Finance Bill, 2015 Direct Tax Highlights Bansi S. Mehta & Co. All the following amendment are made effective from Assessment Years 2016-17, unless specifically mentioned otherwise. I - Residential Status, Taxation of Non-Residents/FIIs etc. Tests for determining residential status of a company are amended Test of Control and Management wholly in India is replaced by the test of Place of Effective Management in India ( POEM ). Intention is to ensure that by merely holding board meetings outside India, a company should not be regarded as a non-resident although, in substance, its effective management is in India. POEM is an internationally recognized concept and is expected to provide certainty of interpretation. It is defined as a place where key management decisions for conduct of business entity taken as a whole are taken. Government is expected to issue guiding principles in due course in this behalf. Tests for determining number of days stay in India, in case of a crew member of a foreign bound ship who is a citizen of India, shall be laid down in rules to be prescribed. This is with a view to avoid uncertainties as regards such determination. This amendment is retrospective w.e.f. A.Y. 2015-16. Provisions relating to taxation of transfer of shares of Indian Companies indirectly held by foreign entities (through another foreign shareholding entity) that were introduced in the 2012 Budget are partially amended to clarify as to when such transfers would be taxable. Taxability would arise only if the value of the Indian Company s shares held by the foreign shareholding entity exceeds Rs. 10 Crore and such shares represent at least 50% of the value of all assets owned by the foreign shareholding entity. Such value shall be determined in a manner to be prescribed in Rules. Where the shares of Indian Company are not the only assets held by the foreign shareholding entity, the capital gains taxable in the hands of the transferor would be determined based on some attribution methodology to be prescribed in Rules.
Such indirect transfers shall not be chargeable to tax in India if the transferor holds less than 5% stake in the foreign shareholding entity and it does not have any rights of management or control in the foreign shareholding entity. If the shares in the foreign shareholding entity are transferred in an amalgamation or a demerger taking place outside India, such transfer would enjoy exemption from capital gains subject to certain conditions. Correspondingly, the cost of acquisition in the hands of the amalgamated /resulting company shall be the cost of acquisition of previous owner. Indian entity in which assets are held by the foreign entity is obligated to furnish details of offshore transactions modifying the ownership control or structure of the Indian entity Section 9(1)(v) is amended to provide that if an Indian branch of a foreign bank pays interest to its foreign head office or to any other foreign branch, such interest would be chargeable to tax in India in the hands of the foreign bank. This is in addition to taxation of the branch profits in India. A foreign established investment fund, that employs a fund manager (not being an employee of the fund) who is situated in India, shall not be taxed in India on its investment income merely because the fund manager is situated in India. There are several conditions specified in this behalf that need to be fulfilled by the fund and by the fund manager to enjoy this exemption. The fund is required to comply with filing requirements that will be prescribed in Rules. Tax on royalty and fees for technical services payable to a non-resident has been reduced from the present rate of 25% to 10% on gross amount. When an employee of the foreign subsidiary of an Indian company who has earned GDRs of the Indian company under ESOPs, becomes a resident in India and earns dividend on those GDRs or earns long term capital gains on sale thereof, he enjoys concessional tax treatment under section 115ACA. This tax regime was introduced when the earlier GDR scheme was in force, which permitted GDR issue only for listed shares. Under the new GDR scheme, GDRs can be issued even for unlisted shares. The definition of GDR in section 115ACA is amended to clarify that the concessional tax treatment will be available only for GDRs issued in respect of listed shares.
