SR Patnaik, Partner at Amarchand Mangaldas, shares his first impressions of the Budget announced yesterday..Our preliminary views on the tax related changes proposed under the Finance Bill 2015 are as follows:.A. DIRECT TAX.1. Taxation of Indirect transfers: The taxation of capital gains arising from the indirect transfer of capital assets located in India has been subject to significant amount of debate. Despite the amendments to the Income Tax Act, in 2012, there was no clarity relating to the taxation of such transfers. The provisions introduced in 2012 provided that an asset being an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India (“foreign entity”) shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India (“Indian assets”)..However, several key aspects remained ambiguous for the past three years. The Finance Bill, 2015 now proposes to provide the much desired clarifications pertaining to indirect transfers. The key provisions are as follows:.Meaning of substantial: The share or interest of the foreign entity shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if the value of such Indian assets exceeds INR 100 million and represents at least 50% of the value of all the assets owned by the entity..Meaning of value: The value of an asset shall be the fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, to be determined in the prescribed manner..Calculation of capital gains: In a case where all the assets owned, directly or indirectly, by the foreign entity are not located in India, capital gains shall be only such part of the income as is reasonably attributable to the Indian assets to be determined in the prescribed manner..Exemptions: The indirect transfer provisions shall not apply in a case where the transferor of share or interest in a foreign entity, along with his associated enterprises, neither holds the right of control or management nor holds voting power or share capital or interest exceeding 5% of the total voting power or total share capital in the foreign entity, holding the Indian assets directly. In case the foreign entity indirectly holds the Indian assets, the exemption would apply provided the intermediary entity(ies) does not entitle the transferor company with the same right. The right / voting power / interest has to be reckoned at any time in the 12 months preceding the date of transfer..Also, exemption has been provided for transfer of share or interest in a foreign entity deriving its value, directly or indirectly, substantially from the shares of an Indian company, pursuant to an amalgamation or demerger of foreign companies, subject to fulfillment of certain conditions..2. Deferment of GAAR and grandfathering of investments: One of the most significant changes in the Budget is the widely expected and anticipated deferral of the General Anti-Avoidance Rules (“GAAR”) by two years. Further, the Finance Bill also proposes that GAAR provisions would apply prospectively only on investments made on or after April 1, 2017..3. Gradual rationalisation of corporate tax rates: The FM in his budget speech indicated that corporate tax rates would be reduced to 25% from the current 30%, over a period of the next four years starting from FY 2016-17. Most of the tax incentives and benefits would also be scaled down during this period..4. Shelving of Direct Tax Code: As per expectations, the Direct Tax Code has been completely shelved. The Finance Minister clarified that since the tax jurisprudence as per the existing Income tax Act, 1961 is very well settled and most of the important provisions of the proposed Direct Tax Code have already been incorporated into the existing Income Tax Act, there is no need to bring in a new tax legislation. This would also go a long way to bring in certainty for the investors..5. Concept of Place of Effective Management (POEM): The Direct Tax Code concept of POEM has now been incorporated into the Income Tax Act. A company would be deemed to be resident in India, if its POEM, at any time in that year, is in India. Thus, if the POEM is considered to be in India “any time” during the tax year, a foreign company would be deemed to be resident in India and subject to tax in India on its global income. This is in contrast to the present law wherein a foreign company is deemed to be resident in India only if during that year, the control and management of its affairs is situated wholly in India. The new amendment may give rise to potential tax exposure of foreign subsidiaries of Indian companies, in India..6. Minimum Alternate Tax on Foreign Institutional Investors and Association of Persons: Putting to rest widespread turmoil in the Foreign Institutional Investor (“FII”) community due to the issuance of income tax notices on applicability of MAT, the Finance Bill proposes that any capital gains arising to a FII on sale of securities (other than short term capital gains on which STT is not paid) would also be exempt from MAT liability. Further, it has also been clarified that a member of an Association of Persons (“AOP”), being a company, would be exempt from MAT liability on its share of income from the AOP..7. Reduction in rate of withholding tax on royalty and fee for technical services: With a view to facilitating technology inflow to small businesses at low cost, withholding tax on royalty and fees for technical services has been reduced to 10% from the existing 25%. This would also discourage treaty shopping for lower rates to avail of lower rates of tax withholding..8. Business Trusts comprising Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INViTs): The Finance Bill proposes