Clarity on taxation of nonresident ~ few steps to

overarching theme of ease

of doing business in India

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The issue of applicability of certain tax provisions to non-resident
has always been a matter of debate and led to controversy in Indian
tax administration. Bringing clarity in taxes, reducing litigation is one
of the prime objective of the present Government. To achieve the
said objective, the Government has taken few steps in the proposed
Budget 2016, and has provided clarity on some of the issues faced
by the non-resident.

Exemption from requirement of furnishing Permanent

Account Number [PAN]
In order to ensure that more people come under the tax net, the
Finance (No. 2) Act, 2009 had introduced section 206AA under the
#IncometaxAct. This section provided for higher withholding tax rate
of 20%, if the payee does not provide the PAN, with an exception for
non-resident in respect of payment of interest on long-term bonds as
referred to in section 194LC. In order to reduce compliance burden
for non-resident, it is now proposed that with effect from 1 June
2016, in addition to interest on long-term bonds, the provisions of
section 206AA shall not apply to a non-resident in respect of any
other payments subject to such conditions as may be prescribed.
This is a welcome relaxation as most of then on-resident tax payers
having one time transactions may not have PAN.

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Minimum Alternate Tax [MAT] on foreign company
Whether foreign companies are liable to pay #MAT has been a controversy coupled with conflicting judicial
pronouncements on the issue. The #FinanceAct, 2015, amended the MAT provisions to exclude capital gains,
interest, royalty and fees for technical services earned by the foreign company from the purview of MAT.
However, since the amendment was applicable from assessment year 2016-17, the Indian tax authorities
started issuing tax notices to foreign companies / FIIs/FPIs to levy and collect the MAT for the period prior to 1
April 2015.
On 24 September 2015, the Government issued a press release stating that the MAT provisions shall not be
applicable to foreign company with effect from 1 April 2001, if it does not have a PE in India under the tax
treaty or a place of business in India. The Hon'ble Supreme Court in the case of Castleton Investment Ltd 1
affirmed the position clarified in the press release.
With a view to provide certainty and put an end to litigation, in line with the press release, necessary
amendments have been proposed to be made in the MAT provisions.
Generally, foreign companies enjoy concessional/nil tax rate on income in the nature of capital gains,
interest, royalty and fees for technical services. Applying MAT provision on these income was defeating the

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Residence rule based on Place of Effective Management [PoEM]
The Finance Act, 2015 amended the provision of section 6(3) to provide that a company would be resident in
India in any previous year if it is an Indian company or its PoEM in that year is in India. The PoEM was defined
to mean a place where key management and commercial decisions that are necessary for the conduct of the
business of an entity as a whole are in substance made.
Implementation of PoEM based residence rule has given rise to various issues on applicability of current
provisions of the Act to the foreign company. In order to provide clarity in respect of implementation of PoEM
based rule of residence and also to address concerns of the stakeholders, the applicability of PoEM has been
proposed to be deferred by one year, hence it will be applicable from 1 April 2017.
Further, section 115JH is proposed to be introduced to provide that where a foreign company is said to be
resident in India for the first time, then the provisions of the Act relating to the computation of total income,
treatment of unabsorbed depreciation, set off or carry forward and set off of losses, collection and recovery
and special provisions relating to avoidance of tax shall apply with such exceptions, modifications and
adaptations as may be specified in the notification for the said previous year. The said transition provisions
would also cover any subsequent years upto the date of determination of PoEM in an assessment
proceedings.

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Equalisation levy
In the current technology driven environment, the supply and procurement of digital goods and services
have undergone exponential expansion worldwide, including India. Currently in the digital domain, business
may be conducted ignoring the national boundaries and without having link to a specific location. The digital
business fundamentally challenges physical presence based PE (i.e. place of business, location, and
permanency).
The Organization for Economic Cooperation and Development [OECD], in Base Erosion and Profit Shifting
[BEPS] project under Action Plan 1 has recommended several options to tackle the direct tax challenges
which includes imposition of equalisation levy on consideration received by a non-resident for certain digital
transactions.
Moving in line with BEPS action plan, the Government has proposed to insert a Chapter on Equalisation Levy
which will be effective from date to be notified by the Central Government. Equalisation levy of 6% will be
levied on the consideration exceeding INR 1 lacs received by a non-resident not having PE in India for online
advertisement, for provision of digital advertising space or any other facility or service for the purpose of
online advertisement and such other services as may be notified.
The collection and recovery of equalisation levy is on the payer by way of deduction from the amount paid or
payable to the non-resident in respect of specified services. In order to ensure effective compliance, it
provides for disallowance of expenses, interest, penalty and prosecution in case of defaults. The income
subject to equalisation levy would be exempt in the hands of recipient.
The e-commerce companies catering to Indian customers have faced significant litigation in this respect,

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Concessional tax rate for non-residents
Presently, the concessional tax rate of 10% (plus applicable surcharge and cess) applies to non-residents in
respect of long-term capital gains arising on unlisted securities. There has been controversy as to whether
the concessional rate can be applied to shares of a private company. A view has been taken by the courts
that shares of a private company are not "securities" as defined under the Securities Contracts
(Regulations) Act. In order to provide clarity, it is proposed to apply the concessional tax rate to shares of a
company not being a company in which public are substantially interested. This should put an end to
litigation on this issue.

Certain exceptions to the taxability of non-resident

In the case of a non-resident, the taxation of income takes place only if the income accrues or arises in India
or is deemed to accrue or arise in India or is received in India. The Government has proposed to provide the
following exceptions to the taxability of the non-resident from the assessment year 2016-17 and onwards:
In the case of foreign mining companies, no income shall be deemed to accrue or arise in India to it
through or from the activities which are confined to display of uncut and unassorted diamonds in a Special
Notified Zone.
Any income accruing or arising to a foreign company on account of storage of crude oil in a facility in
India and sale of crude oil therefrom to any person resident in India shall be exempt from tax, if such
activities are notified or approved by the Central Government.

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