Under the ITA, a foreign company is liable to income tax in India on income received or deemed to be received in India or income accruing or arising in India or deemed to accrue or arise in India.
Income deemed to accrue or arise in India would include:
An asset or capital asset being any share or interest in a foreign company is deemed to be situated in India if it derives its value, directly or indirectly, substantially from assets located in India.
Accordingly, any indirect transfer of such shares would also be taxable in India. To provide clarity, the criteria for when such taxation would be triggered has been laid down from FY 2015-16 onwards. The criteria are as follows:
*As mentioned above, there is an exemption from indirect transfer provisions applied to Category-I or Category-II FPIs under the SEBI Act. With SEBI coming up with SEBI (FPI) Regulations, 2019, it has been provided for the current exemption to be grandfathered and protected.
*Furthermore, a similar exemption is proposed to be extended to investments by only Category-I FPIs under the SEBI (FPI) Regulations, 2019
In case non-residents have a business connection or PE(Permanent Establishment) in India, income attributable to such business connection or PE would be taxable in India at the rate of 40% (plus applicable surcharge and Health and education cess).
However, while calculating the taxable income, a deduction for expenses incurred for earning such income and some part of general administrative expenses are allowed as an expense.
In line with ongoing international discussions, ‘Income attributable to the operations carried out in India,’ has been defined as:
The business connection includes any business activity carried out by a non-resident through a person acting mainly or wholly on their behalf. Furthermore, keeping in mind the challenges of taxation in a digital economy, the Finance Act, 2018 has introduced the concept of ‘Significant Economic Presence’ (SEP) for business connections in India. This relates to virtual business connections of non-residents in India without any physical presence. PE means some presence in India in the form of a fixed place, employee presence, and more through which business activities are carried out in India by the non-resident. Where a non-resident constitutes a business connection or PE in India, it is required to carry out compliances as expected of a domestic company (i.e., maintaining books of accounts, getting accounts audited, various regulatory filings, etc.)
Presently, SEP of a non-resident in India constitutes ‘business connection’ in India. The threshold to determine SEP of a non-resident is given below:
As mentioned earlier, if a foreign company has a PE in India, the tax authorities may try to subject that company to the provisions of MAT– this view of the tax authorities may, however, be subject to litigation.
Finance Act 2021 has stated that the goodwill of a business or a profession is not a depreciable asset and hence the same is not eligible for depreciation. However, it has been stated that the cost of such goodwill will be allowed as a deduction as and when such goodwill is sold/transferred.
Before the Finance Act, 2015, the presence of a fund manager in India was deemed to constitute a business connection in India even though the fund manager was an independent person. Thus, when a manager located in India undertook any fund management activity with respect to investments outside India for an offshore fund, the profits earned by the fund from such investments could be liable to tax in India.
In the Finance Act, 2015, it was clarified that the presence of a fund manager in India would not give rise to a business connection/PE in India with respect to offshore funds subject to the fulfillment of specific conditions and compliances by both the offshore fund and the fund managers.
With a view of introducing a relaxation, for calculating the aggregate investment, a provision was made to exclude the contribution of fund managers during the first three years up to INR 250 million.
For funds which are incorporated during any relevant previous year, it is proposed to extend the applicability of the monthly average of the corpus to INR 1,000 million, to be fulfilled within twelve months from the last day of the month of its establishment.
As stated earlier, the ITA also provides for a mechanism wherein income in the case of specified businesses, such as shipping, aircraft, civil construction, etc. is computed on a presumptive basis, which results in a lower effective tax rate.
However, the interest from foreign currency loans and any long-term bonds would be taxable at a concessional rate of 5% (plus applicable surcharge and Health and education cess) provided the loan or bonds are acquired during a specified period and subject to specified conditions. Furthermore, the said concessional rate of 5% (on the interest income of such bonds) would apply even if the non-resident does not have a Permanent Account Number (PAN) in India. The benefit of 5% taxation has also been extended to interest earned from Rupee Denominated Bonds.
However, with respect to the above, where a beneficial rate/provision is prescribed under any treaty entered into by India with a foreign country, a non-resident can claim such beneficial rate/provision subject to conditions mentioned under the treaty with the respective country.
An equalization levy of 6% shall be charged on the amount of consideration for any ‘specified service’ received/receivable by the non-resident person from a person resident in India and carrying on business or profession; or from a non-resident having a PE in India. The term ‘specified service’ means an online advertisement, any provision for digital advertising space, or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this regard.
The equalization levy shall not be charged where the non-resident providing the specified service has a PE in India, and the specified service is effectively connected with such PE, or the aggregate amount of consideration does not exceed INR 100,000 in the previous year, or the payment made is not for the purpose of carrying out business or profession of the taxpayer.
Specific exemptions provided under Section 10 (50) of the ITA for income arising from any specified service is prescribed in this ‘Equalization Levy’ chapter. This chapter has become effective from 1 June 2016.
The Finance Act, 2020 has extended the scope of equalization levy, and the new amendments to the same are as follows:-
|Quarter Ending||Due date for the quarter|
|30 June||7 July|
|30 September||7 October|
|31 December||7 January|
|31 March||31 March|
It is also provided that income arising from e-commerce supply or services chargeable to the equalization levy (not being income which is already chargeable to tax as royalty/fees for technical services read with the relevant tax treaty) would now be exempt under Section 10(50) of the Income Tax Act, 1961.