International Tax – India – Kunal Savani

Cyril Amarchand Mangaldas (CAM) is a leading Indian law firm with a global reputation of being trusted advisors to our clients. Tracing its professional lineage to 1917, Cyril Amarchand Mangaldas was founded to continue the legacy of Amarchand & Mangaldas & Suresh A. Shroff & Co. – whose pre-eminence, expertise and reputation of almost a century was unparalleled in the Indian legal fraternity. We, at CAM, advise a large and diverse set of clients, including domestic and foreign commercial enterprises, financial institutions, private equity funds, venture capital funds, start-ups, government and regulatory bodies. We are the largest full-service law firm in India, enabling us to deliver truly multidisciplinary advice for our clients’ business needs.

Central to our culture, is our ‘Ahead of the Curve’ mindset. Foresight and innovation lie at the foundation of everything we do, to keep our clients ahead of their legal and business challenges. We have been at the forefront of innovation in the Indian legal market, often breaking new ground. We help our clients embrace and ride the wave, in ever-changing market turbulence. By looking ahead and extensively collaborating, we anticipate challenges and push ourselves to deliver complex, practical solutions to our clients.

Our tax and private client practice, which is my own area, is highly regarded and sought after for legal and practical solutions, especially for the complex and new age transactions, litigation strategy & support. The tax practice at CAM has been consistently ranked as Tier-2 by Legal 500 Asia Pacific rankings. It was also recently recognised in the India Law Form Awards 2023 by India Business Law Journal. Our strategic insights on technical issues, as well as our ability to get on board quickly, with a proactive and pragmatic approach, while always being cognisant of the commercial needs of our clients, is highly appreciated and lauded. We guide domestic and international clients on business-critical matters through commercially relevant counselling. We assist clients with tax advisory services in relation to inbound and outbound structuring, choice of optimal jurisdiction for entity formation, analysing various structures, such as setting up branch office, project office, subsidiary company, joint venture company, LLP etc., for entity formation, tax implications of secondment of expatriates, strategies and measure to minimise the risk of establishing a ‘permanent establishment’ in India, etc. We also advise on structuring and availment of various tax incentives and other benefits and concessions as may be specified by the government from time to time.

We work seamlessly with our specialists in related practice areas, including corporate, real estate, regulatory, capital markets and have a ‘full service’ approach. Our in-house experience in multiple disciplines gives us a significant advantage in complex transactions and helps us provide clients with focused representation, adapted to their requirements.

In addition, we support our clients in navigating the many daunting challenges that they face in relation to succession planning, tax planning, and philanthropy issues, and their desire to remain resilient in the face of the challenges of globalisation and regulatory compliance. In this regard, our clients span from multi-generational business families, successful entrepreneurs, celebrities to senior executives. We also work across a wider cross section of the industry with family offices, wealth management companies, trustee companies in relation to how they function and how they can assist clients on their estate planning.

We are constantly innovating legal solutions and are at the forefront of novel transactions in India. A recent testament of our ‘Ahead of the Curve’ approach and technical expertise is the assistance provided by us to a globally reputed Australian university, in setting up India’s first branch educational centre at India’s International Financial Services Centre at GIFT-City, Gujarat. My team provided detailed structuring advice with regards to setting up the branch campus in India, evaluating various structures which could be used to set up operations in India, assisting in availment of tax holiday benefits in GIFT-City and applicable tax treaty benefits, evaluating risks of establishing a permanent establishment and suggesting measures to mitigate the same, analysing tax implications of repatriation of income abroad, sub-contracting/ secondment of teaching personnel to the branch campus, etc., and assisted the Client in structuring its operations in a manner which was both tax efficient and ensured that the commercial exigencies of the Client were met.

In another recent marquee assignment, we assisted a large conglomerate in cross-border internal group restructuring. Our client was a US-based listed company which has operations across jurisdictions. We were required to constantly coordinate with counsels from multiple jurisdictions to ensure that the interests of the client were protected from all fronts. We analysed and opined on emerging issues with limited judicial jurisprudence such as tax implications arising from re-domiciliation of an entity which owned shares of an Indian company, to another jurisdiction, liquidation of foreign companies owning Indian assets etc. We also analysed possible anti-avoidance and transfer pricing risks and suggested measures to combat the same.

