Following the passing of the Finance Bill in the Lok Sabha on Friday, tax expert Dinesh Kanabar spoke to FE on the key tax-related proposals.
How will the doubling of withholding tax on royalties to 20% impact companies?
This is royalty paid for technical services by an Indian company or an Indian player to a foreign company. Under most tax treaties, the rate is 10% or 15%. Also, everybody realised that while the tax is on the foreign recipient, it is actually passed on to the Indian entity, because they want a payment net of taxes. So, effectively, if you are importing technology and you have to make a payment of 100, 20% is effectively 34% on a gross basis. This means the Indian company will bear that tax, and that tax itself will become royalty and on a cascading basis, becomes about 34% cost.
So, what options do the companies have?
On a micro point, now what will have to happen is everybody who makes a payment will have to ask the recipient for their tax residence certificate and prove that they are a tax resident. But the other guy may come back and say I don’t care. I don’t want to give you anything. You pay me the net of taxes, which could become a challenge. But otherwise, you will have to get a tax resident certificate, you will go to the tax office, apply for the treaty, and then take it from there.
How do you view the tax parity on debt MFs with market-linked debentures?
I think the real point is, the government is saying we will tax the substance of the transaction. So they are saying interest should be taxed fully, the way it is everywhere else. In a debt mutual fund, basically, it’s nothing but interest, which is paid to you, and therefore, pay full taxes. So they’re bringing bank deposits, all borrowings at par.
Many of the changes have not been discussed with stakeholders…This is totally a new policy of this government, which was not there earlier; they are going on introducing changes after the Budget. Normally, if there are 25 changes proposed in the Budget, then you make representations, the government tweaks say three or four or five of them, taking into account all the representations, and the remaining go through. But here are new proposals coming without a discussion in the Budget, which I don’t think is the right thing to happen. But that’s the macro point.
Units in the GIFT City will get tax benefits…Yes, if you are an offshore banking unit, then earlier your profits were tax-free for five years, and half the profits were tax-free for the next five years. Now it is 100% tax exemption for 10 years.
The government has not relented on the Angel tax…Well, that was a change that was brought about in the Budget. There was a representation, which was not considered, and the same has gone through.
The tax changes on REITs and InVITs have been retained…There was a lot of representation on the capital gains, but the government has not agreed. All they have done is to say that only the word ‘redemption’ has been taken away. So long as there is a repayment, whether or not there is a redemption, only the excess is taxable, which is only clarificatory.
What impact could these changes have on investor sentiment?
Most of the people who are investing in India are used to all of these things. People would always wish that there is stability and these last-minute changes do not augur well. But it’s fine, this carries on.