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Demystifying Key Complexities of the India Budget 2024-25

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Demystifying Key Complexities of the India Budget 2024-25

The Indian finance minister presented Budget 2024-25 (the “Budget”) earlier this year. During the last financial year, the Indian economy reported growth rate in G.D.P. of 8.2%. Surpassing the United Kingdom, India has sprinted to the position of the fifth largest economy in the world. Budget 2024-25 has been crafted to continue the economic growth of the county. To that end, the budget includes the following provisions regarding direct taxation: (A) Favorable changes in the holding period and tax rates for long-term capital gains, (B) Limitations on the availability to index costs when computing capital gains that in many instances are taxed at lower rates, (C) Parity in rates for residents and nonresidents, (D) Abolition of the Angel Tax, (E) New tax rules for the taxation of a corporate buyback of shares, and (F) The repeal of Equalization Levy 2.0 on e-commerce transactions. Jairaj Purandare, the Founder & Chairman of JMP Advisors Pvt Ltd, Shibani Bakshi, an Associate Director of the firm, and Siddhita Desai, an Associate with the firm, explain the new provisions.

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Invoking M.F.N. Clause Under Indian Tax Treaties Requires Notification

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Invoking M.F.N. Clause Under Indian Tax Treaties Requires Notification

India’s tax treaties with various countries mitigate double taxation and reduce the scope of taxable income or provide lower rates of withholding tax in certain cases. Some agreements include a most favoured nation (“M.F.N.”) clause. The clause allows the treaty partner country to import benefits from a subsequently signed Indian income tax treaty when certain conditions are met, most notably that the treaty partner country in the treaty subsequently signed is a member of the O.E.C.D. Opinions differed as to whether the M.F.N. clause is self-executing when a treaty partner country was not a member of the O.E.C.D. at the time its treaty with India is negotiated but subsequently becomes a member. Does the M.F.N. clause apply automatically or are there procedures to follow? Recently, the Supreme Court of India upheld the position of Indian tax authorities that an M.F.N. clause is not self-executing and that an M.F.N. clause properly looks only to the list of O.E.C.D. member states at the time the earlier treaty was signed. Sakate Khaitan, the Senior Partner of Khaitan Legal Associates, Mumbai, Abbas Jaorawala, a Senior Director and Head-Direct Tax of Khaitan Legal Associates, Mumbai, and Weindrila Sen, an associate of Khaitan Legal Associates, Mumbai explain all. Indian subsidiaries now face the risk of taxation, interest, and penalties for the past 10 years.

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Dividend Income from India: Tax Treaty Issues for Nonresident Shareholders

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Dividend Income from India: Tax Treaty Issues for Nonresident Shareholders

Effective April 1, 2020, the dividend distribution tax (“D.D.T.”) imposed on Indian companies paying dividends was abolished. While Indian politicians may say otherwise, tax advisers outside India viewed the D.D.T. as a workaround allowing India to collect the equivalent of dividend withholding tax without having to take into account a lower rate provided by an income tax treaty. With the demise of the D.D.T., the Indian tax authorities are challenging claims for dividend withholding tax benefits. Sakate Khaitan, the senior partner of Khaitan Legal Associates, Mumbai, and Abbas Jaorawala, a Senior Director and Head-Direct Tax of Khaitan Legal Associates, Mumbai, review issues that have been raised by the Indian tax authorities at the time dividends are declared and paid to residents of several countries that are treaty partners of India. Terms such as G.A.A.R., P.P.T., and M.L.I. are often raised. In addition, treaties that have most-favored-nation (“M.F.N.”) provisions are now regularly challenged.

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Taxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company

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Taxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company

When a U.S. corporation expands its operations to India and forms an Indian subsidiary, tax issues need to be addressed in both countries at various points in time – when the investment is first made, as profits are generated, as funds are repatriated, and when the investment is sold. In their comprehensive article, Sanjay Sanghvi, a partner of Khaitan & Co., Mumbai, Raghav Jumar Baja, a principal associate of Khaitan & Co., Mumbai, Stanley C. Ruchelman and Neha Rastogi explain all facets of tax planning in both countries at each stage of the investment and do so in an integrated way.

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The Multilateral Instrument and Its Applicability in India

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The Multilateral Instrument and Its Applicability in India

One of the most significant outcomes of the B.E.P.S. Project is the signing of the multilateral instrument (“M.L.I.”) in 2017.  The O.E.C.D. initiated the B.E.P.S. Project in 2013 with a view to curtail tax avoidance.  The M.L.I. addresses B.E.P.S. concerns in thousands of bilateral tax treaties through one common treaty.  India has been at the forefront of implementing B.E.P.S. measures, and India’s covered tax treaties will need to be read with the M.L.I. from April 1, 2020.  Sakate Khaitan of Khaitan Legal Associates, Mumbai, India, and Abbas Jaorawala, a chartered accountant and consultant to that firm, explain India’s positions on various provisions of the M.L.I. for those engaged in trade or investment opportunities relating to India.

