The Indian Finance Company: the key points for the future of companies in the Sub-Continent

Corporate taxation

1) Introduction of a new withholding tax of 0.1%, on transactions for the sale of goods whose value exceeds 5 million rupees (57,000 euros). These provisions are applicable only if the seller's turnover in the immediately preceding year does not exceed 100 million rupees (1.15 million euros). Furthermore, if the Permanent Account Number (PAN) is not provided by the buyer, the tax will rise to 5%. These provisions will be effective from 1 July 2021.

2) Higher withholding tax rate for those who do not complete the tax return. The rate must be higher than twice the rate specified by law or, if not specified, the 5%. The sanction is aimed at any company that has not filed a tax return for the two years preceding the reference year, and for which the deadline for submitting the declaration has expired. For the sanction to take effect, the total withholding tax must exceed 50,000 rupees (575 euros). Effective July 1, 2021 and applicable from the 2021-22 fiscal year onwards.

3) In order to incentivize electronic transactions to boost the digital economy, it is proposed to make tax audit mandatory by raising the existing threshold from Rs 50 million to Rs 10 million (from 575,000 million euros to 1.15 million euros). Effective April 1, 2021 and applicable from the 2020-21 fiscal year.

4) Untaxed business income for start-ups which were incorporated on or after April 1, 2016 but before April 1, 2021. Furthermore, the exemption is also granted to all long-term capital gains arising from the transfer of residential property before 31 March 2021, provided that the net income from such transfer is used to subscribe for shares in an eligible start-up. In order to assist these start-ups, it was decided to postpone the deadline for incorporation to 31 March 2022.

5) Amortization of goodwill not allowed: scope of intangible assets excludes goodwill for amortization purposes has been changed to exclude goodwill from its scope. Therefore, depreciation will not be eligible either on internal goodwill or on purchased goodwill. For purposes of calculating capital gains, the cost of acquisition will be the actual purchase price; on the other hand, it will be null in the case of internal start-up.

6) Delayed payment of contributions to pension funds for employees results in a permanent denial of the deduction. An employer is required to deduct a certain amount from employees' salaries towards their social security funds. If the same is not remitted to the respective fund by the due date, this amount will not be deductible. Effective April 1, 2021 and applicable from the 2020-21 fiscal year onwards.

International taxation

1) It is now clarified that taxation as a royalty or technical service charge under the Income Tax Act takes priority over the Equalization Levy. The Equalization Levy is a digital asset tax on foreign companies that do not have a significant physical presence in India. To qualify as the online sale of goods and the online provision of services, one or more of the following activities must be undertaken online:

– acceptance of the sale offer;

– entry of the purchase order;

– acceptance of the purchase order;

– payment of the consideration or

– supply of goods or provision of services, partially or entirely.

A transaction that is subject to an Equalization Levy will therefore be exempt from this levy as of 1 April 2020.

2) Provisions on the Minimum Alternate Tax (MAT): MAT or Minimum Alternate Tax is a provision in the direct tax laws to limit the tax exemptions that companies enjoy, so that they must pay a minimum amount of taxes to the government. Under the current regime, the MAT is applicable to the 15% rate on a company's profit, and if the accounting profit increases, the assessment office of the MAT recalculates the profit and the tax to be paid. For this to happen, the taxpayer will have to present a request to the tax office. The legislation will take effect from April 1, 2021 and will be applicable from the 2021-22 tax year onwards.

3) For bureaucracy for small companies, it was decided to consider as small companies those companies with a paid-up capital of up to 20 million rupees (230,000 euros); and a turnover of up to 200 million rupees (2.3 million euros).

4) To encourage start-ups, it was decided that One-Person Companies (OPCs, companies with only one shareholder) they no longer have restrictions on paid-up capital and turnover. In addition, conversion to other types of companies is permitted at any time; finally, the residence limit for an Indian citizen to set up an OPC was reduced from 182 days to 120 days.

The Rupee/Euro exchange rate used for this article is as of February 16, 2021.