INDIA For private circulation only 28 February 2015

Transcription

1 INDIA For private circulation only 28 February 2015

2 Contents Foreword 3 Key policy announcements 6 Tax proposals 17 Direct taxes 18 Indirect taxes 43 Abbreviations 49 Disclaimer This material and the information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. No one should act on such material or information without appropriate professional advice after a thorough examination of the particular situation. JMP Advisors Pvt Ltd shall not be responsible for any loss whatsoever sustained by any person who relies on this material or information. 2 India Budget

3 Foreword Budget 2015 is the first full year budget of the Modi Government. Expectations from Budget 2015 had been high and sweeping reforms were keenly awaited by industry and the general public from this budget. The Finance Minister ( FM ) was expected to announce an ambitious and all encompassing budget. He has delivered a realistic budget which is bold on policy reforms and indicative of a directional shift from a political reign, riddled with scam and scandal. This budget is a growth oriented budget, for every section of society and has attempted to strike a balance between growth, inclusiveness and fiscal discipline. In the run up to the budget, the revival of the Indian economy together with the plunge in crude oil prices has resulted in a conducive environment, as evidenced by the Economic Survey. In January 2015, the base year was revised from to Based on the new series, GDP growth for FY is estimated to be 7.4%, while in FY , growth is expected to be about 8.5%. The Consumer Price Inflation ( CPI ) is currently at 5.1% while Wholesale Price Inflation ( WPI ) is negative. The Current Account Deficit ( CAD ) is expected to fall below 1.3% of GDP. The FM has set a target for fiscal deficit of 3.9% for FY , 3.5% for FY and 3% for FY The last ten months saw the Modi Government breathe new life into the administration and age-old policies. Since this Government has come to power, one of its key focus areas has been Make in India. To this end, it has commenced steps to fix basic administrative bottlenecks caused by years of policy paralysis and has also promulgated several ordinances. However, the Government does not seem to have brought in enough reforms in the budget to provide a thrust to this area. Steps taken to eliminate the barriers to investment and to promote ease of doing business include increase in FDI ceiling in insurance and construction sectors, amendment of the law on land acquisition, transparent allocation of coal blocks through auctions, amendments in mining laws, launch of the Government to Business ebiz portal and other similar legislative and administrative pronouncements. A key watershed in the Government s view in respect of tax policy is the decision not to challenge the judgment of the Bombay High Court in the Vodafone transfer pricing case. A framework has been set for resolving pending Mutual Agreement 3 India Budget

4 Procedure ( MAP ) proceedings, particularly in the IT/ITes sectors, flexibility in the pricing of instruments/securities, enabling fairer exit mechanism and progressive amendments to archaic labour laws. In line with the theme of decentralization, the Government has embraced the states as equal partners in economic growth and has agreed for higher devolution of tax revenues to states. However, implementation of various initiatives announced in the previous budget has been slow, as evidenced in the case of setting up of additional Authority for Advance Rulings ( AAR ) benches, revival of Special Export Zones ( SEZs ), notification of rules in respect of roll back of Advance Pricing Agreements ( APAs ), introduction of inter-quartile range concept and use of multiple year data in the process of benchmarking. Expectations from the current budget ranged around providing an impetus to the Prime Minister s flagship Make in India project, roll out of Goods and Services Tax ( GST ), ushering stability in taxes, clarity on the General Anti-Avoidance Rule ( GAAR ), tax incentives for CSR activities, clarity on substantial value in cases of indirect transfers of assets, tax incentives for Real Estate Investment Trusts ( REITs ) and revival of SEZs. Some of the budget announcements include setting up of a monetary policy framework, measures to curb black money, Gold Monetisation Scheme, introduction of universal social security measures, agricultural reforms and Skill India initiatives. On the tax front, the Budget proposals include announcement of the date of GST roll out, deferral of GAAR by two years and its prospective applicability, exemption from capital gains tax to sponsors on transfer of units of REITs, extension of pass through status to certain rental incomes of REITs, clarification on provisions relating to indirect transfers, abolition of the Direct Taxes Code and a promise to reduce the corporate tax rate coupled with removal of incentives, in a phased manner. This is indicative that the Government is making a sincere attempt to establish a nonadversarial, stable, certain and simplified tax regime, conducive to encourage investment, including foreign investment. On the flipside, there are a few sore points such as the increase in the rate of service tax, introduction of ambiguous POEM provisions, a proposed draconian Black 4 India Budget

5 Money law, absence of provisions to exempt SEZs from the applicability of Minimum Alternate Tax ( MAT ) and continuation of angel tax. The Government has also resolved to increase economic growth to the 8% level and even more. In fact, the Prime Minister has expressed a desire for India to be among the top 50 countries (currently at position 142) in the World Bank s list of Ease of Doing Business. However, restoring the momentum of growth is an uphill task and requires a sustained commitment and strong, continuous administrative action. Nevertheless, the stage has been set for achhe din and the economy is ready to fly. In the Prime Minister s own words, New Age India has begun its transition from a winter of subdued achievements to a new spring that beckons. Ambitious and inspiring as these words are, it now remains to be seen whether the Government can deliver its promise and walk the talk within realistic timelines. The JMP Advisors Team 28 February 2015 JMP Advisors Private Limited 12, Jolly Maker Chambers II Nariman Point Mumbai , India T: /67/68 info@jmpadvisors.in 5 India Budget

