Tax Residency certificate :- Section 90 (4) /90A(4)|
Existing Act
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Proposed Changes (w.r.e.f AY 2013-14)
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·
Assessee, not being a resident
·
to whom DTAA applies
·
Shall not be entitled to claim any relief
under DTAA,
·
Unless a Certificate, containing particulars of his being a
resident in any country outside India or specified territory.
·
Is obtained from the government of that
country or territory.
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New Sub section (5) inserted:
·
The certificate of being a
resident in a country outside India or specified territory outside India,
·
as the case may be,
·
referred to in sub-section (4),
·
shall be “necessary but not a sufficient condition”
·
for claiming any relief under
the agreement referred to there.
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Comment:
1.
Finance Act 2012 brings an amendment in section 90 according to which
submission of “Tax Residency Certificate” is mandatory and only condition to
claim treaty benefit. Interestingly it has been mentioned in ‘Memorandum
explaining Finance Bill 2012’ that TRC would be necessary but not a sufficient
condition for getting the treaty benefit. Though the said wordings was not part
of Finance Act 2012, it is now proposed in finance bill 2013 to reintroduce the
same with retrospective effect from AY 2013-14.
2.
As per proposed amendment “Tax Residency Certificate” produced by a Non-
Resident shall not be sufficient to take treaty benefit. What else the taxing
authority is expecting from them is best known to them only.
3.
Mauritius is a popular source of foreign investments into India, accounting for
around 40% of portfolio inflows according to some estimates. As per Memorandum
explaining Finance Bill 2012 “ 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.”
Proposed
amendment will give tax authorities to identify the actual beneficiary instead
of FIIs operative in front end activities. These FIIs buy Indian assets on
behalf of their clients through subsidiaries with double tax treaties with
India, meaning under Indian law, only the banks and brokerages are registered
as the foreign investor, while the end investor remains outside the purview of
Indian tax authorities.
4.
In Circular No. 789 dated 13.04.2000, CBDT had clarified that with respect to
DTAA with Mauritius, wherever the certificate of residence is issued by
Mauritian Authorities, such certificate will constitute sufficient evidence for
accepting the status of residence of a taxpayer.
Hon’ble
Supreme Court in Azadi Bachao Andolan
(132 Taxman 373) had held circulars in no case curtail the powers of
assessing officer. Accordingly Apex Court had upheld the validity of circular
no. 789.
Advance
Ruling in case of E Trade Mauritius Ltd (190
Taxman 232) has accepted the above principle. In this case Investment had
brought in India thorough a company of Mauritius, the parent of which was a
USA
based company. AAR held that treaty benefit cannot be denied as the assessee is
a tax resident of Mauritius holding TRC certificate issued by the
government.
5. Amid pressure from foreign investors, Finance
ministry had issued a press release dated 01.03.2013 clarifying that sub
section (5) of section 90 does not mean that the tax residency certificate
produced by a resident of a contracting state could be questioned by the taxing
authorities.
It has been clarified that Tax Residency
Certificate produced by a resident of a contracting state will be accepted as
evidence that he is a resident of that contracting state and the Tax
Authorities in India will not go behind the TRC and question his resident
status.
It is also clarified that for Mauritius, circular no.
789 dated 13.4.2000 continues to be in force, pending ongoing discussions
between India and Mauritius.
Even
Finance Minister after the budget speech said “It has not become law
yet. It's a bill. When I read that clause again, I said it is clumsily worded,"
6. The said clarification is clearly in contradiction of
scheme of the proposed amendment as clear from the memorandum explaining
finance bill given below. The said clarification seems to calm down the anxiety
of foreign investors till the time finance bill becomes Act.
Extract
of Memorandum:
“The
scheme of interplay between DTAA and domestic legislation ensures that a
taxpayer, who is resident of one of the contracting country to the DTAA, is
entitled to claim applicability of beneficial provisions either of DTAA or of
the domestic law. Sub-section (4) of sections 90 and 90A of the Income-tax Act
inserted by Finance Act, 2012 makes submission of Tax Residency Certificate
containing prescribed particulars, as a condition for availing benefits of the
agreements referred to in these sections.
It is
proposed to amend sections 90 and 90A in order to provide that submission of a
tax residency certificate is a necessary but not a sufficient condition for
claiming benefits under the agreements referred to in sections 90 and 90A. This
position was earlier mentioned in the memorandum explaining the provisions in
Finance Bill, 2012, in the context of insertion of sub-section (4) in sections
90 & 90A.”
