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).

– Preamble Clause of the MLI
Purpose of a Covered Tax Agreement

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.

International Taxation

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,-

a) has been in India for an overall period of 365 days or more within four years preceding that year, and

b) 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)
	(a)	(b)	(c)	(d)
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.

8. Modification in conditions for offshore funds’ exemption from “business connection”

– Section 9A of the Act provides for a special regime in respect of offshore funds by providing them exemption from creating a “business connection” in India on fulfilment of certain conditions.

– Section 9A proposed to be amended, to amend: –

Existing Conditions	Proposed Conditions
Aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed five per cent of the corpus of the fund	For the purpose of calculation of the aggregate participation or investment in the fund, directly or indirectly, by Indian resident, contribution of the eligible fund manager during first three years up to twenty-five crore rupees shall not be accounted for
where the fund has been established or incorporated in the previous year in which case, the corpus of fund shall not be less than Rs 100 Crore at the end of a period of six months from the last day of the month of its establishment or incorporation, or at the end of such previous year, whichever is later.	if the fund has been established or incorporated in the previous year, the condition of monthly average of the corpus of the fund to be at Rs 100 Crore shall be fulfilled within 12 months from the last day of the month of its establishment or incorporation.

9. Section 94B – Excluding interest paid or payable to PE of non-resident Bank

– Section 94B of the Act, inter alia, provides that deductible interest or similar expenses exceeding one crore rupees of an Indian company, or a permanent establishment (PE) of a foreign company, paid to the associated enterprises (AE) shall be restricted to 30 percent of its earnings before interest, taxes, depreciation and amortisation (EBITDA) or interest paid or payable to AE, whichever is less.

– Based on the Representations received to carve out interest paid or payable in respect of debt issued by a PE of a non-resident in India, being a person engaged in the business of banking for the reason that as per the existing provisions a branch of the foreign company in India is a non-resident in India. Further, the definition of the AE in section 92A, inter alia, deems two enterprises to be AE, if during the previous year a loan advanced by one enterprise to the other enterprise is at 50 per cent. or more of the book value of the total assets of the other enterprise. Thus, the interest paid or payable in respect of loan from the branch of a foreign bank may attract provisions of interest limitation provided for under this section.

– Proposed to amend section 94B of the Act so as to provide that provisions of interest limitation would not apply to interest paid in respect of a debt issued by a lender which is a PE of a non-resident, being a person engaged in the business of banking, in India

10. Incorporation of MLI preamble clause to statue book

– India has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (commonly referred to as MLI) along with representatives of many countries, which has since been ratified.

– The MLI will modify India’s DTAAs to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out. The MLI will be applied alongside existing DTAAs, modifying their application in order to implement the BEPS measures. MLI is a single instrument, which will modify number of DTAA agreements entered into between sovereign states.

– Article 6 of MLI is a Minimum Standard and shall apply invariably to all the signatories to MLI. Article 6 of MLI contains the Preamble to be incorporated to all the Covered tax agreements.

– To incorporate such preamble in the statue itself, it is proposed to amend clause (b) of sub-section (1) of section 90 of the Act so as to provide that the Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India for, inter alia, the avoidance of double taxation of income under the Act and under the corresponding law in force in that country or specified territory, as the case may be, 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 any other country or territory).

11. Deferring Significant Economic Presence (SEP) proposal

– The current SEP provisions shall be omitted from assessment year 2021-22 and the new provisions will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-23 and subsequent assessment years.

12. TCS on foreign remittance through LRS

– Proposal of Finance Bill 2020 – Proposed to amend Section 206C

– Scope and Coverage – An authorized dealer shall be liable to collect TCS if he receives in aggregate Rs 7,00,000 or more in a financial year from a person for remittance out of India under the LRS of RBI,

– Rate – 5%. However, in non- PAN/Aadhaar cases, rate shall be 10%.

– Not applicable if buyer has deducted TDS under any provision of the Act

– Further Amendment by Finance Act 2020 –

– TCS to be collected by the AD only on the amount which exceeds Rs 7,00,000

– Tax to be collected at a lower rate if foreign currency is remitted towards loan repayment – Lower rate of 0.5% for collection of tax by an authorised dealer where the amount being remitted out of India is a loan, which is obtained from a banking company (including any bank or banking institution) or any other financial institution notified by the Central Government for section 80E, for the purpose of pursuing any education

13. TCS on Foreign Tour Packages

– Proposal of Finance Bill 2020 – Proposed to amend Section 206C

– Scope and Coverage – A seller of an overseas tour program package shall be liable to collect TCS from buyer

– Ceiling Limit – Applicable on all amount without any ceiling limit

– Rate – 5%. However, in non- PAN/Aadhaar cases, rate shall be 10%.