6 Key policy announcements 6 India Budget

7 Key policy announcements Goods and Services Tax ( GST ) It is proposed to put into place a modern indirect tax regime by way of the much awaited GST rollout by 1 April JAM trinity It is proposed to introduce the JAM trinity Jan Dhan, Aadhar and Mobile to implement direct transfer of subsidy benefits to the recipients. This scheme is intended to allow the states to offer support to poor households, with minimum leakages and in a cashless manner i.e. increase in the number of bank accounts under the Jan Dhan Yojana, linking Aadhar number to such bank accounts and delivering direct benefits via mobile money payment gateways. It is also proposed to convert subsidies into direct benefit transfers, similar to what has been done in the case of LPG subsidies. Monetary policy framework A Monetary policy framework has been concluded with the Reserve Bank of India ( RBI ), with the objective of pegging inflation below 6 percent. It is proposed to amend the RBI Act this year to provide for a Monetary Policy Committee. It appears that with this move, the independence of the RBI will be curtailed to some extent. Bank board bureau With a view to improving the governance of public sector banks, it is proposed to set up an autonomous Bank board bureau. This Bureau will be involved in the selection of heads of Public Sector Banks ( PSBs ) and help them in developing differentiated strategies and capital raising plans through innovative financial methods and instruments, as well as provide greater independence to PSBs. 7 India Budget

8 This proposal is intended as an interim step towards establishing a unified holding and investment company for banks. Amendments in the Fiscal Responsibility and Budget Management Act ( FRBM Act ) It is proposed to make total additional public investment of INR 1,250,000 million out of which INR 700,000 million will be out of budgetary outlays. It is proposed to meet the fiscal deficit target of 3% in 3 years as against than the envisaged target of 2 years. It is proposed to make amendments in the FRBM to incorporate the above changes. Financial markets Public debt management agency It is proposed to set up a Public debt management agency to bring domestic and external borrowings under one roof. Capital account controls It is proposed to amend Section 6 of the Foreign Exchange Management Act, 1999 ( FEMA ) to provide that control on capital flows in the nature of equity will be exercised by the Government, in consultation with the RBI. It is proposed to create a Task Force to establish a sector-neutral Financial Redressal Agency that will address grievances against all financial service providers. Suggestions regarding the Indian Financial Code ( IFC ) are currently being reviewed by the Justice Srikrishna Committee and the FM is hopeful that the IFC would be soon introduced in Parliament for consideration. Alternate Investment Funds ( AIFs ) It is proposed to allow foreign investments in AIFs in view of the need to increase investments from all sources. It is proposed to merge the Forward Markets Commission ( FMC ) with the Securities Exchange Board of India ( SEBI ) to strengthen regulation of 8 India Budget

9 commodity forward markets and reduce wild speculation. The enabling legislation, amending the Government Securities Act and the RBI Act is proposed in the Finance Bill, It is also proposed to repeal the Forward Contracts (Regulation) Act, It is further proposed to eliminate the distinction between different types of foreign investments, especially between Foreign Portfolio Investments ( FPIs ), Foreign Venture Capital Investments ( FVCIs ) and Foreign Direct Investments ( FDI), and replace them with composite cap. Monetising of gold jewellery and bullion Gold monetisation scheme It is proposed to introduce a scheme to replace the present Gold Deposit and Gold metal loan schemes. The new scheme will allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal account. Banks/other dealers would also be able to monetize this gold. It is also proposed to develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The bonds will carry a fixed rate of interest and will be redeemable at an amount equivalent to the gold price on the date of redemption. With a view to reduce the demand for coins minted outside India and also to help recycle the gold available in the country, it is proposed to commence work on developing an official Indian Gold Coin. Provisions to combat black money It is proposed that an offence of concealment of income or evasion of tax in relation to a foreign asset will be considered as a predicate offence under Prevention of Money Laundering Act, 2002 ( PMLA ). In view of this provision, enforcement agencies would be able to confiscate unaccounted assets held abroad and launch prosecution against persons indulging in laundering of black money. 9 India Budget

