This article is written by Virendra Yadaorao Ramteke, pursuing Diploma in International Business Law from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction

The Indian Finance Minister recently presented the Union Budget 2021-22 (Budget 2021) against the backdrop of a challenging economic environment due to COVID-19. In view of India’s tax reform measures to date, Budget 2021 maintains the same overall tax structure but contains several measures that aim to attain tax certainty, facilitate tax administration, and reduce tax disputes. Multinational entities should analyse the impact of key Budget proposals on their operations, including a helpful provision to create a new board for advance rulings. 

Ease of doing business remains a government priority. The Budget continues to encourage investments and contains plans for privatization of public sector undertakings and monetization of infrastructure assets.

This article highlights key Budget 2021 tax proposals affecting foreign investors and multinational entities doing business in India. Budget proposals take effect once both houses of Parliament pass them and Presidential assent is accorded.

India Budget 2021 : impact on foreign investors and multinationals

Multinational entities should analyse the impact of key Budget proposals on their operations, including a helpful provision to create a new board for advance rulings. Ease of doing business remains a government priority. The Budget continues to encourage investments and contains plans for privatization of public sector undertakings and monetization of infrastructure assets. This insight highlights key Budget 2021 tax proposals affecting foreign investors and multinational entities doing business in India. Budget proposals take effect once both houses of Parliament pass them and Presidential assent is accorded.

No change in tax rates for companies, limited liability partnerships and firms 

Income tax rates (including surcharge and cess) for companies (domestic and foreign), firms, and limited liability partnerships remain unchanged, including the rates for minimum alternate tax and alternate minimum tax. 

The concessional withholding tax rate on interest, dividends paid to foreign portfolio investors (FPIs)

Budget 2021 proposes that the withholding tax (WHT) rate on interest and dividends paid to FPIs shall be in accordance with the rates provided in the relevant tax treaty or the rates prescribed under the Indian Income tax Act, 1961 (Act) whichever is more beneficial to the FPI. Previously, the WHT rate on interest and dividends paid to FPIs was prescribed as 20%. Budget 2021, however, proposes that FPIs could obtain a lower treaty WHT rate, subject to documentation.

Digital tax : rationalization of equalization levy (EL) provisions 

In order to clarify the existing provisions relating to EL chargeable on consideration receivable by non-residents; 

Budget 2021 proposes the following amendments: 

• Payments taxable as royalties or fees for technical services under the Act read with the tax treaty will not be subject to the EL provisions. 
• Income earned by nonresidents from e-commerce supplies or services that are subject to EL has been exempted from corporate income tax, effective April 1, 2020 (the previous effective date was April 1, 2021). 
• The proposed definitions of ‘online sale of goods’ and ‘online provision of services’ include various online activities – namely, accepting offers, placing and accepting purchase orders, and paying consideration. 
• E-commerce supply or services are to include consideration for the sale of goods and provision of services, even where goods are not owned, or services are not provided by an e-commerce operator.

Rationalization of minimum alternate tax (MAT) provisions 

Budget 2021 proposes that, for the purpose of computation of MAT, any dividend income of a foreign company that is taxable at a rate lower than 15% shall be excluded from book profits when computing MAT. Similarly, any expenditure incurred by a foreign company while earning dividend income shall be added back to compute the book profits. Further, in cases where past-year income is taxed in a financial year pursuant to an advance pricing agreement (APA) or secondary adjustment, book profits of the previous years also shall be adjusted for MAT purposes. 

Reduced time limits to issue scrutiny audit notices

Budget 2021 proposes to; 

• Reduce the time limit for issuing scrutiny audit notices three months (instead of six) from the end of the tax year in which the tax return is filed; 
• Reduce the time limit for issuing income-escaping audit notices to four years from the end of the tax year (instead of seven years). However, in the case of serious tax evasion, a notice for audit may be issued up to 11 years from the end of the tax year; 
• Reduce the time limit for completing the scrutiny audit to 21 months from the end of the tax year (instead of 24 months).

Simplification of tax administration procedures

A dispute resolution committee is proposed to be formed to resolve disputes in a faceless manner for small taxpayers whose returned income is up to INR 5 million (~USD 70K) and the disputed amount is up to INR 1 million (~USD 14K). The Budget also proposes to form one or more Boards for Advance Ruling in order to make the advance ruling mechanism more effective and efficient (and replace the existing authority). 

Withholding tax on the purchase of goods

Budget 2021 proposes a new section that seeks to apply a 0.1% WHT on the purchase of goods by a buyer that has a turnover exceeding INR 100 Mn (~USD 1.3Mn), and that purchases goods from an Indian resident seller of value exceeding INR 5 Mn (~USD 70K ). The WHT shall be 5% if the resident seller fails to furnish an Indian tax ID (permanent account number).

Advance tax does not apply to dividend income

Taxpayers face a practical challenge in estimating dividend income when calculating quarterly advance tax payments. To address this, Budget 2021 proposes that no interest shall be payable for any advance tax shortfall arising from failure to estimate the dividend income. In order to benefit from this proposal, any applicable advance tax would have to be paid in subsequent instalments upon the payment or declaration of a dividend. 

‘Slump sale’ (business transfer as a going concern) to include all ‘transfer’ types

Budget 2021 proposes to extend the scope of a slump sale to cover all types of transfers undertaken by any means (including exchange of business for securities). The current definition covers transfer only through a ‘sale.’

Faceless proceedings for second-level appeal process before the income-tax appellate tribunal

Budget 2021 proposes to introduce faceless appeal proceedings before the Tax Tribunal (second-level appeal authority). This is in addition to faceless audits, the first-level appeal process, and penalty schemes that previously had been introduced. 

Exemption on re-domiciliation of offshore funds to International Financial Services Centre (IFSC)

IFSC provisions were introduced to promote and enable overseas financial services entities to set up a presence in India and undertake financial services transactions that currently are carried on outside India (an IFSC unit is treated as a non-resident). 

The Budget proposes to exempt from capital gains tax the transfer of capital assets by an offshore fund (original fund) to a resultant fund upon re-domiciliation to an IFSC before March 31, 2023. The Budget also would exempt from capital gains tax the transfer of shares or units held in the original fund in consideration for shares or units in the resultant fund. 

Budget 2021 proposes to exempt the capital gains arising on the transfer of shares of an Indian company by the resultant fund (acquired upon re-domiciliation), provided that such capital gains originally were exempt before re-domiciliation. 

Budget 2021 also proposes to allow carry forward losses of an Indian company if there is a change in beneficial shareholding with voting power on account of such re-domiciliation to an IFSC.

Other exemptions for non-residents

Budget 2021 proposes to provide the following exemptions to non-residents: 

• Any foreign enterprise income from royalties for aircraft leases paid by a unit of an IFSC that has commenced operations on or before March 31, 2024, shall be exempt from tax. 

• Any income arising to a unit of an IFSC (that has commenced operations before March 31, 2024) from the transfer of aircraft or aircraft engines shall be exempt from tax. 

Conclusion

Budget 2021 proposal aims to boost India’s economic recovery through increased investments in public as well as private sectors, self-reliance through incentives across all business segments, and improved ease of doing business. The tax proposals present a stable approach and focus on increasing tax certainty, attracting foreign investments, and improving tax administration in India. Multinational entities should assess the impact of some of the key proposals such as the rationalization to the digital tax provisions and non-availability of depreciation on goodwill. The proposal to constitute a new Board for Advance rulings is a welcome move and paves the way for speedy disposals of private ruling applications.

---

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.