– Not applicable if buyer has deducted TDS under any provision of the Act

– Further Amendment by Finance Act 2020 – TCS to be collected for remittance for foreign tour packages without any ceiling limit even if same is made through AD bank under LRS scheme of RBI. Further As a buyer of an overseas tour program package can make payment in respect of overseas tour package to the seller either directly or through an authorized dealer, both seller and the authorized dealer may collect tax from the buyer on the same amount which results in the double collection of tax. To remove this ambiguity, a proviso has been inserted under sub-section (1G) by the Finance Act, 2020 to provide that the authorised dealer shall not collect the tax on an amount in respect of which the tax has already been collected by the seller.

14. TCS on SALE of Goods

– Proposal of Finance Bill 2020 – Proposed to amend Section 206C

– Scope and Coverage – A seller of goods is liable to collect TCS whose total turnover from the business carried on by it exceed Rs 10 crore during the immediately preceding financial year

– Ceiling Limit – Consideration received from a buyer in a previous year in excess of Rs 50 lakh.

– Rate – 0.1% on consideration received from a buyer. However, higher rate of 1% in non-PAN/ Aadhaar cases

– No TCS to be collected under this section, if TCS is already collected under other provisions or TDS has been deducted under any other provision

Further Amendment by Finance Act 2020 –

No TCS on Import or Export Transactions – No tax shall be required to be collected in respect of goods exported out of India and goods imported into India.

15. Deferment of new TCS provisions

– Proposal of Finance Bill 2020 – these new TCS provisions were to be applicable from 01/04/2020

– Further Amendment by Finance Act 2020 – Now these TCS amendments are made applicable from 01/10/2020.

16. Provisions relating to Transfer Pricing Audit Due Date

– Changes in the Due date for furnishing Audit Reports – Further, to enable pre-filling of returns in case of persons having income from business or profession, it is required that the tax audit report may be furnished by the said assessees at least one month prior to the due date of filing of return of income. Thus, provisions of section 10, section 10A, section 12A, section 32AB, section 33AB, section 33ABA, section 35D, section 35E, section 44AB, section 44DA, section 50B, section 80-IA, section 80-IB, section 80JJAA, section 92F, section 115JB, section 115JC and section 115VW of the Act are proposed to be amended accordingly. Therefore, these audit reports to be furnished by 30^th

Proposed Due Date for filing return u/s 139(1) – 31^st October. Further, now no distinction between working partner and non working partner due date.

Equalization Levy – Now also on E-COMMERCE OPERATORS

– In the Finance Bill 2020 there was no amendment proposed to the scheme of Equalization levy. But the Finance Act, 2020 expanded the scope of equalization levy on E-Commerce Operators.

– Scope – two type of transactions: –

a)  Sum received or receivable by a non-resident for the online advertisement services rendered to a specified persons	w.e.f.  01/04/2016 @ 6% by payer of sum
b) Sum received or receivable by an e-commerce operator from e-commerce supply of goods or services to specified persons.	w.e.f. 01/04/2020 @ 2% by recipient of sum

– Taxable Transactions – 2% from the consideration received or receivable by an e-commerce operator from e-commerce supply of goods or services made or provided or facilitated by it to the following persons:

a. A person who is resident in India;

b. A person who buys such goods or services or both using internet protocol address located in India;

c. A non-resident person in the following circumstances:

> Sale of advertisement which targets a customer who is resident in India or a customer who accesses the advertisement through internet protocol address located in India; and

> Sale of data collected from a person who is resident in India or from a person who uses internet protocol address located in India.

– Meaning of e-commerce operator – E-commerce operator means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.

– Meaning of e-commerce supply or services – E-commerce supply or services means: –

a. Online sale of goods owned by the e-commerce operator;

b. Online provision of services provided by the e-commerce operator;

c. Online sale of goods or provision of services or both facilitated by the e-commerce operator; or

d. Any combination of above activities

– Threshold Limit – Equalisation levy shall not be charged if the sale, turnover or gross receipts of the e- commerce operator from  e-commerce supply  or  services  made or  provided  or facilitated to the persons mentioned above is less than Rs. 2 crore during the previous year in aggregate from all specified buyer.

– When equalisation levy shall not be charged

a. Online advertisement service covered under Section 165

b. Consideration is less than threshold limit

c. E-Commerce operator has a PE in India

– Due Date of payment – The due dates for payment of equalisation levy in respect of online supply of goods and services have been prescribed in the below table:

Period	Due date
April 1st – June 30th	7th July
July 1st – September 30th	7th October
October 1st – December 31st	7th  January
January 1st – March 31st	31st March

– Consequences of late payment – Simple interest at the rate of 1% of such levy for every month or part of the month during which such failure continues

– Statement of equalisation levy – Every e-commerce operator shall prepare and deliver or cause to deliver a statement of equalisation levy in respect of all e-commerce supply or services during such financial year on or before 30 June of the financial year immediately following the financial year in which equalisation levy is chargeable

17. No Tax on Income Arising From E-Commerce Supply on Which Equalization Levy Is Chargeable

– Section 10(50) of Income Tax Act amended – to give tax exemption for the income arising from any e-commerce supply or services made, on or after 01- 04-2020, on which equalization levy is chargeable.

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