10 It is also proposed to amend the definition of proceeds of crime under PMLA to enable attachment and confiscation of an equivalent asset in India where the asset located abroad cannot be confiscated. It is further proposed to amend FEMA to provide that if any foreign exchange, foreign security or any immovable property situated outside India is held in contravention of the provisions of FEMA, then action may be taken for seizure and eventual confiscation of assets of an equivalent value situated in India. These contraventions are also being made liable for levy of penalty and prosecution with punishment with imprisonment up to five years. In addition to the prosecution under FEMA, in case of concealment of foreign assets, the taxpayer would be subject to imprisonment under the proposed legislation for a period of 7/10 years. It is proposed to introduce several measures to provide incentives to credit card or debit card transactions and disincentivize cash transactions. To curb domestic black money, it is proposed to introduce a new and more comprehensive Benami Transactions (Prohibition) Bill. This law is aimed at enabling confiscation of benami property and providing for prosecution, with a view to curb a major avenue for generation and holding of black money in the form of benami property, especially in real estate. Power and infrastructure National Investment and Infrastructure Fund ( NIIF ) It is proposed to set up NIIF to raise debt and invest it as equity in infrastructure finance companies, which would leverage the additional equity. Tax free infrastructure bonds It is proposed to introduce tax free infrastructure bonds for projects in rail, road and irrigation sectors. Public Private Partnership ( PPP ) It is proposed to revisit and revitalize the Public Private Partnership mode of infrastructure development with sovereign risk. 10 India Budget

11 Power projects It is proposed to set up five new ultra mega power projects of 4,000 megawatts in the plug and play mode. It is also proposed to consider similar plug and play projects in other infrastructure areas such as roads, ports, rail lines, airports etc. Corporatization of public sector ports It is proposed to allow the public sector ports to corporatize themselves under the Companies Act to leverage the land resources available with the public sector ports. Ease of doing business in India e-biz portal The FM had mentioned in the previous budget that it is proposed to integrate services of all Central Government Departments and Ministries with the e-biz platform by 31 December To this end, the FM mentioned in his speech that 14 regulatory permissions have been integrated on the e-biz portal. It is proposed to provide that eligible foreign funds would not be considered as resident in India merely due to the fact that the fund managers are located in India. It is also proposed to appoint an Expert Committee to examine the possibility and prepare a draft legislation as to whether the need for multiple prior permissions can be replaced with a pre-existing regulatory mechanism. Disinvestment It is proposed to scale up disinvestment considerably, including disinvestment in loss making units and some strategic disinvestment. 11 India Budget

12 Disputes in public contracts With a view to achieve speedy resolution of long drawn disputes arising in public contracts, it is proposed to introduce a Public Contracts (Resolution of Disputes) Bill. Speedy resolution of disputes It is proposed to set up exclusive commercial divisions in various courts in India based on the recommendations of the 253 rd report of the Law Commission. Banking the unbanked It is proposed to create a Micro Units Development Refinance Agency ( MUDRA ) Bank to refinance micro finance institutions with priority lending for enterprises owned by members of the Scheduled Castes/Scheduled Tribes. Micro, Small and Medium Enterprises ( MSME ) Sector To improve the liquidity of the MSME sector, an electronic Trade Receivables Discounting System ( TReDS ) is being established for financing of trade receivables of MSMEs from corporate and other buyers, through multiple financiers. Bankruptcy code In order to overcome the failure of Sick Industrial Companies Act ( SICA ) and Bureau for Industrial and Financial Reconstruction ( BIFR ) in bringing about bankruptcy law reform, legal certainty and speed, it is proposed to bring in a comprehensive Bankruptcy Code in the fiscal year , in line with global standards. Non-Banking Financial Companies ( NBFCs ) It is proposed that NBFCs registered with RBI and having asset size of INR 5,000 million and above will be considered for notification as Financial Institution in accordance with Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( SARFAESI ). 12 India Budget

13 Higher devolution of revenue to the states In line with the recommendations of the 14 th Finance Commission, it is proposed to transfer 42% of the divisible pool of tax to states. Additional transfers by way of grants and plan transfer would result in aggregate transfer of 62% of the total receipts to the states. Agriculture It is proposed to create a Unified National Agriculture Market which is expected to provide the incidental benefit of moderating price rises. Team India It is envisioned that the project Team India, led by the states and guided by the Central Government, would achieve the following by the year 2022: Housing for all with basic amenities such as power, clean drinking water, sanitation, connectivity to roads including completion of roads currently under construction, medical services and also communication facilities for all villages; A means of livelihood to be provided for at least one member of each family; Electrification of remaining 20,000 villages in the country (including offgrid solar power generation); The Ministry of New Renewable Energy has revised its target of renewable energy capacity to 175,000 MW till 2022, comprising 100,000 MW solar power, 60,000 MW wind power, 10,000 MW biomass and 5,000 MW small hydro power; Providing education and employment skills to the youth to convert them from job seekers to job creators and encouraging entrepreneurship by supporting start ups. Atal Innovation Mission ( AIM ) It is proposed to establish in National Institution for Transforming India ( NITI ), an Atal Innovation Mission as an Innovation Promotion Platform involving academics, entrepreneurs and researchers, draw upon national and 13 India Budget

