Clarity on taxation of non-resident ~ few steps to overarching theme of ease of doing business in India

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 Income-taxAct. 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.

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 Finance Act, 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 Ltd¹ 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 whole purpose of taxing these income at concessional/nil tax rate. The clarity on MAT provisions will provide a big relief and certainty to the foreign taxpayer.

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.