Further Tax Amendments Receive Approval in India

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May 23 – India recently passed amendments on its Union Budget’s 2013 Finance Bill, which seeks to clarify and update the country’s recent tax law changes. The original Finance Bill, which proposed many changes to India’s existing tax laws and was presented to Parliament earlier this year, finally passed at the end of April after several rounds of amendments.

Under the bill, the tax on share buybacks will now be raised to 20 percent, and a temporary 15 percent dividends tax will be placed on companies that own a quarter-share or more in a foreign subsidiary. Furthermore, the tax on technical service fees provided to non-residents will also be raised from 10 percent to 25 percent.

To attract additional foreign institutional investor (FII) and qualified foreign investor (QFI) participation in India’s debt market, the withholding taxes on interest earned for foreign investors will be lowered to 5 percent from the previous rate of 20 percent. The rate, which was cut in a move to deepen the Indian debt market and accelerate the growth of the Indian economy, will be effective until May 2015.

“In order to provide broad-based incentives and encourage greater off-shore investment in the debt market by FIIs and QFIs, it has been decided that the benefit of a lower withholding tax (i.e., 5% instead of 20%) shall be available in respect of interest on investments made in bonds issued by Indian companies and government securities,” said India’s Finance Ministry.

Furthermore, several other amendments were added to the Finance Bill to clarify the categorization of speculative transactions, the scope of income tax exemptions and eligibility requirements for sitting on the Income Tax Appellate Tribunal. For instance, one of the amendments requires taxpayers who wish to claim benefits under a treaty to hold a Tax Residence Certificate to prove that they are a tax resident of the treaty country.

Also, newly added Section 91 of the Finance Bill provides tax officials from the Revenue Department the power to arrest or fine persons for the non-payment of service taxes. The maximum punishment is imprisonment for up to seven years in addition to a maximum fine of Rs 1 lakh (US$1,800). In addition, the implementation of the General Anti Avoidance Rule (GAAR) will be deferred by two years, which is designed to crack down on tax avoidance schemes.

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