The growth of any emerging country like India depends upon flow of inwards foreign funds by the Non- Resident Investors. The countries tax regime is often a decisive factor, for a foreign investor, to invest its funds in any jurisdictions. Therefore, international tax policy of the Government needs to be critically framed as it will have an impact on the business environment of the Non Resident to conduct business in India.
The Budget however, has brought certain significant provisions in the extant Act which could adversely affect Non Resident Tax Payer. The budget proposes to tax, transfer of share outside India, having substantial underlying assets located in India, fees paid to foreign satellite companies, payment for software use in India, etc which can have major impact on the business of the Non Residents in India.
The retrospective amendment of section 9(1) (i) has been made primarily to nullify the effect of recent juris prudence, to tax any transfer of share outside India, having substantial underlying assets located in India. However the meaning and scope of word ‘substantial' has been left for judicial interpretation which could further lead to unnecessary litigation.
Another major amendment was made to Section 9 (1) (vi) to add clarificatory amendment to tax income earned by satellite companies by transmission (including upliking, amplification, conversion for down-linking of any signal). This nullifies the latest judgment in the case of Asia Satellite by the Delhi High Court. As the amendment is made retrospective with effect from June 1, 1976, many satellite companies would come in the loop.
Yet another instance of overturning the judicial decision is amendment of the definition of ‘royalty' to include the consideration for use or right to use of computer software irrespective of the medium through which such rights is transferred. This amendment brings within its sweep even “software for consumer use” which could not pose major challenge to the IT industry operating in India. This could also bring financial adversities to IT industries operating in India.
Additionally, the proposed General Anti-Avoidance Rules also provides that provisions which defines what can be constituted as commercial substance in the transaction which includes the need for commercial justification for place of residency for an entity.
Further, the primary responsibility for withholding taxes has been extended to non residents retrospectively from April 1, 1962, if the income of recipient non resident is chargeable to tax in India.
Presumably only relief to the Non- Residents is the introduction of APAs in the transfer pricing mechanism. This could significantly bring down tax litigation and provide tax certainty to foreign investors. However it needs to be seen, how the mechanism actually works in the future.
The above proposals could have major impact on the inward foreign direct investments in India. The budget proposal may be a challenge to investor-friendly environment which every investor requires. It needs to be seen how far this could affect India as a favourite foreign investors destination.
(The author is Principal Associate, Amarchand & Mangaldas & Suresh A. Shroff & Co.)