India’s 2016 budget affects foreign investors and multinational enterprises

Tax Insights
from International Tax Services
India’s 2016 budget affects foreign
investors and multinational
enterprises
March 9, 2016
In brief
The Indian Finance Minister on February 29, 2016, presented the 2016 budget, the third budget released
by the current government. The budget proposals continue to focus on development, improving the
ability to conduct business in India, and attracting foreign investment.
Among the proposed amendments in the budget are: a reduction in domestic corporate tax rates for
certain taxpayers, incentives for new start-up companies, the introduction of a patent box regime,
requirements for country-by-country reporting (CbCR), and a new equalization levy in line with the
OECD’s base erosion and profit shifting (BEPS) initiatives.
The budget also attempts to address several uncertainties by clarifying applicability of the favorable nonresident long-term capital gains tax rate of 10% to the shares of Indian private companies. The budget
also introduces a new dispute settlement period. Many foreign investors welcome these initiatives.
The budget proposals would take effect after passing both houses of Parliament and obtaining
presidential assent.
In detail
Reduction in domestic
corporate tax rate
The corporate tax rate for
foreign companies (including
branches and permanent
establishments) would remain
unchanged at 40%.
The tax rate for domestic
companies would remain
unchanged at 30%, except in the
following cases:
 The corporate tax rate for
domestic companies with
total revenue not exceeding
INR 50 million
(approximately USD
750,000) would be reduced
to 29%.
 New domestic companies
(those registered on or after
March 1, 2016) that engage
solely in ‘manufacture or
production’ activities can opt
to be taxed at a reduced 25%
income tax rate, but only if
the company does not benefit
from other tax incentives,
excluding incentives related
to employment generation.
All rates would exclude
applicable surcharges.
The government also proposes
to phase out other tax
incentives, such as the existing
tax holiday for Special
Economic Zone units and ‘super
deductions’ for research and
development.
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Clarification of Minimum
Alternate Tax (MAT) applicability
to foreign companies
In September 2015, the government
clarified that MAT will not apply to
foreign companies that do not have a
permanent establishment (PE) in
India, subject to certain conditions.
This clarification is enacted in the law
and would apply retroactively
beginning April 1, 2001, and thus
addresses the uncertainty and
litigation that many foreign
companies have been facing in India.
Clarification of non-resident
capital gains taxation
Applicability of a beneficial tax rate
In 2013, the non-resident long-term
capital gains tax rate on the sale of
‘unlisted securities’ was reduced to
10%, plus applicable surcharges.
However, because the wording of the
provisions was unclear, taxpayers
were uncertain whether the beneficial
rate would apply to sales of shares of
Indian private limited companies.
The budget addresses this ambiguity
by clarifying that the lower rate would
apply to shares of an Indian private
limited company.
Reduction of holding period
The budget also proposes reducing the
long-term capital gain holding period
for unlisted securities from 36 months
to 24 months to benefit from a
reduced tax rate.
Limited liability partnerships
(LLPs)
The budget would not change the
current tax rates applicable to LLPs.
However, the favorable corporate tax
rates proposed for certain domestic
companies would not be available to
LLPs.
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Conversion of companies into LLPs
The budget proposal adds another
requirement applicable to the neutral
conversion of a company into an LLP:
The total book value of the assets of
the company being converted, in any
of the three years preceding the year
in which the conversion takes place,
may not exceed INR 50 million (USD
750,000).
BEPS initiatives
Introduction of CbCR
Acknowledging BEPS Action Plan 13,
the government proposes introducing
CbCR requirements.
Indian-headquartered multinational
enterprises (MNEs) with global
consolidated revenues exceeding the
prescribed threshold (expected to be
EUR 750 million) would be required
to comply with the CbCR
requirements starting in tax year
2016-17. The proposals broadly align
with the requirements in Action Plan
13, including maintenance of CbCR,
master, and local files.
Less stringent requirements would
apply to Indian subsidiaries of foreign
entities if India can obtain the CbCR
from the foreign parent’s country and
other conditions are met.
Stringent penalties would apply to
non-filing, delayed filing, or
inaccurate filing of CbCR.
Equalization levy on foreign ecommerce companies
Recognizing tax challenges created by
the evolution of the digital economy,
the budget proposes introducing an
‘equalization levy’ that would equal
6% of consideration from online
advertisement services, provisions for
digital advertising space, and other
notified services received by a
non-resident from an Indian resident
conducting business, or from a
non-resident with a PE in India.
The levy would not apply when the
non-resident service provider
establishes a PE in India and the
services are effectively connected to
the PE, or if aggregate consideration
does not exceed INR 100,000
(approximately USD 1,500).
Observation: It is unclear as to
whether such equalisation levy will be
covered under applicable double tax
treaty provisions and if a foreign tax
credit could be available in respect of
such levy.
