UNION BUDGET 2012- INTERNATIONAL TAXATION PROVISIONS

Tax Rates Remain Unchanged


  • The corporate tax rates remain unchanged at 40% for a foreign company.
  • The surcharge applicable on companies with total income exceeding INR 10 million also remains same at 2% for Foreign Companies.
  • Similarly Education Cess and Secondary Higher Education Cess continue to be levied at 2% & 1% respectively.

 

Withholding Taxes

  • On Interest

Section 115A (ii) which provides for withholding of tax on interest paid to non residents on External Commercial Borrowings (i.e borrowings in Foreign Currency) has been reduced from 20% to 5%(plus applicable surcharge and cess) for certain specific sectors1 for a period of 3 years2.

It is further proposed to insert a new section 194LC to provide that interest income paid by such specified company1 to a nonresident shall be subjected to tax deduction at source at the rate of 5% (plus applicable surcharge and cess).

This amendment will take effect from 1st July, 2012.

On Royalty

  • Royalty paid to non residents is subject to withholding to tax at the rate of 10% as per section 115A;
  • Section 9(1)(vi) that any income payable by way of royalty in respect of any right, property, or information shall be deemed to accrue or arise in India;
  • The definition of royalty is provided in explanation 2 to section 9 of The Income Tax Act. The definition of royalty has always been a matter of dispute, this year budget provides a clarification explanation to be included in section 9(1)(vi) by way of retrospective amendments from 1st June, 1976 will accordingly apply in relation to the assessment year 1977-78 and subsequent assessment years..
  • The explanation has been included to target payments towards shrink-wrap and embedded software, online databases and data clouds, which have been disputed before Indian tax courts in the past (except data clouds) and include them within the ambit of ‘royalty’.
  • The proposed explanation seeks to include that “consideration for use or right to use” of computer software is royalty, by clarifying that it includes and has always included transfer of all or any right for use or right to use a computer software (including granting of software) irrespective of the medium through which it is transferred.
  • Further explanation has been included that royalty includes “consideration in respect of any right, property or information whether or not”:

(a)  The possession or control of such right, property or information is with the payer;

(b) Such right, property or information is used directly by the payer;

(c)  The location of such right, property or information is in India.

  • The term “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber or by any other similar technology, whether or not such process is secret.  The impact of this is that non-resident broadcasters could be required to pay tax on royalty in India on account of providing services in India.

On Non Resident Sportsmen Or Sports association

Section 115BBA which provides for withholding of tax on payment made to non-resident and non citizen sportsmen or sports association has been raised from 10% to 20% of the gross receipts.

It is further proposed to amend section 115BBA to provide that income arising to a non-citizen, non-resident entertainer (such as theatre, radio or television artists and musicians) from performance in India shall be taxable at the rate of 20% of gross receipts.

On payment made By One Non Resident to Another( Reversal of Vodafone Case)

The recent Supreme Court judgement set out that a requirement of tax presence was necessary for imposing a withholding tax obligation. The decision has been nullified by retrospective amendment in the statute, the budget proposes to tax on indirect transfers of Indian entities by non residents.

The changes made to tax indirect transfers are:

Meaning of Property

As per section 2(14) “capital asset” means property of any kind held by the assessee whether or not connected with his business or profession except stock in trade, consumable stores or raw material held for the purposes of his business or profession.

 

“Both the Bombay High Court and the Supreme Court held in Vodafone that “controlling interest” is not a capital asset”.

The Finance Bill proposes to add the following Explanation and the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April 1962, namely:

“Explanation– For the removal of doubts, it is hereby clarified that ‘property’ includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.”

Meaning of Transfer

As per section 2(47) transfer means any sale, exchange, extinguishment or relinquishment of rights.

“Revenue’s primary case in Vodafone in the Supreme Court was that there was an “extinguishment” under this provision. It was inserted by Parliament to widen the scope of section 2(47) in order to cover transactions in which there is no sale in the ordinary sense. Although section 2(47) does not so provide, it is submitted that it is not open to the Revenue to invoke “extinguishment” in a transaction in which there is admittedly a sale, simply because that sale is not taxable. The Chief Justice’s implicit approval of this proposition is, it is submitted, to be welcomed.

The Finance Bill proposes to add the following Explanation and the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April 1962, namely:

Explanation – For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed always to have included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company incorporated outside India.”

Scope of Income Deemed To accrue or arise in India

Section 9 contains provision for Income to accrue or arise in India. It is a legal fiction created to tax income which may or may not accrue or arise in India.

Sub clause (1)(i) provides for income accrue or arises in India directly or indirectly, through the transfer of a capital asset situate in India.

“The Supreme Court held in Vodafone that the words “directly or indirectly” do not qualify the transfer of the asset.”

The Finance Bill proposes to add the following Explanation and the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April 1962, namely:

1. “Explanation – the expression ‘through’ shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.

2. “ Explanation–          to clarify that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

 

  • Further Amended section 195(1) to clarify that obligation to comply with sub-section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident has:-

(a) a residence or place of business or business connection in India; or

(b) any other presence in any manner whatsoever in India.

  1. The specified company shall be an Indian company engaged in the business of –

i.      construction of dam,

ii.      operation of Aircraft,

iii.      manufacture or production of fertilizers,

iv.      construction of port including inland port,

v.      construction of road, toll road or bridge;

vi.      generation, distribution of transmission of power

vii.      construction of ships in a shipyard; or

viii.      developing and building an affordable housing project as is presently referred to in section 35AD(8)(c)(vii).

This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the Assessment Year 2013-14 and subsequent assessment years.

  1. It is proposed to amend Section 115A of the Income Tax Act to provide that any interest paid by a specified company to a non-resident in respect of borrowing made in foreign currency from sources outside India between 1st July, 2012 and 1st July, 2015, under an agreement, including rate of the interest payable, approved by the Central Government, shall be taxable at the rate of 5% (plus applicable surcharge and cess).