The statement from the India Finance Minister about the Budget 2021 to be an exceptional one which India has not seen in past 100 years; had made all the business community and society at large expect it to be an optimistic one that would revive the Indian economy and boost the India growth story. And Foreign Investor’s community were also eyeing the same. The Finance Minister in her Budget 2021 proposals has made all the efforts to continue to lure the Foreign Investors and make India still one of the favourite investment destination inspite of the deadlock created by the deadly covid-19 virus.
The investments made by the Foreign Portfolio Investors (FPIs) in Indian equities to the tune of USD 31.7 billion in this Financial Year which is the highest investment since Financial Year 2012-13 depicts their positive sentiments.
The key announcements made for foreign investors and non-residents are discussed below:
1. Benefit of Tax Treaty while taxing Dividend Income
Dividend received by an FPI investors is currently taxable @ 20% (plus surcharge and cess). The company paying dividend accordingly withholds tax. The FPI may claim the lower rate of tax prescribed under the tax treaty subject to satisfaction of certain conditions. Since most of the FPIs come from the countries which have tax treaties with India and provide for concessional rate of tax on dividends. This leads to an increased compliance burden for the FPIs as they have to submit certain details and documents to be eligible to claim lower tax withholding.
The Budget Proposals have now amended the provisions to withhold tax at 20% or rate specified in tax treaty, whichever is lower, subject to availability of tax residency certificate. This will avoid higher tax withholding on Dividend income and streamline the cash flows.
2. Tax incentives for units located in International Financial Services Centre (IFSC)
In order to make location in IFSC more attractive, it is proposed to provide the following additional incentives:
i. The relocation of foreign funds to IFSC will be tax exempt similar to the tax exemptions available on merger/demergers. This may be relevant for offshore funds from countries such as Mauritius and Singapore holding India investments. There would be no tax on relocation from another country to IFSC for the Fund as well as the investors in the Fund. The relocated fund will continue to get capital gains exemption otherwise available under the respective tax treaty.
Relocation is proposed to be defined as transfer of assets of the original fund to a resultant fund on or before the 31st day of March, 2023, where consideration for such transfer is discharged in the form of share or unit or interest in the resulting fund to the shareholder or unit holder or interest holder of the original fund in the same proportion in which the share or unit or interest was held by such shareholder or unit holder or interest holder in such original fund.
ii. One more relaxation given is in relation to the safe harbour rules for managing offshore funds from India. Currently the Fund and the Fund manager need to satisfy the prescribed conditions in the tax laws in order to get the approval.
As per the proposals, a Manager in IFSC managing offshore fund may not need to satisfy these conditions. The government will lay down the conditions waived by way of a notification.
This relaxation of meeting the onerous conditions will now make the Fund Managers (especially India focussed) to reconsider shifting the fund management activity in India which was not actively considered inspite of the safe harbour regime being in place since long.
iii. Another surprise element is the tax holiday for aircraft leasing companies in IFSC. The proposals provide that the income arising from transfer of an asset, being an aircraft or aircraft engine which was leased by a unit to a domestic company engaged in the business of operation of aircraft before such transfer shall also be eligible for 100% deduction subject to condition that the unit has commenced operation on or before the 31st March 2024.
This tax holiday will make IFSC as an attractive destination for even other type of business such as aircraft leasing which is different from current activities of financial service sector in IFSC.
iv. It is also proposed to provide tax exemption on income earned by a non-resident on transfer of non-deliverable forward contracts entered into with an offshore banking unit (‘OBU’) of IFSC, provided such OBU commences operations before 31 March 2024.
3. Non-applicability of Minimum Alternate Tax (MAT) on Dividend Income
Currently, as dividend income is taxable in the hand of shareholders, dividend received by a foreign company on its investment in India is required to be excluded for the purposes of calculation of book profit in case the tax payable on such dividend income is less than MAT liability on account of concessional tax rate provided in the tax treaty. Several representations were made in order to clear this anomaly.
In order to rationalise the said provisions, it is now proposed that dividend income of a foreign company will not to be included in computation of book profit where such dividend income is taxable at a rate lower than the MAT rate of 15%. Similarly, expenditure relatable to such income also not to be deducted while computing book profit of such foreign company.
Author: CA. Ritesh Podar, Mumbai, Maharashtra.
(The views expressed are personal.)
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