14 international experiences to foster a culture of innovation, R&D and scientific research in India. The platform is also intended to promote a network of world-class innovation hubs in India. Self Employment and Talent Utilisation ( SETU ) It is proposed to establish Self Employment and Talent Utilisation ( SETU ) as a mechanism to support start up business and other self employment activities in technology driven areas. Social security measures It is proposed to create a universal social security system, especially for the poor and the underprivileged. The following schemes are proposed to be introduced: Pradhan Mantri Suraksha Bima Yojna To cover accidental death risk of INR 200,000 for a premium of INR 12 per annum. Atal Pension Yojana To provide a defined pension, depending on the contribution and period. To encourage people to join this scheme, the Government will contribute 50% of the beneficiaries premium limited to INR 1,000 each year, for five years, in the new accounts opened before 31 December Pradhan Mantri Jeevan Jyoti Bima Yojana To cover both natural and accidental death risk of INR 200,000. The premium will be INR 330 per annum (which is less than one rupee per day), for the age group between 18 and 50 years. Senior Citizen Welfare Fund To appropriate the unclaimed deposits of approximately INR 30,000 million lying in the Provident Fund accounts to a corpus to subsidize the premium of vulnerable age groups. A detailed scheme in this regard is proposed to be issued in the month of March Employees Provident Fund ( EPF ) It is proposed to provide an option to the employees to contribute either to EPF or to the New Pension Scheme ( NPS ). 14 India Budget

15 It is also proposed that the employee contribution to EPF would be optional for employees having monthly income below a certain threshold. The employer s contribution would continue to remain the same in the cases even where the employee opts out of contribution to EPF. Employees State Insurance ( ESI ) It is proposed to provide an option to contribute either to ESI or to a health insurance product recognized by the Insurance Regulatory Development Authority ( IRDA ). Skill India It is proposed to launch a National Skills Mission through the Skill Development and Entrepreneurship Ministry. The Mission is aimed at consolidation of skill initiatives spread across several Ministries and standardization of procedures and outcomes across 31 sector skill councils. This proposal is in line with the Prime Minister s view that Skill India should be closely co-ordinated with Make in India and is likely to give a strong boost to the manufacturing industry. E-visa In the previous budget, the FM had announced the introduction of Electronic Travel Authorization (e-visa). To this end, e-visas have already been launched in respect of 43 countries. It is now proposed to extend this facility to 150 countries, in a phased manner. Procurement law To curb malfeasance in public procurement, it is proposed to consider having a procurement law and an institutional structure consistent with the United Nations Commission on International Trade Law ( UNCITRAL ) model. Gujarat International Finance Tec-City ( GIFT ) The first phase of GIFT is soon expected to be a reality and appropriate regulations in this regard will be issued in March India Budget

16 Smart cities Two key industrial corridors have already accomplished preliminary work and the stage is set to start construction of basic infrastructure. General Anti-Avoidance Rule ( GAAR ) It is proposed that GAAR will be deferred for a period of two years. This is a step in the right direction to give a boost to foreign investment. This will also provide additional time to the Income tax department to train tax officers and announce a clear set of rules for enforcing the provisions of GAAR. Direct Taxes Code ( DTC ) It is proposed to drop the enactment of the DTC which was to replace the current tax law as most of the provisions of the DTC have already been included in the current law and the jurisprudence under the Income tax Act, 1961 ( the Act ) is well evolved. Other major provisions of DTC such as Place of Effective Management ( POEM ) have been introduced in the present budget. Corporate tax rate It is proposed to reduce the rate of tax for domestic companies from the present 30% to 25% over the next four years, beginning from FY , with the objective of bringing the rate, more or less, at par with that of other major Asian economies. Consequentially, it is also proposed to remove various tax exemptions and incentives available to corporate taxpayers in a phased manner. This is intended to reduce tax litigation and disputes. Tax Administration Reform Commission ( TARC ) The recommendations given by TARC are in an advanced stage of examination and it is proposed to implement them appropriately during the current year. 16 India Budget

17 Tax proposals 17 India Budget

18 Direct taxes This section summarises significant direct tax proposals announced in the Budget These proposals are subject to enactment of Finance Bill, Further, most direct tax proposals in the Finance Bill, 2015 are effective from FY unless otherwise specifically stated. Tax rates The basic rates for FY have been left unchanged and are given below. Individuals Total Income Up to INR 250,000* Tax Rates# Nil INR 250,001 to INR 500,000** 10% INR 500,001 to INR 1,000,000 20% Above INR 1,000,001*** 30% * For a resident individual aged between sixty and eighty years, the basic exemption limit is INR 300,000. For a resident individual aged eighty years or above, the basic exemption limit is INR 500,000. ** Rebate under section 87A from tax of upto INR 2,000 or 100% of the tax whichever is lower, will continue to be available to a resident individual whose total income is below INR 500,000. *** Surcharge has been increased by 2% to 12% if the total income exceeds INR 10 million (marginal relief available). #2% education cess and 1% secondary and higher education cess is applicable on income tax (inclusive of surcharge, if any). Domestic companies The basic rate of tax for domestic companies continues to remain unchanged at 30%. 18 India Budget

