Additional amendments to the Union Budget 2023 passed by the Lok Sabha

The Lok Sabha has approved the Finance Bill, 2023 with some important tax changes, which were not part of the budget previously presented by the Finance Minister on 1 February 2023. The approved Finance Bill, 2023 will now be presented before the Rajya Sabha, followed by the President of India, upon whose assent, it will become law.

The key amendments to the Finance Bill, 2023 are:

1) Change in taxation of income from debt and other non-equity mutual funds

The tax advantage for debt mutual funds over traditional fixed deposits has now been done away with, as long-term income from debt mutual funds shall now be taxed at slab rates / respective tax rate as against lower rate of 20%. The amendment proposes to consider ’specified mutual funds’ having less than 35% total proceeds invested in equity shares of domestic companies as short-term capital assets, gains from which are taxable at regular tax rates. While the Finance Bill, 2023 previously sought to bring only market linked debentures under the net of higher tax rate by considering them as short-term assets (irrespective of period of holding), this has now been extended to debt mutual funds as well.

While it may not be the intention, the amendment could also increase the tax burden on ETFs/ fund of funds which either invest in other mutual funds including equity oriented mutual funds or which invest in overseas equity shares or other securities.

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2) Royalty and fees for technical services (‘FTS’) received by a non-resident

It is proposed to increase the tax rate on royalty and FTS income received by a non-resident from India from 10% to 20% under the Indian domestic tax law.

Consequently, the rates under most tax treaties entered into by India are likely to become more attractive as majority of India’s tax treaties provide for a 10%/15% rate. Not only will this increase the tax burden for foreign entities, they will also have to evaluate if they meet the anti-abuse conditions laid down in the Indian domestic tax law/ tax treaty. In addition, foreign entities will now be required to file tax returns in India (which is currently not required if tax is paid as per domestic law).

3) No relief to non-residents from “angel tax” for investment in Indian companies

The Finance Bill, 2023 had proposed to expand the anti-abuse provisions to include share subscription money received by Indian companies from non-resident shareholders in excess of the prescribed fair value of shares. Though various representations had been made to reverse this proposal, the Government has not acceded to the request and these expanded provisions will apply from FY 2023-24 onwards.

The introduction of this provision will require compliance with pricing guidelines under the tax laws in addition to compliance with pricing guidelines under Indian exchange control laws which will remove the flexibility in deciding the price at which shares can be issued to non-residents. Hopefully, the government will provide further guidance and synchronize the valuation rules to remove the difficulty and ensure that non-residents who want to pay a higher price and bet on the India growth story are not discouraged.

4) Taxability of distributions by a business trust (i.e. REIT/ InvIT)

As part of the Finance Bill 2023, it was previously sought to bring within the tax net, distribution in the nature of ‘repayment of debt’ by REIT/ InvIT [i.e. other than interest and dividend distributed by REIT/ InvIT and rental income distributed by REIT to the unitholders] by taxing the same as ‘Income from other sources’ in the hands of the REIT/ InvIT holders.

It is now proposed that the distribution in the nature of ‘repayment of debt’ (amount not being dividend/ interest/ already subjected to tax) should be reduced from the cost of acquisition in the hands of the REIT/ InvIT holders irrespective of whether the REIT / InvIT redeems the investor units. Once the cumulative distribution in the nature of ‘repayment of debt’ exceeds the issue price of the unit, the excess distribution will be taxed as ‘Income from other sources’ in the hands of the REIT/ InvIT holders.

This could create challenges for unit holders who may have already exited their units in such REITs/InvITs in earlier years without reducing their cost of acquisition or where they might have paid taxes in the earlier years on the repayment resulting in higher tax burden consequent to the amendment.

5) Tax collection at source (‘TCS’) on Remittance under the Liberalized Remittance Scheme (‘LRS’)

As part of the Finance Bill, 2023 approved by the Lok Sabha, it has now been proposed to increase the TCS rate on all payments made under the LRS from 5% to 20% without any minimum threshold (except a threshold of INR 7 lakhs for remittances made for education or medical treatment). It is also proposed to include credit card payments within the ambit of LRS for the purpose of TCS. This is likely to have a big impact on numerous online payments made by individuals since any payment made via a credit card to foreign vendors (such as for hotel and airline bookings, gaming, subscriptions to software/magazines/memberships etc.), will be subjected to TCS at 20% irrespective of the amount paid. In every such case, individuals will need to claim a credit for such TCS in their tax returns resulting in increased administrative compliance and cash flow issues.

In addition to the above, the below are some of the other proposals/ procedural and administrative updates forming part of the Finance Bill 2023 that has been approved by the Lok Sabha:

1) The STT to be levied on sale of options is proposed to be increase from INR 1,700 to INR 2,100 on a turnover of INR 1 crore; and on sale of futures contracts from INR 10,000 to INR 12,500 on a turnover of INR 1 crore

2) The 100% income-tax holiday benefit to offshore banking units operating in GIFT city is proposed to be enhanced to 10 years

3) Dividend income received by a non-resident or a foreign company from a unit in IFSC is proposed to be subject to tax at a lower rate of 10% as against the current tax rate of 20%

4) Contrary to the expectations of various stakeholders, the period for lower withholding tax rate on interest on loans raised from non-residents by way of issue of long-term bond or rupee denominated bond [4% if listed on a recognized stock exchange located in any IFSC/ 5% for others] has not been extended beyond 1 July 2023.

However, a new proviso has been introduced wherein a lower withholding tax rate of 9% shall apply on interest on loans raised from non-residents by way of issue of long-term bond or rupee denominated bond listed on a recognized stock exchange located in any IFSC. Hence any such interest will be taxable from 1 July 2023 at 9% or tax treaty whichever is lower.

(By Rajesh H. Gandhi, Partner, Deloitte India; Shivani Kotadia, Manager and Dhrti Manek, Deputy Manager, Deloitte Haskins & Sells LLP. Views are personal)