The Hindu Business Line : Handful for non-residents

The Finance Bill, 2007 proposes to impose higher income-tax on foreign companies conducting business in India (see Table). As regards taxation of interest, royalties and technical services income arising to non-residents in India, one of the amendments, with retrospective effect from June 1, 1976, proposes to give legal sanctity to the source rule and, accordingly, clarifies that these streams of income would be subject to tax in India whether or not the non-resident has a residence or place of business or business connection in India.

A recent Supreme Court decision held that for income from services rendered by a non-resident, used by a resident for a business carried on in India, there has to be a `live link' between the non-resident and the Indian business. In other words, income from services was taxable in the hands of a non-resident only if the services were performed in India and consumed in India.

India defined

The definition of `India' has also been widened in the Finance Bill proposals, with retrospective effect from August 25, 1976, to include its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone, any other maritime zone and air space above its territory and territorial waters. Thus, the activities carried out by non-residents within the widened definition of `India' could trigger taxation in India.

There are certain relief proposals as well. The Finance Bill proposes to extend tax holiday for infrastructure projects to navigational channels in the sea, which is a high risk and capital-intensive project with a long gestation, by covering it as `infrastructure facility'. Accordingly, these projects would be eligible for a 10-year tax holiday.

The Finance Bill also proposes to grant tax holiday of 10 years to any undertaking engaged in the business of laying and operating a cross-country natural gas distribution network (including pipelines and storage facilities integral to such network). This is subject to the approval of the Petroleum and Natural Gas Regulatory Board and on the condition that one-third of the total capacity be available for use on common carrier basis to third parties.

On the administrative front, the tax officers will now be required to complete the assessments of foreign shipping companies within nine months from the end of the year in which their freight return is filed. This proposal would apply to the filing of return on or after April 1, 2007. On the other side, the time limit for completion of assessments, wherein a reference to the transfer pricing officer has been made, has been extended by one year.

Amendments of import

Two other important amendments merit attention: An assessing officer will now compulsorily have to adopt the arm's length price computed by the transfer pricing officer. Also, an appeal against a withholding tax order in respect of payment made to non-residents can be filed by a payer of income to that non-resident only if he has borne the tax on that income.

To conclude, some significant amendments have been proposed which affect the taxation of non-residents. Some of these can potentially have a significant impact.

(The author is Head of Tax & Regulatory Practice (India), BSR & Co, Mumbai.)