India’s Finance Act 2023 has introduced various changes that can have significant tax implications for businesses operating in the country. As a result, it is important for businesses to carefully assess these changes before taking any actions. For assistance, contact our professional advisors at india@dezshira.com.
The Indian federal government has notified the Finance Act, 2023, in force starting April 1, 2023. The Finance Bill, 2023, which was introduced during the Union Budget for the financial year (FY) 2023-24 on February 1, 2023, has undergone important changes through the lower house of Indian Parliament’s notice of amendments, known as the Amendment Bill.
Over 64 amendments have been passed under the Finance Act 2023, including alterations to the taxation of debt repayments from Business Trusts, advancing the date for charging withholding tax by online gaming operators, and incentivizing the International Financial Services Centre (IFSC).
Fresh changes have also been made, such as an increase in the tax rate for non-residents on royalty or fees for technical services (FTS) from 10 percent to 20 percent and the taxation of income from debt mutual funds.
These changes have implications for businesses operating in India and require careful consideration. Below, we provide a detailed analysis of the amendments.
Taxation of income from royalty and FTS in the hands of non-residents is subject to certain rules and regulations. Here are the key points to keep in mind:
The changes introduced by the Finance Act 2023 to the taxation of income from royalties and FTS in the hands of non-residents are as follows:
From April 1, 2023, Business Trusts will be taxed on distributions made in the form of debt repayment or proceeds from amortization of debt as income from other sources. Previously, unit holders of Business Trusts were not taxed on such capital payments, but now they will have to pay tax at a rate of 40 percent (for non-residents) or applicable slab rates (for residents).
This amendment introduced through Finance Act 2023 has nullified the benefit provided to sovereign wealth funds (SWFs) and pension funds (PFs) under section 10(23FE) of the Income-tax Act, 1961 to the extent distributions made to SWFs and PFs were in the nature of debt repayments from Business Trusts.
The Finance Act 2023 has introduced the following changes to the taxation of Business Trusts.
The taxable income of unit holders will now be determined based on the “specified sum” received during the previous year for the unit held at any time during that year. The specified sum can be calculated using a formula: A-B-C. If the result of the formula is negative, then the specified sum will be considered zero.
Here’s what each variable in the formula represents:
The amendment is viewed as a positive development for unit holders, as it provides some relief, particularly through the reduction of the amount subject to tax under Section 56(2)(xii) when calculating the specified sum. However, since Business Trust units are publicly traded, the tax implications may vary for different unit holders at different times. To assist unit holders in determining their tax liability, Business Trusts may need to make appropriate disclosures, and Form 64C may need to be revised accordingly. It is worth noting that the implications under Section 56(2)(xii) are only likely to arise when the distributions in the form of debt repayments exceed the issuance price of the Business Trust units.
The Income-tax Act provides an exemption to specified SWFs and PFs from paying tax on their dividends, interest, or long-term capital gains (LTCG) earned from investments in Infrastructure Investment Trusts (InvITs), subject to certain conditions. The Finance Act 2023 has now extended this exemption to also include the specified sum mentioned in section 56(2)(xii) of the Income-tax Act. As a result, any distributions made in the form of a specified sum to SWFs or PFs should also be exempt from tax, provided that they fulfil the necessary conditions under Section 10(23FE). This is a positive development that should address the concerns of SWFs and PFs investing in InvITs.
The Finance Act 2023 outlines that the cost of acquisition of a unit of Business Trust should be decreased by any amount received by a unit holder from the Trust that does not fall under the category of interest or dividend as mentioned in section 10(23FC) or 10(23FCA) of the Income-tax Act, and is not taxable under Sections 56(2)(xii) or 115UA(2) of the Income-tax Act. The effect of this change is explained below.
Distributions by way of repayment of debt
Implication in hands of unit holders
Capital Gains
Income from other sources
To the extent of issuance price of unit of Business Trust
Cost of acquisition of units to be reduced by such distributions, therefore, unit holders end up paying capital gains tax on higher amount
No implication
Above the issuance price of unit of Business Trust
No implication
Amount received by unit holder in excess of issuance price and amount already subject to tax under income from other sources, to be taxable as income from other sources:
The Finance Act 2023 amends Section 193 of the Income-tax Act to remove the obligation for Indian companies to withhold tax on interest payments made to Business Trusts that hold controlling interest or interest as per specific regulations. Earlier, Section 194A1 of the Income-tax Act exempted Business Trusts from tax withholding on interest payments, except for interest on securities like debentures. This amendment may provide welcome relief to Business Trusts holding controlling interest or interest under specific regulations, by removing the requirement for tax withholding on interest payments.
To encourage the growth of the IFSC, the Finance Act 2023 proposes the following measures:
According to the new provision introduced by the Finance Act 2023, capital gains resulting from the transfer of units of a ‘specified mutual fund‘ acquired on or after April 1, 2023, will be deemed short-term capital gains. The term ‘specified mutual fund’ refers to a mutual fund that invests no more than 35 percent of its total proceeds in equity shares of domestic companies.
The capital gains will be calculated by reducing the cost of acquisition and expenses incurred in connection with a transfer or redemption at maturity. This amendment eliminates the benefit of indexation of the cost of acquisition while computing capital gains on transfers of units of specified mutual funds, resulting in such capital gains being taxable at the applicable slab rates for resident investors.
The impact of this change is likely to be felt not only by debt funds but also by other categories of funds, such as ETFs, funds of funds, international funds, and gold funds.
The Finance Bill 2023 had earlier proposed a new tax regime for taxing winnings from online games, with withholding tax provisions to take effect on July 1, 2023. However, the Amendment Bill 2023 moved the date for the withholding tax provision up to April 1, 2023, and it was enforced through the Finance Act 2023.
Starting April 1, this year – 30 percent tax deducted at source will apply to withdrawals of net winnings.
At present, the Finance Ministry has not provided rules on how to compute ‘net winnings’. It is important to note that the requirement to withhold tax at a higher rate, as provided in Section 206AB(3), will not apply to withholding tax on winnings from online games.
The STT on the sale of options has been increased to INR 2,100 on a turnover of INR 10 million against an earlier levy of INR 1,700, an increase of 23.5 percent, while on the sale of futures contracts, the STT has been raised to INR 12,500 on a turnover of INR 10 million against INR 10,000 earlier, indicating a 25 percent hike.
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India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for more support on doing business in in India.
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