I am a Partner in the Tax and Private Client practice at CAM. With close to two decades of experience, I have been working as an Indian tax qualified lawyer for over 16 years and I am also a qualified chartered accountant for almost two decades. I have been named as a “Recommended Lawyer Tax” in The Legal 500 Asia Pacific Ranking for 2022 and 2023. I have expertise in various aspects of direct tax, such as corporate tax, international tax, inbound and outbound M&As. My experience also includes conceptualising and evaluating tax efficient alternatives and plans for acquisitions / divestments, mergers / demergers and business / corporate reorganisation, with a view to minimise transaction costs and/or tax exposure, based on the commercial objectives of the stakeholders involved.

I have advised on matters related to compensation planning for MNC executives, statutory compliances relating to corporate taxation and expatriate taxation. Since 2012, I have also been a part of the Private Client Practice team, specialising in tax laws related to family settlements/ constitutions, trusts, wills, gifts and succession planning. I have been fortunate to have had the opportunities to advise clients across industries, including Aerospace, Automotive, Banking, Education, Financial Services, Hospitality, Infrastructure, Insurance, ITES, Media & Entertainment, Mining & Metals, Pharmaceuticals, Private Equity, Real Estate, Telecommunications, etc.
I have written several articles and blogs on direct tax matters, which have been published in leading newspapers, journals and tax blogs such as Bloomberg, Tax Notes International, the Financial Express, Lexology, Tax Sutra etc. I am also a regular contributor to Cyril Amarchand Mangaldas blogs (or CAM Blogs), which can be accessed here.

I have also been invited as a speaker at various forums such as PHD Conference on Tax Aspects of Business Reconstructions, Acquisitions and Family Settlement, Confederation of Indian Industry – Family Business Network, Programme for Legal Education and Awareness – Bridge session at IMC. I have also co-authored a detailed chapter on ‘Taxation of income from other sources – Implications under section 56 (2)(vii)/(viia)’– a compendium published by The Chamber of Tax Consultants, and an academic paper on ‘Disclosure Regime in India’ published in the Oxford Journal Trust and Trustee, mainly focusing on FATCA and CRS, etc.

I am a member of Chamber of Tax Consultants, Jain International Trade Organisation, Bombay Chartered Accountants Society, and several other tax professionals’ organisations.

The Tax Team at CAM is best known for adding value to complex structuring of M&A transactions, including in a bid situation, complicated direct and indirect tax litigation, advice on interpretation of taxation provisions, advice on structuring of businesses for tax optimisation, structuring of investment funds for different asset classes. In addition, we provide comprehensive advisory services on convoluted and emerging tax issues such as undertaking impact analysis of recent or proposed investments, highlighting tax risks arising from a proposed transaction, ideating and suggesting tax efficient alternatives, etc. Accordingly, our current workflow is exceedingly varied and, inter alia, involves:

• Restructuring and reorganisation of entities and businesses – for inviting investment, as well as, for sale and monetising or consolidating and streamlining business verticals, and for Initial Public Offerings;
• Structuring of inbound and outbound investments, undertaking comparative jurisdictional analysis, capital restructuring, guiding through various tax incentives, exemptions and compliances for claiming benefits, advising on the mode of investment and incorporation of investor entity in line with the regulatory requirement pertaining to the sector;
• Providing comprehensive transaction tax advice, ranging from advising on tax implications (including compliance requirements), assisting in negotiating, drafting/ reviewing commercial documents to reflect selected structure, and protecting client interest through drafting and negotiating tax representations, warranties and indemnities in transaction documents viz. share purchase agreements, joint venture agreements, business transfer and asset transfer agreements, and other commercial agreements;
• Undertaking tax due diligences for transaction advisory as well as for undertaking a ‘health check’ for identifying risks associated with ‘place of effective management’, ‘general anti avoidance rules’, ‘permanent establishment’, etc.;
• Structuring of new and complex investment and fund products, such as alternative investment funds, real estate investment trusts, infrastructure investment trusts, foreign portfolio investors, etc.;
• Advising private clients on tax implications of complex cross border estate planning and structures, family settlements and arrangements, setting up of trusts and other related guidance;
• Assisting charitable institutions in claiming tax exemptions in India;
• Representing clients in tax litigation and assisting with dispute resolution strategy advice; and
• Assisting industry bodies in making representations to appropriate authorities, while taking into consideration the legal and regulatory requirements, availability of exemptions, dichotomy in interpretation, disclosure requirements, accounting and tax impact.

