April 8, 2020
India enacts 2020-21 Union Budget
On 27 March 2020, India’s Finance Act 2020 was enacted when the President of India approved the Union Budget for tax year 2020-21 (Budget 2020).1 During the Budget 2020 approval process, amendments were made which: (i) addressed ambiguities in certain proposals; (ii) deferred the introduction of new tax withholding provisions; and (iii) extended the Equalization Levy to e-commerce transactions conducted by nonresident e-commerce operators.
This Alert summarizes the key amendments made to the Finance Act 2020.
- Budget 2020 abolished the dividend distribution tax (DDT). Nonresident shareholders are now subject to tax at 20%2,3 on dividend income under domestic law.
- Dividends declared on or before 31 March 2020 but received by shareholders after this date are exempt from the 20% tax (under both normal and Minimum Alternate Tax provisions for companies, if applicable) if DDT has been paid by the company.
- Ambiguity regarding the application of higher withholding tax (WHT) rates for dividends paid to nonresident shareholders (other than companies) and foreign companies has been removed; the final tax rate on such dividends is 20%4 under domestic law.
- Rules to mitigate a multiplying WHT impact by allowing the set-off of dividends distributed within multi-tiered structures is expanded to include dividends received from foreign companies and business trusts.5
- Dividend income received by unit holders from distributions of a Real Estate Investment Trust (REIT) or an Infrastructure Investment Trust (InviT) is exempt from taxation, subject to conditions including that any special purpose vehicle6 distributing dividend income to the REIT or InviT has not elected to be subject to the lower 22% corporate tax rate.
- The scope of the Equalization Levy is extended to include consideration received or receivable by an e-commerce operator from an e-commerce supply or services to “specified payers,” subject to conditions:
- “Specified payers” include: (i) an Indian resident; (ii) a nonresident (NR) selling an advertisement targeted at a customer resident in India or accessing such an advertisement through an Indian internet protocol (IP) address; (iii) an NR selling data collected from an Indian resident or from a person who uses an Indian IP address; and (iv) a person who buys goods or services or both using an IP address located in India.
- An exemption provided in the Budget 2020 to sovereign wealth funds satisfying specified conditions for income earned from debt or equity investments made between 1 April 2020 and 31 March 2024 in eligible infrastructure or other notified business entities is extended to certain foreign pension funds. Eligible investments have been expanded to include investments in debt, share capital or units in: (i) an InviT; and (ii) a Category I or Category II Alternate Investment Fund having 100% of its investments in eligible infrastructure or other notified business entities.
- WHT at a rate of 1% applicable to payments made by an ”e-commerce operator”7 to e-commerce participants for the sale of goods or provision of services facilitated through the operator’s digital or electronic facility or platform is deferred to 1 October 2020.
- The definition of an “e-commerce operator” is modified to exclude the requirement for the e-commerce operator to be responsible for making payments to an e-commerce participant.
- The WHT rate for royalties paid to Indian residents in consideration for the sale, distribution or exhibition of cinematographic films to Indian residents is proposed to be reduced from 10% to 2%.8
1. See EY Global Tax Alert, India releases the 2020-21 Union Budget, dated 4 February 2020.
2. This rate may be reduced by a tax treaty.
3. Additional surcharge and cess are generally applicable to all rates mentioned in this Alert.
4. This rate may be reduced by a tax treaty.
5. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InviTs).
6. A “special purpose vehicle” is an Indian company in which the REIT or InviT holds a controlling interest and meets specified shareholding percentage requirements at the time of registration of the business trust.
7. Additional guidelines to be issued.
8. To align this royalty WHT rate with the amended WHT rate applicable to payments made for the provision of technical services.
For additional information with respect to this Alert, please contact the following: