1. Important recent Supreme Court Rulings

  • Software taxability

Software can be in various forms/models, like single/multiple licenses, distribution model, shrink wrap software, customised software, software embedded in hardware etc. There have been various conflicting decisions on the subject matter wherein the key issue is centered around the interpretation of the term ‘copyright’.

The Supreme Court of India has ruled that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through End User Licensing Agreement (EULAs)/distribution agreements, is not in the nature of royalty for the use of copyright in the computer software under various relevant tax treaties. Accordingly, the same is not liable for deduction of tax at source under Section 195 of the Indian Income-tax Act, 1961.

  • Secondment of Employees

Cross-border movement of personnel within a Multinational Group's affiliated entities is a business reality. Such movement, especially medium to long-term, is referred to as ‘Secondment’.

Recharge of secondment charges to an Indian counterpart by its foreign group company has been a matter of litigation in India under the direct and indirect tax laws.  The Supreme Court of India has pronounced a judgment wherein it was held that service tax is payable on secondment of employees from overseas group companies. 

2. Key Budget 2023 amendments (CIT):

  • Increase in tax rate for Royalty/Fees for Technical Services (‘FTS’)

With effect from 1 April 2023, the base tax rate for royalty and FTS has increased to 20 per cent (from existing tax rate of 10 per cent) under the Income-tax Act,1961.

With such an amendment, if a non-resident entity wishes to opt for beneficial tax rate under applicable tax treaty, certain compliances would have to be undertaken in India. Importantly, the eligibility to take a benefit of the tax treaty would be subject to certain conditions given in tax treaty.

  • Issue of shares to non-residents

With effect from 1 April 2023, issuance of shares to non-residents has been brought under the ambit of taxation, where issuance is at a price which exceeds fair value computed as per prescribed rules.

You may refer to this Link of KPMG in India Union Budget Booklet 2023 - 2024.

3. International Taxation - Base erosion and profit shifting (BEPS) and Multilateral Instrument (‘MLI’)

The Organisation for Economic Co-operation and Development (OECD) launched 15 Action Plans on Base Erosion and Profit Shifting in July 2013 with an objective of an international collaboration to end tax avoidance. The Action plans developed by OECD recognise the importance of a borderless digital economy and proposed to develop a new set of standards to prevent BEPS and to equip governments with domestic and international instruments to prevent corporations from paying little or no taxes. 

With an objective to expedite and streamline the implementation of the measures developed to address BEPS and amend bilateral tax treaties, many negotiations on the Multilateral Convention have been concluded to implement Tax Treaty related measures to prevent BEPS.

India is actively involved in the BEPS project in alliance with the OECD and G20 member countries and is keen to implement and make changes to domestic law to ensure parity with BEPS recommendations. India has a large consumer market and thus, source country taxation model becomes critical for India to gain a fair share of taxes from the digital transactions of non-residents. 

India has been a frontrunner in adopting certain unilateral measures by introducing Equalisation Levy (‘EL’) and Significant Economic Presence (‘SEP’) related provisions in domestic law.

You may refer to this link for Webinar on the topic - Tax - Webinars & webcasts - KPMG India

4. Equalisation Levy (‘EL’)

New and complex business models have come with a set of new tax challenges in terms of nexus, characterisation and valuation of data and user contribution. To provide clarity on the same, Government of India introduced provisions of EL to give effect to one of the recommendations of the BEPS Action Plan 1. Such levy is at the rate of 6per cent of the gross consideration to be paid to a non-resident service provider for specified services like online advertisement. The government further expanded the scope of EL with effect from 1 April 2020 by adding a new levy of 2per cent on the consideration received/receivable by an e-commerce operator from e-commerce supply or services. The wordings of the new provisions are wide enough to bring into its ambit more than the normally understood connotation of online marketplace intermediaries and aggregators.

You may refer to this link for latest KPMG in India Tax Flashnews on this- CBDT notifies Centralised Processing of Equalisation Levy Statement Scheme 2023

5. Significant Economic Presence (‘SEP’)

India adopted the concept of SEP through the Finance Act, 2018. SEP has expanded the scope of the term ‘Business Connection’ under domestic law (a concept parallel to Permanent Establishment under tax treaties). This is a significant change, whereby non-residents selling goods/services may be liable to tax under Indian domestic law. Considering that SEP has a very wide connotation, accessibility to tax treaty becomes very important.

Though SEP provisions were notified in the Finance Act 2018, the same remained inoperative in the absence of the thresholds. The same have been prescribed and is applicable from the Financial Year 2021-22.

You may refer to this link for latest KPMG in India Tax Flashnews - CBDT notifies thresholds for the provisions of SEP

6. GAAR (‘General Anti-Avoidance Rule’)

Introduction of GAAR is a significant development in India’s tax policy, impacting decisions relating to structuring of a transaction or entering into an arrangement. GAAR empowers the revenue authorities to declare a transaction/arrangement as an ‘impermissible avoidance arrangement’, thereby determining and levying taxes as may be deemed appropriate, thereon denying benefits originally claimed (including those under the tax treaty). More and more countries are adopting GAAR to check aggressive tax planning and reduce incidence of tax avoidance. In India, GAAR came into effect from 1 April 2017.

7. Faceless assessment and appeals

Government introduced the Faceless Assessment and Appeal Scheme to provide greater transparency, efficiency and accountability in Income Tax assessment/appeals and to eliminate the interface between the officers and the assessee during the course of proceedings. While it is a step-in right direction, new scheme brings new challenges as well such as stringent compliance dates, no in-person hearing, limited adjournments etc. 

You may refer to this link for latest KPMG in India Tax Flashnews - CBDT notifies new Faceless Appeal Scheme 2021

You may refer to this link for Webinar on the topic - Tax - Webinars & webcasts - KPMG India

8. Not-for-profit Organisations/Charitable Institutions

Taxability of charitable institutions has been an ever-evolving subject marred by continuous changes in tax regulations, conflicting judicial precedents coupled with entry of new age not-for-profit operating models.

What constitutes ‘Charitable purpose’ and which activities entitle an entity to claim exemptions has also been subject matter of extensive dispute with the tax authorities.

The impact of these developments and rulings may require a change in the operating model of charitable institutions. It is important for charitable institutions to understand the nuances of these developments/rulings and the impact of the same.

You may refer to this link for latest KPMG in India Tax Flashnews - Tax Flash News - KPMG India

You may refer to this link for Webinar on the topic - Tax - Webinars & webcasts - KPMG India