India budget proposals and foreign investors

Indian Finance Minister presented the annual budget yesterday that contains host of income tax provisions that need attention for an efficient tax planning by a foreign investor. Some of the key provisions are:

  • Royalty and technical fee paid to a foreign person is now subject to 25% withholding tax rate instead of 10%. Lower rate maybe available for the investors from treaty countries.
  • Introduction of FIRPTA kind of withholding tax – all buyers (including NRIs) of real property in India would be subject to 1% withholding tax (TDS) on the sale price of the real property. If the seeler does not have a Permanent Account Number for tax purposes, the withholding tax would be assessed at 20%
  • There was a confusion if tax residency certificate is conclusive evidence to establish residency of foreign country in order to claim treaty benefits; it has been clarified that it may not be sufficient evidence although it will be necessary
  • Mortgage interest is now allowed to be dedducted in a limited amount provided certain conditions are met
  • Direct Tax Code will be introduced prior to the end of current budget session according to the Finance Minister
  • Surcharge on foreign company’s taxable income to increase from 2% to 5% if the taxable income exceeds Rs. 100 million ($2 million)
  • Dividend distribution tax surcharge to increase from 5% to 10%; however, 15% rate on dividend received by the Indian company from its foreign subsidiary will continue for one more year

Additional information is available from CPA Global Tax professionals.

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