The Indian Parliament approved the long-pending Goods and Services Tax Bill earlier this month, paving the way for a uniform tax regime. There were more tax reforms when the India-Cyprus Double Tax Avoidance Treaty was amended. The Government also kept its promise to implement a proposal made in the Union Finance Budget.
Goods and Service Tax (GST).
The Parliament of India approved the amendment to the Constitution by passing the Constitution (122nd Amendment) Bill relating to introduction of GST. The Bill was passed almost unanimously by the members across all political parties. The Bill will now be required to be ratified by a majority of Indian states, which is not expected to be a roadblock.
The Finance Ministry has been preparing for the implementation of the provisions of the Bill with effect from April 1, 2017. However, there are still a number of issues to be ironed out including the most critical being the GST rate. The various central and State government ministries and departments are deep in discussions to come to a consensus on most of the open issues. Once the law comes into force, it will replace the different laws and rates in India relating to taxes.
The cornerstone of this mammoth exercise is to bring transparency in taxation and reduce the burden of multiple compliances. The new law will pave the way for a uniform tax regime across the country leading to operational efficiency and better business growth. This, in turn, is expected to improve foreign investment.
This is evident from a recent statement from the United States Commerce Secretary, Penny Pritzker mentioning that bilateral trade will get further boost from new reforms including GST. She exuded confidence that “India’s rapidly growing economy and the Modi government’s ambitious reform agenda, including the landmark Goods and Service Tax, passage of the recent national bankruptcy law, and liberalized foreign direct investment limits in key sectors, point towards a deeper economic relationship in the years ahead.”
India Cyprus Double Taxation Avoidance Treaty.
Close on the heels of the amendment to the India-Mauritius Double Taxation Avoidance Treaty in May this year, the Union Cabinet has given its approval for the signing of an Agreement and the Protocol between India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.
With the revision of the treaty now approved by the Cabinet, capital gains will be taxed in India for entities resident in Cyprus, subject to double tax relief. In other words, India will have the right to tax capital gains arising in India. The provisions in the earlier treaty for residence-based taxation were leading to the distortion of financial and real investment flows by artificial diversion of various investments from their true countries of origin, for the sake of avoiding tax. This amendment will deter such activities.
However, on a comparison of the provisions of both these treaties, it appears that Mauritius has an edge over Cyprus, but the same may be for a limited period till March 31, 2019, since it will get concessional for two years beginning April 1, 2017. Capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. The full rate will apply from April 1, 2019.
FDI in NBFCs.
The Union Cabinet chaired by the Prime Minister Narendra Modi has given its approval to amend regulation for foreign investment in the Non- Banking Finance Companies (NBFCs). The amendment in the existing Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) regulations on Non- Banking Finance Companies (NBFCs) will enable the inflow of foreign investment in “Other Financial Services” on the automatic route provided such services are regulated by any financial sector regulators (RBI, SEBI, PFRDA etc.) / Government Agencies. Foreign investment in “Other Financial Services”. Which are not regulated by any regulators / Government agencies, can be made on the approval route.
Further, minimum capitalisation norms as mandated under FDI policy have been eliminated as most of the regulators have already fixed minimum capitalisation norms. This will induce FDI and spurt economic activities. It will cover whole of India and is not limited to any State/District.
The genesis of this amendment goes back to the proposal made in the Union Finance Budget by Union Finance Minister, Arun Jaitley in February this year, relating to relaxation of FDI norms for NBFCs.