Union Budget 2020
To boost the economy, in September 2019, the Indian Government had reduced corporate tax rates from 30% to 22% for domestic companies, and to 15% for newly setup manufacturing companies. There were many expectations from the first Union Budget following the corporate tax reforms. With this backdrop, on 1 February 2020, the Finance Minister presented the Union Budget 2020, focusing on three key themes: Aspirational India, Economic Development and Caring Society. The thrust of the Budget tax proposals is around simplification of tax administration, rationalisation of the personal tax regime, and enhancing the ease of doing business in India. In order to win the trust of taxpayers, the Finance Minister has also proposed introducing a ‘Taxpayer’s Charter’, which will lay down guidelines for effective tax administration, with an objective of ending tax harassment.
While there are many changes proposed in the Budget, we highlight below some of the key tax proposals from an international investor’s perspective.
1. Abolition of Dividend Distribution Tax (DDT)
Any company distributing profits, in addition to paying corporate tax, was required to pay DDT at 20% on the dividends distributed. Dividends were tax free in the hands of shareholders. In a move to make India a more attractive destination for investments, the Finance Bill includes a proposal to remove the DDT levy. The incidence of tax has now shifted back on the shareholder, at the applicable tax rates. Tax withholding on dividends will now apply, according to the terms of the tax treaties with the respective countries.
2. Significant Economic Presence (SEP)
The existing international tax rules giving primacy to physical presence have been unsuccessful in taxing digital transactions. India has been one of the forerunners in advocating the concept of taxing digital businesses. Right from being the first country to implement an equalisation levy, to introducing the concept of ‘SEP’, India has led the way in implementing recommendations under the BEPS Action Plan 1.
For the purposes of determining SEP of a non-resident in India, thresholds for the aggregate amount of payments arising from the specified transactions and for the number of users were required to be prescribed. Given that SEP thresholds are still under discussion at the OECD-G20 BEPS forum, it is proposed in the Finance Bill to defer the operation of SEP-related provisions by a year, to tax year 2021-22.
3. Tax withholding on e-Commerce transactions
In another proposal, irrespective of their residential status, digital platform operators would be required to withhold taxes on the amount accrued to the Indian resident vendor on sales of products or services, including digital products over their platform. The tax must be withheld by the platform operator at 1% of the gross amount of the sales or services, either at the time of credit or while making payment to the vendor. Exemption thresholds and higher withholding conditions have also been proposed.
4. Relaxation for offshore funds
The current tax laws provide for a special taxation regime to facilitate the location of fund managers of offshore funds in India. Under this regime, the fund management activity carried out through an eligible fund manager in India by an eligible investment fund does not constitute a business connection in India and does not trigger residency of the fund in India. This regime is subject to fulfilment of certain conditions related to offshore fund structure, investor composition, maintenance of corpus, etc. In order to make the regime feasible and attractive for offshore funds, the Finance Bill includes a proposal to relax some of the conditions exempting creation of a taxable presence of an offshore investment fund in India by an Indian fund manager.
5. Relief from filing income-tax return
Currently, any person liable to tax in India is required to submit a tax return within a specified time. The Finance Bill proposes to do away with the requirement to file a return for non-residents earning income in the nature of Fees for Technical Services (‘FTS’) or royalties. However, this will only be available where the applicable taxes are appropriately withheld and paid to the Government. By reducing compliance for International businesses, the Government aims to enhance the ease of doing business in India.
6. Tax litigation settlement scheme
In order to reduce the pending litigation at various appellate forums, the Finance Minister has tabled the Direct Tax Vivad Se Vishwas Bill, 2020, a tax litigation settlement scheme. In order to incentivise people to opt for this scheme, this Bill provides that the taxpayer can pay the disputed tax demand and seek closure of pending income tax litigation. No interest and / or penalty would need to be paid, if the taxpayer pays the disputed tax amount on or before 31 March 2020.
7. Changes in tax residency rule for individual taxpayers
A ‘Global non-resident’ arranges his affairs in such a manner that he is not liable to tax in any country or jurisdiction during a year. With an aim to curb tax abuse in double non-taxation situations, the Finance Bill proposes to modify rules relating to individual tax residency:
- Any Indian citizen not liable to pay taxes in any country due to his domicile, residence or any other such criteria, would be deemed to be a resident of India and thus liable to tax on their global income.
- For Indian citizens or Persons of Indian origin being outside India and visiting India, a reduced period of stay of 120 days would trigger tax residency in India.
8. Other key proposals
- Changes to tax return and some other tax compliance deadlines
- Safe Harbour Rules and Advance Pricing Agreement mechanism also to be available to determine profit attribution to a Permanent Establishment
- Clarification on Tax regime for Foreign Portfolio Investors (FPI)
- Changes to withholding tax regime for certain investments
- Concessional personal tax regime introduced, available as an option to the existing scheme
- Changes to Custom Duties for some products imported into India
- Changes to GST regime.
The Budget proposals clearly reflect the intent of the Government to move towards gaining the trust of taxpayers and providing a non-adversarial tax regime. The lowest corporate tax rates amongst developing economies, simplified tax laws and business-friendly tax administration would go a long way in making India a destination of choice for International Investors.
For further detail on the above proposals, and other Budget proposals, please visit: https://www.bdo.in/en-gb/insights/publications/india-union-budget-2020
For further detail on the Tax Litigation Settlement Scheme please visit: https://www.bdo.in/en-gb/insights/alerts-updates/tax-alert-amendments-proposed-in-the-direct-tax-vivad-se-vishwas-bill,-2020