March 2023
Revisiting Non-Discrimination Clause of The India – Us Tax Treaty in Light of India’s Corporate Tax Rate Reduction
Hardeep Singh Chawla, Advocate
Tax complexity itself is a kind of tax - Max Baucus, US Senator
This Article seeks to juxtapose the principle of non-discrimination with Article 14(2) of the India - US tax treaty and analyse its fallout. The combined reading of the two provides for the applicability of different tax rates imposed on a permanent establishment of a US corporation vis-ŕ-vis a domestic corporation in India. However, the treaty posits that the tax rate differential shall not exceed fifteen percentage points. In this Article, the author argues that with the reduction of the corporate tax rate in India (albeit through an election), the concession of fifteen percentage points provided by the United States stands breached. Sequitur, the full force of principles of non – discrimination may be applicable notwithstanding the carve-out of Article 14(2).
I. INTRODUCTION
On September 20, 2019 the Government of India enacted a significant reduction of the corporate income tax rate for domestic corporations. On the statute, it was introduced as an election where the domestic corporations could elect to be taxed at 22 per cent1 which was earlier either 25 per cent or 30 per cent2 effective taxable year beginning April 1, 2019. On making this election, the corporation would forgo majority of the tax exemptions and incentives. If the domestic corporation is engaged in manufacturing activity, subject to certain conditions like company formation and commencement of operations, then it could elect a tax rate of 15 percent3. On the other hand, tax rate for a foreign corporation or a Permanent Establishment (“PE”) of a foreign corporation was left unaltered at 40 per cent4.
Article 26 of the India-US Tax Treaty (“Treaty”) enlists the principle of non-discrimination which enjoins nationals of a Contracting State to not be subjected to any taxation that is ‘other or more burdensome’ or ‘less favourable’ than that taxation of nationals in ‘same circumstances’ in the other Contracting State. Article 26(5) of the Treaty creates a carve-out from the general principle in terms of Article 14(2) – Permanent Establishment Tax. To give some context, Article 14 concerns itself with the imposition of a permanent establishment or branch tax5. Article 14(2) while deviating from the general principle of non-discrimination provides for the taxation of United States resident at a tax rate higher than applicable to domestic companies in India. However, the Article posits that the difference in tax rate shall not exceed the ‘existing’ difference of 15 percentage points. The Article therefore, in a certain way, creates a positive obligation on the Contracting State, India, to adhere the domestic tax rates i
Article 26 of the India-US Tax Treaty (“Treaty”) enlists the principle of non-discrimination which enjoins nationals of a Contracting State to not be subjected to any taxation that is ‘other or more burdensome’ or ‘less favourable’ than that taxation of nationals in ‘same circumstances’ in the other Contracting State. Article 26(5) of the Treaty creates a carve-out from the general principle in terms of Article 14(2) – Permanent Establishment Tax. To give some context, Article 14 concerns itself with the imposition of a permanent establishment or branch tax5. Article 14(2) while deviating from the general principle of non-discrimination provides for the taxation of United States resident at a tax rate higher than applicable to domestic companies in India. However, the Article posits that the difference in tax rate shall not exceed the ‘existing’ difference of 15 percentage points. The Article therefore, in a certain way, creates a positive obligation on the Contracting State, India, to adhere the domestic tax rates i
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