The Indian Government has responded to investor concerns raised on the back of the Budget 2013 proposals and interalia has continued to ease foreign debt investments in India through key amendments to the Finance Bill, 2013. Read our analysis of the proposals introduced in the Finance Bill, 2013 in our India Budget Insights (2013-14).
The Finance Bill, 2013 which was proposed on February 28, 2013 was passed by the lower house of the Indian Parliament on April 30, 2013 with several amendments to the proposed bill. The most significant amendment is the roll-back of the tax residency certificate ("TRC”) related provisions introduced by the Finance Bill, 2013 which provided that TRC would be a necessary but not sufficient condition for claiming relief under a tax treaty. Additionally, the Government has extended lower withholding tax benefits to interest income earned by the Foreign Institutional Investors ("FIIs”) and Qualified Foreign Investors ("QFIs”) from rupee denominated bonds. Another key amendment was the doing away of the requirement ot provide Permanent Account Number ("PAN”) for availing of lower withholding rate under Section 194LC of the ITA. Please see a detailed discussion on the amendments to the Finance Bill, 2013 in the following paragraphs.
EASING TRC RELATED FEARS
The Finance Bill, 2013 sought to introduce a new provision to provide that a TRC even if in the prescribed format would only be a necessary but not sufficient condition for claiming benefits under the relevant tax treaty. This caused a lot of apprehension amongst foreign investors as the new provision gave arbitrary powers in hands of the tax authorities to disregard the TRC and deny treaty benefits to foreign investors. Heeding to investors' concerns, the Government, has supplanted this provision with the requirement to provide such other documents and information as may be prescribed. Additionally, the requirement for the TRC to contain prescribed particulars, introduced vide Finance Act, 2012 has been taken back, such that a TRC issued by any foreign government as per its domestic laws should suffice for claiming treaty benefits.
FIIs and QFIs provided lower withholding on Indian debt
Further easing debt investment regime in India1, the Government has introduced a new provision (Section 194LD) through which interest payments made to Foreign Institutional Investors (FIIs) and Qualified Financial Investors (QFIs) on or after June 1, 2013 but before May 31, 2015 on (i) rupee denominated bonds of an Indian company; , and (ii) a Government security would be subject to a tax at the rate of 5%, instead of the ordinary rate of 20%. However, the lower withholding rate would be applicable only on interest paid on bonds whose interest rates do not exceed the rate as specified by the Central Government in this regard.
The Government has also taken back the amendment proposed to Section 194LC whereby foreign currency routed through designated accounts by non-residents for investment in long-term infrastructure bonds will not be entitled to the concessional rate of tax.
Facilitating investments in foreign currency borrowings
The Finance Bill, 2012 had introduced Section 194LC in the ITA through which interest payments made on foreign currency denominated long term infrastructure bonds and loan agreements in foreign currency were afforded a lowered 5% rate of tax. This lowered rate was subject to production of PAN on account of Section 206AA of the ITA. Section 206AA provides that where the details of PAN of the payee have not been provided, tax would be withheld at the rate of 20% irrespective of any beneficial rate available on such payment.
However, vide an amendment to the Finance Bill, 2013 Government has exempted persons receiving interest payments under Section 194LC of the ITA from having to produce a PAN in order to obtain the lowered rate of tax. This should go a long way in easing operational costs for foreign investors providing foreign currency loans to Indian persons.
Commodities derivative transaction not a speculative transaction
The Government also issued a series of amendments clarifying the status of commodities transactions, in the context of the imposition of commodities transactions tax vide the Finance Bill, 2013. Under Indian law, transactions not involving spot delivery goods (and specifically securities) are treated as speculative transactions and losses arising from speculative businesses are allowed to be set off only against income from speculative businesses. The Government has proposed to amend Section 43(5) of the ITA to provide that any 'eligible transaction' in respect of commodity derivatives executed on a recognized association shall not be considered a speculative transaction. As a consequence, going forward, businesses engaged in commodities trading would be able to set off losses from commodity derivative transactions against income from other businesses.
Time limit for completing assessments in case of TPO reference
Finance Act, 2012 had introduced a provision whereby the time limit for completion of an assessment, where the matter has been referred to a Transfer Pricing Officer ("TPO") was extended to three years (from the year in which the income was first assessable) as opposed to two years, in cases where (i) reference has been made on or after July 1, 2012, or (ii) reference has been made before July 1, 2012 but an order has not been passed before that date. Finance Bill, 2013 has been amended to provide that the time lines for any assessment where a reference has been made to the TPO shall be three years.
Conclusion and Analysis
The amendments made to the Finance Bill, 2013 should provide some amount of comfort to foreign investors who will not only appreciate the removal of detrimental language in the ITA regarding the availability of tax treaty benefits, but will also be pleased with the reforms relating to beneficial tax rates in case of interest payments on bonds. The amendments proposed demonstrate the Government's commitment towards promoting the QFI route for investment into India. However, what would be particular interest is framing of the rules with respect to provision of information in relation to claiming treaty benefits. It is possible that the tax authorities may use this power to unnecessary hassles for foreign investors, where the rules provide wide discretionary powers to the tax authorities in this regard.
The Finance Bill, 2013 will now be tabled in the upper house of the Indian Parliament (the Rajya Sabha) for voting, post which it will be signed into law by the President of India. There appears to be little chance of any further modifications being made to the Finance Bill, 2013 at this stage, however, the amendments seem to suggest a more responsive government that not too long ago was accused of being in a state of 'policy paralysis.'