Direct Tax Proposals 2012 : NON RESIDENTS / DTAA

Non Resident Taxations

    Foreign Company engaged in Crude oil business (Section 10)

Present Law

Proposed  New Clause  (W.r.e.f. 01-04-2011)

ü Subject to the conditions specified ü In the relevant clauses of section 10, ü Certain incomes are  ü not included in the total income of a person i.e. Exempt from Tax.

ü any income of a foreign company ü Received in India in ‘INR’ ü on account of sale of crude oil to any person in India ü will be exempt ü  subject to the following conditions: ·         Receipt is under an agreement or an arrangement which is either entered into by the Central Government or approved by it. ·         The arrangement is notified by CG to the national interest in this behalf. ·         The receipt of the money is the only activity carried out by the foreign company in India.

Comment:

In case of Foreign Company selling crude oil in India and it is the only activity carried on by foreign company, then subject to conditions, Income will be exempt in India. Proposed amendment will provide, a much needed help to foreign company. 

Extract of Memorandum

“ In the national interest, a mechanism has been devised to make payment to certain foreign companies in India in Indian currency for import of crude oil. The current provisions of the Income-tax Act would render such payment taxable in India because payment is being received by these foreign companies in India in Indian currency. This would not be justified when such payment is based on national interest and particularly when no other activity is being carried out in India by these foreign companies except receipt of payment in Indian currency.”

    Tax incentive for Foreign funding in Infra Sector

Existing Act	Proposed  New Clause  (w.e.f. 01-07-2012)
Section 115A ü Interest income received ü by any non-resident ü from the Govt. or an Indian concern ü shall be taxable at the rate of 20% ü on the gross interest income.	ü Any interest paid by a Specified Company ü to a non-resident ü in respect of borrowing made in foreign currency ü  from sources outside India ü Between “ 1st July, 2012 and 1st July, 2015”, ü under an agreement, including rate of the interest payable, ü approved by the Central Government, ü shall be taxable at the rate of 5% (plus applicable surcharge and cess). The specified company shall be an Indian company engaged in the business of - ü construction of dam, ü operation of Aircraft, ü manufacture or production of fertilizers, ü construction of port including inland port, ü construction of road, toll road or bridge; ü generation, distribution of transmission of power ü construction of ships in a shipyard; or ü Developing and building an affordable housing project.
Section 194LC (New Section) ü Interest income paid by such specified company. ü to a non-­resident. ü Shall be subjected to TDS @ 5% (plus applicable surcharge and cess).

Comment:

v Infrastructure sector contributes substantial part of Indian economy.

v To attract foreign funds in Infra Sector, this amendment is proposed. FDI will flow in the sector as Interest income will be taxed @ 5% only.

v Companies engaged in Infra sector will get more benefit vide this amendment.

 Extract of Memorandum:

“ In order to augment long-term low cost funds from abroad for the infrastructure sector, it is proposed to provide tax incentives for funding certain infrastructure sectors from borrowings made abroad subject to certain conditions.”

    Non Resident entertainer & Sports person

Existing Act	Proposed  New Clause
Section 11BBA Sports Person ü Gross Receipts or Income Received by sports persons ü who are non-citizen and non-resident. ü By way of participation ü in any game or sport, advertising or contribution of article in any newspaper etc. Sports Associations ü Gross Receipts being ü guarantee money received by ü non-resident sports association or institution for ü any game or sport played in India. Both are Taxed @ 10% of the gross receipts.	ü Tax @ 20% on Gross Receipts ü Of ü Non Resident non citizen i.e. ·         Sports man ·         sports association or institution ·         Entertainer (theatre, radio, television artists and musicians) Applicable w.e.f. AY 2013-14.
Section 194E TDS @ 10%	TDS @ 20% w.e.f 01-07-2012

Comment:

Internationally Sports Persons, associations and Entertainers are taxed at the range of 10% - 30% of gross receipts. To bring parity with international tax rates, tax rate proposed to be increased to 20%.

Extract of Memorandum

“Under the Double Tax Avoidance Agreement (DTAA’s), there is parity between a non-resident sportsman and a non-resident entertainer. A similar tax regime i.e. taxation on basis of gross receipts rather than net income would simplify the process of taxation in the case of entertainer. The special treatment in respect of entertainer is required because determination of deductible expenses for performance is complicated, especially when the production expenses of an international tour need to be allocated across performances in various countries.”

 Double Taxation Avoidance Agreements

Existing Act		Proposed  New Clause
Meaning assigned to a term used in DTAA
Section 90 ü  Central Govt is empowered to ü  enter into an agreement with the ü  Government of any foreign country or specified territory outside India ü  for the purpose of – ·         Granting relief in respect of avoidance of double taxation, ·         Exchange of information and ·         Recovery of taxes. Section 90A ü  CG is empowered ü  to adopt any agreement (DTAA) ü  between specified associations for ü  Relief of double taxation & ü  Assign meaning of any Term through Notification ü  Which was not in the ACT or DTAA.	ü Any meaning assigned through notification to a term ü used in DTAA but not defined in the Act or DTAA, ü shall be ‘Effective’ from the ü ‘Date of coming into force of the DTAA’ W.r.e.f. 01-10-2009
Tax Residency certificate ‘NOT’ sufficient for DTAA benefits
ü  Provisions of ACT or DTAA , ü  Which is more beneficial ü  Shall ü  Applicable to Assessee.		ü Submission of Tax Residency Certificate (TRC) ü containing prescribed particulars, ü as a ‘Necessary but NOT SUFFICIENT CONDITION’  ü For availing benefits of the DTAA. W.e.f. 01-07-2012

Comment:

v  Term which has not defined in the Act or treaty is generally defined by Notifications. As per retrospective amendments, the notification will apply from the date when relevant DTAA came into force.   

v  DTAA benefits will be given to companies that are Tax residents and having DTAA with India.

v  Amendment is aimed to possible misuse of Tax treaties like Mauritius Treaty.

v  Tax Residency Certificate will now be necessary to claim DTAA benefit. But, Apart from Tax residency certificate, department may asks further details to substantiate the claim of the assessee as the amendment states “TRC necessary but NOT SUFFICIENT CONDITION’.

v  There are practical difficulties in various countries to obtain even TRC. 

v  Proposed Amendment seems to overcome Zero Tax Regime.

v   

v  Extract of Memorandum:

“Since this assignment of meaning is in respect of a term used in a treaty entered into by the Government with a particular intent and objective as understood during the course of negotiations leading to formalization of treaty, the notification under section 90(3) gives a legal frame work for clarifying the intent, and the clarification should normally apply from the date when the agreement which has used such a term came into force.”

“It is noticed that in many instances the taxpayers who are not tax resident of a contracting country do claim benefit under the DTAA entered into by the Government with that country. Thereby, even third party residents claim unintended treaty benefits.”