India: International tax proposals in Budget 2015
On February 28, the Indian Government presented its much-awaited Union Budget for tax year 2015-16. The Finance Bill 2015 (FB 2015), which was a part of the Budget, contained a number of international tax proposals to amend the Indian tax law (ITL).
To provide clarity on taxation of indirect transfers under the ITL, the FB 2015 provides the meaning of 'value of an asset' and 'deriving substantial value'. It also proposes non-taxation of indirect transfers facilitated in a scheme of amalgamation or demerger or where the transferor does not hold right to control or manage and specified voting power or capital in the foreign entity which in turn holds Indian assets.
A foreign company would be treated as resident in India if its place of effective management (POEM) is in India at any point during the year, from tax year 2015-16 onwards. POEM is defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity are, in substance, made.
Applicability of general anti-avoidance rules (GAAR) under the ITL to be deferred until March 31 2017. This is done to implement GAAR as part of a comprehensive regime to deal with base erosion and profit shifting (BEPS) and aggressive tax avoidance.
Reduction in the tax rate on royalty and fees for technical services (FTS) payments made to non-residents to 10% from the current rate of 25% under the ITL.
Mere presence of a fund manager would not constitute a business connection or a taxable presence of an overseas investment fund in India and it would not impact the residential status of the fund in India. The proposed regime would be applicable where the overseas fund is from a treaty jurisdiction, subject to certain other conditions.
Indian branch of non-resident bank (head office) would be deemed to be a separate and independent person from the head office and any interest paid by the branch to head office or any other branch of the head office outside India, would be taxable in India subject to withholding tax.
The concessional tax rate of 5% on interest on borrowings by foreign institutional investors or qualified financial institutions is to be provided until June 30 2017.
Indian tax administration to be empowered to prescribe rules for manner of granting the foreign tax credit against income tax payable in India.
Reporting requirements on payments made to non-residents to be strengthened to ensure withholding tax at appropriate rates on foreign payments.
The proposals will become law after the FB 2015 is enacted. The finance minister has also announced a phased reduction in India's corporate tax rate from 30% to 25% over the next four years. The proposals of FB 2015 are far-reaching and are intended to act as a stimulus to improve foreign investment into India, in the days to come.
Rajendra Nayak (firstname.lastname@example.org) and Aastha Jain (email@example.com)
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