Taxation

Finance Act, 2017

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

Some of the key amendments introduced to the ITA by Finance Act, 2017 are:

i. Conversion of preference shares into equity shares will not be regarded as transfer and will be exempt from capital gains tax. Further, cost of acquisition and period of holding of the preference shares will be attributable to the equity share received upon conversion;

ii. Exemption from long term capital gains arising from transfer of equity share of a company that are chargeable to Securities Transaction Tax (‘STT’) will be available only if the acquisition of such shares was also subject to STT. Further, to protect some of the genuine transactions (e.g. acquisition pursuant to IPO, FPO, bonus or rights issue by a listed company, by non-resident as per the FDI Policy etc.), the GoI will notify transfers to which the proposed condition of chargeability of STT on acquisition will not apply;

iii. If consideration for transfer of unlisted shares is less than fair market value (‘FMV’) determined as per the prescribed manner, such FMV will be deemed to be the full value of consideration for the purposes of computing capital gains;

iv. Indirect transfer provisions will not be applicable to investments held by a non-resident, directly or indirectly, in FIIs/ Category-I or Category II FPIs;

v. Domestic transfer pricing provisions will now be applicable only in cases where one of the related party to the transaction is availing tax holidays; and

vi. The scope of applicable tax on any deemed gift has been widened by extending its applicability to all ‘persons’ and extending the scope of properties to all ‘properties’, except contribution of money or assets by an individual to a trust created solely for benefit of relative of the contributor.

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GST Bills Passed in the Lok Sabha

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Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

Lok Sabha, on March 29, 2017, passed four GST bills, (i) the Central Goods and Services Tax Bill, 2017; (ii) the Integrated Goods and Services Tax Bill, 2017; (iii) the Union Territory Goods and Services Tax Bill, 2017; and (iv) the Goods and Services Tax (Compensation to States) Bill, 2017. The bills will be placed in the Rajya Sabha for consideration. The State Goods and Service Tax Bill will also be presented in the respective State legislative assemblies. GoI, on April 1, 2017, also released eight GST Rules (Composition Rules, Valuation Rules, Transition Rules, ITC Rules, Revised Invoice Rules, Revised Payment Rules, Revised Refund Rules, Revised Registration Rules and Revised Return Rules) for inviting comments from the stakeholders.

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Protocol to India-Singapore Double Taxation Avoidance Agreement

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Published In:Inter Alia - Quarterly Edition - January 2017 [ English Chinese japanese ]

Pursuant to the protocol signed between GoI and the Government of Singapore on December 30, 2016 amending the Indo-Singapore Double Taxation Avoidance Agreement (‘Indo-Singapore DTAA’):

i. Capital gains tax exemption available to Singapore residents under the Indo-Singapore DTAA has been withdrawn with respect to shares in Indian resident companies that are acquired on or after April 1, 2017. The withdrawal of exemption is in a phased manner as explained below:

a. Capital gains arising on or after April 1, 2017 till March 31, 2019 (‘Transition Period’): Capital gains arising during the Transition Period will be taxed at 50% of the applicable Indian domestic tax rate, subject to fulfillment of the clause on Limitation of Benefits.

b. Capital gains arising on or after April 1, 2019: Capital gains arising after the Transition Period will be taxed in India as per India’s full domestic tax rate.

ii. Capital gains arising to Singapore tax residents with respect to shares of Indian tax resident companies, which have been acquired up to March 31, 2017, will only be taxable in Singapore even if the gain arises on or after April 1, 2017, subject to fulfillment of ‘limitation of benefits’ clause.

iii. Capital gains arising to Singapore tax residents with respect to securities (other than shares of Indian tax resident companies), e.g. instruments like CCDs and shares of offshore entities, whenever acquired, will continue to be exempt from capital gains tax in India.

It may be further noted that while the Indo-Mauritius Double Taxation Avoidance Agreement (as amended), the withholding tax rate on interest payments made to a Mauritian tax resident will be 7.5% with respect to interest arising on or after April 1, 2017, there is no change on withholding tax rate on interest payments the India-Singapore DTAA, i.e., interest payments to a Singapore tax resident continue to be subject to withholding tax at the rate of 15% in case of loan given by non-banking entities.