Taxation of Royalty / Fees
for technical services :- Section 115A|
Existing Act
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Proposed Changes
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· Where
the total income of a non-resident taxpayer includes any income by way of
· Royalty
and Fees for technical services (FTS) received under an agreement entered
after 31.03.1976 and
· which
are not effectively connected with permanent establishment, if any, of the
non-resident in India.
· then
tax is payable on the gross amount of income at the rate of
-
30%, (if the agreement is on or before
31.05.1997) /
-
20% (if
the agreement is after 31.05.1997 but
before 01.06.2005)
-
and 10%
if the agreement is after 01.06.2005.
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Tax will be payable on the gross amount of
income at the rate of 25%
if the agreement is on or after 31.03.1976.
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Comment:
1. India has tax treaties with 84 countries, majority
of tax treaties allows India to levy tax on gross amount of royalty at rates
ranging from 10% to 25% (like for tax residents of UK- USA @15%, for tax
residents of Denmark-Italy.. @20%, for tax residents of Poland – Romania.. @
22.5% & for tax residents of magnolia @25%) whereas the tax rate as per
section 115A is 10%.
As per
section 90 of IT Act, DTAA provisions will apply to a taxpayer in a beneficial
manner and accordingly by applying section 115A payment to resident of above
mentioned country is get taxed @ 10% though DTAA prescribes a higher rate.
Extract of Memorandum:
“ In order to correct this anomaly, the tax
rate in case of non-resident taxpayer, in respect of income by way of royalty and
fees for technical services as provided under section 115A, is proposed to be
increased from 10% to 25%. This rate of 25% shall be applicable to any income
by way of royalty and fees for technical services received by a non-resident,
under an agreement entered after 31.03.1976, which is taxable under section
115A.”
General Anti Avoidance Rules (GAAR) :- |
Applicable w.e.f. 01.04.2016
|
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GAAR
was originally introduced by Finance Act 2012 to ‘COUNTER AGGRESIVE TAX
PLANNING.’ However the
applicability of the same was differed till 31.03.2014. A number of
representations were received against the provisions relating to GAAR. An
Expert Committee was constituted by the Government and based on the report of
the committee, following amendments are proposed in original GAAR:
(A)
GAAR provisions will come into force with effect from April 1, 2016 and
shall apply from the assessment year 2016-17.
(B)
An arrangement, the main purpose of which is to obtain a tax
benefit, would be considered as an impermissible avoidance arrangement.
(C)
The factors like, period or time for which the arrangement had
existed; the fact of payment of taxes by the assessee; and the fact that an
exit route was provided by the arrangement, would be relevant but not
sufficient to determine whether the arrangement is an impermissible avoidance
arrangement
(D)
An arrangement shall also be deemed to be lacking commercial
substance, if it does not have a significant effect upon the business risks,
or net cash flows of any party to the arrangement apart from any effect
attributable to the tax benefit that would be obtained but for the application
of Chapter X-A.
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Tax incentive for Foreign
funding in Infra Sector :- Section 194LC|
Existing Act
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Proposed changes (w.e.f. 01.06.2013)
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ü Specified
company
ü borrows
money in Foreign currency
ü from
a source outside India
ü Under
loan agreements or by way of issue of long term infra bonds.
ü As
approved by CG, then
ü Interest
income paid shall be subjected to
ü TDS
@ 5% (plus applicable surcharge and cess).
The specified company shall be an Indian company engaged in
the business of -
ü construction
of dam, 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.
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A new proviso
inserted :
· where a non-resident (not being a company) or a foreign
company has deposited
· any sum of money in foreign currency in a designated account through which
· such sum, as converted in rupees,
· is utilised by the non-resident or the foreign company,
· to subscribe to any long-term infrastructure bonds issued by
the specified company in India,
· then, such borrowing,
· shall be deemed to have been made by the
Specified company in foreign currency.
Designated account” means an account of a person in a bank
which has been opened solely for the purpose of deposit of money in foreign
currency and utilisation of such money for payment to the specified company for
subscription in the long-term infrastructure bonds issued by it;
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Comment:
1. The amendment is proposed to provide tax incentive
for making investment in Infra sector to make it more attractive for foreign
investor.
Extract
of Memorandum:
“ In order to facilitate subscription by a non-resident in
the long term infrastructure bonds issued by an Indian company in India (rupee
denominated bond ), it is proposed to amend section 194LC of the Income-tax Act
so as to provide that where a non-resident deposits foreign currency in a
designated bank account and such money as converted in rupees is utilised for
subscription to a long-term infrastructure bond issue of an Indian company,
then, for the purpose of this section, the borrowing by the company shall be
deemed to be in foreign currency. The benefit of reduced rate of tax would,
therefore, be available to such non-resident in respect of the interest income
arising on such subscription subject to other conditions provided in the
section.”
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