Biblical scholars may know where we’re talking about when we mention Hodu, or the eastern boundary of the Persian Empire, or the mahouts of Antiochus’s war elephants. Any guesses? India, that’s where! And today we discuss how, bizarrely (or bazaarly perhaps) India is becoming a global frontrunner from a tax, business and investment perspective. Let’s take a whirlwind tour through some interesting developments.
Gift from the East?
While India is definitely not known as a low-tax or easy tax jurisdiction, it has slowly but surely been focusing on Special Economic Zones, with specific tax incentives to attract specific international businesses to India, for instance the wonderfully named GIFT, or the Gujarat International Finance Tec-City, which has been around for a while but getting more and more traction. Some even suggest it may start competing with more common offshore tax jurisdictions. And now, with India often beating China from a production and services cost perspective, we may see more and more such “gifts”.
Shake up on withholding tax rates
Most recently, on 1 April, big changes were made to certain Indian withholding taxes (“WHT”). WHT is essentially an amount that is required to be withheld (got to love tax terminology) by the payer when making payment to the relevant (usually but not always cross-border) recipient. It’s basically a lazy way to pass the tax collection and calculation job to the businesses or people making certain types of payment. We all know how much Africa loves WHT (see our previous newsletter)but India also has some pretty complex rules.
Now India is doubling the WHT rates on both royalties and technical service fees from 10% to 20%. This is a huge increase and initially caused shock waves as it runs counter to other tax simplification or even reduction measures, so let’s dig a little deeper.
In order to understand who this change affects and why it is important, we need to remember the purpose of a double tax agreement (“DTA”), also known as a tax treaty. See here for one we made earlier on DTA’s in general. At its core, the purpose of a DTA is to alleviate or eliminate double taxation on income flowing or arising between two states. A DTA generally also lowers the applicable WHT rates.
Now, India has a whopping 90+ treaties in force, including with the likes of the UAE, Singapore, Mauritius and SA, and so none of them will be impacted. Thus although it sounds bad, the increase in WHT from 10% to 20% only really affects taxpayers who are tax resident in a foreign country with which India does not have a DTA and there aren’t too many of them.
Another massive game changer from India
Now this one is very interesting and we think over time will be seen as a seminal shift. So we all know that since the old Bretton-Woods fandango, the US dollar has been the global reserve currency and thus basically gains strength through being used to facilitate and benchmark international trade.
And of course, in recent years there have been various mutterings and semi-initiatives to move away from the US dollar supremacy. Well now India’s Reserve Bank recently gave the go-ahead to 18 different countries to open “Special Vostro Rupee Accounts”.
Essentially, this means that international trade between those countries can now be conducted using the Indian Rupee, even if no Indian party is party to the transaction, i.e. now foreign transactions can be settled using the Indian Rupee. By using the Rupee to settle and invoice foreign trade, the associated exchange rate risk can also be lowered. Hmmmmm…
There is lots happening in this space, including from China, and perhaps kick-started by the announcement by dear old BRICS (which comprises Brazil, Russia, India, China and South Africa) last July that it would be developing its own international currency. (Ed’s note – no this is not an April fools edition). So India is not acting in isolation, but it’s interesting to see how strongly it’s acting.
These recent developments make it quite clear that India is solidifying its place on the world stage, as a powerhouse country. As we work mainly in what’s nowadays called “the global south”, we do find it refreshing to see developing countries owning and stepping into their power from a taxation and international trade perspective. For more information on any international structures, or WHT dilemmas please contact us.
About the author:
Today’s article was written by Liane Bouwer. Liane is one of our international tax consultants in the SA office and can be contacted via email at lbouwer@reganvanrooy.com.