that at the time of sale of units of REIT through an initial public offer (IPO), the Sponsor will not be required to pay any capital gains tax provided he has paid securities transaction tax on the same. Further, the rental income arising from real estate assets directly held by the REIT is to be allowed to pass through status and would be taxed in the hands of the unit holders of the REIT. However, when the sponsor transfers the relevant assets to the REITS/InViTs in exchange of units, no exemption from Minimum Alternate Tax (MAT) liability has been granted to the sponsor. Further, no exemption from dividend distribution tax on dividends paid by the SPV to the REITS and INViTs has been granted..9. Specific Tax regime for Alternate Investment Funds: In order to clarify / rationalise the taxation of the Alternate Investment Fund (“AIF”) – Category I and Category II, a specific tax regime has been introduced detailing the manner in which the income would be taxed, in the hands of such AIFs and the unit holders in such AIFs. The specific taxation regime would include the following:.a. AIF Category I and Category II together are to be defined as ‘Investment Fund’ and have been granted tax pass through status for all incomes except business income. Accordingly, all income, except business income, earned by the Investment Fund will exempt in its hands..b. All other income will be taxable in the hands of the unit holders in the year in which such income accrues or arises or is received by the Investment Fund as if the income was directly received by such unit holders..c. The characterization of income in the hands of the unit holders shall be deemed to be of the same nature and in the same proportion as in the hands of the Investment Fund..d. Distributions made by the Investment Fund, other than those relating to the income taxable in the hands of the Investment Fund, to its unit holders will be subject to a withholding tax at the rate of 10%. Such distributions will not be subject to dividend distribution tax..e. Any losses at the Investment Fund level (whether current loss or brought forward loss) would not be allowed to be passed on to the unit holders. These losses would be carried forward at the Investment Fund level only, and be eligible for set off against Investment Fund’s income in the subsequent years..f. The Investment Fund will be required to file its return of income in respect of its income or loss. The Investment Fund will also be required to furnish the details of the nature of income paid or credited to the unit holders along with such other details as may be prescribed to the income tax authorities..10. Fund Managers not to constitute business connection in India: With a view to facilitate relocation of fund managers of offshore funds to India, it is proposed to modify the permanent establishment (PE) norms on the basis of which an eligible fund manager located in India and undertaking fund management activities on behalf of an eligible investment fund would not result in the establishment of PE of the eligible investment fund in India. However, in order to qualify as an “eligible investment fund” and an “eligible fund manager” the Finance Bill proposes a list of rather expansive conditions that need to be fulfilled. While it is a commendable step and will bring in clarity to the private equity industry regarding the tax treatment, it remains to be seen how many funds would avail this benefit in the coming days..11. Abolition of Wealth tax: The cumbersome Wealth Tax has been abolished with the FM pointing out that there is no point in continuing the tax with high cost of collection. However, in its place the FM has introduced a 12% surcharge for individuals earning Rs. 1 crore and above and companies with income in excess of Rs. 10 crore and above..12. Increase in surcharge for companies: A company making distribution of dividends or buying back its shares would be liable to pay an additional surcharge of 2% taking the surcharge rate to 12%. This increase in surcharge would also be applicable to distribution of dividends to unit holders and distribution of profits by securitisation trusts. Further, surcharge of 7% is proposed to be levied in case of domestic companies having income exceeding Rs.1 crore and up to Rs. 10 crore. Further, surcharge at12% is proposed to be levied on domestic companies having income exceeding Rs. 10 crore..13. Other major developments: The Finance Bill also proposes to allow an additional depreciation at 20% on new plant and machinery installed by a manufacturing unit or a unit engaged in generation and distribution of power. Further, 100% deduction would be available to contributions to the Swatch Bharat and Clean Ganga schemes, should these be other than by way of CSR contributions. Additionally, in a major relief to domestic companies, the threshold for applicability of transfer pricing provisions on specified domestic transactions limit has been increased to Rs. 20 crores from the present Rs. 5 crore..B. INDIRECT TAX.1. Introduction of Goods and Services Tax: In what is believed to be the most ambitious tax reform initiative in India, the Finance Minister has given a categorical indication that the much anticipated Goods and Services Tax shall be introduced with effect from April 1, 2016..2. Increase in the rate of Service Tax: In order to prepare the groundwork for the introduction of Goods and Services Tax, the effective rate of service tax is proposed to be increased from 12.36% to 14%..3. Increase in the rate of Excise Duty: The base rate of excise duty is also proposed to increase from 12.36% to 12.5%.