Income from transfer of securities (being long term capital asset) by Foreign Institutional Investor ( FII ) is to be excluded from chargeability of MAT and corresponding expenses are to be added to book profits u/s 115JB. Section 195 is widened to require furnishing of prescribed information regarding foreign payments irrespective of whether such payments are chargeable to tax or not. Penal implications are introduced on submission of inaccurate/ non-submission of information in the prescribed form and manner u/s 195. II Business Trust: Under Section 2(13A) a business trust must be registered as an Infrastructure Investment Trust ( IIT ) under SEBI(IIT) Regulations, 2014 or a Real Estate Investment Trust ( REIT ) under the SEBI(REIT) Regulations, 2014. The requirement to notify them with Central Government is done away with. Income of a business trust, being a REIT, by way of renting or leasing or letting out any real estate asset owned directly by such business trust to be exempt under section 10(23FCA). Long-term Capital Gains arising from transfer of units of a business trust which were acquired by the assessee in consideration of a transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor as referred to in Sec. 47 (xvii) exempted u/s. 10(38). Short-term Capital Gains thereon taxable at 15%. Currently, the interest income of business trust is taxable in the like manner in the hands of the investor u/s. 115UA. Similar provisions are introduced for distributed income which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such REIT. No Tax to be deducted u/s. 194-I where the rent income is credited or paid to a REIT for income exempt u/s. 10(23FCA). REIT to deduct tax when distributing rental income allowed to be passed through to its unit holders under Section 194LBA ( In case of Resident-10% and Nonresident at the rates in force applicable)
III Alternate Investment Funds ( AIFs ) Investment funds mean funds established in the form of trust/company/llp/body corporate registered as Category I and Category II AIF regulated by SEBI (AIF) Regulations, 2012. Income accruing or arising to or received by a unit holder from investment fund shall be chargeable to tax in the same manner as if the investment were made directly by him. If investment fund does not pay / credit income to unit holders in that year, such income shall be deemed to have been credited to their accounts in the proportion of their entitlement. Income included in the total income of the unit holder on accrual basis shall not be included in the total income in the year of actual receipt. Income other than business income shall be exempt in the hands of investment funds. Income accruing or arising to unit holder of investment fund being that proportion which is in the nature of business income shall be exempt in the hands of unit holder Loss under any head of income before giving effect to exemption provision [i.e. 10(23FBA)] shall be carried forward and set-off in accordance with Chapter VI by the investment fund. Such loss shall be ignored in the hands of unit holders Total taxable business income of investment fund shall be charged to tax as follows: Where fund is a company or firm - at the rates specified in the Finance Act In any other case - at maximum marginal rate Income distribution by Investment Fund will not attract DDT. Statement of income paid or credited to unit holders shall be furnished by the person responsible for making payment or crediting income in the prescribed manner to unit holders and to prescribed income tax authority. Alternate Investment Funds which may otherwise be not required to file return of income, now required to file.
Special provisions relating to venture capital companies ( VCCs ) and venture capital funds ( VCFs ) contained in Chapter XII-F shall not apply to income of VCCs and VCFs in the nature of AIF. Income payable to unit holder of the nature other than business income exempt u/s 10(23FBB) shall suffer tax deduction at the rate of 10%, at the time of credit of such income or payment, whichever is earlier. IV Consolidation Mutual Funds Schemes Transfer of units held the holder (capital asset) pursuant to the consolidating scheme of a mutual fund, in consideration of the allotment to him of a capital asset, being unit/units, in the consolidated scheme of the mutual fund shall be exempt from tax. Cost of Acquisition in case of a capital asset, being a unit/units in a consolidated scheme of a mutual fund that became the property of the assessee in consideration of a transfer pursuant to consolidating scheme shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating scheme of the mutual fund. V Charitable Trust / Institution: Definition of charitable purposes enlarged to include Yoga ; Proviso to section 2(15) amended for excluding activities incidental to attainment of advancement of general public utility only if aggregate receipts from such incidental activities do not exceed 20% of total receipts of the Trust/Institution; Form and manner of intimating the Department regarding shortfall in utilising 85% of income would be prescribed in rules. Notice for accumulation/set apart in Form 10 under section 11(2) to be furnished on or before due date of filing return of income; Denial of exemption u/s. 11(2) if Form 10 is not filed on or before due date of filing return of income u/s.139(1) OR if return of income itself is not filed on or before due date of filing return of income u/s.139(1). VI Settlement Commission Scope of cases where application can be made to Settlement Commission has been expanded.