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Same Same, But Different: Taxing a Sale of Indian Stock by a U.S. Person

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Same Same, But Different: Taxing a Sale of Indian Stock by a U.S. Person

While tax rules generally appear to be similar in India and the U.S., several divergent provisions in the domestic law of each country produce adverse consequences for those who are not well-advised. The prime example involves the taxation of gains from the sale of shares of an Indian company by a U.S. person: India sources the gain based on the residence of the target while the U.S. sources the gain based on the residence of the seller. No relief from double taxation is provided, notwithstanding the capital gains and relief from double taxation articles in the U.S.-India income tax treaty. The result is tax that can be as high as 43.8% of the gain. Rahul Jain and Sanjay Sanghvi of Khaitan & Co., Mumbai, India, along with Neha Rastogi and Stanley C. Ruchelman explain the problem and, more importantly, suggest a path forward for U.S. individuals realizing sizable gains.

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India Budget 2019-20

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India Budget 2019-20

The first budget of the Modi 2.0 government was announced during the summer with a goal of bringing India to a growth trajectory. To that end, the Taxation Laws (Amendment) Ordinance, 2019, was introduced on September 20, 2019, to incorporate the proposed changes into law. Included are incentives for International Financial Services Centres, tax relief for start-ups, a boost for electric vehicles, and faceless tax examinations intended to ensure that tax examinations are carried out in a uniform way. Although anticipated by some, an inheritance tax was not introduced. Jairaj Purandare, the Founder and Chairman of JMP Advisors Pvt Ltd, Mumbai, explains the new provisions.

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India and the Digital Economy – The Emerging P.E. and Attribution Issues

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India and the Digital Economy – The Emerging P.E. and Attribution Issues

The exponential expansion of information and communication technology has made it possible for businesses to be conducted in ways that did not exist 15 years ago.  It has given rise to new business models that rely almost exclusively on digital and telecommunication networks, do not require physical presence, and derive substantial value from data collected and transmitted through digital networks.  So how and where should these companies be taxed?  Sunil Agarwal, an advocate and senior tax partner of AZB & Partners New Delhi, evaluates proposals already enacted in India and the U.K. and those under consideration at the level of the European Commission and E.U. member countries Italy, France, and Austria.  Should the digital tax be a consumption tax passed on to the final consumer or a minimum income tax based on global profits or substantial economic presence?  At this point, consensus does not exist.

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Strategies for Foreign Investment in Indian Start-Ups

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Strategies for Foreign Investment in Indian Start-Ups

Foreign investment in Indian high-tech start-ups can yield significant profit opportunities for savvy investors.  During 2018, over 1,000 deals were struck, reflecting $38.3 billion in new investments.  If these investments turn out to be profitable, the tax exposure for the investor will vary with the form of the investment.  Choices of investment vehicles include (i) L.L.P.’s, (ii) Category I, Subcategory I alternative investment funds (“A.I.F.’s”) registered with the Securities Exchange Board, (iii) Category III A.I.F.’s, and (iv) trusts.  Each has unique tax consequences for investors receiving dividends and realizing gains.  Raghu Marwah and Anjali Kukreja of R.N. Marwah & Co L.L.P., New Delhi, explain the entities choices and the resulting tax costs.

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Tax Authorities Eye GSK-HUL Merger: Could Attract Tax on Long-Term Capital Gains and Brand Transfer

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Tax Authorities Eye GSK-HUL Merger: Could Attract Tax on Long-Term Capital Gains and Brand Transfer

GSK Consumer Healthcare India (“GSKIndia”) is in the process of merging with Hindustan Unilever Ltd (“HUL”) inthe biggest deal in India’s consumer packaged goods space, valued at ap- proximately $4.5 billion. Although the transaction is structured to be tax-free for shareholders, plenty of room exists for the Indian tax authorities to assert tax from the companies: The transfer of a brand owned outside India may generate Indian tax to the extent its value stems principally from India. In addition, arm’s length pricing for royalty payments and accompanying with- holding tax issues also come into play. Sanjay Sanghvi and Raghav Kumar Bajaj of Khaitan & Co., Mumbai and New Delhi, discuss the global tax issues surrounding the transaction.

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Do India’s Amalgamation Revisions Prevent Misuse of Accumulated Losses?

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Do India’s Amalgamation Revisions Prevent Misuse of Accumulated Losses?

India’s recent Finance Act addressed a tax planning device intended to reduce or eliminate the imposition of the Dividend Distribution Tax ("D.D.T") that applies when a corporation exercises the right to distribute dividends to shareholders.   The statue targets plans involving an amalgamation between a profitable company and a loss company and prevents the reduction of earnings when the profitable company is the acquiring company.  Does this mean that earnings can be reduced when the loss company is the acquiring company?  Differing views have been expressed by Indian tax advisers.  CA Anjali Kukreja of R.N. Marwah & Co L.L.P., New Delhi, examines both views and explains why one view is technically preferable.