19 A 7% surcharge is applicable if the total income exceeds INR 10 million but does not exceed INR 100 million (marginal relief available). A 12% surcharge is applicable if the total income exceeds INR 100 million (marginal relief available). A 2% education cess and 1% secondary and higher education cess is applicable on income tax (inclusive of surcharge, if any). Foreign company No change in tax rates. The rate for foreign companies will continue to be 40%. The surcharge on foreign companies remains unchanged. A 2% surcharge on tax is applicable if the total income exceeds INR 10 million but does not exceed INR 100 million (marginal relief available). A 5% surcharge on tax is applicable if the total income exceeds INR 100 million (marginal relief available). A 2% education cess and 1% secondary and higher education cess is applicable on income tax (inclusive of surcharge, if any). Firms including Limited Liability Partnerships ( LLPs ) No change in tax rates. Rate for firms continues to be 30%. A 12% surcharge is applicable if the total income exceeds INR 10 million (marginal relief available). A 2% education cess and 1% secondary and higher education cess is applicable on income tax (inclusive of surcharge, if any). Minimum Alternate Tax ( MAT ) The basic rate for MAT applicable to companies remains unchanged at 18.5% (plus surcharge as applicable). A 2% education cess and 1% secondary and higher education cess is applicable on income tax (inclusive of surcharge, if any). Currently, post-tax profits of an Association of Persons ( AOP ) distributed to a corporate member are liable to MAT (therefore, effectively double taxed). It is now proposed to remove such post-tax profits distributed by 19 India Budget

20 AOPs to a corporate member from the ambit of MAT under section 115JB of the Act. It is proposed to exclude Foreign Institutional Investors ( FIIs ) from the levy of MAT in respect of income in the nature of capital gains arising on transactions in securities [other than short term capital gains arising out of transactions on which Securities Transactions Tax ( STT ) is not chargeable]. This exemption from MAT is applicable subject to the FII making investments in accordance with the rules laid down by SEBI. However, income of FIIs other than capital gain, may be exposed to levy of MAT. Alternate Minimum Tax ( AMT ) The basic rate for AMT applicable to a person other than a company remains unchanged at 18.5% (plus surcharge as applicable). A 2% education cess and 1% secondary and higher education cess is applicable on income tax (inclusive of surcharge, if any). Dividend Distribution Tax ( DDT ) The rates at which DDT is applicable is changed to % on net basis (gross rate 20.92%) due to increase in the rate of surcharge by 2%. Abolition of wealth tax Wealth tax Act has been abolished from 1 April This is a measure introduced by the Finance Bill because of the compliance burden on the taxpayers and cost of administration of wealth tax. To offset the loss in revenue, the rate of surcharge is increased by 2% for all taxpayers (other than foreign companies) whose income exceeds INR 10 million. However, the income tax return forms are proposed to be modified to include particulars of assets which were earlier reported in wealth tax returns. Procedure for computing period of stay in India With a view to bring clarity with regard to the manner of determination of the period of stay in India for crew members of ships who are Indian citizens, it is proposed to amend section 6 the Act to provide the manner for determination of the period of stay in India subject to conditions as may be prescribed in this 20 India Budget

21 regard. This change will provide a level playing field for crews of Indian flag and foreign flag vessels and will enable Indian shipping to get quality manpower. The proposed amendment will take effect retrospectively from 1 April Provisions relating to source rule Change in provisions relating to tax residential status for companies A provision has been inserted amending section 6 of the Act which considers a company to be tax resident in India if the control and management of its affairs is situated wholly in India during that year. It is now proposed to consider any company to be a tax resident of India if at any time during the relevant year its Place Of Effective Management ( POEM ) is in India. This provision is a dis-incentive for foreign companies wanting to invest into India and could be stumbling block to the Make in India campaign. For example, a foreign company wishing to invest in India and holding a meeting of Board of Directors in India runs the risk of having its global income subject to tax in India. Indirect transfers The Finance Act, 2012 had inserted certain clarificatory amendments in the provisions of section 9 of the Act dealing with income deemed to accrue or arise in India wherein all income accruing and arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India, is deemed to accrue or arise in India. Explanation 5 inserted retrospectively from 1 April 1962 in section 9(1)(i) of the Act clarified that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India 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. 21 India Budget

