from International Tax Services India s 2016 budget affects foreign investors and multinational enterprises March 9, 2016 In brief The Indian Finance Minister on February 29, 2016, presented the 2016 budget, the third budget released by the current government. The budget proposals continue to focus on development, improving the ability to conduct business in India, and attracting foreign investment. Among the proposed amendments in the budget are: a reduction in domestic corporate tax rates for certain taxpayers, incentives for new start-up companies, the introduction of a patent box regime, requirements for country-by-country reporting (CbCR), and a new equalization levy in line with the OECD s base erosion and profit shifting (BEPS) initiatives. The budget also attempts to address several uncertainties by clarifying applicability of the favorable nonresident long-term capital gains tax rate of 10% to the shares of Indian private companies. The budget also introduces a new dispute settlement period. Many foreign investors welcome these initiatives. The budget proposals would take effect after passing both houses of Parliament and obtaining presidential assent. In detail Reduction in domestic corporate tax rate The corporate tax rate for foreign companies (including branches and permanent establishments) would remain unchanged at 40%. The tax rate for domestic companies would remain unchanged at 30%, except in the following cases: The corporate tax rate for domestic companies with total revenue not exceeding INR 50 million (approximately USD 750,000) would be reduced to 29%. New domestic companies (those registered on or after March 1, 2016) that engage solely in manufacture or production activities can opt to be taxed at a reduced 25% income tax rate, but only if the company does not benefit from other tax incentives, excluding incentives related to employment generation. All rates would exclude applicable surcharges. The government also proposes to phase out other tax incentives, such as the existing tax holiday for Special Economic Zone units and super deductions for research and development. www.pwc.com
Clarification of Minimum Alternate Tax (MAT) applicability to foreign companies In September 2015, the government clarified that MAT will not apply to foreign companies that do not have a permanent establishment (PE) in India, subject to certain conditions. This clarification is enacted in the law and would apply retroactively beginning April 1, 2001, and thus addresses the uncertainty and litigation that many foreign companies have been facing in India. Clarification of non-resident capital gains taxation Applicability of a beneficial tax rate In 2013, the non-resident long-term capital gains tax rate on the sale of unlisted securities was reduced to 10%, plus applicable surcharges. However, because the wording of the provisions was unclear, taxpayers were uncertain whether the beneficial rate would apply to sales of shares of Indian private limited companies. The budget addresses this ambiguity by clarifying that the lower rate would apply to shares of an Indian private limited company. Reduction of holding period The budget also proposes reducing the long-term capital gain holding period for unlisted securities from 36 months to 24 months to benefit from a reduced tax rate. Limited liability partnerships (LLPs) The budget would not change the current tax rates applicable to LLPs. However, the favorable corporate tax rates proposed for certain domestic companies would not be available to LLPs. Conversion of companies into LLPs The budget proposal adds another requirement applicable to the neutral conversion of a company into an LLP: The total book value of the assets of the company being converted, in any of the three years preceding the year in which the conversion takes place, may not exceed INR 50 million (USD 750,000). BEPS initiatives Introduction of CbCR Acknowledging BEPS Action Plan 13, the government proposes introducing CbCR requirements. Indian-headquartered multinational enterprises (MNEs) with global consolidated revenues exceeding the prescribed threshold (expected to be EUR 750 million) would be required to comply with the CbCR requirements starting in tax year 2016-17. The proposals broadly align with the requirements in Action Plan 13, including maintenance of CbCR, master, and local files. Less stringent requirements would apply to Indian subsidiaries of foreign entities if India can obtain the CbCR from the foreign parent s country and other conditions are met. Stringent penalties would apply to non-filing, delayed filing, or inaccurate filing of CbCR. Equalization levy on foreign e- commerce companies Recognizing tax challenges created by the evolution of the digital economy, the budget proposes introducing an equalization levy that would equal 6% of consideration from online advertisement services, provisions for digital advertising space, and other notified services received by a non-resident from an Indian resident conducting business, or from a non-resident with a PE in India. The levy would not apply when the non-resident service provider establishes a PE in India and the services are effectively connected to the PE, or if aggregate consideration does not exceed INR 100,000 (approximately USD 1,500). Observation: It is unclear as to whether such equalisation levy will be covered under applicable double tax treaty provisions and if a foreign tax credit could be available in respect of such levy. Less stringent requirements related to higher tax withholding without an India tax ID / Permanent Account Number (PAN) Indian taw law provides a minimum 20% withholding tax on taxable income earned by a non-resident without a PAN. The 20% rate currently applies regardless of lower tax withholding rates prescribed under applicable tax treaties or domestic law. The budget would eliminate the requirement to obtain a PAN to benefit from the lower rates, but nonresidents still would need to produce certain documentation. Unlisted share buy-back Under current law, an Indian company buying back its shares is subject to a 23.07% buy-back tax. The tax currently applies only to buy-backs carried out under a specific provision of the companies act (Section 77A), not to share repurchases under other provisions. Effective June 1, 2016, the budget proposes that the buy-back tax would apply to all buy-backs or share repurchases under any provisions of Indian corporate tax law.
