More clarity now on cross-border taxation

Harsh Bhuta | Updated on April 26, 2021

This apart, the amendments in the Budget give a fillip to foreign institutions to invest in India

In the backdrop of the Covid-19 pandemic and a worldwide economic recession, Finance Minister Nirmala Sitharaman presented her third Budget on February 1, making it her shortest one as yet at 10,500 words and lasting around 110 minutes.

The focus was to reset the economy by spending heavily on infrastructure development and increasing the healthcare outlay by a record 137 per cent. The government came up with a roadmap for ‘Atmanirbhar Bharat’ through six pillars. The aim was to kickstart the economy by creating demands through novel infrastructure projects funded by the government or public-private partnerships.

With respect to proposals relating to cross-border taxation, there have been few amendments with far-reaching implications. Some of the key proposals are as below:

Non-Resident Indians

The 2020 Budget had amended Section 6 of the Income Tax Act with an intention to tax citizens of India, having Indian-sourced income exceeding ₹15 lakh during a financial year to be deemed to be a resident in India, if one is not “liable to tax” in any other country by reason of his domicile/residence. The phrase “liable to tax” was not defined and, therefore, created confusion and interpretation issues.

There was no clarity in cases where there was no income-tax leviable on the taxpayer. In jurisdictions such as the UAE, there is no personal tax presently leviable on a person whereas the jurisdiction retains the right to tax any person at any point in time. Therefore, whether such person would be considered as “liable to tax” in such jurisdiction was uncertain.

Budget 2021 has now defined the term “liable to tax” in relation to a person as: (a) there is a liability of tax on such person under any law for the time being in force in any country, and (b) it shall include a case where subsequent to imposition of tax liability, an exemption has been provided.

Thus, it is now clarified that in cases where a person can merely be subjected to tax in the future, but no liability is imposed at present, would not be considered as a person “liable to tax” for the purposes of deemed residency.

Overseas retirement fund

Presently, many foreign retirement funds tax withdrawals on receipt basis, whereas the same is taxed in India on an accrual basis. This creates a mismatch of tax credit due to the year of taxability.

This amendment would be applicable to a person who is currently a resident of India and had opened a retirement account in a foreign country, in which income is taxed only at the time of withdrawal or redemption.

This is a relief to non-residents returning back to India after retirement as it would avoid double taxation on withdrawal of retirement funds, which would otherwise have been taxable both on receipt basis in the foreign country and on accrual basis in India.

Scope of equalisation levy

Equalisation levy of 2 per cent was levied, through the Finance Act, 2020, on consideration received by an e-commerce operator from e-commerce supply/services provided to persons resident in India who buys such goods or services using IP address located in India. Correspondingly, an exemption was provided for income received by the e-commerce operator after April 1, 2020. An amendment has now been suggested to widen the scope of the levy to bring within the tax net such e-commerce operators that are merely aggregators and do not themselves own goods or provide/facilitate services.

It has also been clarified that transactions that are subject to tax as royalty or fees for technical services will not be covered within the scope of the equalisation levy.

TDS relief for FPIs

Under the present provisions, the income of FPIs from securities other than specified interest attracts withholding tax at 20 per cent irrespective of the rates mentioned in the country-specific Double Tax Avoidance Agreement (DTAA), which could be lower. For example, the Mauritius-India Tax Treaty provides for 15 per cent rate for dividend income of FPIs. To create a conducive spirit for foreign institutions to invest in India and acting upon a recent Supreme Court ruling, Budget 2021 provides for the TDS rate to be the lower of the rates mentioned in the DTAA or 20 per cent, subject to such FPI providing a valid Tax Residency Certificate.

Apart from the above, there have been quite a few measures intended to provide a fillip to the fledgling and ambitious ‘global financial hub’ initiative — that is, the IFSC/GIFT City in India. For instance, there is tax exemption proposed for the royalty income of a non-resident on account of aircraft lease paid by an unit located in the IFSC.

Also, certain practical difficulties faced by the foreign Sovereign Wealth Funds and Pension Funds on the taxability of their income from investment in Indian infrastructure have been ameliorated in this Budget.

The writer is Partner of

Bhuta Shah & Co LLP

Published on April 25, 2021

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