22 It is proposed to make the following amendments in the provisions of section 9 of the Act relating to indirect transfers after considering recommendations of the Shome Committee. It is explicitly stated that assets includes tangible and intangible assets located in India. Further, substantial value of Indian assets has been defined as amount exceeding INR 100 million and representing at least 50% of the value of the total assets owned by the company or entity on the specified date. The value of the assets shall be the fair market value of such asset, without reduction of liabilities if any, relating to the asset. The manner of determination of fair market value of the Indian assets as a proportion of the global assets of the foreign company/entity is to be prescribed in the rules. Specified date has been defined as the date on which the accounting period of the company or entity ends, preceding the date of transfer. However, specified date would be the date of transfer if the book value of the assets of the company on the date of transfer exceeds the book value of the assets on the last balance sheet date, by at least 15%. The taxation of gains arising on indirect transfer will be on a pro rata basis. However, the method for determination of proportionality is proposed to be provided in the rules. Exemption from tax is provided to the transferor of a share of, or interest in, a foreign entity if it along with its associated enterprises, neither holds the right of control or management, nor holds voting power or share capital or interest exceeding five per cent (the Shome Committee has recommended 26%) of the total voting power or total share capital in the foreign company or entity directly holding the Indian assets ( direct holding company ). In case the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly, the exemption shall be available to the transferor if it, along with its associated enterprises, neither holds the right of management or control in relation to such company or entity, nor holds any rights in such company which would entitle it to either exercise control or management of the direct holding company or entity or entitle it to voting 22 India Budget

23 power exceeding five percent (the Shome Committee has recommended 26%) in the direct holding company or entity. However, no exemption is provided to portfolio investors. Therefore, the holding of more than 5% by portfolio investors will be covered under these provisions. In a scheme of amalgamation, exemption is provided in respect of transfer of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company, to the amalgamated foreign company, subject to the following conditions: At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and Such transfer is not taxable in the country in which the amalgamating foreign company is incorporated. In case of a demerger which is not governed by the provisions of the Companies Act, 1956, the exemption is provided in respect of transfer of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company, to the resulting foreign company subject to the following conditions: At least 75% of the shareholders of the demerged foreign company continue to remain shareholders of the resulting foreign company; and Such transfer is not taxable in the country in which the demerged company is incorporated. Any Indian entity whose assets are owned by the foreign company or the entity will be required to report any off-shore transaction having the effect of directly or indirectly modifying the ownership structure or control of the Indian company or entity as prescribed. Failure to report such a change will attract penalty of two percent of the value of the transaction where such transaction has the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern and INR 0.5 million in any other case. It may be difficult for an Indian entity to furnish certain 23 India Budget

24 information especially in case of listed companies. Further, no minimum threshold is proposed to comply with the reporting obligation. Hence, even a transfer of one share will need to be reported by the Indian entity, which may create undue hardships. In his speech, the FM mentioned that applicability of provisions relating to indirect transfers to dividends paid by foreign companies to their shareholders will be addressed by the Central Board of Direct Taxes ( CBDT ) through a clarificatory circular. While the Finance Bill has attempted to provide relief to investors, a number of recommendations of the Shome Committee have not been considered under the proposed amendment. Some of the recommendations relate to exemption to listed securities, P-Notes and investors in private equity funds. Further, issues relating to double taxation in case of multi layered structures, step up in cost basis if the shares of the Indian company are subsequently transferred on which tax is earlier paid under these provisions, is also not dealt by the Finance Bill. However, the Memorandum to the Finance Bill has indicated that some of the recommendations may be announced by way of a clarificatory circular in due course. Further, it is interesting to note that Finance Act, 2012 had amended section 9 of the Act to tax indirect transfers retrospectively from 1 April However, the proposed change clarifying the taxation of indirect transfers will come into effect prospectively from 1 April General Anti-Avoidance Rule ( GAAR ) The provisions of GAAR under section 95 of the Act were introduced by the Finance Act, 2013 and were made applicable from FY onwards. The implementation of GAAR is now proposed to be deferred by two years and will come into force prospectively from FY and subsequent years i.e. applicable to investments made after 31 March The investments made up to 31 March 2017 are proposed to be protected from the applicability of GAAR by amendment in the relevant rules in this regard. 24 India Budget

25 Provisions relating to non-residents Royalty and fees for technical services It is proposed to amend the rates at which royalties and fees from technical services from 25% to 10% under section 115A of the Act with an aim to encourage transfer of technology into India. Taxability of interest paid by the permanent establishment of a bank to a non-resident outside India Taxability of interest paid by a Permanent Establishment ( PE ) of a bank to head office or any other branch outside India was a matter of litigation in the past. Interest expense incurred by a PE of a banking company was not subject to withholding tax provisions in India as per several judicial decisions but the interest paid was allowed as a deduction in computing the profits of the PE in India. Such interest was not chargeable to tax in the hands of the recipient outside India, effectively constituting a double dip situation. To remedy this situation, it is proposed to amend the section 9 of the Act to provide that in case of a non-resident engaged in the business of banking, any interest payable by the Indian PE of such non-resident to the head office or any other branch outside India would be deemed to accrue and arise in India and chargeable to tax in the hands of the recipient, since the PE would be deemed to be a person separate and independent of the nonresident. Such interest would also be subject to withholding tax at the rates in force and any non-deduction would result in disallowance of the expenditure for the PE in India and attract consequent interest and penalty. Payment to non-residents It is proposed to increase the disclosure requirements for payments made to non-residents (other than companies) or to foreign companies. 25 India Budget

