Clarity on taxation of non-resident

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Clarity on taxation of non-resident few steps
to overarching theme of ease of doing business in
India
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• The issue of applicability of certain tax
  provisions to non-resident has always been a
  matter of debate and led to controversy in Indian
  tax administration. Bringing clarity in taxes,
  reducing litigation is one of the prime objective
  of the present Government. To achieve the said
  objective, the Government has taken few steps in
  the proposed Budget 2016, and has provided
  clarity on some of the issues faced by the
  non-resident.
• Exemption from requirement of furnishing
  Permanent Account Number PAN
• In order to ensure that more people come under
  the tax net, the Finance (No. 2) Act, 2009 had
  introduced section 206AA under the IncometaxAct.
  This section provided for higher withholding tax
  rate of 20, if the payee does not provide the
  PAN, with an exception for non-resident in
  respect of payment of interest on long-term bonds
  as referred to in section 194LC. In order to
  reduce compliance burden for non-resident, it is
  now proposed that with effect from 1 June 2016,
  in addition to interest on long-term bonds, the
  provisions of section 206AA shall not apply to a
  non-resident in respect of any other payments
  subject to such conditions as may be prescribed.
• This is a welcome relaxation as most of then
  on-resident tax payers having one time
  transactions may not have PAN.

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• Minimum Alternate Tax MAT on foreign company
• Whether foreign companies are liable to pay MAT
  has been a controversy coupled with conflicting
  judicial pronouncements on the issue. The
  FinanceAct, 2015, amended the MAT provisions to
  exclude capital gains, interest, royalty and fees
  for technical services earned by the foreign
  company from the purview of MAT. However, since
  the amendment was applicable from assessment year
  2016-17, the Indian tax authorities started
  issuing tax notices to foreign companies /
  FIIs/FPIs to levy and collect the MAT for the
  period prior to 1 April 2015.
• On 24 September 2015, the Government issued a
  press release stating that the MAT provisions
  shall not be applicable to foreign company with
  effect from 1 April 2001, if it does not have a
  PE in India under the tax treaty or a place of
  business in India. The Hon'ble Supreme Court in
  the case of Castleton Investment Ltd1 affirmed
  the position clarified in the press release.
• With a view to provide certainty and put an end
  to litigation, in line with the press release,
  necessary amendments have been proposed to be
  made in the MAT provisions.
• Generally, foreign companies enjoy
  concessional/nil tax rate on income in the nature
  of capital gains, interest, royalty and fees for
  technical services. Applying MAT provision on
  these income was defeating the whole purpose of
  taxing these income at concessional/nil tax rate.
  The clarity on MAT provisions will provide a big
  relief and certainty to the foreign taxpayer.
•  

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• Residence rule based on Place of Effective
  Management PoEM
• The Finance Act, 2015 amended the provision of
  section 6(3) to provide that a company would be
  resident in India in any previous year if it is
  an Indian company or its PoEM in that year is in
  India. The PoEM was defined 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.
• Implementation of PoEM based residence rule has
  given rise to various issues on applicability of
  current provisions of the Act to the foreign
  company. In order to provide clarity in respect
  of implementation of PoEM based rule of residence
  and also to address concerns of the stakeholders,
  the applicability of PoEM has been proposed to be
  deferred by one year, hence it will be applicable
  from 1 April 2017.
• Further, section 115JH is proposed to be
  introduced to provide that where a foreign
  company is said to be resident in India for the
  first time, then the provisions of the Act
  relating to the computation of total income,
  treatment of unabsorbed depreciation, set off or
  carry forward and set off of losses, collection
  and recovery and special provisions relating to
  avoidance of tax shall apply with such
  exceptions, modifications and adaptations as may
  be specified in the notification for the said
  previous year. The said transition provisions
  would also cover any subsequent years upto the
  date of determination of PoEM in an assessment
  proceedings.
• One has to wait and watch how the PoEM based
  residence rule will be administered and to what
  extent Government would provide exemption and
  reliefs to such foreign companies. Nevertheless,
  the deferral and transition provisions will give
  some breathing space to such a foreign company as
  well as tax authorities to prepare for the new
  tax rule.

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• Equalisation levy
• In the current technology driven environment, the
  supply and procurement of digital goods and
  services have undergone exponential expansion
  worldwide, including India. Currently in the
  digital domain, business may be conducted
  ignoring the national boundaries and without
  having link to a specific location. The digital
  business fundamentally challenges physical
  presence based PE (i.e. place of business,
  location, and permanency).
• The Organization for Economic Cooperation and
  Development OECD, in Base Erosion and Profit
  Shifting BEPS project under Action Plan 1 has
  recommended several options to tackle the direct
  tax challenges which includes imposition of
  equalisation levy on consideration received by a
  non-resident for certain digital transactions.
• Moving in line with BEPS action plan, the
  Government has proposed to insert a Chapter on
  Equalisation Levy which will be effective from
  date to be notified by the Central Government.
  Equalisation levy of 6 will be levied on the
  consideration exceeding INR 1 lacs received by a
  non-resident not having PE in India for online
  advertisement, for provision of digital
  advertising space or any other facility or
  service for the purpose of online advertisement
  and such other services as may be notified.
• The collection and recovery of equalisation levy
  is on the payer by way of deduction from the
  amount paid or payable to the non-resident in
  respect of specified services. In order to ensure
  effective compliance, it provides for
  disallowance of expenses, interest, penalty and
  prosecution in case of defaults. The income
  subject to equalisation levy would be exempt in
  the hands of recipient.
• The e-commerce companies catering to Indian
  customers have faced significant litigation in
  this respect, especially in relation to
  characterisation of income (i.e. business income
  or royalty or fees for technical services) and
  withholding taxes. Though clarity would be
  required on some issue such as availability of
  tax credit for equalisation levy in home country,
  taxability under the tax treaty etc., the
  taxpayers would certainly welcome the move as by
  paying 6 tax, the litigation can be put to rest.

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• Concessional tax rate for non-residents
• Presently, the concessional tax rate of 10 (plus
  applicable surcharge and cess) applies to
  non-residents in respect of long-term capital
  gains arising on unlisted securities. There has
  been controversy as to whether the concessional
  rate can be applied to shares of a private
  company. A view has been taken by the courts that
  shares of a private company are not "securities"
  as defined under the Securities Contracts
  (Regulations) Act. In order to provide clarity,
  it is proposed to apply the concessional tax rate
  to shares of a company not being a company in
  which public are substantially interested. This
  should put an end to litigation on this issue.
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• Certain exceptions to the taxability of
  non-resident
• In the case of a non-resident, the taxation of
  income takes place only if the income accrues or
  arises in India or is deemed to accrue or arise
  in India or is received in India. The Government
  has proposed to provide the following exceptions
  to the taxability of the non-resident from the
  assessment year 2016-17 and onwards
•     In the case of foreign mining companies, no
  income shall be deemed to accrue or arise in
  India to it through or from the activities which
  are confined to display of uncut and unassorted
  diamonds in a Special Notified Zone.
•     Any income accruing or arising to a foreign
  company on account of storage of crude oil in a
  facility in India and sale of crude oil therefrom
  to any person resident in India shall be exempt
  from tax, if such activities are notified or
  approved by the Central Government.
• While one needs to wait for the Finance Bill to
  be approved by the houses of the Parliament and
  the President of India for it to come into force,
  the proposed clarity should decrease the disputes
  between the taxpayers and the tax authorities and
  create certainty in the minds of the foreign
  investors. The move of government will certainly
  create positive waves and boost economic growth.

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