Recently, some of the tax-related concerns that clients have been reaching out to us for, include:

• Assistance with structuring setting up various kinds of businesses in India’s International Financial Services Centre such as ship leasing, aircraft leasing, family office, branch campus, etc.;
• Advising on transfer pricing implications arising in India on cross-border inter-group services/ payments;
• Risk analysis from a General Anti Avoidance Rules (including ‘principal purpose test’ under the tax treaties) perspective,
• Advising on applicability of digital tax provisions (such as equalisation levy, significant economic presence etc.) to tech companies looking to set-up or expand operation into India.
• Negotiation and finalisation of transaction documents, review of condition precedent documents and drafting tax-specific agreements within stringent timelines in several key M&A transactions; etc.

India follows a mix of residence and source-based taxation. While Indian tax residents are subject to tax on their global income, non-residents are only required to pay tax on income which is received or deemed to be received in India or accrues or arises or is deemed to accrue or arise in India. Further, the Indian tax laws include detailed residency rules, which vary according to the status of a taxpayer. Some of the unique features of the Indian corporate tax regime which have posed interesting issues for non-resident taxpayers are:

• Foreign companies can be deemed to be residents of India if their place of effective management is considered to be India. In this respect, the Indian tax authorities have published detailed guidelines which, inter alia, provide certain objective criteria which can assist a foreign company in establishing that it has substantial operations outside India. However, the said guidelines may conflict with similar requirements in the country of incorporation. We have often advised clients with respect to a risk of having a place of effective management in India and suggest measures to mitigate the same.

• In addition, corporate tax rates differ for Indian and foreign companies. Typically, foreign companies are taxed at a higher rate while several concessional tax regimes are available to different types of Indian companies. However, foreign companies have access to various beneficial provisions/ tax rates under the domestic law with respect to, inter alia, investment income sourced from India. We regularly assist clients in evaluating various structures (such as setting up a subsidiary or a branch office, acquisition of an existing business, etc.) in order to reduce the tax costs of their operations in India.

• Indian tax law includes a concept of ‘business connection’ which is similar to a permanent establishment but much broader in scope. It becomes especially critical to structure operations in a tax efficient manner where transactions involve residents from countries with which India does not have a tax treaty. We provide detailed analysis in this respect and assist clients in mitigating the risk of establishing a business connection or permanent establishment in India.

• Several investment incomes (such as dividend, royalty, capital gains, etc.) may be deemed to be taxed in India in the hands of foreign companies, even in the absence of a business connection/ permanent establishment. We review the nature of payments received by a client under various agreements having an Indian nexus and advise on whether any Indian tax implications (including withholding tax, compliance requirements, etc.) arise pursuant such arrangements. We also regularly advise clients with respect to whether any indirect transfer tax implications arise in India from a transfer of foreign shares and build-in clauses within the transaction documents, to protect the interests of the client.

• Several capital gains exemptions and other tax benefits are also available for M&A transactions. We regularly assist clients in structuring their operations in a manner so as to as make use of such exemptions/ benefits.

