India's lower house of Parliament passes key direct ... - Ernst & Young

1 May 2013
Global
Tax Alert
India’s lower house of
Parliament passes key
direct tax amendments to
Finance Bill, 2013
Executive summary
The Indian Finance Minister presented Finance Bill, 2013 (the Bill), as part
of the Union Budget 2013-14, to Parliament on 28 February 20131. The
Bill contained a number of far-reaching proposals to amend the Indian Tax
Laws (ITL) such as providing that a Tax Residency Certificate is necessary
but not sufficient for claiming tax treaty benefits, levy of Commodities
Transaction Tax, an increase in the tax rate for royalty and fees for technical
services, additional tax on the buy-back of shares of an unlisted company,
and tax withholding on immoveable property, among others. Taking into
account representations made by various stakeholders on the adverse impact
of various proposals and/or to correct certain anomalies, amendments have
been made to the Bill at the enactment stage. This Tax Alert summarizes
certain significant direct tax amendments to the Bill which has now been
passed by the Lok Sabha (the lower house of Parliament).
Finance Bill 2013 Amendments
Tax Residency Certificate (TRC)
A taxpayer is entitled to claim benefits under a tax treaty or the ITL,
whichever is more beneficial.
However, for this purpose, Finance Act 2012 (FA 2012) introduced,
effective from tax year 2012-13, the requirement to obtain a TRC
containing the particulars prescribed by the Income Tax Rules (Rules)
as evidence of being a tax resident of the tax treaty country. The Bill, as
passed by the Lok Sabha has amended the provision to dispense with the
requirement that the TRC needs to contain prescribed particulars. This
amendment is made retroactively from tax year 2012-13.

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Further, the Bill had proposed a
provision stating that submission
of the TRC would be necessary but
not sufficient for claiming benefits
under the tax treaty. This provision
could have applied retroactively from
tax year 2012-13. The Bill, as passed
by the Lok Sabha, has deleted this
provision. Instead, effective from
tax year 2012-13, the ITL has now
been amended to provide that a
taxpayer claiming tax treaty benefit
shall, in addition to the TRC certifying
its residency, provide such other
documents and information as may
be prescribed by the Rules.
Commodities Transaction Tax (CTT)
Chapter VII of the Bill proposed to
introduce CTT on sale of commodity
derivatives (other than agricultural
commodities) through recognized
associations at the rate of 0.01%
on the value of such transactions
payable by the seller. The provisions
are to come into force on a date
to be notified by the Central
Government in the Official Gazette.
The Finance Minister, in his Budget
Speech, had clarified that such
transactions shall not be treated as
speculative transactions. However,
the Bill did not specifically contain
any such provision.
The anomaly has been removed at
the enactment stage by introducing
a specific provision that eligible
transactions in respect of trading in
commodity derivatives carried out
through recognized associations
shall not be treated as speculative
transactions, provided they comply
with certain conditions.
The conditions are comparable to
those currently applicable to stock
derivative transactions.
Concessional rate of tax on
approved borrowings in foreign
currency
FA 2012 had introduced the
concessional tax rate of 5%2 on
interest payable to nonresidents on
borrowings in the form of approved
loans or long-term infrastructure
bonds in foreign currency. The
concessional rate is applicable
subject to compliance with certain
conditions.
However, in the absence of a
Permanent Account Number (PAN) of
a nonresident payee, the withholding
rate on the abovementioned interest
is 20% in view of the applicability of
a general provision which requires a
withholding tax rate of 20% if payee
does not hold a PAN. This general
provision is now amended with
effect from 1 June 2013 to provide
that, even in the absence of a PAN
of the payee, payment of interest
on long-term infrastructure bonds3
to nonresidents will be subject to
withholding at 5%4.
Concessional rate of tax on rupeedenominated
bonds
The Bill proposed to extend
the concessional rate of 5% 5 to
interest payable to nonresidents
on rupee-denominated long-term
infrastructure bonds subscribed to
in foreign currency. This provision
was to come into effect from 1 June
2013 but this proposal has been
omitted at the enactment stage.
Global Tax Alert
Instead, a new provision has been
inserted, with effect from 1 June
2013, to provide that the tax rate
on interest payable to Foreign
Institutional Investors (FIIs) or
Qualified Foreign Investors (QFIs)
on rupee-denominated bonds of
an Indian company or Government
security shall be 5% 6 provided the
rate of interest does not exceed
the rate as may be notified by the
Central Government in this respect.
The definition of QFIs is borrowed
from SEBI 7 Circular No. Cir/IMD/
DF/14/2011 dated 9 August 2011,
as amended from time to time. The
definition of FIIs is borrowed from an
existing provision in the ITL dealing
with taxation of FIIs. Consequential
amendments are also made in other
provisions of the ITL.
However, in the absence of a PAN,
the rate of withholding on the
abovementioned interest payable
to FIIs/QFIs will be 20%.
Comments
Immediately after presentation of
the Bill on 28 February 2013, the
Ministry of Finance clarified, via a
Press Release dated 1 March 2013,
that the proposed amendment
regarding the TRC being necessary
but not a sufficient condition did
not intend to dilute the existing
legal position on validity of the
TRC and the TRC would continue
to be accepted as an evidence of
the taxpayer’s residency. It was
also clarified that the intent of
the provision was to ensure that
furnishing of the TRC should not

preclude the Tax Authority from looking into beneficial
ownership of the recipient in the matter of interest,
royalty etc. It was also assured that concerns of
taxpayers on language can be addressed suitably when
the Bill is taken up for consideration. While the proposal
of the TRC being necessary but not sufficient for treaty
benefit has not been enacted, one would need to wait
Endnotes
1. See Ernst & Young Tax Alert dated 1 March 2013.
2. Plus applicable surcharge and cess.
Global Tax Alert
for notification of the Rules to ascertain the
requirement of additional documents/information
which are to be furnished in support of treaty claim.
As part of the legislative process, the Bill also needs
to be transmitted to the Rajya Sabha (upper house of
Parliament) for its recommendations and assented by
the President of India before it is enacted as law.
3. By implication, higher withholding rate at 20% in the absence of PAN will continue to apply to interest payable
to nonresidents on approved loans borrowed in foreign currency.
4. Plus applicable surcharge and cess.
5. Plus applicable surcharge and cess.
6. Plus applicable surcharge and cess.
7. Securities and Exchange Board of India (SEBI)– regulator of securities trading in India.
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For additional information with respect to this Alert, please contact the
following:
Ernst & Young Private Limited, Mumbai
• Sudhir Kapadia +91 22 6192 0900 sudhir.kapadia@in.ey.com
• Hitesh Sharma +91 22 6192 0620 hitesh.sharma@in.ey.com
Ernst & Young LLP (UK), Indian Tax Desk, London
• Nachiket Deo +020 778 30862 nachiket.deo@ey.com
Ernst & Young Shinnihon Tax, Indian Tax Desk, Tokyo
• Niladri Nag +91 124 464 4000 nag-nldr@shinnihon.or.jp
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
• Gagan Malik +65 6309 8524 gagan.malik@sg.ey.com
Ernst & Young LLP, Indian Tax Desk, New York
• Tejas Mody +1 212 773 4496 tejas.mody@ey.com
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