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New Indo-Cyprus Double Taxation Avoidance Agreement

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Published In:Inter Alia - Quarterly Edition - January 2017 [ English Chinese japanese ]

GoI and the Government of Cyprus have signed the New India-Cyprus Double Taxation Avoidance Agreement on November 18, 2016, which, inter alia, provides for source based taxation of capital gains arising from alienation of shares of companies that are tax residents of India. However, a grandfathering clause has been provided for investments made prior to April 1, 2017, in respect of which capital gains would be taxed in the country of which the said taxpayer is a resident. Further, the notification[1] declaring Cyprus as a Notified Jurisdictional Area under section 94A of the Income-tax Act, 1961, has been rescinded with retrospective effect.[2]

[1]     Notification No.86/2013 [F.NO.504/05/2003-FTD-I]/SO 3307 (E); dated November 01, 2013.

[2]     Notification No.114/2016 [F.NO.500/02/2015-FT & TR- III]/SO 4033 (E)]; dated December 14, 2016 as amended by Notification No.119/2016 [F.NO.500/02/2015-FT & TR- III]/SO 4082 (E)]; dated December 16, 2016.

 

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Transfer Pricing Adjustment – AMP Expenses

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Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

The Delhi Income Tax Appellate Tribunal (‘ITAT’) in the case of Toshiba India Pvt. Ltd. v. DCIT,[1] ruled on the applicability of transfer pricing on advertisement, marketing and promotion expenses (‘AMP’) for promoting the brand owned by its associated enterprise (‘AE’), and held that the transaction on account of AMP expenses incurred by Toshiba India Pvt. Ltd (‘Toshiba’) qualified as an international transaction subject to transfer pricing regulations.

The ITAT relied on the following key facts:

i.  The distribution agreement between Toshiba and its AE provided that Toshiba would use its best efforts to promote the ‘Toshiba’ brand name in India.

ii.  The AE had also reimbursed a portion of the AMP expenses incurred by Toshiba.

The ITAT observed that the very fact that Toshiba expressly undertook to promote the ‘Toshiba’ brand in India and the AE reimbursed a portion of the AMP expenses clearly demonstrated that Toshiba undertook promotion of the ‘Toshiba’ brand in India on an understanding with the AE, which evidently amounts to an international transaction.

[1]     ITA No.1357/Del/ 2017

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CBDT notifies Final Rules prescribing Method of Valuation

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

The Finance Act, 2017 amended the Income-tax Act, 1961 to insert two new provisions, namely Section 56(2)(x) and Section 50CA. Section 56(2)(x) provides that where a person receives any property for a consideration less than its fair market value (‘FMV’), the difference between the consideration received and such FMV shall be taxable in the hands of the recipient. Section 50CA provides that where a person receives any consideration for transfer of unquoted shares which is less than their FMV, the FMV shall be deemed to be the full value of consideration for computation of capital gains tax liability. The Central Board of Direct Taxes has now notified the final Rules[1] providing for the manner of computation of FMV of unquoted shares under the aforesaid provisions.

[1]     Rules 11UA and 11UAA of the Income-tax Rules, 1962 [Notification No. 61/ 2017 dated July 12, 2017].

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Revision of Indo–Cyprus Double Taxation Avoidance Agreement

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Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

GoI has, by way of a press release dated August 24, 2016, announced that the Union Cabinet, chaired by the Prime Minster, has given its approval for signing the ‘Protocol between India and Cyprus for avoidance of double taxation and the Prevention of Fiscal Evasion’ amending the Indo – Cyprus Double Taxation Avoidance Agreement. As per the press release, India will get the right to tax capital gains arising in India, however, investments made prior to April 1, 2017 will be grandfathered, in respect of which, capital gains would be taxed in the country of where the taxpayer is a resident. It further provides that India will consider rescinding the notification dated November 1, 2013[1] declaring Cyprus as a notified jurisdictional area under Section 94A of the Income-tax Act, 1961, with retrospective effect. This follows the recent amendment of the India – Mauritius Double Taxation Avoidance Agreement which withdraws the capital gains tax exemption. Talks to amend the India – Singapore Double Taxation Avoidance Agreement are also in progress.

[1]     Notification No.86/2013 [F.NO.504/05/2003-FTD-I]/SO 4625] dated November 1, 2013.

 

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Constitution (One Hundred and First Amendment) Act, 2016 for Introduction of Goods and Services Tax

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Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

The Bill for introduction of Goods and Services Tax (‘GST’) received the Presidential assent on September 8, 2016 and was notified[1] as Constitution (One Hundred and First Amendment) Act, 2016 on September 16, 2016, which provides concurrent powers to the Central and State legislatures to make laws on GST. As a step towards implementation of GST, the Union Cabinet in its meeting held on September 12, 2016 approved setting-up of GST council (‘Council’), consisting of the Union Finance Minister, Union Minister of State for Revenue or Finance, and State Finance Ministers or any other minster nominated by any State Government. The Council will make recommendations on important aspects relating to GST e.g., exemptions, place of supply, threshold limits and GST rates.