Foreign investors should also be mindful of the fact that, generally, tax laws in India are highly complex and constantly evolving. India is a common law country and judicial precedents play an important role in determining the changing position of law. Additionally, Indian tax provisions require compliances at various stages, which are often missed out by taxpayers, particularly foreign taxpayers. There may be a requirement to obtain various tax-related identification numbers and/ or file tax returns in India, even when no taxable income arises in India. India has a huge network of double tax avoidance agreements with over 90 countries, and they can play an instrumental role in the choice of jurisdiction while making any investments into India. Thus, it is imperative for foreign investors to seek professional tax advice with respect to structuring and compliance before entering into any transaction which can have Indian tax implications.

As discussed above, tax laws in India are highly complex and constantly evolving. As a result, taxpayers, especially non-resident taxpayers, face a myriad of difficulties while engaging in cross-border transactions involving India. We provide end-to-end solutions to our clients and assist them with routine as well as unique tax issues, such as:

• We recognise that no two businesses are the same and no two clients have the same needs. Our highly experienced team is able to act swiftly on any cross border and domestic transaction, provide in-depth analysis and risk assessment and recommend structures that are optimum from taxation perspective, mitigate litigation risk and achieve the commercial and business objective.
• The Indian tax authorities have been increasing compliance requirements for non-residents. Non-compliance with such requirements may carry hefty penalties, and even make defaulters liable for prosecution in certain cases. Thus, multiple layers of taxation and different compliance standards make it imperative to seek reliable legal advice while doing business in India. We render aid and assistance to the clients in relation to direct and indirect tax compliances wherever necessary.
• The Indian tax authorities have also introduced various disclosure provisions to ensure income is adequately reported at the time of payment/ accrual itself. It is critical for taxpayers to undertake an impact analysis of these provisions on their businesses and ensure compliance, wherever applicable. We provide detailed impact and risk analysis in this respect.
• Additionally, India has revamped its taxation regime, over the past few years, in order to align it with internationally accepted taxation standards. For instance, the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) suggested measures to combat tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity or to erode tax bases through deductible payments such as interest or royalties. As a consequence, India introduced several amendments to its taxation regime such as introduction of general anti avoidance rules, equalisation levy provisions, expansion of the concept of business connection to include ‘significant economic presence’, etc. We undertake impact analysis and analyse risks arising to clients under these provisions. We further help in strategising ways to minimise such risks.

Due to the complex nature of the Indian taxation regime, we advise across a wide range of sectors and this experience makes us pragmatic, solution driven and the destination practice for all kinds of transactions and enables us to help our clients with strategic market insights. We take pride in our ability to add value to our clients, in making focused and strategic decisions and assessing risk.

India is one of the premier destinations for attracting foreign investment. India was ranked as the fifth-largest recipient of Foreign Direct Investments in 2020, according to the World Investment Report-2021 that was released by the United Nations Conference on Trade and Development.(1) India’s tax laws include several beneficial provisions for foreign investors. Some of the tax advantages in place under the tax laws of India for foreign investors are as follows:

• Investment income such as dividends, royalty, fees for technical services, etc. is taxable at beneficial rates in the hands of non-resident investors, as compared to resident investors.
• Interest income arising from certain specified loan agreements/ debt instruments is taxable at beneficial rates in the hands of non-resident investors, as compared to resident investors.
• Long-term capital gains arising on sale of unlisted shares of an Indian company is subject to tax at a beneficial rate of 10% (plus applicable surcharge and cess) for non-resident taxpayers, including foreign companies (as compared to 20% (plus applicable surcharge and cess) in case of resident taxpayers).
• India also has an International Financial Services Centre (IFSC) at GIFT City, Gujarat which provides various tax incentives to foreign investors looking to invest in GIFT City.

In addition to the more general benefits, the domestic laws also provide several sector/ business specific benefits which may be availed by foreign acquirers/ investors. Our team enjoys a multi-disciplinary experience across sectors, including healthcare & pharma, manufacturing, banking & financial services, retail, power, FMCG, real estate & infrastructure, telecom, media & technology, education, engineering & capital goods, investment funds and hospitality. We are able to understand the commercial exigencies of each client and provide tailor-made sector-specific solutions to our clients.

