ACCOUNTING & TAXATION
Finance Act 2020 Analysis of International Taxation related amendments
World Moving Towards Multilateral Instrument (MLI)
Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions).
Article mainly explains Amendments vide Finance Act, 2020 relating to Residential Status, Amendment Removing Dividend Distribution Tax and Impact thereof, Incorporation of MLI and Introduction of Equalization Levy on E-Com Operators.
1. Modification of residency provisions – 120 days to substitute 182 days
The exiting provisions of section 6(1) of the Act provide for situations in which an individual shall be resident in India in a previous year. Clause (c) thereof provides that the individual shall be Indian resident in a year, if he,
- has been in India for an overall period of 365 days or more within four years preceding that year, and
- is in India for an overall period of 60 days or more in that year
Explanation 1(b) to section 6 provided that – In situation (b) above, an Indian citizen or a person of Indian origin shall be Indian resident if he is in India for 182 days instead of 60 days in that year
– Proposal of Finance Bill 2020 – the exception provided in clause (b) of Explanation 1 of sub-section (1) to section 6 for an Indian citizen or a person of Indian origin be decreased to 120 days from existing 182 days.
– Further Amendment by Finance Act 2020 – The Finance Act, 2020 has restricted the application of proposed provisions of Explanation 1(b) only to that Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means – income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
2. Modification of residency provisions – Deemed Residency for Stateless Person
The Residency Provisions as per Income Tax Act may sometime results into a Indian citizen or person of Indian origin to be non resident for all countries and resident for none. Thus, the issue of stateless persons has been bothering the tax world for quite some time.
– Proposal of Finance Bill 2020 – The Finance Bill, 2020 has proposed to insert a new clause (1A) to section 6 of the Income-tax Act to provide that an Indian citizen shall be deemed to be resident in India if he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.
Immediate CBDT Clarification – the proposed amendment relating to deemed residency and taxation of their worldwide income created huge panic and chaos amongst the Indian citizen or person of Indian origin, who are hitherto treated as non resident and not taxed in India on from their worldwide income. To avoid any misinterpretation and to give benefit to bonafide persons working in abroad, the CBDT has issued an immediate clarification on 02-02-2020 that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.
– Final Amendment by Finance Act 2020 – The Finance Act, 2020 has revamped the proposed Section 6(1A). The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). Other conditions proposed in the Finance Bill, 2020 have been kept same, inter-alia, such individual shall be deemed to be Indian resident under the new provision only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.
The residential status of such person shall of a ‘Not Ordinarily Resident’ due to new sub-clause (d) added to Section 6(6). Accordingly, he would be liable to pay tax in India on his global income except income which accrue or arise outside India.
3. Modification of residency provisions – Resident but Not Ordinarily Resident (RBNOR)
– As per Section 6, a resident individual or a Hindu Undivided Family (HUF) is deemed as Not Ordinarily Resident in India, if he satisfies any of the following conditions:
- a) Individual or Karta of HUF has been a non-resident in India for at least 9 years out of 10 years preceding the previous year; or
- b) Individual or Karta of HUF has been in India for 729 days or less during the period of 7 years preceding the previous year.
– Proposal of Finance Bill 2020 – the bill proposed to replace both the above conditions with one new condition of that an Individual/HUF shall be deemed to be Not Ordinarily Resident if he/Karta of HUF has been a non-resident in any 7 out of the 10 immediately preceding years.
– Final Amendment by Finance Act 2020 – The Finance Act, 2020 has completely overturned the proposed amendment as above. The Finance Bill proposal on this point has been omitted. The Finance Act retained the existing two situations and further added two more situations to categorize a person as RBNOR, which are: –
- a) An Indian Citizen or a person of Indian origin whose total income (other than income from foreign sources) exceeds Rs. 15 lakhs during the previous year and who has been in India for a period of 120 days or more but less than 182 days;
- b) An Indian Citizen who is deemed to be resident in India as per new Section 6(1A).
Case Study Situations: –
|Class of Individual||Total income (excluding income from foreign sources)||Minimum no. of days of stay in India during the relevant year to be considered as ‘Resident in India’||Whether liable to pay tax in any other country?||Residential Status if stay in India is less than no. of days mentioned in condition (b)|
|Indian citizen going outside India as a crew member or for employment||Not exceeding Rs. 15 lakhs||182 days||Yes||Non-resident|
|Not exceeding Rs. 15 lakhs||182 days||No||Non-resident|
|Exceeding Rs. 15 lakhs||182 days||Yes||Non-resident|
|Exceeding Rs. 15 lakhs||182 days||No||Not Ordinarily Resident*|
|Indian citizen visiting India||Not exceeding Rs. 15 lakhs||182 days||Yes||Non-resident|
|Not exceeding Rs. 15 lakhs||182 days||No||Non-resident|
|Exceeding Rs. 15 lakhs||120 days (and 365 days in last 4 years)||Yes||Non-resident|
|Exceeding Rs. 15 lakhs||120 days (and 365 days in last 4 years)||No||Not Ordinarily Resident|
|Any other Indian citizen (does not visit India during the year)||Not exceeding Rs. 15 lakhs||–||Yes||Non-resident|
|Not exceeding Rs. 15 lakhs||–||No||Non-resident|
|Exceeding Rs. 15 lakhs||–||Yes||Non-resident|
|Exceeding Rs. 15 lakhs||–||No||Not Ordinarily Resident|
|Person of Indian origin visiting India||Not exceeding Rs. 15 lakhs||182 days||–||Non-resident|
|Exceeding Rs. 15 lakhs||182 days (and 365 days in last 4 years)||–||Not Ordinarily Resident*|
|Exceeding Rs. 15 lakhs||120 days (and 365 days in last 4 years)||Yes||Non-resident|
|Exceeding Rs. 15 lakhs||120 days (and 365 days in last 4 years)||No||Non-resident|
4. Removing dividend distribution tax (DDT)
– Proposal of Finance Bill 2020 –
– Proposed to remove the concept of Dividend Distribution Tax u/s 115-O (from Companies) and 115R (From Mutual Funds etc)
– Proposal applicable to dividend received after 01/04/2020
– New regime to move to classical system of taxing dividend in the hands of shareholders/unit holders
– Now dividend not exempt in the hands of recipient u/s 10(34) and 10(35)
– Dividend taxable in the hands of the recipient as per their regular income, without any exemption ceiling
– Deduction u/s 57 can be claimed maximum upto 20% of such dividend
– Section 80M to be reintroduced – to remove the cascading effect of dividend distributed by the company a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date.
