Today, India is one of the largest and fastest developing G20 economies. With its enormous market base, India is emerging as a preferred destination for global investors. The Indian Government has taken several steps to encourage foreign investments and make it easier for foreign companies to do business in India. The recent efforts have brought dividends already as the country is ranked 63rd in the Ease of Doing Business report 2020 as compared to 142 in 2015. However, India continues to trail in parameters such as Ease of Starting Business (rank 136) and Paying Taxes (rank 115).
Although the taxation system has undergone reforms during the last decade, the tax rates have been rationalised and attempts have been made to simplify tax laws, the current system is still fairly complex and fraught with a higher compliance burden. It is important that the Government focuses on easing tax compliances with respect to certain obligations of foreign taxpayers highlighted below:
Multiple Registrations: Permanent Account Number (PAN) and Tax Account Number (TAN) are required to be obtained to complete numerous direct tax compliances. TAN being state-wise registration is obtained to make withholding tax (WHT) payments to the Government and file quarterly WHT returns. It is imperative that the Government rationalises the multiple TAN registrations and brings a PAN based mechanism for WHT compliances as initiated for resident individuals paying rent.
Double Taxation Avoidance Agreement (DTAA) benefits: A foreign taxpayer is not entitled to claim any relief under DTAA unless it furnishes documents such as a Tax residency certificate (TRC) and Form 10F (if requisite details are not provided in TRC). Since August 2022, the Government has mandated the e-filing of Form 10F on the income-tax e-filing portal. To e-file Form 10F, every foreign taxpayer is required to obtain a PAN, which indirectly mandates all foreign taxpayers, who wish to claim DTAA benefits, to obtain a PAN in India, thus creating an unnecessary compliance burden. Further, the director/authorised signatory of such a foreign taxpayer is also required to obtain (PAN-based) DSC in India to file such a form. Given the fact that Form 10F merely provides basic information, the Government should consider dispensing with this requirement.
Relief in transfer pricing compliances: Foreign taxpayers having income in the nature of dividend, interest, royalty or fees for technical services, wherein tax has been withheld as per the provisions of the Income-tax Act, 1961 (the Act) are exempt from filing a tax return in India. However, there’s no specific exemption from transfer pricing compliances in such cases. Additionally, foreign taxpayers having transactions with Associated Enterprises (AE) in India are required to file a ‘flip side’ transfer pricing report and maintain transfer pricing documentation, even though compliance is undertaken by its Indian AE. This is a duplication of efforts and it has also led to tax litigation. Government should consider exempting such foreign taxpayers from transfer pricing compliances.
Significant Economic Presence in India (SEP): The concept of SEP was introduced in 2018 with the view to taxing the digital economy. However, based on the plain reading of the provisions, it appears that many conventional transactions are also covered in the definition. Further, the threshold limit prescribed is Rs 20 million for sales to Indian persons or 0.3 million of Indian users is very low, which is an extremely wide coverage. There is no rule/clarification on the method by which such a threshold shall be computed. Once taxation under SEP is triggered in India, the payer is required to withhold any tax due and undertake various compliances. Further, the non-resident may not be able to claim tax credit of this levy in his country of residence, as equalisation levy is a separate levy under the Finance Act, 2016 and will not be part of the Income-tax Act. It is imperative that appropriate amendments are carried out providing a rule for SEP income attribution.
Withholding tax order: There’s no time limit prescribed under the Act for passing an order under section 195(2) of the Act, which causes undue hardship in genuine cases. It is suggested that an appropriate time limit say thirty (30) days may be introduced.
Property Sale by non-residents: When a Non-resident sells a property to a resident, tax is required to be withheld by the resident purchaser on the amount of capital gains. It creates a practical difficulty, for both buyer and seller and both are subjected to cumbersome compliances such as obtaining lower or nil withholding tax certificate from the tax officer, seller obtaining PAN (if not available), buyer obtaining TAN, etc. Some relaxations and dispensation with these compliance obligations would relieve the burden of taxpayers. For example, the Government may consider doing away with the requirement of TAN and instead introduce a PAN based mechanism for withholding tax and allowing remittances based on a Chartered Accountant certificate.
Globally the expectations are high from the upcoming Budget and the FM will have to focus on easing tax compliances and eliminating/reducing compliances that have an adverse impact on the time and cost of business.
Source: Financial Express