[1]     F. No. 31011/07/2014-SO (ST) dated September 16, 2016.

 

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Protocol to India-Mauritius Double Taxation Avoidance Agreement Withdrawing Capital Gains Tax Exemption

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Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

The Government of India (‘GoI’) and Government of Mauritius signed a protocol dated May 10, 2016, amending the Protocol to the India – Mauritius Double Taxation Avoidance Agreement, which, inter alia, provides for:

i. Withdrawal of the capital gains tax exemption available to Mauritian residents with respect to shares in Indian resident companies acquired on or after April 1, 2017 in a phased manner as follows:

•   Capital gains arising on or after April 1, 2017 till March 31, 2019 (‘Transition Period’) will be taxed at 50% of the applicable Indian domestic tax rate subject to fulfilment of certain conditions; and

•   Capital gains arising after the Transition Period will be taxed in India as per India’s full domestic tax rate;

ii. Introduction of concepts of ‘service permanent establishment’, fee for technical services sourced in India and derived by Mauritian residents to be taxed at the rate of 10% on gross basis, and income in the nature of ‘other income’ of a Mauritian resident to be taxed as per India’s domestic tax laws.

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Press Release on New Indo-Cyprus Double Taxation Avoidance Agreement

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Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

GoI by way of a Press Release dated July 1, 2016 announced its in-principle agreement with the Government of Cyprus regarding finalisation of the New Indo-Cyprus Double Taxation Avoidance Agreement, which, inter alia, provides for source based taxation of capital gains with a grandfathering clause for investments made prior to April 1, 2017, in respect of which, capital gains would be taxed in the country where the taxpayer is resident. It was further agreed that India will consider rescinding the notification declaring Cyprus as a Notified Jurisdictional Area under section 94A of the Income-tax Act, 1961, with retrospective effect.

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Amendment of Rules for Application of General Anti Avoidance Rule

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Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

The Central Board of Direct Taxes has amended Rule 10U of the Income-tax Rules, 1962 (‘Rules’) regarding application of General Anti Avoidance Rule (‘GAAR’), whereby any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made by such person before April 1, 2017 will be grandfathered and not be subject to GAAR (such date previously being August 30, 2010). Further, GAAR will apply to any arrangement, irrespective of the date on which it was entered, with respect to the tax benefit obtained from such arrangement on or after April 1, 2017 (such date previously being April 1, 2015).

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Finance Act, 2018

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Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

Some of the key amendments introduced by the Finance Act, 2018 (‘Finance Act’) are summarized below:

i. New long-term capital gains tax regime for listed shares etc.

• Under the unamended provisions of the Indian Income-tax Act, 1961 (‘IT Act’), with respect to transfer/redemption of units of an equity oriented mutual fund or an on-market[1] sale of Indian equity shares (listed or as part of an initial public offer) or units of a business trust, long-term capital gains were exempt from tax in India, subject to payment of securities transaction tax (‘STT’) (which may vary from 0.001% to 0.2% of the transaction value).

• The Finance Act has withdrawn the aforesaid long-term capital gains tax exemption and has proposed a new long-term capital gains tax regime for the above asset class. Under the new regime, the long-term capital gains, in excess of Rs. 0.1 million (approx. US$ 1,500) in a tax year, arising from transfer/redemption of units of an equity oriented mutual fund or an on-market transfer of Indian equity shares (including sale of shares as part of initial public offer) will be taxed at the rate of 10% (plus applicable surcharge and cess) subject to payment of STT, as applicable as before.[2] The computation of such capital gains will be subject to step up of the cost base till January 31, 2018. This amendment will apply on any capital gains arising on or after April 1, 2018.

ii. Scope of ‘Business Connection’ proposed to be widened:

• The scope of ‘business connection’ under the IT Act is similar to the provisions relating to Dependent Agent Permanent Establishment (‘DAPE’) in India’s Double Taxation Avoidance Agreements (‘DTAAs’). However, this scope is proposed to be widened pursuant to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (‘MLI’). In order to align the scope of ‘business connection’ with the expanded definition of DAPE, the Finance Act has introduced an amendment to the definition of ‘business connection’ to also include any business activities carried through a person who, acting on behalf of the non-resident, habitually plays the principal role leading to conclusion of contracts by the non-resident. This has taken effect from the financial year beginning April 1, 2018.

• Until now, the scope of ‘business connection’ under the IT Act provided for physical presence based nexus rule for taxation of business income of the non-resident in India. Therefore, emerging business models such as digitized businesses were not covered within its scope.

