Foreign Remittances: Know The Tax & Regulatory Aspects
Covered below are key tax and exchange control implications for foreign remittances towards some common business transactions
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Advancement in technology, faster transportation and newer modes of communication, have helped the business grow beyond borders. For aspirants, the entire world has become a marketplace. Favourable trade policies coupled with robust banking channels and the advent of digital payment modes has fueled the speedy expansion of enterprises. In order to regulate such cross-border business and ensure collection of a fair share of taxes, Governments have introduced measures such as Exchange control regulations, International tax regulations, Transfer pricing, Foreign trade policies, etc.
Covered below are key tax and exchange control implications for foreign remittances towards some common business transactions:
Import of Goods
Generally, the revenue (i.e. profit) from the sale of goods/articles/things accrues in the country of residence of the seller. No major income tax implications arise in India for an importer. However, if imports are made from a related party, the importer is required to ensure that the transactions are carried out at “arm’s length price” (price at which two unrelated parties would have traded under uncontrolled circumstances).
The importer would be required to pay applicable custom duties on such imports, the rate of which depends upon the place of origin/sale and classification of the imported goods. In addition to basic customs duty, goods may be subject to CVD (countervailing duty), SAD (special additional duty), Protective and Anti-dumping duty. CVD and SAD are generally creditable against GST liability of the importer. Importers in special economic zones could also import duty-free under certain circumstances.
Import of goods are classified as current account transactions for Exchange Control purposes and thus are freely permissible unless the same pertains to items under banned/restricted categories. As per the prescribed regulations, remittances against imports are required to be made generally made within six months from the date of shipment. There are specific conditions around aspects like advance, guarantees, deferred payments, etc.
Payments Towards Services
Any payment towards services would need to be examined for tax withholding by the Indian service recipient. As per the extant domestic tax laws of India, the payment towards services is generally taxable in India and thus subject to withholding, unless they are for the purposes of business outside India. However, in light of the bilateral tax treaties(Double Tax Avoidance Agreements) entered into by India, the tax liability in the country could be restricted, and in some cases even eliminated. For example, payment to a US enterprise towards the installation of the machine in India would be subject to tax in India as per the Indian tax laws, however, upon invoking the restricted coverage under the India-US tax treaty, such tax could be brought down to zero. In case taxes are withheld as per the tax treaty, the foreign enterprise may examine the feasibility of claiming the tax credit for taxes withheld against the tax liability in country of its residence. While making remittance, Indian service recipient is required to obtain a certificate from a Chartered Accountant in a prescribed form, certifying that the taxes have appropriately been deducted. Transfer pricing regulations apply if such transactions are between related parties.
Further, an Indian service recipient would need to examine “Place of Supply Rules” to determine if there is any liability towards payment of GST on import of services under reverse charge mechanism. Such payment on the reverse charge is generally creditable against the GST liability on output services. In certain B2C service transactions, foreign companies are required to register and pay GST in India.
Most service transactions are covered as current account transactions under the Indian Exchange control regulations. Conditions/restrictions for foreign remittances under the regulations are largely similar to those applicable in case of import of goods.
Payment to a foreign enterprise for online advertisement or digital advertising space is subject to an Equalisationlevy of 6 per cent on the value of such services. The levy is applicable only on payments made in excess of INR 1 lakh in a financial year to a particular foreign enterprise. The payer is required to withhold the equalisation levy from the consideration payable to the non-resident for the said services. Further, the foreign enterprise is not liable to income tax on transactions subject to Equalisation levy, and since it is not levied under the Indian Income-tax, Foreign enterprise may find challenges in claiming the tax credit in the country of their residence. Further, foreign companies earning income which is subject to equalisation levy are required to file income tax returns in India.
Transfer pricing, GST and Exchange control regulations are largely similar to those applicable for services.
Exchange control regulations govern borrowing from an overseas lender. Borrowings by Indian companies are governed by the External Commercial Borrowings (ECBs) Guidelines regulated by the RBI. Under the extant regulations, ECBs are permitted subject to certain criteria on the eligible borrower, eligible lender, tenure and interest rates.
Furthermore, where the lender is a related party of the borrower, tax deduction on annual interest payout is restricted to 30 per cent of EBITDA. Any excess interest is disallowed and carried forward to be set off in subsequent 8 years. In respect of amounts borrowed in foreign currency, tax withholding is at a concessional rate of 5 per cent, subject to fulfilment of the conditions.
While making payment of dividends, Indian corporates are required to make payment of Dividend Distribution Tax (DDT) at 20.36% within 14 days of declaration, distribution or payment of dividend, whichever is the earliest. While DDT is not a tax on income but a tax on the distribution, applicability of tax treaties for the purpose of rate and tax credits is a big debate.
Investment Outside India
Indian enterprises looking to set up operations overseas, acquire companies outside India or enter into joint ventures which are guided by the Exchange control guidelines and regulated by the Reserve Bank of India (RBI). Resident individuals are allowed to remit an aggregate sum of USD 250,000 per financial year for any permissible current account or capital account transaction (other than for use in certain prohibited purposes and prohibited sectors) under Liberalized Remittance Scheme (LRS) without any prior approval from RBI. Genuineness of transaction needs to be satisfied before remitting funds. Corporates can invest overseas up to 400% of their net worth under automatic route. This limit cumulatively applies for investment in capital, loans and guarantees given. Investment in Real estate and Banking sector is prohibited. Compliances and filings are required to be made with AD Bank (Authorised Dealer) at the time of investment and annual filings.
One of the key aspects of compliance and responding to any regulatory enquiries is maintaining robust documentation relevant for foreign remittances. Below is an indicative list (not exhaustive) of documents that an Indian payer is advised to maintain:
* Agreements between parties evidencing the nature of transaction, consideration, payment terms, tax incidence, etc.
* Declaration by the foreign enterprise that it does not have any place of business or permanent establishment in India and that it is the beneficial owner of the income
* Tax Residency Certificate of the foreign enterprise issued by the country of residence, in order to claim a tax treaty benefit
* CA certificate in Form No. 15CB
* Other relevant documents
In today’s fast-paced economy, any payment around the globe can be made in a matter of seconds. With banking, exchange control and tax compliances going digital, the Governments are able to monitor volumes of cross border transactions by deploying digital tools and intelligent analytics. Enterprises need to be mindful of conditions and compliances under various regulations impacting international transactions. Any breach could result in penal implications and some may trigger prosecution. Complex and digital transactions need further caution as laws in some of the areas are still evolving.
*This article only covers key implications under Foreign Exchange Management Act, 1999; Income Tax Act, 1961, GST laws. There could be more detailed implications under these and other laws. The above are only general situations. The reader is advised to examine relevant regulations in detail and determine applicability in their specific cases.
This article has been co-authored by CA Jagat Mehta
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