26 In furtherance to this, a new section 271I has been introduced to provide that if a person obligated to provide information fails to do so or gives inaccurate information, the tax officer may levy a penalty of INR 100, 000. The proposed amendment is effective from 1 June Foreign tax credit With a view to provide a mechanism for granting credit of taxes paid in any country outside India, it is proposed to amend sub-section 2 of section 295 of the Act, which would enable CBDT to make rules to provide the procedure for granting relief or deduction with respect to any income tax paid outside India against the income tax payable under the Act. The proposed amendment is effective from 1 June Global Depository Receipt ( GDR ) norms The Scheme of Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through depository receipt mechanism) Scheme, 1993 has been replaced by the Depository Receipts Scheme 2014, notified by the Department of Economic Affairs. As per the new scheme, Depository Receipts ( DRs ) are now proposed to be issued against the securities of listed, unlisted or private or public companies or against underlying securities which could be debt instruments, shares or units etc. Further, both sponsored issues, unsponsored deposits and acquisitions are permitted, and the benefits of DRs are extended to both residents and nonresidents. However, the taxation scheme of GDRs under section 115ACA of the Act is unchanged, restricting the benefit to non-residents with respect to sponsored DRs issued against listed shares. Incentives to fund managers of offshore funds In order to encourage fund management activities in India, a specific regime under section 9A of the Act has been proposed. 26 India Budget

27 The regime provides, in case of an eligible investment, that fund management activity carried out through an eligible fund manager on Indian soil acting on behalf of such fund, shall not constitute a business connection in India, subject to specified conditions. The eligible investment fund will not be considered as a tax resident of India merely on the basis of the location of such fund manager in India. Some of the key conditions applicable for eligible funds are: o o o o o o The aggregate participation or investment in the fund, directly or indirectly, by persons resident in India should not exceed five percent of the corpus of the fund. The fund should have a minimum of 25 members who are not connected either directly or indirectly. A member of the fund, along with connected persons should not have a participation interest, directly or indirectly, exceeding 10% in the fund. Further, the aggregate participation of ten or less members, along with connected persons, should be less than 50% in the fund. The fund should not make any investment in any of its associate entities. Such fund shall not carry on or control and manage, directly or indirectly, any business in India or from India. It is further proposed that such eligible fund should furnish to the income tax authority, a statement containing information of fulfilment of the conditions subject to which the benefit is derived, failing which a penalty of INR 0.5 million would be levied. Key conditions applicable to fund managers are: o o The fund manager must not be an employee either of the eligible investment fund or of its connected person and must carry out fund management in the ordinary course of business. The person should be registered as a fund manager or investment advisor in accordance with the specified regulations. 27 India Budget

28 o Such fund manager along with connected persons shall not be entitled to more than 20% profits of the fund, directly or indirectly. Transfer pricing It is proposed to increase the threshold limit under section 92BA of the Act for covering specified domestic transactions from INR 50 million to INR 200 million. Taxation of Alternative Investment Funds ( AIFs ) A special tax regime under Chapter XII-FB is proposed to rationalize the taxation of Category I and Category II Alternative Investment Funds ( Investment Fund / Fund ) which are subject to the Securities and Exchange Board of India (Alternative Investment Fund) Regulations These changes will help garner funds from local High Net worth Individuals ( HNIs ) into these funds. An Investment Fund which is established or set up in India in the form of a trust, Indian company, LLP or body corporate is covered under this special tax regime. All investment income earned by the fund would be taxable in the hands of its unit holders or investors of the Fund, while the business income of such Fund will be taxed in the hands of the Fund. Taxation of income in the hands of the unit holder of the Investment fund Business income of the Fund will be taxed in the hands of the Fund and shall be exempt in the hands of unit holders under section 10(23FBB) of the Act. Income other than business income of the Fund shall be taxed in the same manner as if it were the income accruing and arising to the unit holder without change of its character. However, the Investment Fund will be obliged to deduct tax@ 10% under section 194LBB of the Act on the income distributed to the unit holders (other than on business income). Therefore, tax deduction will apply even to incomes like dividend and long term capital gain on listed shares which are exempt in the hands of unit holders. 28 India Budget

29 The proposed amendment is effective from 1 June If there is a loss at the Fund level for income other than business income, the loss would not be passed through to the investors but would be set off in accordance with the current provisions of the Act relating to set off and carry forward of losses at the Fund level itself. Taxation of income in the hands of Investment fund Income other than business income shall be exempt from tax in the hands of the Fund under section 10(23FBA) of the Act. Business income of the Fund will be taxable at the rate applicable to firm/company if the fund is set up as firm/company or at the maximum marginal rate in case of any other structure. It is proposed that the income received by the Investor Fund would be exempt from the requirement of tax deduction through a suitable notification under section 197A(1F) of the Act to be issued subsequently. The Investment Fund will be mandatorily required to file a return of income. Further, it will also be required to provide the details of various components of its income to the income tax authority and investors/unit holders. Due to these changes a Fund will be a translucent structure viz partly transparent and pass through other income and partly opaque for nonpass through of business income. Taxation regime for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) Finance (No.2) Act, 2014 had introduced a special taxation regime in respect of two new investment vehicles, REITs and InvITs ( business trusts ). Tax implications for the sponsor Under the said tax regime, transfer of units in the business trust by the sponsor, acquired in exchange for shares in the Special Purpose Vehicle ( SPV ), was subject to capital gains tax. 29 India Budget

