Union Budget 2018-19 Proposed Amendments in International Tax- Synopsis By CA Jaikumar Tejwani


Dear Professional Colleagues,

The Finance Minister, Mr Arun Jaitley, presented the Union Budget for the year 2018. It was the last full budget presented by him before the general election to be held next year in 2019. 

1. Taxation of long-term capital gains in the case of Foreign Institutional Investor
[Section 115AD]

Consequent to the proposal for withdrawal of exemption under section 10(38) of the Act, the FIIs will be liable to tax on long-term capital gains arising from transfer of long-term capital asset being equity shares of a company or a unit of equity oriented fund or a unit of business trusts only in respect of amount of such gains exceeding one lakh rupees.

This amendment will apply in relation to the assessment year 2019-20 and subsequent assessment years.

2. Aligning the scope of “business connection” with modified PE Rule as per Multilateral Instrument (MLI) [Section 9(1)(i) ]

a. Amendment to Explanation 2 to section 9(1)(i)

“Business connection” shall include any business activities carried by a person who, acting on behalf of the non-resident,

  • habitually concludes contracts or
  • habitually plays the principal role leading to the conclusion of contracts by the non-resident and
  • the contracts are 
  1. in the name of the non-resident; or
  2. for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that the non-resident has the right to use; or
  3. for the provision of services by that non-resident.

This amendment is to give effect to BEPS Action Plan 7, which suggests that an agent would include not only a person who habitually concludes contracts on behalf of the non-resident but also a person who habitually plays a principal role leading to the conclusion of contracts.

This amendment will apply in relation to the assessment year 2019-20 and subsequent assessment years.

b. Insertion of Explanation 2A to section 9(1)(i)

“Business connection” to include “Significant Economic presence”.

Significant Economic presence shall mean (mutually exclusive definition)

  • any transaction in respect of any goods, services or property carried out by a non-resident in India including the provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or
  • systematic and continuous soliciting of its business activities or engaging in interaction with a such number of users as may be prescribed, in India through digital means.

The threshold of “revenue” and the “users” in India will be decided after consultation with the stakeholders.

Further, it is proposed as under

  • only so much of income as is attributable to such transactions or activities shall be deemed to accrue or arise in India.
  • the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India.

It is also clarified that unless corresponding modifications to PE rules are made in the DTAAs, the cross-border business profits will continue to be taxed as per the existing treaty rules.

The above amendment is in accordance with OECD’s BEPS Action Plan 1, as per which, a non-resident enterprise would create a taxable presence in a country if it has a significant economic presence in that country on the basis of factors that have a purposeful and sustained interaction with the economy by the aid of technology and other automated tools.

This amendment will apply in relation to the assessment year 2019-20 and subsequent assessment years

3. Rationalisation of provisions relating to Country-by-Country Report [Section 286]
  • The time allowed for furnishing the Country-by-Country Report (CbCR), in the case of parent entity or Alternative Reporting Entity (ARE), resident in India, is proposed to be extended to twelve months from the end of reporting accounting year (For FY 2017-18 the time limit shall be March 31, 2019)
  • in case its parent entity outside India has no obligation to file the report in its country or territory then constituent entity resident in India shall also furnish CbCR within the aforesaid due date i.e. twelve months from the end of reporting accounting year

These amendments will take effect retrospectively from the 1st April 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

4. Measures to promote International Financial Services Centre (IFSC) [Section 47]

  • Transactions in the following assets, by a non-resident on a recognized stock exchange located in any IFSC shall not be regarded as transfer, if the consideration is paid or payable in foreign currency:—
  1. bond or Global Depository Receipt, as referred to in section 115AC(1); or
  2. rupee denominated bond of an Indian company; or
  3. derivative
  4. It is further proposed to amend the section 115JC so as to provide that in case of a unit located in an IFSC, the alternate minimum tax under section 115JC shall be charged at the rate of 9% ( earlier it was 18.5%).

This amendment will apply in relation to the assessment year 2019-20 and subsequent assessment years.

