The Hon'ble Finance Minister ('FM'), Mrs. Nirmala Sitharaman, presented the Union Budget 2020 on 1st February 2020 wherein she proposed quite significant changes in the Income-tax Act, 1961 ('the Act'). While the aim of the Hon'ble FM is to bring in a simplified income-tax regime, on a thorough reading of the fine print of Finance Bill 2020 it appears there are few issues which may still create doubt in the minds of the taxpayers and thus require clarity. In the ensuing paragraphs, an attempt is made to highlight few of these issues and share our thoughts on the same:
Amendment in relation to Digital Economy and the interplay with Equalization Levy:
The Hon'ble FM has proposed to extend the source rule for non-resident taxpayers by adding a new Explanation 3A to section 9(1)(i) of the Act to provide that the income attributable to the operations carried out in India shall include income from:
i. such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;
ii. sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and
iii. sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India
Thus, as per the above amendment if any non-resident having a business connection in India is providing online advertisement services, then the income attributable to the operations carried out in India shall include income derived from the services mentioned in clause (i) above.
In this respect, it is to be noted that the concept of Equalization Levy has already been introduced in the year 2016 to collect taxes from certain specified digital services like online advertisements. Under the equalization levy regime, non-residents receiving any sum from Indian residents or entities having a PE (Permanent Establishment) in India towards online advertisement and similar services are subject to levy at 6%.
Therefore, there is an overlapping of the services in the nature of online advertisement under both regimes. The same may give an apprehension of double taxation wherein the same amount may be subject to equalization levy on one hand and income tax on the other hand. Although as per Section 10(50) of the Act, any income chargeable to equalization levy is exempt from income-tax but does the exemption give precedence to equalization levy over income tax chargeable under the Act on account of business connection still needs to be evaluated.
Interestingly, the Equalization Levy is not regarded as income tax and, hence, the non-resident online advertisement service provider will not able to claim foreign tax credit in respect of the Equalization Levy deposited by the Indian payer. Thus, it is imperative that the government brings out a clarification for implementation of the above amendment otherwise it may lead to prolonged litigation.
Expanding scope of Tax Collection at Source ('TCS') on sale of goods leading to additional compliance burden for non-residents engaged in such transactions:
Currently section 206C of the Act provides for the collection of tax at source (TCS) by the seller on business of trading in alcohol, liquor, forest produce, scrap etc. In order to widen and deepen the tax net, the Finance Bill 2020 proposes to amend section 206C to levy TCS on sale of goods above specified limit.
It has been proposed that in case of sale of goods where seller receives a consideration in excess of INR 5 Million from a buyer in a particular fiscal year, TCS will be levied at the rate of 0.1%, however, where PAN (Permanent Account Number)/Aadhar is unavailable, levy shall be at a higher rate of 1%. This is only applicable on sellers whose total sales, gross receipts, or turnover from business exceed INR 100 Million during the immediately preceding fiscal year. This provision is also applicable to exports as the exception is carved out only for government authorities and other buyers notified by the Government.
The above amendment would be burdensome and onerous for the non-residents as the Indian company selling goods to non-residents above the specified limit will have to collect tax at source from the non-residents. Further, the non-residents will have to obtain PAN in India to protect themselves from the higher tax rate of 1%. Also, if the non-resident has no income from India, then they may be required to file income tax returns in India to claim a refund of the tax so collected. This will lead to additional compliance burden for the non-residents leading to administrative and procedural discomfort merely for purchasing goods from India and may negatively impact the overall exports as well.
Exemption to non-residents from filing return of income if tax has been withheld under the provisions of domestic tax law but not if withheld as per the tax treaty:
Section 115A of the Act specifies that non-resident taxpayers are not required to file income-tax returns in India provided their income comprises of only dividend or interest income and requisite tax on the said income has been withheld by the payer.
The Finance Bill 2020 proposes to extend the same relief to non-residents whose total income consists only of the income by way of royalty or FTS (fees for technical services). The benefit of not filing tax return will be granted only if TDS on such income has been deducted under the provisions of Chapter XVII-B of the Act at the rates which are not lower than the prescribed rates under clause (b) of sub-section (1) of section 115A.
It is interesting to note that the relief has only been provided to non-residents whose tax has been deducted as per the rates which are not lower than the rates prescribed under Section 115A (1) of the Act. On the basis of above, whether relief will be available to non-residents whose taxes will be deducted at the beneficial rates provided under a tax treaty may need to be evaluated.
For instance, under section 115A(1)(b) of the Act, tax rate applicable on royalties and FTS is 10% which is further increased by applicable surcharge and cess (effective tax rate being 10.92%). Now, if a German company is providing FTS to an Indian company and the Indian company withholds tax at the rate of 10% as per Article 12 of India Germany tax treaty which is lesser than the rate of 10.92%, then whether the German company is still required to file income tax return in India needs clarity. Similarly, in case of tax treaties entered with countries like Singapore, USA etc. if any non-resident is invocating a beneficial clause under tax treaty for claiming FTS to be not taxable (like not satisfying the test of make available), will such non-residents still be liable to file income tax returns needs evaluation.
Further, there are conflicting rulings of the Authority for Advance Rulings1 on the issue of requirement to file return of income where the income is not liable to tax in India, owing to more favourable tax treaty provisions. It is to be noted that failure to file income-tax returns may result in interest, penalty or even prosecution. Thus, it will be certainly beneficial to the non-resident community if an appropriate clarification is brought out with respect to the above issues. It is also important to highlight that the non-resident is only relieved from filing tax returns in India if adequate withholding has been done as per the rates specified in the Act. Accordingly, non-residents may still be liable for undertaking requisite transfer pricing compliances in India if it receives royalty/FTS from an associated enterprise in India.
1. Castleton Investment Limited (AAR No. 999 of 2010); VNU International B.V  198 taxmann 454 (AAR); SmithKline Beecham Port Louis Ltd.  348 ITR 556; Factset Research Systems Inc (2009) 317 ITR 169 (AAR); Dow Agro Sciences Agricultural Products Ltd (2016) 380 ITR 668 (AAR).