Taxation of Shares & Securities

Transcription

1 Taxation of Shares & Securities - Special emphasis on taxation issues relating to non-residents CA Vishal Gada WIRC - Mumbai 7 January 2012 Contents Investment avenue for Non-residents Scheme of ADRs / GDRs / FCCBs Scheme of FCEB & salient features Taxation of ADRs / GDRs, etc Benefit of lower rate as per proviso to Section 112(1) Special Regime - taxation of NRIs, FIIs & OFs Zero Coupon Bonds 2 1

2 Investment avenues for NRs Equity Shares Foreign Currency Exchangeable Bonds (FCEBs) Foreign Currency Convertible Bonds (FCCBs) Nonresidents Debentures Preference Shares American Depository Receipts / Global Depository Receipts 3 Scheme of issue of ADRs / GDRs / FCCBs 2

3 Scheme of ADRs / GDRs / FCCBs Overseas Investors Investment Investment Overseas Depository Bank Issue of ADRs / GSRs / FCCBs in foreign currency & Payment of Dividend / interest Payment of Dividend / interest Listing of ADRs / GDRs / FCCBs Overseas Stock Exchange Overseas India Indian Issuer Co Issue of underlying Shares in Indian Rupees Domestic Custodian Bank 5 Scheme of ADRs / GDRs / FCCBs Eligible Indian Issuer Co to obtain approval from shareholders for issues of ADRs / GDRs/ FCCBs Issuer Co to finalization issue structure in consultation with LM and to obtain all approvals / permissions Issuer Co to issue underlying shares denominated in Indian Rupees to DCB ODB to issue ADRs / GDRs / FCCBs denominated in foreign currency to overseas investors ADRs / GDRS / FCCBs to be listed on overseas stock exchanges Issuer Co pays dividend / interest in Indian Rupees to DCB, which in turn remits the same to OCB for distributing it to overseas investors in foreign currency GDRs / ADRs can be issued to non-resident / resident permanent employees of the Issuer Co engaged in specified sector including overseas subsidiaries engaged in specified sector 6 3

4 Scheme of FCEBs Overseas Investors Issue of FCEBs and payment of interest in foreign currency Exchange of FCEBs against shares Offered Co Overseas India Issuer Co Offered Co (listed in India) Belongs to same promoter group 7 Salient features of FCEBS Foreign Currency Exchangeable Bonds means a bond expressed in foreign currency, the principal and interest thereof payable in foreign currency, subscribed by a non-resident in foreign currency and exchangeable into equity shares of Offered Co, in any manner, either wholly or partly or on the basis of equity related warrants attached thereto Offered Co should be listed and should be engaged in business in which FDI is permitted Prior approval of RBI required for issuance of FCEBs Prior approval of FIPB required (if applicable) Adherence to FDI guidelines and sectoral caps mandatory Retention and deployment of proceeds from FCEBs should be as per ECB guidelines 8 4

5 Taxation of ADRs, GDRs, etc. firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights Taxation of Dividend / interest Dividend on ADRs / GDRs / Shares Exempt from tax in India in the hands of overseas investors Indian Co to pay % under Section 115O Interest on FCCBs / FCEBs Taxable in 10%* under Section 115AC Indian Co liable WHT under Section 196C Applicability of tax treaty? *plus applicable surcharge and cess 10 5

6 Transfer / redemption of ADRs etc outside India Transfer of ADRs / GDRs / FCCBs / FCEBs outside India by NR to NR is not taxable transfer in India under Section 47(viia) Transfer / Conversion of FCEBs/ FCCBs into shares is not taxable in India under Section 47(xa) Redemption of ADRs / GDRs into underlying shares whether taxable in India? 11 Transfer of ADRs etc in India Held of 3 years or more - long term capital gains on transfer of ADRs / GDRs / FCCBs / FCEBs taxable in India in the hands of NRs / resident 10%* under Section 115AC / 115ACA Held for less then 3 years - short term capital gains on transfer of ADRs / GDRs / FCCBs / FCEBs taxable in India in the hands of NRs / resident employees as per normal tax rates (as applicable) *plus applicable surcharge and cess 12 6