5. Exemption of income of Foreign Company from sale of leftover stock of crude oil on termination of agreement or arrangement [Section 10(48B)]

  • The benefit of exemption is presently not available on any income accruing or arising to a foreign company on account of sale out of the leftover stock of crude in case of termination of the said agreement or the arrangement.
  • It is now proposed to amend Section 10(48B) to provide that the benefit of tax exemption in respect of income from leftover stock will be available even if the agreement or the arrangement is terminated in accordance with the terms mentioned therein.

This amendment will apply in relation to the assessment year 2019-20 and subsequent assessment years.

6. Royalty and FTS payment by NTRO to a non-resident to be tax-exempt [Section 10]

  • Section 195 requires a person to deduct tax at the time of payment or credit to a non-resident.
  • Given the business exigencies of the National Technical Research Organisation (NTRO), it is proposed to amend section 10 so as to provide that the income arising to non-resident, not being a company, or a foreign company, by way of royalty from, or fees for technical services rendered in or outside India to, the NTRO will be exempt from income tax.
  • Consequently, NTRO will not be required to deduct tax at source on such payments.

This amendment will apply in relation to the assessment year 2018-19 and subsequent assessment years.

7. Entities to apply for Permanent Account Number in certain cases [Section 139A]

  • It is proposed that every person, not being an individual, which enters into a financial transaction of an amount aggregating to 2.5 Lakhs or more in a financial year shall be required to apply to the Assessing Officer for allotment of PAN. (Purpose: To use PAN as Unique Entity Number (UEN) for non-individual entities)
  • It is also proposed that the managing director, director, partner, trustee, author, founder, Karta, chief executive officer, principal officer or office-bearer or any person competent to act on behalf of such entities shall also apply to the Assessing Officer for allotment of PAN. (Purpose: In order to link the financial transactions with the natural persons)

This amendment will take effect from 1st April 2018.

8. Taxation of long-term capital gains on sale of equity shares etc. [Insertion of New Section 112A]

Exemption u/s 10(38) of the Act has been withdrawn and a new section 112A is proposed to be introduced to provide that long-term capital gains arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10 % of such capital gains exceeding 1 lakh rupees.

  • The long-term capital gains will be computed without giving effect to indexation. The benefit of computation of capital gains in foreign currency in the case of a non-resident is not allowed;
  • The cost of acquisitions in respect of the long-term capital asset acquired by the assessee before the 1st day of February 2018 shall be deemed to be;


  • Section 112(4) empowers the Central Government to specify by notification the nature of acquisitions in respect of which the requirement of payment of STT shall not apply in the case of equity share in a company;
  • the requirement of payment of STT at the time of transfer of long-term capital asset, being a unit of equity oriented fund or a unit of business trust, shall not apply if the transfer is undertaken on recognized stock exchange located in any International Financial Services Centre( IFSC) and the consideration of such transfer is received or receivable in foreign currency

These amendments will apply in relation to the assessment year 2019-20 and subsequent assessment years.

9. Application of Dividend Distribution Tax to Deemed Dividend [Section 2 clause(22) subclause (e)]

  • Deemed dividend u/s 2(22)(e) has been brought under the scope of Dividend Distribution Tax, such deemed dividend is proposed to be taxed at the rate of 30 percent (without grossing up).
  • Earlier Deemed dividend under the section of 2(22)(e) the Act was taxed in the hands of the recipient at the applicable marginal rate. The taxability of deemed dividend in the hands of recipient has posed serious problem of the collection of the tax liability and has also been the subject matter of extensive litigation

EXPLANATIONS (Only for reference)

1. Aligning the scope of “business connection” with modified PE Rule as per Multilateral Instrument (MLI).

Under the existing provisions of Explanation 2 to clause (i) of sub-section (1) of section 9, "business connection" includes business activities carried on by non-resident through dependent agents. The scope of "business connection" under the Act is similar to the provisions relating to Dependent Agent Permanent Establishment (DAPE) in India’s Double Taxation Avoidance Agreements (DTAAs). In terms of the DAPE rules in tax treaties, if any person acting on behalf of the non-resident is habitually authorised to conclude contracts for the non-resident, then such agent would constitute a PE in the source country.
 