Additionally, India has tax treaties in place with over 90 countries, including countries such as the USA, UK, Singapore, Malaysia, Netherlands, France, and Japan. Investors from such countries can avail relief under the applicable tax treaty, to the extent such treaty is more beneficial to them (in the form of lower tax rate or limited scope). Several treaties provide major relief to non-resident taxpayers earning income from India. For instance:

• Under the India-Mauritius tax treaty, interest income is subject to tax at the rate of 7.5% (as opposed to rates ranging from 9%-40%(2) (plus applicable surcharge and cess) under the Indian tax laws).
• The India-USA and India-UK tax treaty the definition of fees for technical services more restricted than the definition provided under the Indian tax laws.
• The India-Netherlands tax treaty provide for certain beneficial provisions for taxation of capital gains arising from sale of shares of an Indian company.

We provide detailed comparative analysis amongst various treaties and advise our client with respect to the most optimum investment structure, as per their business needs.

(1) World Investment Report 2021: INVESTING IN SUSTAINABLE RECOVERY (unctad.org).
(2) These rates are applicable for debts incurred on or after July 1, 2023.

The Indian government has taken concerted efforts to strengthen tax regulation and counter tax evasion, in line with internationally accepted principles. With effect from April 1, 2017, the Indian government introduced General Anti Avoidance Rules (GAAR). The GAAR provisions, inter alia, provide that if the main purpose of any part or step of the arrangement is to obtain tax benefits, the entire arrangement shall be presumed to have been entered into with the purpose of obtaining a tax benefit and the burden of proof will be on the taxpayer to establish that obtaining a tax benefit was not the main purpose of the entire arrangement. If GAAR provisions are invoked, then the tax authorities have wide powers, including denial of tax benefit or a benefit under a tax treaty, the consequences and effects of which are not determinable at present. In the absence of any precedents on the subject, the application of these provisions is uncertain. Further, due to the broad nature of the GAAR provisions, we are careful to analyse every transaction from a GAAR perspective to ensure no adverse risks arise for a client. We also advise our clients on the importance of having sufficient material on record, including justification of the commercial rationale of undertaking a transaction, while undertaking any cross-border transaction which has nexus with India. This helps us provide holistic advisory services, which protect the interests of the client.

Further, India is also a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI is a multilateral treaty signed by more than 95 countries that amends and supplements existing tax treaties with various anti-abuse provisions, depending on the elections made by the signatories. India signed the MLI on June 7, 2017 and submitted the instrument of ratification on June 25, 2019. MLI will come into effect, with respect to the specific tax treaties, depending on the date of deposit of instrument of ratification by the other country and nature of the provisions. The MLI, inter alia, introduced the principal purpose test which broadly provides that a benefit under a tax treaty would not be granted, if it is reasonably concluded by the tax authorities that obtaining the benefit was one of the principal purposes of the concerned arrangement/ transaction that resulted directly/ indirectly in that benefit. Similar to GAAR, we analyse the impact of the MLI, where applicable, under India’s tax treaties, while advising our clients.

In addition, the Indian government has taken a slew of measures and introduced various amendments to the Indian tax laws to plug any loopholes as well as ensure ease in compliance to taxpayers, such as rationalising of tax provisions applicable to charitable organisations, introduction of numerous withholding tax provisions to ensure income does not escape assessment, mandating reporting of certain specified high-value financial transactions in tax returns, etc.

Such measures have led to various interesting questions being raised by non-resident investors. For instance, in the past few years we have provided advisory services in relation to:

• Providing an opinion on tax implications arising from re-domiciliation of a foreign company and suggesting measures to protect such a structure from scrutiny from a GAAR perspective.
• Advising on conditions to be satisfied and steps to be followed in order to claim capital gains tax exemptions under the Indian tax laws.
• Advising on satisfying the ‘beneficial ownership’ requirement under India’s domestic law as well as various tax treaties.
• Advising on claiming benefit of carry-forward of tax losses, unabsorbed depreciation, Minimum Alternate Tax credit, etc. in M&A transactions.

