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Indian Government has widened the scope of equalization levy to include “e-commerce supply or services” provided by a non-resident e-commerce operator, under its purview. A non-resident e-commerce operator is required to pay 2 per cent equalization levy on value of e-commerce supply or service, on quarterly basis. Such non-residents are also required to file an annual statement in India.
To facilitate the payment of equalization levy, the tax authority has amended the payment challan “ITNS 285”. This challan requires non-resident e-commerce operator to mandatorily quote the India tax registration number (i.e., Permanent Account Number or PAN), without which tax payment cannot be processed.
Given the wide definition of the key terms used in the extended scope, it is important for all non-resident companies to carefully assess the impact of widened scope of equalisation levy on their business operations with India especially where use of digital means are involved.
For detailed information regarding equalisation levy, read more>>
India has been an active participant of OECD Base Erosion and Profit Shifting (BEPS) project. It deposited its Multilateral Instrument (“MLI”) ratification document with OECD on 25 June 2019. The MLI came into force in India from 1 October 2019 and will be effective from 1 April 2020.
It shall impact various tax treaties with European counties like Austria, Belgium, Finland, France, Ireland, Luxembourg, Malta, Netherlands, Poland, Slovenia and Sweden [who have deposited their instruments of ratification before 30 June 2019]. Also tax treaties with Non-European countries like Australia, Japan, Italy, Singapore, UK etc.would also be impacted with effect from 1 April 2020.
Since the MLI does not modify all tax treaties uniformly, taxpayers need to undertake a country by country matching exercise to check the impact, inter-alia:
The synthesized tax treaty texts which have been released by the Indian Government would be a useful tool for this purpose.
India-Austria had signed protocol in February 2017, to amend its tax treaty to broaden the scope of exchange of tax related information, which will help in curbing tax evasion/avoidance and enable mutual assistance in collection of taxes. On 24 April 2020, Indian Government notified that all the provisions of the said amending Protocol, shall apply with effect from the 1 May 2020 (entry into force).
The Protocol replaces Article 26 on Exchange of Information (“EOI”) which now provides that the Competent Authorities (“CAs”) of the contracting States shall exchange such information relevant for implementing the provisions of this Convention or for administration or enforcement of the domestic laws concerning taxes.
The Protocol inserts new Article 26A on Assistance in the Collection of Taxes, which provides that the Contracting States shall assist each other in collecting taxes to ensure that the benefit of any exemption or reduced rate of tax granted under this Convention is not enjoyed by persons not entitled to such benefits. The CAs of the Contracting States may by mutual agreement settle the mode of application of this Article.
The Indian Government vide Finance Act (“FA”), 2020 had inserted Section 115BAC Income-tax Act, 1961 (“ITA”) which provides for alternate (concessional) rates of tax for individual subject to “forgoing” certain exemptions and deductions.
It has now been clarified vide Circular no. C1/2020 dated 13 April 2020 that employee (having income other than income from business or profession) can intimate their employer whether they wish to opt for the concessional tax rate or not. If the employee does not intimate the employer, the employer should withhold taxes without considering the concessional tax rate.
The intimation given by the employee would be only for the purpose of withholding of taxes for that year. The employee can change their preference of tax rates at the time of filing of their tax return in India for that Financial Year (“FY”) (period from 1 April to 31 March).
The Indian Government has further clarified vide Notification no. 38/2020 dated 26 June 2020 that the individuals having salary income opting for concessional tax rate shall be eligible for the following allowances :
However, no exemption shall be given for free food and non-alcoholic beverages provided by employer via paid voucher to an employee opting for concessional tax rate. Section 115BAC ITA is applicable from FY 2020-21.
The scope of taxability of an individual in India is dependent on their tax residential status in India in a FY. An individual may either qualify as a resident or non-resident or not ordinarily resident depending upon the duration of their stay in India during a FY or past FYs.
Instances had been brought to the notice of the Indian Government wherein many individuals who had come on a visit to India during FY 2019-20 for a particular duration and intended to leave India before 31 March 2020 but were forced to extend their stay in India due to declaration of the lockdown and suspension of international flights by the Indian Government owing to covid-19 outbreak. Such extra stay in India may impact the residential status of these individuals in India and in turn their taxation in India for FY 2019-20.
To avoid genuine hardship in such cases, the Indian Government vide Circular No. 11 of 2020 dated 8 May 2020 clarified that the following period shall be excluded while determining the residential status of individual for FY 2019-20 who have come to India on a visit before 22 March 2020:
Further, the Indian Government, by way of a Press Release dated 8 May 2020, has clarified that a similar circular for determining residential status of individuals for FY 2020-21 shall be issued in due course.
In order to provide more liquidity at the disposal of the taxpayers during these difficult times, the Government vide Press Release dated 13 May 2020 announced reduction in the rates of Tax Deduction at Source (“TDS”) for non-salaried specified payments made to residents and rates of Tax Collection at Source (“TCS”) for specified receipts by 25 per cent of the existing rates.
New reduced rates are applicable between the period of 14 May 2020 to 31 March 2021. Therefore TDS/TCS at such reduced rates on the specified payments to residents is to be deducted and deposited for the period of 14 May 2020 to 31 March 2021.
Most importantly, payment to residents for contract, professional fees, rent, interest, commission, etc. are eligible for this reduced rate of TDS. Relaxation is not applicable for payment to residents, where PAN/Aadhaar is not furnished.
The Indian Government in March 2020, in efforts to combat the challenges faced by taxpayers due to the spread of covid-19, had announced various relaxation norms in order to ease the tensions of missing deadlines under various statutory laws including Income Tax, Goods and Service Tax (GST)/Indirect Tax, Customs, etc.
