The Finance Minister of India presented the Finance Bill 2013 before the Parliament on February 28, 2013. This ITSNewsalert presents a brief overview of the key income-tax proposals made in the Bill that may have an impact on foreign companies.
Corporate Tax rate
The corporate tax rate for foreign companies remains unchanged at 40%. However, surcharge has been increased from 2% to 5% for large companies having income more than INR 100m (equivalent to USD 1.8m). The education cess of 3% on the sum of tax and surcharge continues to apply. The rate of tax after considering income-tax, surcharge and education cess will be 43.26% for large companies and 42.02% for other companies.
Distribution tax on buy-back of unlisted shares
A distribution tax of 20% will be levied on distributed income by an unlisted domestic company on a buy-back of shares. Distributed income is calculated by subtracting the issue price of the shares realised by the company from the buy-back price paid by the company for the acquired shares. This tax is on similar lines to the Dividend Distribution Tax. At the level of shareholders, capital gains from the disposal of the shares are tax exempt. Thus treaty benefits on capital gains have been neutralised.The provisions would be applicable with effect from June 1, 2013.
Increased tax rate for royalty and fees for technical services
The tax rate on royalties and fees for technical services are proposed to be increased to 25% as against the current rate of 10% under the domestic tax law of India. The proposed tax rate shall apply on any payment under old and new agreements. The tax rate is subject to treaty benefits.
“Indirect” transfer of shares
Finance Act 2012 inserted the provisions for a taxation of indirect transfers of shares of an Indian company with retroactive effect from the year 1961. The Expert Committee set up by the Government recommended that such provisions should not be made retroactively. However, no changes are proposed in the Finance Bill 2013 with respect to indirect transfers based on the recommendation of the Expert Committee.
Provisions relating to tax treaties
The Finance Bill 2013 proposes that a Tax Residency Certificate (TRC) is necessary but not sufficient to claim treaty benefits. Due to the language of the proposed provision, some concerns have come up that a TRC produced by a foreign company could be questioned by the tax authorities in India. After that, the government issued a press release on March 1, 2013 stating that a TRC produced by a foreign company will be accepted as evidence for resident status and the tax authorities in India will not question the residential status. However, since concerns have come up about the language of the proposed provisions, these will be addressed when the Finance Bill 2013 is taken up for consideration in the Parliament.
General Anti-Avoidance Rule
General Anti-Avoidance Rule (GAAR) provisions were introduced by the Finance Act 2012 to be applied from financial year 2013/2014 onwards. Under GAAR provisions, an arrangement whose main purpose or one of the main purposes is to obtain a tax benefit and which also satisfies certain other conditions could be declared an Impermissible Avoidance Arrangement.Based on various concerns against the GAAR provisions, an expert committee was set up. The committee submitted its report in September 2012 giving certain recommendations. The Bill proposes to defer the implementation of GAAR to two years. Accordingly, they will apply from financial year 2015/2016 onwards.
It may be noted that the proposals made in the Finance Bill 2013 are yet to be enacted. It is expected that the Finance Bill 2013 may be enacted by the Parliament in a couple of months. The Parliament has the right to make changes to the proposals before enacting the Bill.