Recently, we have also advised various tech companies across sectors such as fintech, ed-tech, hospitality, etc. in relation to the equalisation levy provisions and significant economic presence provisions under the Indian tax laws.

Unlike many other firms, we provide end-to-end solutions, from due diligence to structuring the transaction, to drafting applications to obtaining requisite regulatory approvals. We help clients evaluate the risks involved in adopting certain ways of doing transactions, as well as help them in adopting mitigating strategies. We evaluate some very complex and innovative transactions, instruments and methodologies across multiple industry sectors and use our expertise and experience to arrive at tax implications even where there is no judicial precedent. We use our unique, insightful, dynamic and multi-dimensional principles and ideas to provide solutions.

Our multi-skilled team of lawyers and chartered accountants enable us to understand the business rationale of our clients, as well as the accounting impact. Our sector specific expertise puts us in a favourable position to provide solutions to uncharted, first-time transactions coming up in the face of changing financial engineering as well as in the traditional structures. At CAM, being a full-service law firm, we are in a position to draw from our expertise in various sectors in a seamless manner to deliver maximum value to our clients.

We advise clients from multiple jurisdictions on a range of issues. We have a wide client base which includes a large number of foreign clients.

Our highly experienced team is able to act swiftly on any cross border and domestic transaction, provide in-depth analysis and risk assessment and recommend structures that are optimum from a taxation perspective, mitigate litigation risk and achieve the commercial and business objective. We bring together lawyers with deep domain knowledge in varied sectors and unmatched experience across legal forums to provide clients with the most effective litigation solutions. In our effort to strive for perfection and client’s utmost satisfaction, we have multiple offices in India and outside to provide ease and effectiveness to our clients. In India, we have offices in Mumbai, Delhi, Bengaluru, Ahmedabad, Chennai and GIFT City. To create a better communication chain with our foreign clients, we have desks in Singapore, Japan, South Korea, Nordic, China, Israel, Middle East and Germany.

Additionally, we also prepare and publish quarterly/yearly publications providing tax related updates to our clients. Tax Scout, our flagship quarterly publication on tax issues, informs our clients of recent developments in direct and indirect tax laws in India. We also publish other internationally-focused magazines and booklets such as ‘Eye on India’ to give our clients an overview of the socio-political scenario in India and its impact on the legal economy; ‘enTrusted’ which provides taxation and other key insights to our private client practice clients, etc.

We also make regular contributions to global publications such as Bloomberg Tax, Tax Notes International, Mondaq, Lexology, etc. Further, we update our clients regularly on significant legal developments/issues through our CAM Blogs (available here).

The government of India recently announced the annual fiscal budget for 2023-24, pursuant to which the Finance Act, 2023 (FA 2023) was notified, which has brought various amendments to the Indian tax laws. One of the most significant changes has been that tax on royalty and fees for technical services earned by a non-resident or a foreign company has been enhanced to 20% (plus applicable surcharge and cess), from the 10% (plus applicable surcharge and cess). This is likely to necessitate foreign investors in undertaking increased compliances in order to claim applicable treaty benefits in India.

In addition, over the past year, the Indian government has notified various regulations to promote proliferation of businesses at International Financial Services Centre (IFSC), GIFT City. Such regulations have allowed setting up of varied businesses/ investment structures such as ship leasing, aircraft leasing, educational institutions, family offices, holding company structures, etc. Tax holiday is available to businesses set up in IFSC, GIFT City, on satisfaction of prescribed conditions. Thus, it is a lucrative option for non-residents looking to set-up operations in India. However, since the regulatory framework for IFSC, GIFT City is still evolving and the types of business activities permitted are constantly being notified, there is lack of clarity in how to structure operations or claim available tax exemptions. Thus, we are actively involved in providing advisory services to emerging businesses looking to expand into India via the GIFT City route.

We have already advised multiple clients in structuring their operations in GIFT City and related activities such as repatriating income abroad or hiring employees/ contractors in India, across industries.