[Opinion] Budget 2023 | The Corporate Wishlist of Overseas Investors

Authored by Medha Sharma – Chartered Accountant

Table of contents

1. Introduction
2. Expectation 1: Extension of sunset date under section 194LC and 194LD for concessional tax rate
3. Expectation 2: Relaxation from filing income tax return by NR needs to be extended.
4. Expectation 3: Overcoming adversity faced by non-residents for furnishing Form No. 10F
5. Expectation 4: Clarity on taxability of interest income from Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs)
6. Expectation 5: Ease of compliance for taxability of dividend income earned by foreign portfolio investors
7. Concluding Remarks

1. Introduction

Where some of the countries around the globe are facing recession, India is becoming the fastest-growing and one of the largest economy in the world which is unlikely to go into recession. However, it has been said by an Indian official that the global recession is likely to hit India post June 2023 which can be inter alia due to contraction of global GDP.

One of the major factor which contribute to the emerging economy of India is Foreign Direct Investments (FDI) / Foreign portfolio Investments (FPI) (net foreign direct inflows rose to USD 22.7 billion during April to October 2022) for which tax and regulatory changes by the government have been made in past to ensure a smooth functioning of them. Funds are also flowing from Non-resident Indians (NRI) over the past years in relation to which various relaxations have been announced by the government in past.

Since Union Budget 2023 is just around the corner and global recession is about to hit the base it is expected from the Indian government to ease the current taxation schemes and also ease in other regulatory compliance in order to promote and attract those FDI / FPIs and inflow from NRIs.

In this article, we have discussed key expectations of overseas investors from Union budget 2023 as under:

2. Expectation 1: Extension of sunset date under section 194LC and 194LD for concessional tax rate

Provisions of section 194LC and section 194LD of the Income-tax Act, 1961 (the Act) provide for concessional tax rate of 5% for interest on borrowings in India from non-residents (NR). These provisions contain sunset date of 30 June 2023, accordingly, higher tax rate of 20% (plus surcharge and cess) on interest accrued / paid on borrowings in foreign currency and higher tax rate 40% (plus surcharge and cess) for interest on account of borrowing in Indian currency post such date will apply.

Therefore, in order to boost the India’s foreign exchange reserves, extension to such sunset date of the abovesaid sections should be provided.

3. Expectation 2: Relaxation from filing income tax return by NR needs to be extended.

Under the current income tax regime vide Finance Act 2020, NRs are not required to file income tax return only for certain category of income earned/received which is dividend, interest, royalty, and fees for technical services as referred in Sections 115A(1)(a) and 115A(1)(b) of the Act, subject to fulfillment of prescribed conditions.

However, this relaxation would not be available in case the income pertains to sources other than as referred above for example interest received from the government or from an Indian entity on borrowings in Indian currency or interest received on income tax refund, irrespective of taxes has been withheld under the Act.

In order to reduce compliance burden, there is a need to extend this relaxation from filing income tax return by NR taxpayer (not having permanent establishment in India) driving income from sources other than referred under abovesaid section, where taxes have been withheld under the Act.

4. Expectation 3: Overcoming adversity faced by non-residents for furnishing Form No. 10F

A NR is required to furnish form No. 10F (containing the particulars as prescribed under Rule 21AB(1) of the Rules) for the purpose of claiming benefit of tax treaty where certificate of residence (i.e TRC) from the domicile country does not contain all such prescribed information.

The Central Board of Direct Taxes (CBDT) vide notification¹ prescribed the NRs to furnish Form 10F electronically. This compliance was subsequently relaxed by the CBDT for certain NRs (not having PAN and does required to obtain PAN under the Act) from electronic filing of form 10F² till 31 March 2023.

In case such certain NRs are required to file Form 10F electronically, there will be an additional obligation cast on them on account of compliance requirement i.e. they will have to obtain a PAN in order to file the Form 10F even though the Act does not require such NRs to obtain PAN.

Accordingly, considering the undue hardship faced by such taxpayers, the government should clarify that such NRs are not required to file Form 10F electronically even after 31 March 2023.

5. Expectation 4: Clarity on taxability of interest income from Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs)

In 2014, the concept of REITs and InvITs have been introduced by the Indian government (vide SEBI Regulations) to enhance the private participation in infrastructure and real estate sectors. In 2016, the FPI investment in REIT and InvITs was permitted by the government in order to increasing liquidity and to attract capital from global investors. Since these investment vehicles has gained so much attention in global markets as well, as a result, there are five REITs and 19 InvITs in India which are registered with SEBI.

Section 115AD of the Act was introduced to tax the income earned by foreign portfolio investors or foreign institutional investors from securities [as defined in the Securities Contracts (Regulation) Act, 1956 (SCRA)] issued in India at the rate of 20%. Whereas, section 115A read with section 194LBA of the Act, provides a concessional tax rate of 5% for taxing the interest income earned by NR unitholders from business trust.

In Union Budget 2021, the definition of “securities” under SCRA was amended to inter alia include units of REITs and InvITs. The said amendment in the SCRA has led to an ambiguity under the Act, that whether to tax the interest income received by FPIs from business trusts at 20% under section 115AD of the Act or at concessional rate of 5% which is specifically provided for interest income received by any NR from business trusts as per section 115A of the Act.

Having said that, it is expected from the budget 2023 to resolve this ambiguity to provide clarity since it may not be the intention of the government to tax FPIs at a rate higher than other non-residents who continue to be taxed at 5%.

6. Expectation 5: Ease of compliance for taxability of dividend income earned by foreign portfolio investors

From Union Budget 2020, income from dividend is taxable in the hands of the receiver (i.e investor) at the applicable tax rate. As a result of which, dividend income earned by the NR (including FPIs) is taxable at 20% (plus surcharge and cess) under section 115A of the Act. The Indian company is required to withheld at source 20% or as per the rate available under the relevant tax treaty, whichever is beneficial to the taxpayer.

In this regard, countries like Mauritius, Singapore and USA has entered into an arrangement (i.e DTAA) with India, which provides for a lower tax rate (i.e., 5%, 10%, or 15%) on dividend income earned from India company subject to certain prescribed conditions.

In recent tax assessments, treaty benefits have been declined by the Indian tax authorities on a premise that foreign funds were unable to demonstrate ‘commercial substance’ and ‘beneficial ownership test’.

One of the conditions to avail treaty benefit is when the dividends are being paid only to beneficial owners (beneficial ownership test). In case where, intermediaries are being setup in Mauritius or Singapore that receives the dividend and subsequently such intermediaries transfer such dividend to the original fund or company (i.e overseas fund), the treaty benefit has been denied on account that it is being received by pass-through entities instead of beneficial owner.

Therefore, in order to obtain treaty benefit, beneficial ownership is required to substantiate by the such foreign funds basis the valid documentation. In this regard, for the purpose of encouraging such foreign funds continue to invest in India, a standardised format by way of clarification should be provided so as to ease the compliance burden and undue hardships faced by such foreign funds.

7. Concluding Remarks

In this budget, it is expected from the government that it may roll out production linked incentive (PLI) to attract more overseas investors. There are various factors which may attract the foreign inflows which can be ease of doing business, skilled manpower, presence of natural resources, liberal FDI policies, huge domestic market and healthy GDP growth.

However, various obstacles such as delay in enforcement of contracts, cumbersome procedures and high interest rates are still food of thought.

Since overseas investor and NRIs have raised their high hopes from the Indian government considering the past trends and liberalised policies, chances of meeting the abovementioned expectations are upright.

1. Notification No. No. 3 of 2022
2. Vide DGIT order dated, 12 December 2022