Proposed Amendments In Respect of International Taxation Under Union Budget 2023
Macroeconomic Context & International Tax Posture
This article highlights the major Budget proposals in the area of international taxation. On an international taxation front, the Budget of Amrit Kaal as envisaged by our FM has the advantage of delivering no shocks. While the budget is silent on taxation of digital economy as well as India’s roadmap for implementing the Pillar 2 solution of the Global Anti base Erosion (GloBE) Rules of the OECD and G-20, the Government continues to push its pet project of a specially designated zone - IFSC Gift City. However there is a dampener in the provisions of section 56 being extended to issue of shares to non -residents which will cause additional hurdles for investments coming into India.
Deemed accrual of gift made to Not Ordinarily Resident (RNOR)
Taxation of gift by way of sum of money without consideration exceeding Rupees 50,000/- from Resident to Non-Resident was specifically brought into deeming fiction under Section 9 (1)(viii) of the Income Tax Act (The Act) and the same was made taxable u/s 56(2)(x) under the head Income from other sources.
Since, this section was limited to Non-Residents and there was no reference of Resident and Not-ordinarily Residents (RNOR), section 9(1)(viii) of the IT Act is now proposed to be amended to extend the ambit of taxation under Section 56(2)(x) of the IT Act to bring not-ordinarily residents defined under Section 6(6) of the IT Act w.e.f. 1st April, 2024.
However, the exemption for gifts/ property received by a not-ordinarily resident from his/ her relatives as well as other exemptions as provided shall continue.
Preventing misuse of presumption tax schemes (Sections 44BB & 44BBB)
Currently the presumptive tax schemes under section 44BB and 44 BBB of the Act allow for –
- taxation of a non-resident at 10% on receipts from providing services, machinery, etc. used in prospecting for, extraction or production of mineral oils (Section 44BB of the IT Act); and
- taxation of a foreign company at 10% on receipts from civil construction, erection, etc. for approved turnkey power projects (Section 44 BBB of the Act).
Both sections provide that Non-resident Assessee may claim lower profits and gains if he keeps and maintains such books of account and other documents as required under section 44AA(2) of the Act and gets his accounts audited and furnishes a report of such audit as required under section 44AB of the Act. In such a case, the assessee is also allowed to carry forward of loss and unabsorbed depreciation to next years and may set it off from the profits of the next year -either from the presumptive income or from income declared under Normal Taxation.
This often leads to taxpayers doing a double dip and opting in and out from the scheme in different years assessment years. In the year of losses, the actual losses were claimed and carried forward as per regular books of accounts and conducting Audits. Whereas, in the year of higher profits, the profits were sought to be restricted to 10% and brought forward losses and unabsorbed depreciation are set off from the earlier years.
With a view to curb this option, it is proposed to amend both section 44BB and section 44BBB of the Act to provide that where an assessee declares profits and gains of business for any previous year in accordance with the provisions of presumptive taxation then no set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year. This is applicable from 1st April, 2024.
Non- resident investors now covered under Angel Tax (Section 56(2)(viib))
The existing provision of section 56(2)(viib) of the Act which is applicable since April 1,2013 provide for taxation of any receipt of any consideration for issue of shares in excess of FMV(Fair Market Value) of the shares by the resident investors .Any additional consideration received in excess of the FMV is taxable in the hands of the closely held companies under the head Income from other sources (IFOS).
For this purpose, the valuation of the unquoted shares is prescribed under Rule 11UA of the IT Rules,1962 and is determined by the Merchant Banker. These provisions were introduced to prevent circulation of unaccounted money through share premium received from resident shareholders.
It is proposed to extend the applicability of this section to non-resident investors with effect from 1st April,2024.
The exemption in respect of investments from Venture Capital Undertaking from a Venture Capital Company or a VCF and specified funds as well as notified certain classes of persons will continue Therefore start-ups registered under DPIIT and notified by the Ministry Of Commerce And Industry to be exempt.
This proposal could lead to litigation. as there could be valuation disputes as different methodologies are prescribed under FEMA and The Act. FEMA regulations mandate that issue of a capital instrument by an Indian company shall not happen at any value less than FMV computed as per FEMA laws. Whereas, under the Income tax Act, tax will be levied on any excess price recovered over and above FMV on issuing shares to a non-resident. Foreign investors and private equity funds which are not registered as well as various unregistered start-ups and smaller private companies which want to raise funds may fall under the rigors of section 56(2)(viib) of the Act.
