Aligning the scope of “business connection” with modified PE Rule as per Multilateral Instrument (MLI)<\/strong><\/h2>\nExiting factual position – in example form – <\/strong>In terms of the DAPE rules in tax treaties, if any person acting on behalf of the non-resident, is habitually authorised to conclude contracts for the non-resident, then such agent would constitute a PE in the source country. However, in many cases, with a view to avoid establishing a permanent establishment (hereafter referred to as ‘PE’) under Article 5(5) of the DTAA, the person acting on the behalf of the non-resident, negotiates the contract but does not conclude the contract.<\/p>\nReview by OECD – <\/strong>The OECD under BEPS Action Plan 7 reviewed the definition of ‘PE’ with a view to preventing avoidance of payment of tax by circumventing the existing PE definition<\/p>\nUpdate in Multilateral Instrument – <\/strong>Further, with a view to preventing base erosion and profit shifting, the recommendations under BEPS Action Plan 7 have now been included in Article 12 of Multilateral Convention to Implement Tax Treaty Related Measures<\/strong> (herein referred to as ‘MLI’), to which India is also a signatory. Consequently, these provisions will automatically modify<\/u><\/strong> India’s bilateral tax treaties covered by MLI, where treaty partner has also opted for Article 12.<\/p>\nAct vs DTAA – beneficial provisions were being applied –<\/strong> However, sub-section (2) of section 90 of the Act provides that the provisions of the domestic law would prevail over corresponding provisions in the DTAAs, to the extent they are beneficial. Since, in the instant situations, the provisions of the domestic law being narrower in scope are more beneficial than the provisions in the DTAAs, as modified by MLI, such wider provisions in the DTAAs are ineffective.<\/p>\nTherefore, now<\/strong> its<\/strong> proposed to amend<\/strong> the provision of section 9 of the Act so as to align them with the provisions in the DTAA as modified by MLI so as to make the provisions in the treaty effective. <\/p>\nAccordingly, clause (i) of sub-section (1) of section 9 is being proposed to<\/strong> be amended to provide that “business connection” shall also include any business activities carried through a person who, acting on behalf of the non-resident, habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by the non-resident.<\/p>\n“Business connection” to include “Significant Economic presence” – Physical vs digital presence<\/strong><\/h2>\n“The oranges upon the trees in California are not acquired wealth until they are picked, not even at that stage until they are packed, and not even at that stage until they are transported to the place where demand exists and until they are put where the consumer can use them. These stages, upto the point where wealth reached fruition, may be shared in by different territorial authorities.” (excerpts from a report on double taxation submitted to League of Nations in early 1920s)<\/em><\/p>\nIn the above illustration, both the residence and source countries claim the right to taxation.<\/p>\n
If an enterprise carries on its business in another country through a ‘Permanent Establishment’ situated therin, such other country may also tax the business profits attributable to the ‘Permant Establishment’.<\/p>\n
Under these new business models, the non-resident enterprises interact with customers in another country without having any physical presence in that country resulting in avoidance of taxation in the source country. Therefore, the existing nexus rule based on physical presence do not hold good anymore for taxation of business profits in source country. As a result, the rights of the source country to tax business profits that are derived from its economy is unfairly and unreasonably eroded.<\/p>\n
For a long time, nexus based on physical presence was used as a proxy to regular economic allegiance of a non-resident. However, with the advancement in information and communication technology in the last few decades, new business models operating remotely through digital medium have emerged. Under these new business models, the non-resident enterprises interact with customers in another country without having any physical presence in that country resulting in avoidance of taxation in the source country. Therefore, the existing nexus rule based on physical presence do not hold good anymore for taxation of business profits in source country. As a result, the rights of the source country to tax business profits that are derived from its economy is unfairly and unreasonably eroded.<\/p>\n