However, in many cases, with a view to avoiding establishing a permanent establishment (hereafter referred to as 'PE') under Article 5(5) of the DTAA, the person acting on the behalf of the non-resident, negotiates the contract but does not conclude the contract.
 
Further, under paragraph 4 of Article 5 of the DTAAs, a PE is deemed not to exist when a place of business is engaged solely in certain activities such as maintenance of stocks of goods for storage, display, delivery or processing, purchasing of goods or merchandise, the collection of information. This exclusion applies only when these activities are preparatory or auxiliary in relation to the business as a whole.
 
The OECD under BEPS Action Plan 7 reviewed the definition of 'PE' with a view to preventing avoidance of payment of tax by circumventing the existing PE definition by way of commissionaire arrangements or fragmentation of business activities. In order to tackle such tax avoidance scheme, the BEPS Action plan 7 recommended modifications to paragraph (5) of Article 5 to provide that an agent would include not only a person who habitually concludes contracts on behalf of the non-resident but also a person who habitually plays a principal role leading to the conclusion of contracts. Similarly Action Plan 7 also recommends the introduction of an anti-fragmentation rule as per paragraph 4.1 of Article 5 of OECD Model tax conventions, 2017 so as to prevent the taxpayer from resorting to fragmentation of functions which are otherwise a whole activity in order to avail the benefit of exemption under paragraph 4 of Article 5 of DTAAs.
 
Further, with a view to preventing base erosion and profit shifting, the recommendations under BEPS Action Plan 7 have now been included in Article 12 of Multilateral Convention to Implement Tax Treaty Related Measures (herein referred to as ‘MLI’), to which India is also a signatory. Consequently, these provisions will automatically modify India’s bilateral tax treaties covered by MLI, where treaty partner has also opted for Article 12. As a result, the DAPE provisions in Article 5(5) of India’s tax treaties, as modified by MLI, shall become wider in scope than the current provisions in Explanation 2 to section 9(1)(i). Similarly, the anti-fragmentation rule introduced as per paragraph 4.1 of Article 5 of the OECD Model Tax Conventions, 2017 has narrowed the scope of the exception under Article 5(4), thereby expanding the scope of PE in DTAA vis-a-vis domestic provisions contained in Explanation 2 to section 9(1)(i). In effect, the relevant provisions in the DTAAs are wider in scope than the domestic law.
 
However, sub-section (2) of section 90 of the Act provides that the provisions of the domestic law would prevail over corresponding provisions in the DTAAs, to the extent they are beneficial. Since, in the instant situations, the provisions of the domestic law being narrower in scope are more beneficial than the provisions in the DTAAs, as modified by MLI, such wider provisions in the DTAAs are ineffective.
 

In view of the above, it is proposed to amend the provision of section 9 of the Act so as to align them with the provisions in the DTAA as modified by MLI so as to make the provisions in the treaty effective. Accordingly, clause (i) of sub-section (1) of section 9 is being proposed to be amended to provide that “ business connection” shall also include any business activities carried by a person who, acting on behalf of the non-resident, habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by the non-resident . It is further proposed that the contracts should be-

(i) in the name of the non-resident; or

(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that the non-resident has the right to use; or

(iii) for the provision of services by that non-resident.

This amendment will take effect from 1st April 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years. 

2. OECD under its BEPS Action Plan 1 addressed the tax challenges in a digital economy wherein it has discussed several options to tackle the direct tax challenges arising in digital businesses. One such option is a new nexus rule based on “significant economic presence”. As per the Action Plan 1 Report, a non-resident enterprise would create a taxable presence in a country if it has a significant economic presence in that country on the basis of factors that have a purposeful and sustained interaction with the economy by the aid of technology and other automated tools. It further recommended that revenue factor may be used in combination with the aforesaid factors to determine 'significance economic presence'.

Author
CA. Jaikumar Tejwani
Email:- jkt@jktco.com 

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