In light of the above, Section 9(1)(i) of the IT Act has been amended to provide that ‘significant economic presence’ in India should also constitute ‘business connection’. This amendment in the domestic law will enable India to negotiate for inclusion of the new nexus rule in the form of ‘significant economic presence’ in the DTAAs. Unless corresponding modifications to permanent establishment rules are made in the DTAAs, the cross border business profits will continue to be taxed as per the existing DTAA rules. However, where the foreign enterprise is not entitled to a DTAA protection, the above amendment would become immediately effective. This amendment has taken effect from financial year beginning April 1, 2018.

[1]     Sale on the floor of a recognized stock exchange in India.

[2]     In certain notified listed equity shares, there is a condition that STT should have been paid at the time of acquisition of such shares as well at the time of transfer so as to be eligible for this regime.

 

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Goods and Services Tax

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Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

Goods and Services Tax (‘GST’) has come into force with effect from July 1, 2017, and the Central Goods and Services Tax Act, 2017 (‘CGST’), The Integrated Goods and Services Act, 2017 (‘IGST’) and the Union Territory Goods and Services Tax Act, 2017 (‘UTGST’) were notified in this regard. Further, all States have notified their respective State GST laws as well. Some of the key aspects of GST are as under:

i. GST is a levy on ‘Supply’ of goods and services in India and would be computed on the value of such supply. It is structured to be a dual GST i.e. GST would be levied by both Central and State Governments on a transaction. The indirect taxes such as excise duty, service tax, and State value added taxes, entry tax, entertainment tax and similar taxes have been subsumed into GST.

ii. The threshold exemption limit prescribed under GST is INR 2,000,000 (approx. USD 30,880) and INR 1,000,000 (approx. USD 15,440) for certain special category states. The threshold exemption would not apply in certain cases e.g. a non-resident taxable person, e-commerce operator, etc.

iii. For computing GST, the value of supply of goods or services would be the ‘transaction value’, which is the price actually paid or payable for supply of goods or services. However, in case of related party transactions or other specified situations, the taxable value will be determined as per the prescribed valuation rules.

iv. Under GST, broadly the tax rates prescribed are nil rate, 5%, 12%, 18% and 28%. Applicable rates for goods and services would depend on the nature of such goods, services and classification thereof.

v. Certain supplies have been declared as non-supplies of goods and services for the purposes of GST. These include services by an employee, services by a Court or Tribunal and sale of land or building. Additionally, certain goods have also been exempted from GST.

vi. Rules dealing with, inter alia, registration, valuation, input tax credits, returns, search and seizure and maintenance of records under GST have been notified.

vii. An enabling provision on ‘anti-profiteering’ has been introduced which requires businesses to pass on any benefit obtained under GST as a result of reduction in rate of tax or input tax credit to customers by way of commensurate reduction in prices. An authority and mechanism has been set up to examine and monitor the implementation of these measures.

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Qualification for Long Term Capital Gains Tax Exemption

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Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

Finance Act, 2017 (‘Finance Act’) had amended Section 10(38) of Income Tax Act, 1961 (‘ITA’) to withdraw the long-term capital gains tax exemption available on transfer of listed equity shares acquired on or after October 1, 2004 and which were not chargeable to Securities Transaction Tax (‘STT’). However, the Central Government was authorized to carve out those transactions, which would not lose the capital gains tax exemption, by issuing a notification in that regard.

In pursuance thereof, the Central Board of Direct Taxes (‘CBDT’) has issued a notification dated June 5, 2017 listing both, i.e. the transactions which will lose exemption and also those transactions which will not lose the exemption, as per details below:

i. Acquisition of existing listed equity shares in a company, whose equity shares are not frequently traded in a recognized stock exchange of India, which are made through a preferential issue. However, the following acquisition of listed equity shares (even if made through a preferential issue) are protected and continue to be covered by Section 10(38) exemption:

a. Acquisition of shares which has been approved by the Supreme Court (‘SC’), High Court (‘HC’), NCLT, SEBI or RBI in this behalf;

b. Acquisition of shares by any non-resident in accordance with foreign investment guidelines;

c. Acquisition of shares by an Investment fund or a Venture Capital Fund or a QIB; and

d. Acquisition of shares through a preferential issue to which the provisions of Chapter VII of the ICDR Regulations do not apply.

ii. Transactions for acquisition of existing listed equity shares in a company which are not entered through a recognized stock exchange. However, the following acquisitions of listed equity shares are protected (even if not made through a recognized stock exchange) and continue to be covered by Section 10(38) exemption.

