The Hindu Business Line : Fairness on the foreign front

NON-RESIDENTS occupy a special place in the Indian tax code. Till recently, interest earned by non-residents from their investments in India was given special exemption from Indian income-tax.

Last year, the Government had announced that the exemption was being completely withdrawn. But protests and representations against the move prompted the Finance Minister to announce that the exemption would continue till March 2005.

There was a decline in the remittances from non-resident Indians (NRIs) and again, a spate of representations followed.

In Para 158 of the Budget speech, the Finance Minister announced, "Bowing to popular demand, I propose to continue the exemption from the tax on interest earned on accounts maintained by Non-Resident Indians."

Interest on monies standing to the credit of an individual in a Non-Resident (External) Account in any bank in India is exempt from income-tax under Section 10 (4)(ii) of the Income-Tax Act, 1961. The exemption was to be discontinued after March 31, 2005. The amendment now made secures that the exemption will continue to be available even after March 31.

As is only to be expected, many scheduled banks lowered the rate of interest on such deposits.

Interest on FCD

Under the existing provisions of item (fa) of sub-clause (iv) of clause (15) of Section 10, the interest payable by a scheduled bank before April 1, 2005, to a non-resident or to a person who is not ordinarily resident, on deposits in foreign currency, where the acceptance of such deposits by the bank is approved by the Reserve Bank of India, is exempt from income-tax.

It is proposed to amend the said item (fa) to provide that such income payable by way of interest to a non-resident or to a person who is not ordinarily resident shall continue to be exempt on or after April 1, 2005.

Lease of aircraft

Foreign aircraft are generally taken on lease by Indian companies, and lease payments are substantial. As a measure to encourage the aircraft industry, tax exemption was allowed in respect of such lease payments in the hands of the foreign leaser of the aircraft. Section 10(15A) provides for exemption from income-tax of the lease payment received in respect of a lease of an aircraft or an aircraft engine by the Government of a foreign state or enterprise from an Indian company engaged in the business of operation of aircraft.

This exemption is available subject to the condition that the agreement for such lease is entered into before April 1, 2005.

In other words, the tax exemption is not available in respect of lease rent payments under an agreement entered in on or after April 1, 2005. Further, clause (6BB) of Section 10 also provides for exemption from tax on tax paid by the Indian company in such lease rents.

It is now provided that the exemption for lease payments shall continue with regard to agreements entered into on or before September 30, 2005.

However, the benefit of exemption from tax on tax will be available in respect of lease payments made in pursuance of agreements entered on or after October 1, 2005.

In para 173 of the Budget speech, the Finance Minister explained that this exemption is conferred in difference to the request from Air India and Indian Airlines.

It is no doubt true that the benefit will be conferred in respect of transactions involving more than Rs 30,000 crore proposed to be undertaken by AI and IA by buying or leasing foreign aircraft. But there are important private players such as Jet Airways and the UB group which will definitely take advantage. It is not as if only the carriers in the government sector will benefit.

Royalty and technical service fees

An important amendment to be taken note of by joint venture partners relates to the tax rate applicable to royalty and technical fees under Section 115A. Section 115A (1)(b) lays down the rate applicable in respect of royalty or technical service fees payable to a non-resident or foreign company. The tax rate has been reduced in respect of the agreements made after May 31, 2005, as shown in the Table.

Technology transfer is now made cheaper. It should be remembered that tax is often borne by the Indian party, though strictly, the burden should be on the foreign lender of technology.

Wherever a double tax avoidance agreement (DTAA) provides for a tax rate in excess of 10 per cent, it is the 10 per cent rate fixed under Section 115A that will be applicable. Courts have ruled that the foreign taxpayer can opt to be governed either by the Indian tax code or the DTAA, whichever is beneficial. It is a dubious point whether the cess and surcharge will be applicable in such cases.

One wishes that the amendment covered agreements entered into on or after April 1, 2005, rather than June 1, 2005.

(The author is a former Chief Commissioner of Income-Tax.)

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