SR Patnaik, Partner at Amarchand Mangaldas, shares his first impressions of the Budget announced yesterday..Our preliminary views on the tax related changes proposed under the Finance Bill 2015 are as follows:.A. DIRECT TAX.1. Taxation of Indirect transfers: The taxation of capital gains arising from the indirect transfer of capital assets located in India has been subject to significant amount of debate. Despite the amendments to the Income Tax Act, in 2012, there was no clarity relating to the taxation of such transfers. The provisions introduced in 2012 provided that an asset being an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India (“foreign entity”) shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India (“Indian assets”)..However, several key aspects remained ambiguous for the past three years. The Finance Bill, 2015 now proposes to provide the much desired clarifications pertaining to indirect transfers. The key provisions are as follows:.Meaning of substantial: The share or interest of the foreign entity shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if the value of such Indian assets exceeds INR 100 million and represents at least 50% of the value of all the assets owned by the entity..Meaning of value: The value of an asset shall be the fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, to be determined in the prescribed manner..Calculation of capital gains: In a case where all the assets owned, directly or indirectly, by the foreign entity are not located in India, capital gains shall be only such part of the income as is reasonably attributable to the Indian assets to be determined in the prescribed manner..Exemptions: The indirect transfer provisions shall not apply in a case where the transferor of share or interest in a foreign entity, along with his associated enterprises, neither holds the right of control or management nor holds voting power or share capital or interest exceeding 5% of the total voting power or total share capital in the foreign entity, holding the Indian assets directly. In case the foreign entity indirectly holds the Indian assets, the exemption would apply provided the intermediary entity(ies) does not entitle the transferor company with the same right. The right / voting power / interest has to be reckoned at any time in the 12 months preceding the date of transfer..Also, exemption has been provided for transfer of share or interest in a foreign entity deriving its value, directly or indirectly, substantially from the shares of an Indian company, pursuant to an amalgamation or demerger of foreign companies, subject to fulfillment of certain conditions..2. Deferment of GAAR and grandfathering of investments: One of the most significant changes in the Budget is the widely expected and anticipated deferral of the General Anti-Avoidance Rules (“GAAR”) by two years. Further, the Finance Bill also proposes that GAAR provisions would apply prospectively only on investments made on or after April 1, 2017..3. Gradual rationalisation of corporate tax rates: The FM in his budget speech indicated that corporate tax rates would be reduced to 25% from the current 30%, over a period of the next four years starting from FY 2016-17. Most of the tax incentives and benefits would also be scaled down during this period..4. Shelving of Direct Tax Code: As per expectations, the Direct Tax Code has been completely shelved. The Finance Minister clarified that since the tax jurisprudence as per the existing Income tax Act, 1961 is very well settled and most of the important provisions of the proposed Direct Tax Code have already been incorporated into the existing Income Tax Act, there is no need to bring in a new tax legislation. This would also go a long way to bring in certainty for the investors..5. Concept of Place of Effective Management (POEM): The Direct Tax Code concept of POEM has now been incorporated into the Income Tax Act. A company would be deemed to be resident in India, if its POEM, at any time in that year, is in India. Thus, if the POEM is considered to be in India “any time” during the tax year, a foreign company would be deemed to be resident in India and subject to tax in India on its global income. This is in contrast to the present law wherein a foreign company is deemed to be resident in India only if during that year, the control and management of its affairs is situated wholly in India. The new amendment may give rise to potential tax exposure of foreign subsidiaries of Indian companies, in India..6. Minimum Alternate Tax on Foreign Institutional Investors and Association of Persons: Putting to rest widespread turmoil in the Foreign Institutional Investor (“FII”) community due to the issuance of income tax notices on applicability of MAT, the Finance Bill proposes that any capital gains arising to a FII on sale of securities (other than short term capital gains on which STT is not paid) would also be exempt from MAT liability. Further, it has also been clarified that a member of an Association of Persons (“AOP”), being a company, would be exempt from MAT liability on its share of income from the AOP..7. Reduction in rate of withholding tax on royalty and fee for technical services: With a view to facilitating technology inflow to small businesses at low cost, withholding tax on royalty and fees for technical services has been reduced to 10% from the existing 25%. This would also discourage treaty shopping for lower rates to avail of lower rates of tax withholding..8. Business Trusts comprising Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INViTs): The Finance Bill proposes