Big controversy: Section 90 amendment regarding tax residency certificates (TRC)

Pending clarification from the Finance Ministry, we take this to mean that from 1 April 2013, FIIs who are investing into India from DTAA jurisdictions (such as Mauritius and Singapore) could be asked by the Indian taxmen to prove that they are indeed residents in these jurisdictions (with the TRC not being sufficient proof

of the same). This in turn would increase the amount of ’substance‘ that FIIs would need to have in the DTAA jurisdictions and, in effect, this could negate the benefits of GAAR being postponed by two years.

Higher tax on MNC subsidiaries’ royalty payments to foreign parent

In his speech the FM said that: “Another case is the distribution of profits by a subsidiary to a foreign parent company in the form of royalty. Besides, the rate of tax on royalty in the Income-tax Act is lower than the rates provided in a number of Double Tax Avoidance Agreements. This is an anomaly that must be corrected.

Hence, I propose to increase the rate of tax on payments by way of royalty and fees for technical services to non-residents from 10 percent to 25 percent. However, the applicable rate will be the rate of tax stipulated in the DTAA."

Now, whilst on the face of it this would suggest that MNC subsidiaries in India (eg. Maruti Suzuki and HUL) would have to now pay 25% tax (rather than 10% tax) on royalty payments, it is important to note that most DTAAs signed by India have a 10% tax rate. Hence, the tax increase is actually theoretical rather than real.

Tax surcharges on corporates and on ’Rs1 crore plus‘ income earners

These appear to be the populist measures intended to send a message to the masses in a pre-election year. The increase in the corporate surcharge from 5% to 10% in effect raises the corporate tax rate from 31.5% to 33%.

15% investment allowance: one of the few positives

Manufacturing companies that invest more than Rs100 crore in plant and machinery during FY14 and FY15 will receive 15 per cent of this as a tax break in these years. This appears to be an effective way of boosting capex because this increases the depreciation charge to 115 per cent and thereby boosts profits. (Note further that this tax break will NOT lower the company’s net block. Hence, the depreciation years in the future years remain intact.)

(Ashok Wadhwa is the CEO of Ambit group. Excerpts taken from a report titled " Union Budget FY14: A failure of imagination.)

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