed to be an international transaction whether or not the person concerned is non-resident or not.

Rigors of non-deduction of tax at source reduced to some extent:

In terms of Section 40(a)(i), payments made in respect of certain items of income to non-residents without deduction of tax at source is to be disallowed. Similar provision was also introduced in respect of payments made to residents as well. However, in case of payments to residents, the payer could claim deduction if tax was deducted and paid before filing return of income. This was not available in case of payment to non-residents. Now, both the provisions have been brought on par and even in case of payment to non-residents, the payer can claim deduction if tax is deducted and paid before filing of return.

Lower rate of taxation in case of repatriation of dividends of foreign subsidiaries :

Section 115BBD of the Act was introduced by the Finance Act, 2011 as an incentive for attracting repatriation of income earned by Indian companies from investments made abroad. It provides for taxation of gross dividends received by an Indian company from a specified foreign company at the concessional rate of 15 per cent. Initially, the provision was for one year. This was subsequently extended from year to year. It is now provided that the concessional rate will apply in respect of dividends received in financial year 2014-15 onwards without any limitation of any particular assessment year.

No capital gains on transfer of government security by one non-resident to another non-resident:

With a view to facilitate listing and trading of Government securities outside India, section 47 has been amended to provide that any transfer of a capital asset being a government security, made outside India through an intermediary by a non-resident to another non-resident will not be considered as a transfer and hence no capital gains will arise from such transfer.