30 In view of the above, the sponsor was at a disadvantage due to such capital gains tax at the time of transfer of such (listed) units of the business trust, as against a situation where the sponsor had opted to exit through an Initial Public Offer ( IPO ). In order to overcome this, it is now proposed to tax capital gains arising on the transfer of such listed units at par with listed equity shares, i.e. at 15% for short term capital gains and NIL for long term capital gains, subject to the levy of STT on such transfer. Tax implications for the business trust It is proposed to introduce a new sub-section (23FCA) in section 10 of the Act to extend the pass through status to the income of a business trust (being a REIT) earned by way of renting or leasing or letting out any real estate asset owned directly by the business trust. Such rental income was earlier subject to tax at the maximum marginal rate. It is also proposed that such rental income received by a business trust from assets owned directly by the business trust (being a REIT) will not be subject to any withholding tax. However, rental income received from assets held by the business trust (being a REIT) through an SPV will continue to be taxed at the maximum marginal rate. Tax implications for the unit holders In case of distribution of rental income exempt under section 10(23FCA) of the Act by the business trust (being a REIT), it is proposed to amend section 194LBA of the Act, to subject the said income to a withholding tax of 10% in the case of resident unit holders and a withholding tax at the rates in force, i.e. upto 40% in the case of non-resident unit holders. As per section 115UA of the Act, the income distributed by a business trust is deemed to be of the same nature in the hands of the unit holders, as in the hands of the business trust. It would therefore be interesting to examine whether the deductions available in case of income from house property can be claimed by the unit holders in this regard. 30 India Budget

31 The proposed amendment is effective from 1 June Taxation of charitable trusts The definition of charitable purpose is proposed to be amended to include Yoga as one of the activities for which a charitable trust can be formed. For an activity to be considered as an advancement of any other object of general public utility, two conditions have been introduced viz.: Such activity should be undertaken in the course of actually carrying out of such advancement of any other object of general public utility; and The aggregate receipts from such activities during the year do not exceed 20% of the total receipts of the charitable trust. 85% of the receipts of a trust are mandatorily required to be expended on charitable objects of the trust. The taxpayer had an option of deferring and accumulating such sums for specific purposes by submission of Form 10. In order to remove ambiguity in the timelines of submitting such From 10, it is now proposed that Form 10 has to be filed before the due date, as applicable, for filing the tax return. It is also proposed that if the tax return is not filed within the prescribed timelines, the benefit of accumulation will be forfeited. Tax reliefs and incentives Incentives for the states of Andhra Pradesh and Telangana A new section 32AD is proposed to be inserted to provide additional investment allowance of 15% of the cost of new assets acquired and installed in notified backward areas in the state of Andhra Pradesh and Telangana during the period from 1 April 2015 to 31 March 2020, by a manufacturing undertaking or enterprise. This deduction shall be available in addition to the deduction under section 32AC of the Act to the manufacturing undertaking. Further, higher additional depreciation under section 32(1)(iia)of the Act is also proposed at 35% (instead of 20%) of the cost of new assets acquired for the period 1 April 2015 to 31 March India Budget

32 The term new asset has been defined on the same lines as under section 32AC of the Act. In case such new asset is transferred or sold within five years from the date of installation, the deduction under section 32AD of the Act in respect thereof shall be deemed as business income in the year in which such asset is sold or transferred. However, this restriction shall not apply in case of an amalgamating or demerged company or the predecessor in a case of a business reorganisation, but shall continue to apply to the amalgamated company or resulting company or successor, as the case may be. Additional depreciation In order to encourage investment in plant and machinery by the manufacturing and power sector, it is proposed to provide that the balance 50% of additional depreciation under section 32(1)(iia) of the Act on the new plant and machinery acquired and used for less than 180 days (which has not been allowed in the year of acquisition and installation of such machinery), shall be allowed in the immediately subsequent year. Under section 80JJAA of the Act, all taxpayers deriving profits from manufacture of goods in a factory are eligible for deduction equal to 30% of additional wages paid to the new regular workmen employed during the year, for three assessment years including the year in which employment is provided. The existing provision is applicable to Indian companies only. Further, in order to extend this benefit to smaller units, the requirement to employ minimum 100 regular workmen is proposed to be reduced to 50 regular workmen. Exemption is provided to income of the Core Settlement Guarantee Fund ( Core SGF ) of the Clearing Corporations at par with the exemption available to income by way of contribution to Investor Protection Fund by a recognised stock exchange, commodity exchange or any depository. However, exemption will not be available to the existing amount standing to the credit of the Fund, not charged to tax in any prior years. Such amount will be taxable in the year in which amount is shared with specified persons. 32 India Budget