Corporate Tax News Issue 65 - February 2023

2023-24 Finance bill contains some measures to encourage investment

India’s 2023-24 budget unveiled by the Finance Minister on 1 February 2023 was presented against upcoming parliamentary elections in 2024, with some tax measures proposed in the Finance Act generally aiming to encourage investment in the country, which should help India achieve its goal of becoming a USD 5 trillion economy (for prior coverage, see the article in the October 2022 issue of Indirect Tax News and for detailed analysis of the 2023-24 budget, see BDO India’s Budget 2023-24 analysis).  

The Finance Bill does not include any proposed changes to the corporate tax rates, the tax treatment of cross-border transactions or India’s plans with respect to the BEPS 2.0 proposals, but the previously granted tax concessions for International Financial Services Centre (IFSC) units and start-ups would be extended, a new tax would be imposed on winnings from online games and the rules governing the tax treatment of the issuance of shares would be extended to consideration received from nonresidents.

The following are the key measures that would affect companies doing business in India:

  • Thin capitalisation: The exemption from the application of the thin capitalisation rules would be extended to non-banking financial companies.
  • International Financial Services Centre (IFSC): With a view to making the IFSC a global hub for the financial services sector and to bring the IFSC on par with IFSCs globally, the Finance Bill proposes to further incentivise operations from the IFSC by making the following changes:
    • The tax exemption for offshore funds that relocate to an IFSC would be extended for an additional two years, from 31 March 2023 to 31 March 2025 (for prior coverage, see the article in the February 2022 issue of Corporate Tax News).
    • Nonresidents receiving distributions from IFSC banking units with respect to offshore derivative instruments would be exempt from tax provided the banking unit is taxed on the underlying income.
  • Start-ups: The tax holiday offered to start-up companies would be extended for an additional year to 31 March 2024. As a result, eligible start-ups incorporated on or before 31 March 2024 would be entitled to a full tax holiday for three years. In addition, the period in which business losses incurred by start-ups may be carried forward would be increased from seven to 10 years from the date the start-up is incorporated.
  • Tax arising on issue of shares at premium to nonresident: Nonresidents would be included within the scope of the tax rules governing the issuance of shares by a private company. Currently, where a privately held company receives, from a resident, consideration for the issuance of shares that exceeds the face value of the shares, the  consideration exceeding the prescribed fair market value is taxed as income in the hands of the private company. The Finance Bill would expand the scope of this rule to include consideration received from a nonresident
  • Preventing abuse of presumptive taxation schemes: Presumptive taxation schemes are available for nonresident taxpayers carrying out qualifying businesses such as mineral oil exploration, civil construction, turnkey power projects, etc. Such taxpayers opt in and out of the presumptive scheme, depending on whether they are in a profit or loss situation. To prevent abuse of the scheme, it is proposed that if a nonresident taxpayer declares profits and gains from the business for a previous year, the nonresident would not be allowed to claim brought forward losses and unabsorbed depreciation for that previous year.
  • Time period to submit a transfer pricing report: The time period for a taxpayer engaged in related party transactions to provide information or documentation to the Indian tax authorities would be reduced from 30 days to 10 days (the 10-day period could be further extended up to 30 days).
  • Online gaming: With the increase in the number of users of online games, a special regime is proposed to tax winnings from such games. Users would be subject to a flat 30% tax on net winnings from any online games (plus the applicable surcharge and cess), which would be collected in the form of an annual withholding tax deducted by the gaming company. Should the user withdraw winnings from their account during the year, the 30% tax would be withheld at the time of the withdrawal.

The finance bill will now be discussed in parliament and must be approved by both houses before the bill is sent to the president for her signature.

Pranay Bhatia