7 Taxation of shares after redemption Underlying shares held for 1 year or more - Long term capital gains 10%* Underlying shares held for less than 1 year - short term capital gains taxable as normal income 15%* under Section 111A (as applicable) Cost of acquisition iti of underlying shares would be price prevailing on stock exchange on the date on which the ODB advises the DCB Period of holding of underlying shares shall be reckoned from the date on which the ODB advises the DCB Cost of acquisition of shares on conversion of FCCBs As per Section 49 cost in relation to FCCBs, As per Scheme # price determined on the basis of the price of the shares on Indian stock exchange on the date of conversion of FCCBs into shares Right or Bonus ADRs / GDRs / Shares not taxable Whether Act will prevail over Scheme to determine cost of acquisition of shares on conversion of FCCBs? *plus applicable surcharge and cess # Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, Applicability of tax treaty Paragraph 10 of the Scheme # provide that During the period of fiduciary ownership of shares by ODB, the provision of tax treaty between India and country of residence of ODB will apply to determine taxation of dividend and interest During the period, when the redeemed underlying shares are held by NR, the provisions of tax treaty between India and country of residence of NR will apply to determine taxation of dividend, interest and capital gains on transfer of underlying shares # Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme,

8 Case Study 1 A Ltd., a company incorporated under the Indian Laws, has issued Foreign Currency Convertible Bonds ( FCCB ) with an option of conversion of the same to equity shares or redemption at a premium at the end of the tenure / at the time of maturity. In such a scenario request you to share your thoughts in relation to the following: Tax treatment of the premium at the time of redemption under the Income-tax Act, 1961(i.e. whether the same would be treated as interest or capital gains) Withholding tax implications (i.e. rate at which tax needs to be withheld at the time of redemption) 15 Case Study 2 ABC Ltd., a company incorporated under the Indian Laws, has issued FCCB through its overseas depository bank i.e., Deutsche Bank, London (a branch of Germany). In this connection, request you to share your thoughts in relation to the applicability of the Tax Treaty vis-à-vis payment of interest. Para10 of Scheme # - Application of Avoidance of Double Taxation Agreement in case of Global Depositary Receipts # Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme,

9 Case Study 3 ABC Ltd., an Indian Company, had issued FCCB and are listed on Singapore Stock Exchange. The funds were raised with an intention of using them for capital expenditure, including capacity expansion and for any other uses as may be permitted from time to time under relevant laws, regulations and guidelines. ABC Ltd. is contemplating to buyback FCCBs, which are quoted at a discount, through the Stock Exchange at the prevailing market price and will be cancelled after the buy back. 17 Case Study 3 In such a scenario request you to share your thoughts on taxability of the gain arising on buy back and cancellation of FCCB under the provisions of the Income Tax Act, 1961: Whether the gain arising on buy-back (being the difference between the buy-back price and issue price) and subsequent cancellation of the FCCB can be considered as an income? Whether the gain is a revenue receipt or capital receipt? If the income is a capital receipt, whether it is specifically liable to tax by virtue of: Section 41(1) of the Act as business income; or Section 28 of the Act as business income; or Section 45 of the Act as capital gains 18 9

10 Benefit of lower rate as per proviso to Section 112(1) 19 Benefit of lower rate of tax Section 112(1) provides for tax rates in respect LTCG for residents as well as NRs 20%*) Proviso to Section 112(1) provides that where the tax payable in respect of LTCG arising from the transfer of listed securities or units or ZCB exceeds 10 percent of the amount of capital gains before giving effect to the provisions of the second proviso to Section 48 of the Act, then, such excess shall be ignored for the purposes of computing tax payable by the assessee Whether benefit of lower rate of tax u/s 112 is available to non-residents visà-vis sale of shares or debentures? *plus applicable surcharge and cess 20 10

11 Benefit of lower rate of tax Section 48 of the Act provides the computation mechanism for capital gains arising under Section 45 of the Act. As per Section 48, capital gains should be computed after reducing the cost of acquisition and cost of improvement from the sale consideration of the capital asset First proviso to S. 48 (applicable only to NRs) provides for the computation mechanism of capital gains arising from transfer of shares or debentures of an Indian company (acquired in foreign currency) Second proviso to S. 48 (applicable to all assessees) provides for the indexation benefit to residents on all capital assets and to NRs on capital assets other than specified in first proviso Third proviso to S Bonds and Debentures are excluded d from the indexation benefit (except Capital indexed bonds issued by the Government) Whether benefit of lower rate of tax u/s 112 is available to non-residents visà-vis sale of shares or debentures? 21 Cairn UK Holdings Ltd.*, In re Proviso to Section 112 is applicable to both, residents as well as NRs Phrase before giving effect to implies that for application of proviso to Section 112 of the Act, the asset must be qualified for CII benefit under second proviso to Section 48 of the Act If proviso to Section 112 was supposed to apply also to the first proviso to Section 48 which gives benefit of exchange fluctuation protection to NR taxpayers, specific inclusion to that effect would have been made Since the benefit of lower rate of tax at 10% was already available to NRs, in order to bring level playing field for the residents, concessional rate of 10% was inserted by the Finance Act, 1999 NRs which are given protection against inflation in respect of shares/debentures of an Indian company and which are kept out of CII benefit in respect of such assets, are not eligible for double benefit of 10% under S. 112 of the Act * (2011) 12 taxmann.com 266 (AAR) 22 11