The scope of existing provisions of clause (i) of sub-section (1) of section 9 is restrictive as it essentially provides for physical presence-based nexus<\/strong> rule for taxation of business income of the non-resident in India. Explanation 2 to the said section which defines ‘business connection’ is also narrow in its scope since it limits the taxability of certain activities or transactions of non-resident to those carried out through a dependent agent. Therefore, emerging business models such as digitized businesses, which do not require physical presence of itself or any agent in India, is not covered within the scope of clause (i) of sub-section (1) of section 9 of the Act.<\/p>\nIn view of the above, it is proposed to amend clause (i) of sub-section (1) of section 9 of the Act to provide that ‘significant economic presence’ in India shall also constitute ‘business connection’. Further, “significant economic presence” for this purpose, shall mean-<\/p>\n
(i) any transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or<\/p>\n
(ii) systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means. <\/p>\n
It is further proposed to provide that only so much of income as is attributable to such transactions or activities shall be deemed to accrue or arise in India. It is further proposed to provide that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India.<\/p>\n
Penalty for failure to furnish statement of financial transaction or reportable account u\/s 285BA<\/strong><\/h2>\n\n\nExisting Provision<\/strong><\/td>\nProposed Provision<\/strong><\/td>\n<\/tr>\n\n| Fail to furnish within prescribe time<\/td>\n | Fail to furnish statement within time specified in notice<\/td>\n | Fail to furnish within prescribe time<\/td>\n | Fail to furnish statement within time specified in notice<\/td>\n<\/tr>\n | \n| Rs 100\/ Day<\/td>\n | Rs 500 \/ Day<\/td>\n | Rs 500 \/ Day<\/td>\n | Rs 1000\/ Day<\/td>\n<\/tr>\n<\/table>\n Budget Proposals – Incentives<\/strong><\/p>\nDeduction in respect of income of Farm Producer Companies<\/strong><\/h2>\n– Farm Producer Companies (FPC), having a total turnover upto ` 100 Crore shall eligible to deductions u\/s 80P<\/strong><\/p>\nMeasures to promote start-ups u\/s 80-IAC<\/strong><\/h2>\n– Section 80-IAC of the Act, provides that deduction under this section shall be available to an eligible start-up for 3 consecutive AY out of 7 years at the option of the assessee<\/p>\n – In order to improve the effectiveness of the scheme for promoting start ups in India, it is proposed to make following changes<\/p>\n \n\nParticular<\/strong><\/td>\nExisting Provision<\/strong><\/td>\nProposed Provision<\/strong><\/td>\n<\/tr>\n\n| Eligibility w.r.t. incorporation<\/td>\n | on or after 01\/04\/2016 but before 01\/04\/2019<\/td>\n | on or after 01\/04\/2016 but before 01\/04\/2021<\/td>\n<\/tr>\n | \n| Turnover Requirement<\/td>\n | Does not exceed Rs 25 Crores in any PY beginning on or after 01\/04\/2016 and ending on 31\/03\/2021<\/td>\n | Does not exceed Rs 25 Crores in any seven PYs commencing from the date of incorporation<\/td>\n<\/tr>\n | \n| Eligibility business definition enhanced<\/td>\n | Engaged in Innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property<\/td>\n | Engaged in innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation<\/td>\n<\/tr>\n<\/table>\nMeasures to promote International Financial Services Centre (IFSC)<\/strong><\/h2>\n – Transactions of transfer by NR on recognised stock exchange located in IFSC shall not be regarded as transfer if consideration payable in foreign currency<\/p>\n – bond or Global Depository Receipt, as referred to in sub-section (1) of section 115AC; or
\n rupee denominated bond of an Indian company; or
\n derivative.<\/p>\n – Section 115JC of the Act provides for alternate minimum tax at the rate of 18.50 % of adjusted total income in the case of a non-corporate person<\/p>\n \t– It is proposed to reduce the rate to 9% of AMT of unit located in an IFSC<\/p>\n Incentive for employment generation u\/s 80JJAA<\/strong><\/h2>\n– minimum period of employment is relaxed to 150 days in the case of apparel industry is proposed to extend this relaxation to footwear and leather industry<\/p>\n – new employee who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period in subsequent year shall also become eligible for deduction u\/s 80JJAA in such subsequent assessment year<\/p>\n Tax treatment of transactions in respect of trading in agricultural commodity derivatives<\/strong><\/h2>\n– Section 43(5)<\/p>\n – Under the existing provisions – it was specifically provided that the commodity transactions which are on recognized association and subject to CTT shall not be considered to be speculative transactions.<\/p>\n – However, there was no clarity over the fact with respect to those commodity derivatives which are traded on recognized association but are exempt from CTT.<\/strong><\/p>\n – Accordingly, now it is proposed that such commodity derivatives trading transactions on recognized association, which are exempt from CTT – shall not be considered as speculative business transaction.<\/p>\n | | | | | | |
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