– Now TDS u/s 194 to be applicable on such dividend exceeding the limit of Rs 5000 per payee
– For Non Residents, TDS applicable u/s 195
– Further Amendment made by Finance Act, 2020 –
– Scope of Section 80M as per Finance Bill expanded – The Finance Bill, 2020 (as passed by the Lok Sabha) expanded the scope of deduction available under Section 80M to include the dividend received from a foreign company and business trust. Thus, a domestic company can claim deduction under section 80M even in those cases where dividend received from a foreign company or business trust is further distributed to shareholders within one month before the due date of filing of return.
– Rate of TDS on Dividend Distributed To a Non-Resident or Foreign Company – As per Income Tax Act, dividend is taxable at the rate of 20% in the hands of the Non Residents person or foreign company, whereas same may be taxable at the rate of 5% to 15% as per various DTAA’s.
– However, as per Section 195 TDS is to be deducted on the rates in force and in the schedule of the rates of TDS no specific rate was prescribed for Dividend, meaning thereby TDS would be applicable under the residual category where TDS rate of 40% for foreign company and 30% for other non residents.
– To clarify this position, the Part II of the First Schedule to Finance Act has been amended to provide for TDS @ 20%. However, if lower rate has been prescribed under the DTAA then same would prevail.
– Dividend received on or after 01-04-2020 shall not be taxable if DDT is already paid by the company – as per ICDS the Assessee has to offer the Dividend income for taxation on earlier of the accrue or receipt of the same. Therefore, in situations where the dividend has been declared before 01/04/2020 but received after 01/04/2020, then as per Finance Bill, section 10(34) no exemption would be available.
– To avoid, this kind of situations, the Finance Act, 2020 has further amended section 10(34) to provide that dividend received by assessee on or after 01- 04-2020 shall not be included in his income if tax has already been paid on such dividend under section 115-O or section 115BBDA, as the case may be.
5. Scope of Safe Harbor Rules and APA expanded to cover attribution of profit to PE also
– Existing provisions of Section 92CB and 92CC did not covered the cases of attribution of income in case of a non-resident person to the PE
– These cases also results into long drawn litigation between the department and the Taxpayer
– Therefore, it is proposed to it is proposed to amend section 92CB and section 92CC of the Act to cover income referred to in clause (i) of sub-section (1) of section 9e. determination of attribution income accruing or arising whether directly or indirectly through or from any business connection or any asset or source of any income in India or through the transfer pf a capital asset situated in India.
6. Section 115A – Exempting non-resident from filing of Income-tax return in certain conditions
– Proposal of Finance Bill 2020 – Presently Section 115A(5) provides that a non-resident is not required to furnish its return of income under sub-section (1) of section 139 of the Act, if its total income, consists only of certain dividend or interest income and the TDS on such income has been deducted according to the provisions of Chapter XVII-B of the Act.
This exemption did not covered the cases of Royalties, fee for technical services etc
– Therefore, it is proposed to amend section 115A of the Act in order to provide that a non-resident, shall not be required to file return of income under sub-section (1) of section 139 of the Act if, –
(i) his or its total income consists of only dividend or interest income as referred to in clause (a) of sub-section (1) of said section, or royalty or FTS income of the nature specified in clause (b) of sub-section (1) of section 115A; and
(ii) the TDS on such income has been deducted under the provisions of Chapter XVII-B of the Act at the rates which are not lower than the prescribed rates under sub-section (1) of section 115A.
Further Amendment by Finance Act 2020 – Clause (BA) of Section 115A has been substituted to provide for three types of incomes received by a non-resident person shall be taxable at the rate of 5%:
(iii) Interest received from an infrastructure debt fund as referred to in section 10(47);
(iv) Interest of the nature and extent as referred to in section 194LC or section 194LD;
(v) Interest paid by a business trust under section 194LBA (2).
7. Amendment in definition of ‘Royalty’
– Proposal of Finance Bill 2020 – Clause (vi) of sub-section (1) of section 9 deems certain income by way of royalty to accrue or arise in India. Explanation 2 of said clause defines the term “royalty” to, inter alia, mean the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films
– Due to exclusion of consideration for the sale, distribution or exhibition of cinematographic films from the definition of royalty, such royalty is not taxable in India even if the DTAA gives India the right to tax such royalty. Such a situation is discriminatory against Indian residents, since India is foregoing its right to tax royalty in case of a non-resident from another country without that other country offering similar concession to Indian resident.
– Hence, it is proposed to amend the definition of royalty so as not to exclude consideration for the sale, distribution or exhibition of cinematographic films from its meaning.
– Further, amendment by Finance Act, 2020 – the Government has reduced the rate of tax deduction to 2% on royalty income arising to a person by way of sale, distribution or exhibition of cinematographic films u/s 194J..