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India 2012 Budget Holds Unpleasant Surprises for Nonresidents

Eagerly awaited by resident and nonresident taxpayers alike, India's budget for 2012 (Finance Bill 2012) announced on March 16, 2012, contains a number of significant — and far-reaching — direct tax measures that could have negative implications for nonresidents. One of the measures would provide that indirect share transfers outside India would be subject to tax in India, effectively overruling the Indian Supreme Court's decision in favor of the taxpayer in the landmark Vodafone case. The budget also includes a proposal to introduce a general anti-avoidance rule (GAAR) which could impact investments into India through holding company structures, more rigorous requirements to obtain benefits under India's tax treaties, the application of withholding tax to nonresidents regardless of their presence in India and a broadening of the definition of "royalty." On a more positive note, an advance pricing agreement (APA) program would be introduced. However, considered in their entirety, most of the proposals would make it more difficult for nonresidents to do business in India.

In addition to the above measures, India's Finance Minister announced the following measures that could affect both residents and nonresidents:

  • There will be no change in the base corporate tax rate for domestic and foreign companies, the surcharge or cess, or the dividend distribution tax
  • The 15 percent concessional rate of tax on dividends received by an Indian company from its foreign subsidiary would continue to apply for financial year 2012-2013
  • Interest paid by specified companies (infrastructure companies, such as companies engaged in the construction of roads, toll roads or bridges, power companies, etc., and companies in the business of the operation of aircraft or the manufacture or production of fertilizer) to a nonresident would be subject to a concessional withholding tax rate of 5 percent
  • The tax holiday for power companies would be extended through 2013
  • The Securities Transaction Tax on the actual delivery or transfer of shares would be reduced from 0.125 percent to 0.1 percent
  • Amount received by Indian companies towards share subscription from Indian residents would be taxed to the extent the amount is in excess of fair value
  • Cascading effect of dividend distribution tax on multi-tier holding in India would be eased
  • Transfer pricing regulations would be applicable to domestic transactions between related parties
  • The expeditious enactment of the Direct Taxes Code (DTC, originally slated to become effective as from April 1, 2012)
  • The government is committed to the introduction of the goods and sales tax (GST)
  • The government has proposed to tax all services, except those on a "negative" list.

For additional information or questions, please contact:

Ted Dougherty
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165

Tom Butera
Principal
Deloitte Tax LLP
+1 212 436 3231

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