12 Timken France*, In re Benefit of the proviso to section 112(1) could not be denied to foreign companies who were also entitled to relief in terms of first proviso to section 48. Clear words would have been deployed in the proviso if one particular category i.e. non-residents were to be excluded. The eligibility to avail the benefit of indexed cost of acquisition was not a sine qua non for applying the reduced rate of 10 percent. It was only a mode of computation of capital gains If tax authorities contention accepted, even Zero coupon bonds (ZCBs) and debentures will go out of the purview of section 112 which not intended As per CBDT Circular No. 554, the first proviso to section 48 was introduced to compensate non-resident Indian investors for the lower earning in foreign currency on account of the decline of rupee value. * (2007) 294 ITR 513 (AAR) 23 Timken France, In re As per CBDT Circular No. 636, the second proviso to section 48 was introduced as a measure to off-set the effect of inflation. Further, non-residents were excluded from the purview of second proviso. As protection from fluctuation in rupee value in terms of foreign currency ensured protection from inflation, further relief in terms of indexation would not be available to non-residents who would enjoy the concession available in the first proviso to section 48. The tax authorities contended that the taxpayer could not claim double benefit. However, the AAR held that double benefit or additional relief was not a taboo under the law. Merely because the non-residents got protection from rupee value fluctuation in terms of foreign currency, it did not follow that the non- residents should not get the benefit of reduced d rate of tax which h the residents were getting. The protection in terms of first proviso to section 48, made available to a non-resident, might be a justification to deny the benefit of cost of indexation as stated in CBDT Circular No. 636, but, the same could not be said to apply to lesser rate of tax

13 Other relevant decisions Favourable decisions Alcan Inc. v. DDIT (2007) 112 TTJ 328 (Mum) Mc Leod Russel Kolkata Ltd. (2008) 215 CTR (AAR) 230 Burmah Castrol Plc, In re (2008) 307 ITR 324 (AAR) Fujitsu Services Ltd., In re (2009) 225 CTR 121 (AAR) Four Star Oil & Gas Co., In re (2009) 312 ITR 104 (AAR) Compagnie Financiere Hamon, In re (2009) 310 ITR 1 (AAR) Chicago Pneumatic Tool Company v. DDIT [2009-TII-110-ITAT-MUM-INTL] Hoechst GMBH v. ADIT [2010-TII-54-ITAT-MUM-INTL ] Against decision i BASF Aktiengesellschaft v. DDIT (2007) 12 SOT 451 (MUM) 25 Special Regime - taxation of NRIs, FIIs and Offshore Funds 26 13

14 Taxation of NRIs Transfer of foreign exchange asset purchased by NRIs in convertible foreign exchange Investment income 20%* under Section 115E Long term capital gains 10%* under Section 115E o In case, sale proceeds are invested in specified assets within a period of six months, the following amount, subject to total amount of capital gains, will not be taxable: Cost of specified asset X capital gains Net consideration of sale of foreign exchange assets *plus applicable surcharge and cess 27 Taxation of FIIs Long term capital gains on transfer of securities 10%* under Section 115AD Short term capital gains on transfer of securities 30%* under Section 115AD Short term capital gains on transfer of equity shares on recognized stock exchange and upon payment of STT is 15%* under Section 111A Can FIIs opt out of 115AD and choose to be governed by proviso to Section 48, if the same is beneficial? *plus applicable surcharge and cess 28 14

15 Taxation of Offshore Funds Income in respect of units of Mutual Fund purchased in foreign currency 10%* under Section 115AB Long term capital gains on transfer of such units 10%* under Section 115AB Benefit of indexation not available Short term capital gains on transfer of such units taxable as per normal tax rates (as applicable) *plus applicable surcharge and cess 29 Zero Coupon Bonds 30 15