TCS on overseas remittances (Section 206C(1G))
The Finance Act, 2020 had introduced a Tax Collection at Source (TCS) u/s 206(C)(1G) requirement on foreign remittances in order to widen and deepen the tax net . The obligation of the said TCS is on the Authorised Dealer Bank (AD Bank) through which the remittances are made under liberalized remittance scheme (LRS). In case of an overseas tour, the seller of such package shall be liable to collect TCS. The proposal seeks to increase the rate of TCS and extend its applicability. This amendment will take effect from July 1, 2023.
| S. No | Type of remittance under LRS | Present rate | Proposed rate |
|---|---|---|---|
| 1. | For the purpose of any education, if the amount being remitted out is a loan obtained from any financial institution as defined in section 80E. | 0.5% of the amount or the aggregate of the amounts in excess of Rs.7 lakh. | No change |
| 2. | For the purpose of education, other than (i) or for the purpose of medical treatment. | 5% of the amount or the aggregate of the amounts in excess of Rs. 7 lakh. | No change |
| 3. | Overseas tour package | 5% without any threshold limit. | 20% without any threshold limit. |
| 4. | Any other case | 5% of the amount or the aggregate of the amounts in excess of Rs.7 lakh. | 20% without any threshold limit. |
Treaty benefits on income from Mutual Funds (Section 196A)
Section 196A (1) provides for TDS @ 20% in respect to certain income from units of a Mutual Fund of a Non-Resident . In such a case, TDS cannot be deducted at a rate specified under a tax treaty unless specifically mentioned in the provision of the relevant section.
Its proposed to obviate this hardship by inserting a proviso to section 196A (1) to deduct TDS at the rate of 20% or Rates provided in DTAA u/s 90(1) or 90A(1), subject to furnishing of TRC u/s 90(4) or 90A(4) ,whichever is lower, effective from April 1,2023.
Concessional tax Rate on certain interest income to expire this year (Sections 194LC / 194LD)
Section 194LC /194LD of the Act provided a concessional tax regime at the rate of 5% to its overseas lender or debt investor or Foreign Portfolio Investors (FPI) on the interest income earned by them in India. The overseas lender/Debt Investor could claim Foreign tax credit in their home country or country of its domicile while filing their Income tax Returns.
In absence of any further extension, the concessional tax rate is valid only up to 30th June, 2023 and going forward, the same shall be taxable under the normal tax regime.
7. Proposed Provisions Relating to Taxation of Business Trust (REITs / InvITs)
a) Extending benefit of lower or NIL Rate of TDS to Business Trusts (Section 194LBA & Section 197)
Section 194LBA of the Act requires business trusts(REIT/InvIT) to deduct TDS at the rate of 5% on interest income and 10% on dividend income on distribution to non-resident unitholders.
Whilst a more beneficial tax rate may be available to certain non-resident taxpayers under relevant DTAA, Section 197 of The Act didn’t provide grant of certificate for nil or lower rate of TDS on income received by unit holder referred to in u/s 115UA. Hence, under the extant tax laws, TDS was required to be applied at the rates provided u/s 194LBA and income distributed by a REIT / InvIT to its non-resident unitholders was subject to withholding tax at prescribed rates.
To enable Non-resident unitholders who are entitled to certain prescribed exemptions under the Act (such as pension funds and sovereign wealth funds having a tax exempt status in India) and to receive distributions from the business trusts (REIT/InvIT) without any taxes being withheld , its proposed to provide such non-resident unitholders on income earned from units of business trust to apply for a ‘NIL or a lower withholding’ certificate w.e.f. April 1,2023.
b) Taxation of Distributions from Business Trust (Section 115UA & IFOS)
The Act contains special provisions u/s 115UA for taxation of Real Estate Infrastructure Trusts (“REIT”) and Infrastructure Investment Trusts (“InvIT”) (referred to as “Business Trusts” u/s 2(13A of The Act)). The provisions provide a pass-through status to Business Trusts in respect of –
- (a) interest income, dividend income received by the Business Trust(i.e. both REIT/InvIT) from a special purpose vehicle (SPV) and
- (b) rental income in case of a REIT.
At present, the above income is taxable in the hands of the unit holders. Any other distributions (by way of repayment of debt) from a Business Trust to its unit holders is neither taxable in hands business trust or in the hands of unit holder.
The budget has proposed to tax any sum received (shown as by way of repayment of debt) by the unit holder of a Business Trust which is not in nature of interest, dividend or rental as Income under head other sources (IFOS) in hands of the unit holder.
A provision is also proposed for a situation when the sum received by unit holder represents redemption of unit held by him. In such a case, cost of acquisition (COA) of such units will be reduced from the total redemption amount. The above provisions are applicable from April1,2024.
- Characterization Dispute: Characterization issue may arise as repayment of loan may be considered as income from Capital Gain as against income from other sources ( IFOS) .