Less stringent requirements
related to higher tax withholding
without an India tax ID /
Permanent Account Number
(PAN)
Indian taw law provides a minimum
20% withholding tax on taxable
income earned by a non-resident
without a PAN. The 20% rate
currently applies regardless of lower
tax withholding rates prescribed
under applicable tax treaties or
domestic law.
The budget would eliminate the
requirement to obtain a PAN to
benefit from the lower rates, but nonresidents still would need to produce
certain documentation.
Unlisted share buy-back
Under current law, an Indian
company buying back its shares is
subject to a 23.07% buy-back tax. The
tax currently applies only to buy-backs
carried out under a specific provision
of the companies act (Section 77A),
not to share repurchases under other
provisions.
Effective June 1, 2016, the budget
proposes that the buy-back tax would
apply to all buy-backs or share
repurchases under any provisions of
Indian corporate tax law.
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The government would issue rules to
compute the buy-back tax and
applicable basis in various situations.
Patent box regime
To encourage indigenous research and
development activities, the budget
proposes introducing a 10% (plus
applicable surcharges) tax rate on
royalty income of an Indian resident.
The 10% rate would apply only if the
Indian resident develops and owns the
patent, and the patent is registered in
India.
MAT would not apply to such royalty
income.
Easing litigation / dispute
resolution
The budget also introduces several
proposals to address tax litigation
concerns, including:
 allowing a stay on collection of tax
demands from the taxpayer upon
payment of 15% of the tax demand,
pending resolution at the appellate
level. This would not be available
to taxpayers that receive adverse
judgments at the appellate level.
 a special time period window
would be available to settle
pending cases at the first appellate
level. Under this option, the
taxpayer would have a limited
opportunity to settle the dispute by
paying tax and interest until the
date of assessment, plus a 25%
penalty in some cases.
 a proposed settlement window
would exist for pending disputes
that result from prior ‘retroactive’
amendments. In these cases, the
taxpayer would have to pay only
the tax amount; no interest or
penalties would apply. The
taxpayer would have to withdraw
all pending appeals to benefit from
this window provision. Immunity
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from prosecution also would be
available.
start-up, subject to a minimum
50% shareholding by the taxpayer.
 to expedite pending refunds, the
budget proposes additional 3%
interest payable by the tax
authorities to taxpayers in cases
involving a delay of more than
three months in responding to an
appellate order.
Real Estate Investment Trust
(REIT)/ Investment
Infrastructure Trust (InvIT)
 the budget also proposes changing
the penalty provisions that
currently apply to concealment or
under-reporting of income. The
provisions broadly aim to reduce
the discretion of the tax authorities
in levying penalties in such cases.
To continue making REITs and InvITs
more attractive, a specific exemption
is proposed from the levy on dividend
distribution tax on the distribution of
dividends by special purpose vehicles
(SPV) to REITs and InvITs, subject to
meeting certain ownership conditions.
Tax incentives for domestic startups
The following proposed tax incentives
would be available to companies that
qualify as ‘start-ups:’
 a 100% deduction of profits
derived by an eligible start-up
registered before April 1, 2019. The
profits must be the result of
activities involving innovation,
development, deployment, or
commercialization of new
products, processes, or services
driven by technology or intellectual
property, subject to other
conditions. The deduction would
be available for three consecutive
tax years within the start-up’s first
five tax years.
 a capital gains tax exemption on
the transfer of long-term assets
would be available to taxpayers
that invest the proceeds from such
transfers into specified funds set
up to finance new start-ups.
 a capital gains tax exemption on
long-term gains arising from
transfer of residential property if
the gains are invested in an eligible
In 2014, the government introduced a
specific tax regime for single-level
taxation applicable to REITs and
InvITs.
Alternative Investment Funds
(AIF)
The distribution of income from
certain AIFs for non-residents attracts
withholding tax in India. The
withholding tax would be set at the
‘rates in force’ instead of the current
10% rate. The provision would allow
non-residents to access beneficial
rates in tax treaties.
Other amendments:
Implementation of general antiavoidance rules (GAAR)
The government reinforced its intent
to introduce GAAR effective April 1,
2017.
Place of effective management
(POEM)
The implementation of POEM rules
which lay out tests for determining the
tax residency of foreign companies,
has been deferred by one year to
address certain concerns in respect of
its implementation. POEM would
apply beginning April 1, 2016, under
the proposed budget.
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The takeaway
The proposed budget consolidates the
government's pro-growth agenda
through economic liberalization, while
remaining committed to developing
long-term investment and job
opportunities.
foreign investors and MNEs. Tax
payers will welcome further clarity on
proposals such as the equalization
levy as well as additional guidance on
matters such as indirect transfers in
the coming months.
The government has taken numerous
steps to address pressing concerns of
Let’s talk
For a deeper discussion of how this might affect your business, please contact:
International Tax Services – United States
Chengappa Ponnappa
+1 (646) 313-0080
[email protected]
Pranav Raval
+1 (646) 335-4859
[email protected]
International Tax Services – India
Dwarak Narasimhan
International Tax Services Leader, India
+91 (80) 4079-6003
[email protected]
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