Budget 2020: In areas of ease of compliance, one such amendment proposed by the Finance Minister is to extend exemption to non-residents from filing annual income-tax return in India in additional cases.
Budget 2020 was presented by the Hon’ble Finance Minister on 1 February 2020. The Budget is woven around three prominent themes “Aspirational India, Economic Development for All and A Caring Society”. From the tax perspective, apart from the reform measures already taken so far, it is focused on crucial aspects such as ‘stimulate growth, simplify tax structure, bring ease of compliance, and reduce litigations’.
The current government has put a lot of thrust on manufacturing in India, promoting start-ups, developing job opportunities, widening and deepening of tax base, tax certainty, reducing litigations and simplifying tax laws.
In areas of ease of compliance, one such amendment proposed by the Hon’ble Finance Minister is to extend exemption to non-residents from filing annual income-tax return in India in additional cases.
Under the provisions of the Income Tax Act, 1961 (the Act), specific tax rates have been prescribed for different categories of income.
Further, a non-resident is currently not required to file his return of income, if his total income consists only of dividend or interest income and TDS on such income has been deducted according to the provisions of the Act.
Non-residents earning royalty or fees for technical services (FTS) from India were, however, still required to file their return of income in India.
It is now proposed that a non-resident shall not be required to file a return of income in India if:
i) his or its total income consists of only of dividend or interest income, or royalty or FTS income (i.e. not effectively connected to a permanent establishment); and
ii) tax has been withheld on such income at the rates which is prescribed under section 115A of the Act.
It is pertinent to note that as per the proposed amendment, the said relief is available only if tax is withheld at the rates as prescribed under section 115A of the Act [i.e. 10 percent plus surcharge and education cess in case of royalty or FTS].
However, as per Section 90 of the Act, a taxpayer has an option to be governed by the provisions of the Act or the applicable tax treaty, whichever is beneficial. Many of the tax treaties, which India has entered into, provide for the withholding tax rate in respect of income earned by way of royalty or FTS (i.e. not effectively connected to a permanent establishment) at 10% or lower.
Based on the above, the tax rate provided under the tax treaty could be lower as compared to tax rate as provided under section 115A of the Act. In the said scenario, as the withholding tax could be at the rate lower than as provided under section 115A of the Act, a view which emerges is that the exemption of not filing the return of income in India in that case may not be available. Consequently, the non-resident may be required to file his return of income in India.
Considering the above, in case a non-resident avails the benefit under the tax treaty, a likely view may emerge that the non-resident may be required to file tax return in India.
It may be further noted that there has been no corresponding change proposed in the transfer pricing provisions and hence a non-resident receiving such income from an associate enterprise may still be required to undertake transfer pricing compliances in India.
Non-residents will, therefore, have to be mindful of the additional requirement and their factual position prior to making any decision in respect of their India tax return.
(By Hema Lohiya, Partner; Mihir Vora, Senior Manager; and Ankit Jain, Manager with Deloitte Haskins & Sells LLP)