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India Budget 2018-19

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India Budget 2018-19

The Indian government announced its plans for the 2018–2019 budget year.  It is the last full budget before the 2019 Parliamentary elections and the first budget following the implementation of the landmark national G.S.T. regime.  Tax is reduced to 25% for domestic companies generating income of approximately $40 million or less.  The definition of the term “business connection,” the equivalent of a P.E. under domestic law, is broadened to cover agents having and habitually concluding contracts and circumstances where a nonresident has a significant economic presence.  A 10% tax is imposed on certain stock market gains.  Incentives are given to international financial services companies in the form tax exemptions for certain gains.  These and other provisions are explored by Jairaj Purandare of JPM Advisors Pvt Ltd, Mumbai, India.

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The Changing Face of Service Permanent Establishments

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The Changing Face of Service Permanent Establishments

As governments struggle to adapt the old rules of taxable presence within a jurisdiction to economic activities in the digital age, new concepts have been asserted to impose tax on foreign service providers who are based abroad but regularly furnish services within a country.  India is among the global leaders rejecting physical presence in favor of location of the customer.  Neha Rastogi and Stanley C. Ruchelman look at the concept of destination based taxation and a recent case, where an Indian Income Tax Appellate Tribunal held that the physical presence of the foreign taxpayer’s employees is not relevant for determining the existence of a Service P.E. in the source country.

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India: Legal and Practical Strategies for Managing Tax Disputes

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India: Legal and Practical Strategies for Managing Tax Disputes

Most readers of this journal are front-end tax planners, proposing plans to be implemented by clients.  Regrettably, not all plans escape examination by the tax inspector, and in India, that number is on the rise.  Sanjay Sanghvi of Attorneys Khaitan & Co., Mumbai explains how to prepare for a tax examination in India and provides practical insights into the examination, appeals, and judicial review processes.

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India Budget 2017-18

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India Budget 2017-18

Provisions in Budget 2017-18 announced by the Finance Minister that relate to infrastructure, the financial sector, accountability, prudent fiscal management, and tax administration reflect a view that times are changing in India.  The government appears to remain steadfast in its efforts to bring the Indian tax and regulatory environment up to global standards.  Jairaj Purandare of JPM Advisors Pvt Ltd, Mumbai, explains the focus of the budget

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India – Guidelines Issued for Determining Place of Effective Management

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India – Guidelines Issued for Determining Place of Effective Management

In Circular No. 6/2017, dated January 24, 2017, the Central Board of Direct Taxes issued final guidelines regarding the factors that will be looked to under Indian income tax treaties when determining the place of effective management (“P.O.E.M.”) of a foreign company that is part of an Indian-based group.  Almost as important as the substantive rules, the Circular establishes the procedure that must be followed before a tax officer may determine that the P.O.E.M. of a foreign company is in India.  There are winners and there are losers in the Circular.  Ashutosh Dixit, Parul Jain, and Kaushik Saranjame of BMR & Associates L.L.P. explain the new rules.

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A Year of Guest Features

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A Year of Guest Features

This month, we reminisce on the best of 2016, with articles contributed by guest authors from around the world.

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Goods and Services Tax: A Game Changer

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Goods and Services Tax: A Game Changer

The passage of the Constitution Act, 2016, has brought India one step closer to adopting a national G.S.T. as its new indirect tax structure.  The G.S.T. will replace central and state levies with a goal of eliminating multiple taxation of the same transaction.   Sakate Khaitan of Khaitan Legal Associates, Mumbai, explains the rates, the coordination among jurisdictions, and the anticipated effect on business.  A paradigm shift in the Indian economy is anticipated at both the micro and the macro levels.

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Insights Vol. 3 No. 9: Updates & Other Tidbits

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This month, the authors look briefly at several timely issues, including (i) the filing of appeals briefs in two major cases lost by the I.R.S., Altera and Xilinx, (ii) recent competent authority activity between the U.S. and India, (iii) the future of U.K. automobile assembly plants operated by U.K. subsidiaries of Japanese automakers, and (iv) final State Department rules concerning the revocation of U.S. passports issued to individuals who have a seriously delinquent tax debt.  Kenneth Lobo, Michael Peggs, Nina Krauthamer, and Sultan Arab contribute.

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Disallowance for Failure to Withhold on Outbound Payment Violates India-U.S. Non-Discrimination Clause

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Disallowance for Failure to Withhold on Outbound Payment Violates India-U.S. Non-Discrimination Clause

To withhold, or not to withhold: that is the question.  Neha Rastogi and Nina Krauthamer review the Herbalife case in India that allowed an Indian subsidiary to deduct an administration fee paid to a related parent company for services performed in the U.S. without imposing an obligation on the company to withhold Indian tax.  The case, which relates to the tax year 2000 to 2001, has dragged on for many years.  In 2004, the law was changed, but the litigation continued.

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