The government would issue rules to compute the buy-back tax and applicable basis in various situations. Patent box regime To encourage indigenous research and development activities, the budget proposes introducing a 10% (plus applicable surcharges) tax rate on royalty income of an Indian resident. The 10% rate would apply only if the Indian resident develops and owns the patent, and the patent is registered in India. MAT would not apply to such royalty income. Easing litigation / dispute resolution The budget also introduces several proposals to address tax litigation concerns, including: allowing a stay on collection of tax demands from the taxpayer upon payment of 15% of the tax demand, pending resolution at the appellate level. This would not be available to taxpayers that receive adverse judgments at the appellate level. a special time period window would be available to settle pending cases at the first appellate level. Under this option, the taxpayer would have a limited opportunity to settle the dispute by paying tax and interest until the date of assessment, plus a 25% penalty in some cases. a proposed settlement window would exist for pending disputes that result from prior retroactive amendments. In these cases, the taxpayer would have to pay only the tax amount; no interest or penalties would apply. The taxpayer would have to withdraw all pending appeals to benefit from this window provision. Immunity from prosecution also would be available. to expedite pending refunds, the budget proposes additional 3% interest payable by the tax authorities to taxpayers in cases involving a delay of more than three months in responding to an appellate order. the budget also proposes changing the penalty provisions that currently apply to concealment or under-reporting of income. The provisions broadly aim to reduce the discretion of the tax authorities in levying penalties in such cases. Tax incentives for domestic startups The following proposed tax incentives would be available to companies that qualify as start-ups: a 100% deduction of profits derived by an eligible start-up registered before April 1, 2019. The profits must be the result of activities involving innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property, subject to other conditions. The deduction would be available for three consecutive tax years within the start-up s first five tax years. a capital gains tax exemption on the transfer of long-term assets would be available to taxpayers that invest the proceeds from such transfers into specified funds set up to finance new start-ups. a capital gains tax exemption on long-term gains arising from transfer of residential property if the gains are invested in an eligible start-up, subject to a minimum 50% shareholding by the taxpayer. Real Estate Investment Trust (REIT)/ Investment Infrastructure Trust (InvIT) In 2014, the government introduced a specific tax regime for single-level taxation applicable to REITs and InvITs. To continue making REITs and InvITs more attractive, a specific exemption is proposed from the levy on dividend distribution tax on the distribution of dividends by special purpose vehicles (SPV) to REITs and InvITs, subject to meeting certain ownership conditions. Alternative Investment Funds (AIF) The distribution of income from certain AIFs for non-residents attracts withholding tax in India. The withholding tax would be set at the rates in force instead of the current 10% rate. The provision would allow non-residents to access beneficial rates in tax treaties. Other amendments: Implementation of general antiavoidance rules (GAAR) The government reinforced its intent to introduce GAAR effective April 1, 2017. Place of effective management (POEM) The implementation of POEM rules which lay out tests for determining the tax residency of foreign companies, has been deferred by one year to address certain concerns in respect of its implementation. POEM would apply beginning April 1, 2016, under the proposed budget. 3 pwc
The takeaway The proposed budget consolidates the government's pro-growth agenda through economic liberalization, while remaining committed to developing long-term investment and job opportunities. foreign investors and MNEs. Tax payers will welcome further clarity on proposals such as the equalization levy as well as additional guidance on matters such as indirect transfers in the coming months. The government has taken numerous steps to address pressing concerns of Let s talk For a deeper discussion of how this might affect your business, please contact: International Tax Services United States Chengappa Ponnappa +1 (646) 313-0080 Chengappa.ponnappa@pwc.com Pranav Raval +1 (646) 335-4859 Pranav.raval@pwc.com International Tax Services India Dwarak Narasimhan International Tax Services Leader, India +91 (80) 4079-6003 Dwaraknath.e.n@in.pwc.com Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. SOLICITATION This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC United States helps organisations and individuals create the value they re looking for. We re a member of the PwC network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com/us.