a. Acquisition through an issue of share by a company other than preferential issue, as an example receipt of bonus shares, shares upon conversion of instruments or splitting of shares;

b. Acquisition by scheduled banks, reconstruction or securitization companies or public financial institutions during their ordinary course of business;

c. Acquisition which has been approved by the SC, HCs, NCLT, SEBI or RBI in this behalf;

d. Acquisition under employee stock option scheme or employee stock purchase scheme framed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;

e. Acquisition of shares by any non-resident in accordance with foreign investment guidelines;

f.  Acquisition of shares under SAST Regulations;

g. Acquisition from the Government;

h. Acquisition of shares by an Investment fund or a Venture Capital Fund or a QIB; and

i. Acquisition by mode of transfer referred to in Sections 47 or 50B of the ITA if the previous owner of such shares has not acquired them by any mode which is not eligible for exemption as per this notification.

iii. Acquisition of equity shares of a company during the period of its delisting from a recognized stock exchange.

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Angel Tax Exemption Notification

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Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

Section 56(2)(viib) of the Income-tax Act, 1961 (‘IT Act’) provides that where a closely held company issues its shares at a price which is more than its fair market value (‘FMV’), the amount received in excess of fair market value will be charged to tax in the hands of the company as income from other sources. The section further prescribes various methods for valuation of FMV of shares of the closely held company. Amongst the various options for valuation of FMV, one of the methods prescribed is determination by a merchant banker or an accountant as per the ‘Discounted Free Cash Flow Method’.

The Central Board of Direct Taxation (‘CBDT’) had, on June 14, 2016, issued a notification providing that investments received by ‘start-ups’ (as specified in the Department of Industrial Policy and Promotion (‘DIPP’)) would not be subject to taxation under Section 56(2)(viib) of the IT Act (‘Angel Tax Exemption’).

The DIPP issued a notification on April 11, 2018 specifying the procedure and criteria for start-ups to avail tax benefits (‘DIPP Notification’). This DIPP Notification had specified three key conditions for availing the Angel Tax Exemption: (i) aggregate amount of paid-up share capital and share premium, after the proposed issue of shares, does not exceed INR 10 crore (approx. US$ 1.5 million); (ii) investor/ proposed investor fulfils the prescribed criteria; and (iii) startup procures a report from a merchant banker, specifying the FMV of shares in accordance with applicable rules.

Pursuant to the DIPP Notification, the CBDT has on May 24, 2018 also notified that the provisions of Section 56(2)(viib) of the IT Act will not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the consideration has been received from an investor in accordance with the approval granted by the Inter-Ministerial Board of Certification as per the notification issued by the DIPP Notification. Simultaneously, the CBDT has issued another notification on May 24, 2018 making merchant banker valuation mandatory for the purposes of Section 56(2)(viib) of the IT Act by removing reference to ‘accountant’ in the valuation rules.

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POEM Rules on Tax Computation

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Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

The concept of ‘place of effective management’ (‘POEM’) for deciding tax residency status of a company other than an Indian company was introduced in the IT Act and made effective from April 01, 2017. The CBDT has now issued a notification on June 22, 2018 specifying certain exceptions, modifications and adaptations from the normal provisions of IT Act applicable in case of such companies regarding computation of income, set-off or carry forward of losses, collection and recovery and tax avoidance, to apply to a foreign company having POEM in India. These rules cover only such income of the foreign company which is taxable in India specifically due to the existence of the POEM of that company in India. Key points of the notification are as below:

i. Status and Tax Rate: The foreign company which is considered resident in India on account of having POEM in India will nevertheless continue to be treated as a foreign company for the purposes of the IT Act. In case of a conflict between the provisions applicable to such foreign company as a foreign company and as a resident, the provisions applicable as a foreign company will prevail. The tax rate applicable to a foreign company which is considered resident on account of having POEM in India is the same as applicable to any foreign company (40% plus applicable surcharge and cess) which is higher than the rate prescribed for domestic companies (30% plus applicable surcharge and cess).

ii. Tax withholding obligations on payments made to the foreign company: Where more than one tax withholding provision is applicable to the foreign company i.e. as a resident as well as a foreign company, the provision applicable as a foreign company alone will apply. Additionally, compliance to the tax withholding provisions as are applicable to the foreign company prior to its becoming a person resident in India would be treated as sufficient compliance of the tax withholding provisions.

iii. Credit for Foreign Taxes: The foreign company having POEM in India would be entitled for credit of foreign taxes against Indian income-tax liability.

iv. Carry forward and set-off of losses and depreciation allowance: The notification sets out detailed mechanism for off-setting accumulated losses and unabsorbed depreciation of the foreign company against its taxable income and for determining the written down value of depreciable assets in the hands of the foreign company.

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