that at the time of sale of units of REIT through an initial public offer (IPO), the Sponsor will not be required to pay any capital gains tax provided he has paid securities transaction tax on the same. Further, the rental income arising from real estate assets directly held by the REIT is to be allowed to pass through status and would be taxed in the hands of the unit holders of the REIT. However, when the sponsor transfers the relevant assets to the REITS/InViTs in exchange of units, no exemption from Minimum Alternate Tax (MAT) liability has been granted to the sponsor. Further, no exemption from dividend distribution tax on dividends paid by the SPV to the REITS and INViTs has been granted..9. Specific Tax regime for Alternate Investment Funds: In order to clarify / rationalise the taxation of the Alternate Investment Fund (“AIF”) – Category I and Category II, a specific tax regime has been introduced detailing the manner in which the income would be taxed, in the hands of such AIFs and the unit holders in such AIFs. The specific taxation regime would include the following:.a. AIF Category I and Category II together are to be defined as ‘Investment Fund’ and have been granted tax pass through status for all incomes except business income. Accordingly, all income, except business income, earned by the Investment Fund will exempt in its hands..b. All other income will be taxable in the hands of the unit holders in the year in which such income accrues or arises or is received by the Investment Fund as if the income was directly received by such unit holders..c. The characterization of income in the hands of the unit holders shall be deemed to be of the same nature and in the same proportion as in the hands of the Investment Fund..d. Distributions made by the Investment Fund, other than those relating to the income taxable in the hands of the Investment Fund, to its unit holders will be subject to a withholding tax at the rate of 10%. Such distributions will not be subject to dividend distribution tax..e. Any losses at the Investment Fund level (whether current loss or brought forward loss) would not be allowed to be passed on to the unit holders. These losses would be carried forward at the Investment Fund level only, and be eligible for set off against Investment Fund’s income in the subsequent years..f. The Investment Fund will be required to file its return of income in respect of its income or loss. The Investment Fund will also be required to furnish the details of the nature of income paid or credited to the unit holders along with such other details as may be prescribed to the income tax authorities..10. Fund Managers not to constitute business connection in India: With a view to facilitate relocation of fund managers of offshore funds to India, it is proposed to modify the permanent establishment (PE) norms on the basis of which an eligible fund manager located in India and undertaking fund management activities on behalf of an eligible investment fund would not result in the establishment of PE of the eligible investment fund in India. However, in order to qualify as an “eligible investment fund” and an “eligible fund manager” the Finance Bill proposes a list of rather expansive conditions that need to be fulfilled. While it is a commendable step and will bring in clarity to the private equity industry regarding the tax treatment, it remains to be seen how many funds would avail this benefit in the coming days..11. Abolition of Wealth tax: The cumbersome Wealth Tax has been abolished with the FM pointing out that there is no point in continuing the tax with high cost of collection. However, in its place the FM has introduced a 12% surcharge for individuals earning Rs. 1 crore and above and companies with income in excess of Rs. 10 crore and above..12. Increase in surcharge for companies: A company making distribution of dividends or buying back its shares would be liable to pay an additional surcharge of 2% taking the surcharge rate to 12%. This increase in surcharge would also be applicable to distribution of dividends to unit holders and distribution of profits by securitisation trusts. Further, surcharge of 7% is proposed to be levied in case of domestic companies having income exceeding Rs.1 crore and up to Rs. 10 crore. Further, surcharge at12% is proposed to be levied on domestic companies having income exceeding Rs. 10 crore..13. Other major developments: The Finance Bill also proposes to allow an additional depreciation at 20% on new plant and machinery installed by a manufacturing unit or a unit engaged in generation and distribution of power. Further, 100% deduction would be available to contributions to the Swatch Bharat and Clean Ganga schemes, should these be other than by way of CSR contributions. Additionally, in a major relief to domestic companies, the threshold for applicability of transfer pricing provisions on specified domestic transactions limit has been increased to Rs. 20 crores from the present Rs. 5 crore..B. INDIRECT TAX.1. Introduction of Goods and Services Tax: In what is believed to be the most ambitious tax reform initiative in India, the Finance Minister has given a categorical indication that the much anticipated Goods and Services Tax shall be introduced with effect from April 1, 2016..2. Increase in the rate of Service Tax: In order to prepare the groundwork for the introduction of Goods and Services Tax, the effective rate of service tax is proposed to be increased from 12.36% to 14%..3. Increase in the rate of Excise Duty: The base rate of excise duty is also proposed to increase from 12.36% to 12.5%.