Bar on subsequent application for Settlement Commission expanded to related VII TDS / TCS party of the applicant. Employer to obtain proof/evidences of prescribed claims (including claim for set off of loss) from employees in the prescribed form to estimate salary income u/s 192. Accumulated balance of Recognised Provident Fund ( RPF ) due to an employee on pre-mature withdrawal subject to TDS u/s 192A when rule 8 of Part A of the Fourth Schedule is not applicable. Rate of TDS- 10% (increased by the applicable surcharge) where PAN furnished, Maximum Marginal Rate where no PAN furnished, Nil where payment less than Rs. 30,000/-. Interest other than interest on securities u/s 194A amendments: Threshold of Rs. 10,000/- for interest on bank deposits to be computed at the bank level instead of branch level where the bank follows Core Banking Solutions; Deposit definition to include recurring deposits. Exemption to co-operative society not to extend to co-operative banks. Interest on compensation awarded under the Motor Accident Claims Tribunal subject to TDS in the year of payment. Exemption from TDS on works contracts u/s 194C to apply only to the transport contractors owning less than ten carriages, subject to furnishing of PAN. TDS at 5% u/s 194LD on interest paid to Foreign Institutional Investors/ Qualified Foreign Investors on rupee bonds/government security issued by an Indian Company or the Government of India, as the case may be, to continue till June 30, 2017. Reporting in Form 15CA/15CB u/s 195 to include cases even where the payer has taken a view of non-applicability of TDS. Certificate for lower TDS u/s 197A to include section 192A and 194DA. Intimation for TDS u/s 200A to adjust fee for late filing of quarterly TDS returns charged u/s 234E. Provisions for processing TCS returns introduced in section 206CB.
VIII Deduction under Chapter VI-A Investment in Sukanya Samrddhi Scheme eligible as deduction. Interest and Withdrawal from Sukanya Samrddhi scheme to be exempt from tax. Limit of Deduction on contribution to notified pension funds raised to Rs. 1.5 lakh. Limit of deduction upto Rs. 1 lakh on contribution pension scheme of CG deleted. Deduction of Rs. 50,000, in addition to contribution, shall be allowed. Deduction of medical insurance premium increased to Rs. 30,000. Deduction of medical treatment of dependent person with disability increased to Rs. 75,000 and with severe disability to Rs. 1,25,000. Deduction of medical treatment of very senior citizen increased to Rs. 80,000. Contribution to Swacch Bharat Kosh, Clean Ganga Fund & National Fund for Control of Drug Abuse eligible for deduction. Deduction of Rs. 75,000 & Rs. 1,25,000 for person with disability & severe disability. IX Miscellaneous The Surcharge for other than Foreign Companies has been increased by 2%. The requirement of obtaining approval u/s. 151 for reopening of assessments u/s. 148 from Commissioner has been extended to cases where scrutiny assessment has not been done and reopening is made after 4 years from the relevant assessment year. Order passed by prescribed authorities u/s. 10(23C)(vi) / (via) appealable before ITAT. For the purposes of Section 263, the order would be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if:- Order passed without inquiries / verification; Order passed is contrary to CBDT s direction / instruction; Order is not in accordance with decision of jurisdictional High Court and Supreme Court. New methodology to compute tax sought to be evaded prescribed in Section 271. Balance additional depreciation on new plant & machinery acquired& installed for less than 180 days to be allowed in immediate succeeding year
Additional depreciation @ 35% and further deduction @ 15% of cost will be allowed in year of acquisition and installation of new plant/ machinery between April 1, 2015 - April 1, 2020 in notified backward areas in Telangana & Andhra Pradesh Threshold limit for applicability of Transfer Pricing provisions in domestic transactions increased from Rs. 5 Crore. to Rs.20 Crore. Applicability of GAAR deferred to A.Y. 2018-19 onwards. Book profits under MAT to be increased by: Expenditure relating to share of income of a Member from AOP/BOI on which income-tax is not payable u/s 86; Expenditure relating to capital gain on securities earned by FII (other than STCG on which STT is not paid) Book profits under MAT to be reduced by: Share of income of a Member of AOP/BOI credited to P/L a/c on which income-tax is not payable u/s 86; Capital Gains of FII on securities (other than STCG on which STT is not paid) Effective June1, 2015, restriction on the mode of receiving and repayment of loans/ deposits extended to cover advance/ other sum of money in relation to transfer of immovable property. CBDT to make Rules for granting of relief / deduction of tax paid in specified country/ territory against tax payable in India. Levy of Wealth-tax to be abolished from A.Y. 2016-17. Accountant: Effective June 1, 2015, authorised representative, if an accountant, to be chartered accountant who is holding certificate of practice. To furnish audit reports or certificates as required by certain provisions of the Act (e.g. the Tax Audit Report u/s. 44AB), several other restrictions are imposed to be an `accountant.