India presented its Budget 2020 on February 1, 2020
India presented its 2020 budget on February 1, 2020, it includes measures that will affect multinational corporations with business operations in India or that are considering doing business in that country. The budget replaces the current dividend distribution tax with a new withholding tax, provides an update on India's "significant economic presence" rules and introduces new withholding tax requirements for e-commerce operators, among other measures.
The budget also announces a tax exemption measure for non-Indian sovereign funds and subsidiaries that make investments in Indian infrastructure. Finally, it introduces changes affecting trade and customs.
Some of the key budget announcements are highlighted below.
New dividend withholding tax
The budget announces India is eliminating its dividend distribution tax, payable by Indian corporate taxpayers on dividends paid to resident or non-resident shareholders. This tax is replaced by a withholding tax for which shareholders will be liable, applicable to dividends declared, distributed, or paid by Indian companies to residents and non-residents (such as Canadian shareholders). The tax rate for non-residents is 20% (10% for residents), plus applicable surtaxes. The tax may be reduced under India's tax treaties.
These measures come into effect as of April 1, 2020.
'Significant economic presence' rules
India proposes to defer enacting its "significant economic presence" provisions to assessment year 2022-23 (if applicable, these provisions give non-residents a business connection in India and widens the base of non-residents' Indian taxable income). Details are expected to be confirmed by the end of December 2020.
Further, India's budget proposes expanding the "business connection rule" and "source rule" for its "significant economic presence" provisions. Under the proposal, a non-resident's taxable income in India will further include, for example, income from advertising targeting customers residing in India and income from the sale of goods and services using data collected from people residing in India.
The budget also proposes a 1% withholding tax that must be deducted by e-commerce operators (i.e., a person who owns, operates or manages a digital or electronic facility or platform) on payments made to an e-commerce participant (e.g., a person resident in India selling goods, providing services or both through a digital or electronic facility or platform), if certain conditions are met. This measure comes into effect as of April 1, 2020.
Non-resident income from Indian operations
According to the budget, India proposes to allow its tax authority to prescribe rules to provide for how it may determine a non-resident's income from its operations carried out in India.
There is not yet any guidance from Indian tax authorities on these new measures.
Tax exemption — Sovereign fund infrastructure investments
India is proposing a tax exemption for dividends, interest and long-term capital gains received by a non-Indian resident sovereign welfare fund related to investments (debt or equity) in India's infrastructure sector.
Qualifying sovereign welfare funds must fulfill prescribed conditions. The general requirements for the exemption stipulate that an investment must be:
Trade and customs measures
The budget makes several changes related to customs, intended to protect domestic manufacturing. Notably, duty rates have been increased on many imported finished goods (e.g., footwear and furniture).
For more information, contact your KPMG advisor.
Information is current to February 11, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500
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