Tax Alert Key amendments at enactment stage of Finance Bill, 2018

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1 14 March 2018 Tax Alert Key amendments at enactment stage of Finance Bill, 2018 Executive Summary The Finance Bill, 2018 (FB 2018 or Bill) was presented by the Finance Minister (FM) on 1 February 2018 [1]. In the wake of representations received from various stakeholders, while moving the Bill for approval by the Lok Sabha (the lower house of Parliament), the FM introduced amendments to FB 2018 (amended FB 2018). The amendments are intended to address certain ambiguities arising from the wording of proposals as contained in the original Bill. Key tax takeaways for a tax professional Units of equity-oriented funds investing in other equity-oriented funds (fund of funds) shall turn long-term if held for a period exceeding 12 months. New long-term capital gains (LTCG) taxation regime has been rationalized for equity share in a company, units of equity-oriented funds and units of a business trust in particular, by moving the grandfathering provisions of the computation chapter and also clarifying operation of grandfathering for unlisted shares as on 31 January Lock-in period for investment in specified bonds for claiming exemption from LTCG arising from land or building or both extended from three years to five years. Fair market value (FMV) on the date of conversion of stock-in-trade (SIT) into capital asset (CA) assessed in terms of the new provisions shall be actual cost for the purposes of depreciation allowance. The obligation to obtain Permanent Account Number (PAN) on entering into a financial transaction over INRO.25m in a tax year has been restricted to resident non-individual entities and their related individuals. Significant Economic Presence (SEP) in India to trigger taxation for non-residents, whether or not the agreement for specified transactions or activities is entered in India. Inventory of securities held by scheduled banks and public financial institutions shall be valued after taking into account guidelines issued by the Reserve Bank of India (RBI). Due date for filing country-by-country (CbC) report by an Indian constituent entity, where the non-resident parent entity has no obligation to file CbC report in the home jurisdiction shall be prescribed. Turnover cap of INR250m for an eligible start-up to claim profit-linked tax holiday deduction shall apply only to the tax year for which deduction is claimed. [1] Refer the sector alerts in the series released on 1 February 2018

2 Key amendments Units of equity-oriented funds investing in other equity-oriented funds (fund of funds) to turn long-term if held for a period exceeding 12 months FB 2018 proposed to include fund of funds within the definition of equity-oriented fund for the purpose of the new regime of LTCG 10%. However, no corresponding amendment was proposed to reduce the holding period for such asset to turn long-term from 36 months to 12 months, as applicable for equityoriented funds. The amendment at the enactment stage provides that units of fund of funds will turn long-term if held for a period exceeding 12 months. New LTCG tax regime for equity shares in a company, units of equity-oriented funds and units of business trust ( specified capital asset ) FB 2018 proposed to withdraw the LTCG exemption for specified capital assets and introduce an LTCG tax regime for taxing LTCG exceeding INR0.1m at the rate of 10% [2]. At the enactment stage, the following amendments are made to address certain ambiguities and concerns raised by stakeholders: Benefit of indexation and foreign exchange fluctuation will not be available in computing the LTCG as part of the computation provision itself, rather than merely for the purpose of computing 10%. Likewise, the provision relating to grandfathering of gain till 31 January 2018 is incorporated in the computation of the LTCG itself, rather than merely for the purposes of computing 10%. This resolves certain ambiguities contained in the language of FB 2018 when such provision was made part of the provisions requiring calculation of tax. The FMV of shares which are unlisted on 31 January 2018, but listed on the date of transfer, shall be indexed for the period up to financial year This will also apply to unlisted shares which are substituted in tax-neutral transfers (like amalgamation, conversion of preference shares etc.) for equity shares which are listed on the date of transfer. While tax payable on LTCG on specified capital assets exceeding INR0.1m shall be at 10%, the tax payable on total income, as reduced by the amount of such LTCG, shall be computed as if the total income so reduced were the total income of the taxpayer. Rationalization of capital gains exemption on reinvestment in specified securities [3] by restricting it to transfer of long-term land and building FB 2018 proposed to rationalize the eligibility of LTCG exemption on reinvestment in specified securities by restricting the exemption to LTCG arising only on capital assets, being land or building or both. Furthermore, the redemption period of such specified securities was increased from three years to five years in case such specified securities are issued on or after 1 April Consequential amendment at the enactment stage extends the lock-in period for such specified securities from three years to five years, such that any transfer or conversion of such securities into money within a period of five years shall trigger clawback provisions for withdrawing the exemption. [2] This rate it to be increased by applicable surcharge and cess. [3] Specified securities means bonds issued by the National Highway Authority of India or Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf

