THIS article discusses some of the important Income Tax proposals made in the Finance Bill, 2015 applicable to non-residents. The amendments discussed below are proposed to be effective from 1 April 2015 unless stated otherwise.
Deferral of General Anti-Avoidance Rule
The provisions of General Anti-Avoidance Rules (GAAR) were introduced by the Finance Act, 2013. The applicability of GAAR was later postponed by two years and was to be made applicable from 1 April 2015.
It is proposed to postpone the applicability of GAAR by two more years to be effective from 1 April 2017. As per the Finance Minister's speech, it is also proposed that the investments made upto 31 March 2017 will not be governed by the provisions of GAAR. The Memorandum explaining the proposed provisions suggests that investments made up to 31 March 2017 will be protected from the applicability of GAAR by way of suitable amendment to the rules.
Indirect transfer
As per the current Income Tax provisions, transfer of capital asset situated in India is taxable in India. An asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its values substantially from the assets located in India.
Considering the recommendations of the Expert Committee and various stakeholders, it is proposed to make the following changes relating to indirect transfer:
++ Shares or interest shall be deemed to derive their value substantially from the assets located in India if the value of such assets exceeds INR 100 million and represents at least 50% of the value of all the assets owned by the company owning the Indian assets.++ Capital gains on indirect transfer will be computed on a proportionate basis based on the value of assets located in India versus that outside of India.++ Exemption available to the transferor company if it does not have any right in the control or management nor does it hold voting power or share capital or interest exceeding 5%++ Exemption available for transfers arising in a scheme of amalgamation or demerger between two foreign companies.++ Reporting obligation cast on the Indian concern through or in which the Indian assets are held by the foreign company or the entity.
Taxability of interest paid by Indian PE to its overseas head office
It is proposed that in case of non-resident engaged in banking business, any interest payable by the Indian Permanent Establishment (PE) to its head office or any PE or branch outside India shall be chargeable to tax in India. It also proposed that the Indian PE shall be deemed to be a person separate and independent of the non-resident person.
No Business connection of offshore funds managed by fund managers located in India
In the past, issues had arisen on the nexus of the offshore fund with India i.e. business connection where the offshore fund was managed by a fund manager in India.
In order to facilitate location of fund managers of offshore funds in India, it is proposed that no business connection shall be constituted for the eligible investment fund in India where its fund management activity is managed by an eligible fund manager in India subject to fulfillment of prescribed conditions. Further, it isproposed that an eligible investment fund shall not be regarded as resident in India merely because the eligible fund manager undertaking fund management activities on its behalf is located in India.
The fulfillment of prescribed conditions may be stringent for various offshore funds and may still therefore remain exposed to business connection in India. The fund manager may therefore find it difficult to relocate to India.
Reduction in the tax rate for Royalty and Fees for Technical Services
It is proposed to reduce the tax rate from 25% to 10% (plus applicable surcharge and education cess) in case of non-residents earning income in the nature of royalty or fees for technical services from Government or an Indian concern. The reduction in the tax rate will be beneficial to the non-residents in non-Tax Treaty countries or from countries where the tax rates under the Tax Treaty are higher than 10% or so, e.g. Canada, UK, USA, etc. This will also be beneficial to the Indian importer of know-how or services where he has to bear the tax.
Place of Effective Management
It is proposed to amend the definition of ‘residence' of company by introducing the concept of Place of Effective Management (POEM). It is proposed that the company will be resident in India if its POEM, at any time in the year, is in India. Further, it proposes to define POEM to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. The said amendment will impact those foreign companies who may take key management and commercial decisions in India.
Relief to FII from MAT
To provide a relief to FIIs, it is proposed to exclude the income from transactions in securities (other than short-term capital gains arising on transactions not chargeable to STT) arising to a FII from the ambit of MAT. The question on applicability of MAT to foreign companies not having PE in India still remains open.
Extension of time period for concessional rate of tax on bonds and Government securities
As per the current income-tax provisions, the benefit of concessional withholding tax rate of 5% (plus applicable surcharge and education cess) on interest income is available to FII or a Qualified Foreign Investor for investments made in a rupee denominated bond of an Indian Company or a Government security. The concessional withholding tax rate is applicable for interest payable upto 31 May 2015. It is proposed to extend the time period for interest payable to 30 June 2017.
The above amendment is proposed to be effective from 1 June 2015.
Business Trust
The Finance (No. 2) Act, 2014 provided a special taxation regime for two categories of investment vehicles namely, the Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust (Invit) (collectively referred to as ‘business trust').
Under the said taxation regime, the capital gains arising to the sponsor at the time of exchange of shares of Special Purpose Vehicle (SPV) for units of business trust was deferred and was to be levied at the time of disposal of units of the business trust. Further, the sponsor was not eligible for preferential capital gains tax regime as is available to other unit holders on sale of units which are subject to STT.
It is proposed that the sponsor shall be eligible for the preferential capital gains tax regime relating to capital gains arising on the offloading of units under an Initial offer on listing of units of business trust. The sponsor will therefore be exempt on sale of units of business trust liable to STT if the income is in the nature of long-term capital gains or will be taxable at the rate of 15% (plus applicable surcharge and education cess) if the income is in the nature of short-term capital gains.
As the pass-through benefit is not available to REIT under the current tax regime, it is proposed that any income of REIT earned by way of renting or leasing of real estate owned directly by REIT shall be exempt.
The rental income distributed by REIT to the unitholders is proposed to be deemed to be income of such unit holder and shall be charged to tax accordingly.
Alternative Investment Fund
As per the current tax regime, tax pass-through benefit is available to the funds registered as Venture Capital Fund (VCF) under Category I of SEBI (Alternative Investment Fund) Regulations 2012 (AIF Regulations). It is proposed to extend the pass-through status to:
++ all the Category I AIFs (i.e. AIFs which invest in angel fund, start-up or early stage ventures or social ventures or SMEs or infrastructure); and++ Category II AIFs (i.e. private equity funds or debt funds) which neither undertake leverage or borrowing (except for operational purposes) nor employ diverse or complex trading strategies.
Impact on individuals
There is no change in the tax rate or exemption limit for individuals (including non-resident individuals). However, it is proposed to increase the surcharge rate from 10% to 12% in case of non-resident person (other than a company) if the income exceeds INR 10 million. The rationale for the increase in the surcharge rate by 2% is to offset the tax forgone on account of abolition of wealth tax.
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