- TDS Void u/s 194LBA vs Sec 195: As laid down, if such sum is taxable in hands of unit holders as IFOS, a corresponding withholding obligation has been missed out on the Business Trust u/s 194LBA. In such a case, Business Trusts may have to withhold tax u/s 195 on distribution of sum to its Non-Resident investors.
Proposed Provisions Relating to International Financial Services Centre (IFSC)
As part of the government’s initiatives to promote Gujarat Infrastructure Finance Tech City (“GIFT City”), the Budget proposes several regulatory measures and further tax incentives to boost Foreign Investments. They are as follows–
| Existing Amendment / Regime | Proposed Amendment |
|---|---|
|
Relocation of Offshore Funds (Section 47(viiad)): Section 47(viiad) provides for tax neutral transfer in case of relocation of fund located outside India to IFSC was exempt till 31st March,2023. |
The Budget proposes extension of period for tax neutrality of tax benefits for relocation of funds from foreign jurisdictions to IFSC GIFT City up to March 31, 2025 as against the current sunset date of March 31, 2023. |
|
Regulatory Approvals: Two separate registration/ approvals required for setting-up business in IFSC gift city-SEZ & IFSCA. |
Setting up a single window IT system for registration and approval from IFSCA, Special Economic Zone (SEZ) authorities, Goods and Services Tax Network (GSTN), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDAI). |
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ODI Distributions (Section 10(4E)): Section 10(4E) provides exemption to Non-Resident on income from transfer of Non-deliverable Forwards or Off-shore Derivative instruments (ODI) or over the counter derivatives(OCD) entered into with an IFSC banking Unit(IBU) as referred to in 80LA(1A) subject to such condition as may be prescribed. The IFSC Banking Unit (issuer of the ODI to non-resident investors) pays tax on the income earned in the form of interest, dividend etc. through its investments and the same income is again taxed in the hands of the ODI holders at the time of its post-tax distribution receipts. Under the existing regime, exemption is available to non-resident investors only on the transfer of ODIs but not on the distributions made to them. |
In order to address this anomaly and remove double taxation, the budget proposes to provide additional exemption u/s 10(4E) on distribution of income by IBU to NR ODI holders subject to the condition that such income is already taxed in the hand of IBU u/s 115AD.This is applicable from April1,2024. |
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Tax Holiday under New Regime (Section 80LA): Deduction u/s 80LA is available to a person having unit in IFSC who has opted for taxation u/s 115BAC(1) r.w115BAC(4)/(5) on and after 1stApril,2021. |
The time line of deduction u/s 80LA is limited upto 31st march, 2024 to the assessee opting for the new regime. |
Interest Deduction Limitations: Extension of exemption to non-banking financial companies (NBFCs) (Section 94B)
Thin capitalization rules were introduced by the Finance Act, 2017 as a measure of BEPS (Base erosion and Profit shifting) Action Plan -4 to restrict excess deductions claimed by way of higher interest payments to foreign associated enterprises (AE) by a borrower , being a domestic company or PE of a Foreign Company .
Section 94B of the Act provides the amount of deduction in excess of Rupees one crore in respect of payment of interest to a foreign lender which is also AE of the borrower which is limited to the lower of the–
- a) 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA) of the borrower in the previous year; or
- b) interest paid or payable to AE for that previous year.
At present, section 94B(1) of the Act had carved out an exception to Indian Company or Permanent Establishment( PE) of foreign Company engaged in business of banking or insurance.
An Additional carve out is now provided to such class of NBFCs w.e.f. April 1, 2024, which are engaged in the business of financing as they undertake similar functions and are now being subject to similar regulations and compliances in respect of those functions, as may be notified by the CG in the Official Gazette.
Time limit of furnishing information under TP Provisions (Section 92D & Rule 10D)
Section 92D of the Act requires every person who has entered an international transaction or a specified domestic transaction to keep and maintain the information and documents as provided under rule 10D of the Income-tax Rules, 1962 .
The Assessee is required to furnish any information /documents requires within 30 days from the date of receipt of notice by the Assessing Officer (AOs) or the Commissioner (Appeals) (CIT(A)) u/s 92D(3) of the Act . An additional period of 30 days is provided to an assessee who makes an application requesting to grant extension of the time period .
With a view to reduce the time given for furnishing information, it has been proposed to reduce the time limit of furnishing the same from 30 days to 10 days of the date of receipt of notice by AO or CIT (Appeals). The provision for application for extension by an assessee for a further period not exceeding 30 days will continue. The amendment is applicable w.e.f. April 1, 2023.
Conclusion
To summarize, while there are no radical changes in the Finance Bill, there are some benefits for the taxpayer as well as some to protect the interests of the revenue. The one jarring note is the provision in relation to the issue of shares to non-residents which could only lead to unnecessary harassment on the matters of valuation as startups raise bulk of capital from foreign investors and which may impact the ease of doing business in India.