3 Tax treatment on conversion of SIT into CA FB 2018 proposed to tax conversion of SIT into CA as business income, with reference to the FMV of SIT as on the date of conversion. Furthermore, such FMV shall be treated as cost of acquisition of CA for the purposes of capital gains computation on subsequent transfer of such asset. The corresponding amendment at the enactment stage provides that such FMV shall be treated as actual cost for the purposes of grant of depreciation if such converted asset is used for the purposes of business or profession carried on by the taxpayer. Obligation of obtaining PAN for non-individual entities and related individuals entering into a financial transaction FB 2018 proposed to extend the obligation to obtain PAN to every non-individual person who enters into a financial transaction for an amount aggregating INRO.25m or more in a tax year, as also certain connected individuals of such persons like managing director, director, partner, principal officer, office bearer etc. The amendment at the enactment stage restricts such obligation only to resident non-individual entities, such that non-resident entities are not covered by such extended obligation. Separately, another amendment to the definition of PAN removes the requirement of PAN being issued in the form of a laminated card. Emergence of business connection due to SEP in India: In light of emerging business models in the digital economy, where no physical presence is required in India, FB 2018 proposed to expand the scope of business connection in India to SEP, which means: Any transaction in respect of any goods, services or property carried out by a non-resident in India, including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the tax year exceeds the amount as may be prescribed; or Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India, through digital means. As per FB 2018, such transactions or activities shall constitute SEP in India, whether or not: The non-resident has a residence or place of business in India; or The non-resident renders services in India. The amendment at the enactment stage further provides that transactions or activities shall constitute SEP in India, whether or not the agreement for such transaction or activities is entered into in India. Valuation of inventory (including securities) for banks and public financial institutions in accordance with Income Computation and Disclosure Standards (ICDS): FB 2018 proposed to carry out several retroactive amendments with a view to provide statutory legitimacy and bring certainty in the wake of doubts arising from judicial pronouncement on ICDS. One such amendment provided for valuation of listed and unlisted securities held as inventory, in accordance with ICDS. The amendment at the enactment stage provides that valuation of securities held as inventory by a scheduled banks or public financial institutions shall be valued in accordance with ICDS, after taking into account guidelines issued by the RBI in this regard.

4 Rationalization of country-by-country reporting (CbCR) provisions: FB 2018 proposed a few amendments to the CbCR provisions to align Indian CbCR regulations with the OECD model legislation, to improve the effectiveness and reduce the compliance burden of such reporting. One such clarification proposed was that the Indian constituent entity (having a non-resident parent) will now be required to furnish CbC report in India if the parent entity has no obligation to file such report in the parent jurisdiction. The due date for such filing was prescribed as similar to that prescribed for filing by an Indian resident parent or Indian resident alternate reporting entity i.e., 12 months from the end of the reporting accounting year. The amendment at the enactment stage provides that the due date for filing CbC report by the Indian constituent entity, in the following scenarios, shall be within the period as may be prescribed, where: The non-resident parent entity has no obligation to file CbC report in the home jurisdiction. The parent entity is resident of a country with which India does not have an agreement providing for exchange of CbC report. There has been a systemic failure of the country or territory in which the parent entity is resident. Liberalization of conditions for availing tax holiday for start-ups: FB 2018 proposed to extend the sunset date for incorporation of companies or limited liability partnerships for availing the 3-year profit-linked tax holiday deduction for eligible start-ups from 1 April 2019 to 1 April 2021, and also to rationalize the period of turnover cap of INR250m to seven years from the date of incorporation (as against specific period of tax years to ). Thus, breach of turnover cap during any of the seven tax years from the date of incorporation had the potential to make the taxpayer ineligible for tax holiday deduction for all years (including past years). The amendment at the enactment stage removes the anomaly by providing that turnover cap shall apply only to the year for which deduction is claimed, such that breach in a particular year shall not disqualify the taxpayer for other years. Impact analysis The amended FB 2018 clears the air on some ambiguities on the new LTCG regime; cost base for depreciation allowance on an asset being SIT converted into CA; valuation of securities held as inventory by scheduled banks and public financial institutions; relaxation from obtaining PAN to non-resident non-individual persons; due date for CbCR compliance by Indian constituent entity of non-resident parent entity and turnover cap for eligible start-ups. To mitigate potential litigation, it would be eminently desirable to clarify that listed company shares held as on 31 January 2018, which get substituted with shares of another listed company pursuant to tax neutral transfer, shall also be eligible for grandfathering - say, when shares of an amalgamating company get substituted by shares of the amalgamated company. Likewise, it may also be clarified that the benefit of grandfathering value on 31 January 2018 will also extend to a successor who, for capital gains purposes, is treated at par with the predecessor taxpayer who held the eligible asset as at 31 January 2018 say, the case of a successor acquiring shares by way of gift, inheritance etc. Further ambiguities continue to exist on other proposals, like deemed dividend taxation of accumulated profits of amalgamating company, potential extension of SEP to physical transactions, provisions permitting launch of prosecution for non-filing of tax return even when income of foreign companies is fully covered by withholding tax, uncertainty of restrictive relief from minimum alternate tax for non-resident companies under presumptive basis of taxation etc. Also, no further tax concessions have been extended to companies undergoing corporate insolvency process, other than those announced as part of FB 2018.

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