Budget 2019-New tax regime and its impact on foreign companies in India
Shashank Verma | Head Supply Chain & Order Management | Maier+Vidorno

Sanjeev Kumar | Chartered Accountant and Consultant | Maier+Vidorno

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November 2019

The Indian Budget 2019 has introduced a new tax regime for tax on the buyback of listed company shares, encourages start-ups and provides tax incentives to IFSC’s. It also introduced digitization measures relating to tax returns forms, e payments modes, and faceless e-assessment. It has also added some measures for promoting less cash economy with the focus to discourage cash transactions and increase the online and e payment facilities.

A summary of tax proposal which may have an impact on companies planning to enter into India or already in India are summarized below:

1.      Reduction is domestic corporate rate

In case of domestic company (Indian subsidiary is a domestic company as per Indian tax laws), the rate of tax shall be 25% of its taxable income (excluding applicable surcharge and Cess) if its total turnover and gross receipts in the tax year 2017-18 does not exceed INR 4 billion, compared to earlier threshold of INR 2.5 billion turnover/threshold for the tax year 2016-17. The tax rate for foreign companies, branches of foreign companies and Permanent Establishment will remain at 40% of its taxable income.

2.      Tax Incentives to International Financial Services Centre (IFSC)

Certain tax concessions are currently available to units located in an IFSC, further to promote IFSC’s the below tax soaps are given:

  1. Extension of capital gain exemptions
  2. Tax exemptions on Interest Income earned by nonresidents(NR)
  3. Extension of tax-free dividend distribution
  4. Exemption from Income distributed by mutual funds located in an IFSC
  5. Tax holiday for units located in IFSC

3.      Mandatory furnishing of returns of Income by certain persons

Currently, a person other than a company or firm is required to furnish the return of income only if his total income exceeds the maximum amount not chargeable to tax, subject to certain exemptions.

Therefore a person entering into certain high-value transactions is not necessarily required to furnish his return of Income. To ensure that persons who enter into certain high-value transactions do furnish their return of income. The income-tax act amended its relevant provision in this regard. This may have an impact on Ex-pat employees in India.

4.      Relaxation the provision on failure to deduct or pay tax in case of payment to non-residents

The relief was available to the deductor of withholding taxes wherein the deductor shall not be deemed to be assessee in default if he fails to deduct tax on a payment made to a resident, if such resident has furnished his return of Income and disclosed such payment for computing his income, paid the tax due on such Income and furnished an accountants certificate to that effect.

Such relief is now available to deductor in case of similar failure on payment made to a non-resident.

5.      Buyback tax extended to listed companies 

Currently, domestic unlisted companies are liable to pay additional buyback income-tax at the rate of 20% on distributed income, on buyback of shares. The same provision is now extended to buyback of listed companies. Consequently, such buyback proceeds will be exempt from tax in the hands of the recipient shareholder.

6.      Exemption of interest income of a non-resident

Exemption of interest income of a non-resident arising from borrowings byways of issue of Rupee denominated bonds.

7.      Online filing of application for non- resident

Online filing of application seeking the determination of tax to be deducted as withholding taxes on payment to non- resident.

8.      Clarification concerning the provision of Secondary adjustment and giving an option to assessee to make a one-time payment

The concept of secondary adjustment was introduced vide finance act 2017 requiring adjustments in the books of account of the assessee and its associated enterprise to ensure actual allocation of profits between them are consistent with transfer price determined as a result of the primary adjustment.

Secondary adjustments provision stipulate that in specific cases of primary transfer pricing adjustments (adjustment made suo moto, adjustment in pursuance of an Advance pricing agreement (APA)/ safe harbor /mutual agreement procedures or adjustments accepted by the taxpayer), if the primary adjustment amount is not repatriated to India, interest shall be shall be imputed on the primary adjustment as per the manner specified and taxed in India.

To address the concerns regarding the effective and practical implementation of these provisions, the following amendments are made:

  1. These provisions shall not apply if the primary adjustments do not exceed INR 10 million or the same pertains to the tax year 2015-16 and earlier years. These two conditions are not cumulative.
  2. Interest to be imputed on the primary adjustments or part thereof, not repatriated to India.
  3. Relief of secondary adjustments for APAs signed before April 1, 2017, is provided, however, there is no refund of taxes already paid under the existing provisions.
  4. The amount of primary adjustment may be repatriated from any of the associate enterprises (AE’s), not necessarily the transacting AE’s.
  5. The taxpayer has the option to pay additional income tax at 18% of the primary adjustments plus a 12% surcharge and would not be taxed for imputed interest. This additional tax shall not be allowed as a tax credit against normal tax liability.

9.      Clarification regarding the definition of the ‘accounting year’ in the form of Country by Country Reporting (CbCR)

Several concerns were raised regarding the meaning of accounting year in case of an alternate reporting entity (ARE) resident in India whose ultimate mother company is not resident in India.

To clarify the unintended anomaly, the relevant provision is amended to clarify that the accounting year in case of the ARE of an international group, the ultimate mother company of which is not resident in India, the reporting accounting year shall be the one applicable to such mother entity.

10.    Rationalization of provisions relating international transactions

Rationalization of provisions relating to maintenance, keeping and furnishing of Information and documents by the person entering into an international transaction.

11. Start-up Incentives

  1. Carry forward of business losses by eligible start-ups is allowed with the condition that all the shareholders who held shares carrying voting power on the last day of the year(s) in which the loss was incurred continue to hold those shares on the last day of the year of set-off, and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.
  2. Exemption from Long term Capital Gains from the sale of residential property on investment in eligible start-ups.
  3. Resolution of ‘angel tax’ Issue: the start-ups and their investors who file requisite declarations and provide information in their return will not be subjected to any kind of scrutiny in respect of the valuation of share premiums. The issue of establishing the identity of the investor and source of his funds will be resolved by putting in place an e-verification mechanism. Also, the special administrative arrangement will be made by CBDT for pending assessments and redressal of their grievances.
  4. Besides above, the finance minister in her speech also proposed to start a television program exclusively for star-ups.

For the last 20 years, Maier+Vidorno has been addressing these business needs of overseas companies. Our experience and knowledge in the field of Indian accounting and corporate compliance allow us to help international businesses explore the Indian market. We also offer other support services in areas of Market Research, Distribution Management, Import-Export Management, Supply Chain & Logistics Management, Performance Management, Business Due Diligence, Recruitment, and HR Consulting. Contact us to know more.