The Indian Government has decided to further extend the due dates for various compliances for the FY 2019-20 and FY 2020-21 (Notification No. 35/2020, dated 24 June 2020).
Some of the important timelines extended are given below:
The Indian Government clarified that the reduced rate of interest of 9 per cent on delayed payments of taxes, levies, etc. shall not be applicable for payments made after 30 June 2020.
A new provision i.e. Section 269SU of ITA , was inserted vide the Finance (No. 2) Act 2019 requiring every person carrying on business and having sales/turnover/gross receipts from business of more than INR 500 million ("specified person") in the immediately preceding FY to mandatorily provide facilities for accepting payments through prescribed electronic modes.
In December 2019, Indian Government prescribed three (3) electronicmodes for accepting payments vide Notification no. 105/2019 dated 30 December 2019.
The Government has now issued a clarification vide Circular no. 12/2020 dated 20 May 2020 wherein a specified person is exempted from providing such electronic modes if:
This exemption has been introduced to avoid administrative inconvenience and additional costs to such B2B businesses as the prescribed electronic modes have a maximum payment limit per transaction or per day and B2B businesses generally receive large payments through other electronic modes of payment such as National electronic fund transfer (“NEFT”) or Real Time Gross Settlement (“RTGS”).
The Direct Tax–Vivad se Vishwas Act, 2020 or DT-VsV Act is an Act for settlement of tax disputes between the taxpayer and the tax authority to achieve fast track closure of pending appeals concerning direct taxes. The objective is to reduce the time, energy and resources both on the part of the Government as well as taxpayers.
Earlier, Government of India vide Circular no. 7/2020 dated 4 March 2020 had issued 55 Frequently Asked Questions (FAQs) to provide clarity to the tax payers on several open issues emanating from DT–VsV Act. Recently, Government of India vide Circular no. 9/2020 dated 22 April 2020 has reissued the 55 FAQs with some modification to clarifications pertaining to prosecution cases. As per the modified FAQs, it has been clarified that where only notice for initiation of prosecution has been issued, the taxpayer is eligible to file declaration under DT–VsV Act. However, if the prosecution has been instituted for a particular year then taxpayer cannot file declaration under DT–VsV Act, unless prosecution is compounded before filing of declaration.
Further, due to covid-19 pandemic, the due date for filing a declaration under DT–VsV Act has been extended from 30 June 2020 to 31 December 2020.
Indian Government vide F.No. 380/1/2020-IT(B) dated 8 May 2020 has released an interim action plan for first quarter of FY 2020-21 emphasizing that "no communication with the taxpayer having adverse effect on him/her is to be done during this period till fresh guidelines" are issued by the Board.
Pursuant to amendment brought in by FA, 2020, Indian Government vide notification no. 30/2020/F dated 28 May 2020 has notified a new Form 26AS [Annual Information Statement]. The revised Form 26AS, apart from the withholding tax details, shall now contain information relating to taxpayer’s specified financial transaction, pay¬ment of taxes, tax demand/tax refund details and pending/completed tax proceedings details. Taxpayer can reconcile their tax status with the records of Indian tax departments for taking any remedial action. Information mentioned therein will also be required to be considered while undertaking the India tax compliances .
The Authority for Advance Rulings (“AAR”) [(2020) 116 taxmann.com 878] in the case of Tiger Global International II Holdings (“Tiger Global”) has rejected the application of the taxpayer (a Mauritian Company) for exemption of capital gains tax under India-Mauritius Tax Treaty on indirect transfer of shares. Tiger Global had transferred the shares of a Singapore Company which derived substantial value from assets in India and applied for a nil withholding tax certificate from the Indian tax authority.
Post rejection of the application for nil tax withholding certificate, it filed an application before the AAR to determine whether such transfer is taxable in India. The AAR rejected the Tax Officer’s contention that the application was inadmissible on the ground of pendency of proceedings of nil withholding certificate and that the question involved was the determination of fair value. AAR held that an order passed in respect of nil tax withholding certificate does not decide the final tax liability and hence, it does not bind the jurisdiction of the AAR to proceed with the application.
However, the AAR held that the control and management of Tiger Global was located outside Mauritius and thus, ruled that the Taxpayer was see-through entity whose ultimate owner and beneficiary was a US resident. Given this, the AAR rejected the admission of application of Tiger Global on the ground that the entire arrangement was designed prima facie to avail only the benefit of India-Mauritius Tax Treaty and, ultimately for avoidance of tax. The AAR also clarified that at the stage of admission of application, the requirement is not to conclusively establish that there was tax avoidance; rather, it has to be demonstrated that prime facie the transaction was designed for avoidance of tax.
India had introduced provisions for taxing indirect transfer of shares vide FA 2012 which sought to tax a capital asset being shares or interest in a com¬pany or entity registered or incorporated outside India deriving, value directly or indirectly, substantially from assets located in India. Subsequently, amendments were made vide FA 2015 clarifying certain terms like (i) the meaning of ‘substantial’; (ii) small shareholder exemption; and (iii) determining capital gains attributable to India.
Recently, AAR (AAR nos. 1555 to 1564 of 2013) pronounced a ruling in the case of a British Virgin Islands based company that amendments brought vide FA 2015 are machinery provisions to make the provisions relating to indirect transfer effective and hence, should be applied retroactively. The AAR further accepted the argument of the taxpayer relating to situations where there is an ambiguity in the interpretation of law, if any amendment is proposed by the parliament subsequently, it should be considered as remedial in nature to remove unnecessary hardship to taxpayers and hence, should be applied retrospectively.
Martin Wörlein
Partner, Head of India practice
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