While presenting the Budget for 2011, the Finance Minister observed as under:
To attract foreign funds for financing of infrastructure, I propose to:
- create special vehicles in the form of notified infrastructure debt funds
- subject interest payment on the borrowings of these funds to a reduced withholding tax rate of 5 per cent instead of the current rate of 20 per cent;
- exempt the income of the fund from tax
In order to achieve the aforesaid objective, following amendments have been proposed in the Finance Bill 2011.
- Sub section (47) to section 10 has been introduced which provide that any income earned by a infrastructure debt fund, which may be notified by the Central Government for the purpose of this clause, shall be exempt from income tax. However, such debt fund shall be liable to file its return of income.
- Section 115A of the Income-tax Act has been amended to provide that any income earned by a non-resident (not being a company) or a foreign company from such infrastructure debt fund shall be liable to tax @ 5 per cent.
- Section 194LB has been introduced to provide that the rate of TDS in respect of any interest payable to non-residents in respect of the aforesaid debt fund shall be @ 5 per cent.
The amendments clearly provide that any income earned by a non-resident from investing in infrastructure debt fund shall be liable to tax @5 per cent only. It may be mentioned here that the lowest rate prescribed in the Income-tax Act is 10 per cent. However, the aforesaid amendment will be an exception to entire Income-tax Act. In order to ensure that the non-residents do not bear the burden of higher TDS it has also been proposed that any payment in pursuance to the aforesaid fund shall be liable to TDS @5 per cent only, although this will be subject to the provisions of section 206AA of the Income-tax Act.
Section 206AA provides that any person whose receipts are subject to deduction of tax at source shall be required to quote his PAN to the person responsible for deducting TDS. In case the deductee fails to intimate the PAN to the deductor, then the deductor shall be required to deduct TDS at following rates:
1. Rates prescribed in the Income-tax Act or
2. At the rate of 20 per cent
Whichever is higher
In other words, if the non-residents desire to avail the benefit of lower deduction of TDS under the aforesaid amended provisions, it is mandatorily required on their part to obtain PAN in India. If the non-resident fails to inti-mate the PAN to the deductor, TDS will be at a minimum rate of 20 per cent despite the prescribed TDS rate of 5 per cent.
The procedure for obtaining PAN is simple, inexpensive and quick. Non-residents can apply through the local embassy / consulate of India. Applications can also be filed, paid for or trac-ked online through the Internet. Further, for the purpose of obtaining PAN in India, it is not required that the non-residents should have any office or place of business in India.
Investments by non-residents in India are governed by the provisions contained in FEMA. Master circular no. 13/2010-11, dated 01/07/2010 contains provisions relating to Foreign Investments in India. It provides that Non-residents Indians (NRI) are allowed to invest without limit on repatriation basis on bonds and other securities. The circular further provides that Foreign Institutional Investors (FII) are also allowed to purchase debt instruments and other bonds on repatriatiable basis. However, it is subject to certain limit which may be notified by the SEBI and RBI from time to time.
None of the provisions in FEMA freely permit individuals to make investments in India. It now appears that investments in notified infrastructure debt funds will be allowed freely to non-resident individuals also.
The proposed measure will certa-inly give a big boost to foreign inve-stments in infrastructure sector in India through notified infrastructure debt funds.
(Author is a Sr. Partner in S S Kothari Mehta & Co.)
Email: hp.agrawal@sskmin.com