16 Zero Coupon Bonds Zero Coupon Bond are defined under Section 2(48) to mean a bond issued by infrastructure capital company / fund or public sector company or schedule bank on or after 1 June 2005, in respect of which no payment and benefit is received or receivable before maturity of redemption from issuer and which the Central Government notify Definition of transfer under Section 2(47) includes inter alia the maturity or redemption of a zero coupon bond Third proviso to Section 48 - Provided also that nothing contained in the second proviso shall apply to the long-term capital gains arising from the transfer of a long term capital asset being bond or debenture other than capital indexed bonds issued by the Government 31 Zero Coupon Bonds Proviso to Section 112(1) Provided that where the tax payable in respect of any income arising from the transfer of long term capital asset, being listed securities or units or zero coupon bond*, exceeds 10 percent of the amount of capital gains before giving effect to the provisions of the second proviso to Section 48 of the Act, then, such excess shall be ignored for the purposes of computing tax payable by the assessee Memorandum to Finance Bill 2005 concerning taxation of zero coupon bonds - With a view to rationalizing the tax treatment of zero coupon bonds, it is proposed to treat the income on transfer of a zero coupon bond (not being stock-in-trade) trade) as capital gains Provisions of Section 112 are also proposed to be amended so as to bring parity with other securities. Consequently long termcapital gains on zero coupon bonds will be subject to tax at ten per cent. if the tax payer does not claim the benefit of indexation

17 Relevant Decisions Relevant observations in Timken France, In re (2007) 294 ITR 513 (AAR) We shall first turn our attention to ZCBs. The third proviso to Section 48 which was introduced by the Finance Act, 1997, ordains "nothing contained in the second proviso shall apply to the long-term capital gains arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government". Thus, for computation of capital gains under Section 48 in respect of ZCBs, the benefit of second proviso to Section 48 is specifically excluded by the third proviso to Section 48. When the second proviso to Section 48 is thus excluded in relation to ZCBs, it should logically follow, if the revenue s contention is accepted, that ZCBs should also go out of purview of the proviso to Section 112(1) whereas ZCB was specifically included by way of amendment of the proviso admittedly with a view to extend the benefit of concessional rate of 10 per cent to such bonds. Otherwise, the amendment inserting ZCBs in the proviso to Section 112(1) will be infructuous. It is nobody s case that ZCBs answering the description of long-term assets should be subjected to the normal 20 per cent tax under the substantive provision of Section Relevant Decisions Relevant observations in Cairn UK Holdings Ltd., In re (2011) 12 taxmann.com 266 (AAR) The 3rd proviso to Section 48 of the Act brings out distinction in the species of bonds when it excludes 'bonds ' which are 'capital indexed bonds issued by the Government'. Just as there are 'capital indexed bonds issued by the Government', there is another specie of bonds called 'zero coupon bonds ' of separate and distinct nature to which reference is made by the proviso to Section 112(1). The Legislature is conscious of this fact.. the Finance Act, 2005 inserted 'zero coupon bond ' as one of the assets along with 'securities' and 'unit' in the proviso to Section 112(1). We have already noted that 'zero coupon bond ' and 'bond ' are different financial instruments. The 3rd proviso therefore does not include 'zero coupon bond ' and hence the 'zero coupon bond ' is eligible for indexation under the 2nd proviso to Section 48 of the Act

18 Case Study - Zero Coupon Bonds Background Mr. A subscribes to Zero Coupon Bonds issues by VG Ltd, an infrastructure capital company ZCBs are issued at discount with maturity of 15 years Issue Whether discount is taxable in the hands of Mr. A over the tenure of ZCBs? Whether gains on redemption of ZCBs on maturity, would be taxable? Whether the benefit of indexation benefit would be available? 35 Bangalore Solitaire, 139/26, 3rd Floor, Inner Ring Road, Koramangala, Bangalore Tel Fax Kochi 4/F, Palal Towers, M. G. Road, Ravipuram, Kochi Tel +91 (484) Fax +91 (484) Thank You Chandigarh SCO st floor. Sector 8 C Madhya Marg Chandigarh Tel : Fax Chennai No. 10, Mahatma Gandhi Road, Nungambakam, Chennai Tel Fax Kolkata Infinity Benchmark, Plot No.G-1, 10th floor, Block - EP & GP, Sector - V, Salt Lake City Kolkata Tel: Fax: Mumbai Lodha Excelus, 1st Floor, Apollo Mills Compound, N.M. Joshi Marg, Mahalakshmi, Mumbai Tel Fax KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative ("KPMG International"). Delhi Building No.10, Tower B, 8th Floor, DLF Cyber City, Phase II Gurgaon Haryana Tel Fax Hyderabad /2 Reliance Humsafar, 4th Floor Road No. 11, Banjara Hills Hyderabad Tel Fax Pune 703, Godrej Castlemaine Bund Garden Pune Tel: / 65 Fax: