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.

Tax tribunal in India rules database access fees as royalty – implications for US companies

In the case, the taxpayer (ONGC) was an Indian resident company engaged in the exploration and development of natural oil and gas. ONGC subscribed to an online database maintained by Wood MacKenzie (WM), a U.K. resident company. The subscription, which provided information on the global oil and gas industry, required ONGC to pay a fee to WM in exchange for a license agreement that provided for an exclusive and non-transferable right to access and download information from the site. No right to sublicense was granted to ONGC under the license agreement and the use of the information was limited to what was specified in the agreement. The website was only accessible by select ONGC employees and WM provided two days of training per year to 20 ONGC employees on technical issues related to oil and gas exploration.

The Indian Income tax Appellate Tribunal ruled that the fees paid by ONCG are properly characterized as royalties, for Indian tax purposes, under both Indian domestic law and the India-UK double taxation treaty. It was therefore subject to the applicable withholding tax according to the treaty.

Number of U.S. based companies provide the database subscriptions services to the users in India. They should closely study amd monitor the case as this may have deep implications for them.

Another blow to the popular structure – investment in India via Mauritius

Indian tax appeals authority has directed that the taxpayer should  provide additional evidence to substantiate residence status based on the place of effective management of a Mauritius-based company to obtain the capital gains tax exemption under the India-Mauritius treaty (SMR Investments Ltd. v. DDIT); mere certificate of residence issued by Mauritius government is not enough to claim the treaty benefits. The ruling departs from the previous view of the government as well as the Supreme Court that the benefits under the Mauritius treaty are available to a Mauritius company if the company is in possession of a certificate of residence issued by the Mauritius government.

Proposed Direct Tax Code recently tabled for discussion in Indian parliament contains the general anti avoidance rules which  would override treaty provisions in case of  impermissible arrangements. Planning for investment in India via Mauritius? Think again….