INCOME TAX Taxation of Alternate Investment Funds: The Securities and Exchange Board of India (Alternate Investment Funds) Regulation, 2012 (AIF Regulations) forms the regulatory framework for private pools of funds in India. Presently, AIFs registered as Venture Capital Funds which are accorded a pass through status whereby the investors are taxed on the incomes as if they had directly earned the incomes from the venture capital undertakings. A large number of AIFs (Category I, Category II and Category III AIFs under the AIF Regulations) have been set up in the form of non-charitable trusts under the Income-tax Act, 1961 (ITA), where the name of the investors or their beneficial interests are not explicitly known on the date of their creation, (the same becoming known only when the fund starts accepting contributions from investors). The CBDT has now clarified that where the investors or their specific beneficial interests are not known, the entire income of the funds shall be liable to tax at the maximum marginal rate (MMR) in the hands of the trustee as Representative Assessee. Income Tax FEMA India Budget 2014 (Circular No.13 dated 28.07.2014) Revised Tax Audit Report: The Central Board of Direct Taxes (CBDT) has revised the tax audit report to be obtained in Form 3CA/3CB by the taxpayer whose books of accounts are liable for audit under Section 44AB of the ITA. The revised tax audit report in Form 3CA/3CB and Annexure thereto in Form 3CD requires the assessee to disclose additional details. The key disclosures additionally required now are in relation to: - receipt of shares in a private company without consideration or inadequate consideration. - transactions involving receipt of consideration for issuance of shares exceeding the fair market value of the shares issued. - Where a taxpayer claims any investment-linked or income-linked deduction under Chapter III (such as Section10A, 10AA) or Chapter VI-A (such as Section 80-IA/80IAB/80IB) or deduction under Section 35 (scientific research) or 35AD (specified business),disclosure of fulfillment of prescribed conditions subject to which the deduction is eligible. - Details of tax collection at source (TCS) and payment thereof. - Disclosure related to filing of statement of tax deducted or tax collected at source and noncompliance thereof. - Disclosure of interest liability for delay in remittance of tax deducted/collected at source. - Disclosure of demand raised or refund issued during the previous year under any other tax law other than the ITA and Wealth tax Act, 1957. The revised Form 3CD has come into effect from 25 th July 2014 hence applicable for Financial Year ended 31 st March 2014. (Notification No 33 dated 25.07.2014) 1 P a g e
FEMA Restoration of limit for Overseas Direct Investment (ODI) by Indian parties: The Reserve Bank of India (RBI) vide it s Circular no. 23 dated 14.08.2013 had reduced the limit of Financial Commitment (FC) for Overseas Direct Investment (ODI) under automatic route to 100% of the net worth of the Indian Party as on the date of the last audited balance sheet. Prior to that this ceiling limit was 400% of the net worth of the Indian party. Now, it has been decided to restore the said limit of Overseas ODI/FC to 400% of net worth. However, any financial commitment exceeding USD 1 billion (or its equivalent) in a financial year would require prior approval of the RBI even if the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet). (Circular No.1 dated 03.07.2014) Issue of Partly Paid Shares and Warrants by Indian Company to Foreign Investors: So far only equity shares and compulsorily and mandatorily convertible preference shares/debentures (CCPS /CCDS) are recognized as Foreign Direct Investment (FDI) compliant instruments. Further, equity shares or CCPS / CCDS containing an optionality clause but without any option/right to exit at an assured price have also been recognized as FDI compliant instruments. It is now permitted to treat partly paid equity shares and warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and the SEBI guidelines, as eligible instruments for the purpose of FDI and Foreign Portfolio Investment (FPI) by Foreign Institutional Investors (FIIs)/Registered Foreign Portfolio Investors (RFPIs) subject to compliance of pricing, reporting and other guidelines prescribed in this regard. Further, the same is subject to compliance with FDI/ FPI schemes and SEBI Guidelines. (Circular No.3 dated 07.07.2014) Trade Credits for import into India: The following all-in-cost ceiling for trade credits has been extended till December 31, 2014. Maturity period Up to one year More than one year and up to three years More than three years and up to five years All-in-cost ceilings over 6 months LIBOR* 350 basis points * for the respective currency of credit or applicable benchmark (Circular No.16 dated 28.07.2014) 2 P a g e
Revised pricing guidelines for Issue/Transfer of Shares or Convertible Debentures for Foreign Direct Investment (FDI) in India: The transfer/issue of shares of an Indian company is subject to pricing guidelines stipulated by the RBI as amended from time to time. The RBI had issued A.P. (DIR Series) Circular No. 86 dated January 9, 2014 allowing the optionality clauses while issuing equity shares and CCPS / CCDS to a person resident outside India under the Foreign Direct Investment (FDI) scheme subject to certain conditions. On review of the policy, the RBI has issued a new pricing guideline in respect of transfer/issue of shares and for exit from investment in equity shares with or without optionality clauses of listed/unlisted Indian companies. The key points of the revised pricing guidelines are: a. In the case of listed companies: - issue and transfer of shares including CCPS and CCDS shall be as per the SEBI guidelines; - the non-resident investor shall be eligible to exit at the market price prevailing on the recognized stock exchanges subject to lock-in period as stipulated, without any assured return. b. In case of unlisted companies, the issue and transfer of shares (including CCPS and CCDS with or without optionality clauses) shall be at a price worked out as per any internationally accepted pricing methodology on arm s length basis from the existing Discounted Cash Flow methodology. Thus, the guiding principle will be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at a fair price computed as above at the time of exit subject to lock-in period requirement Further, the Company taking on record in its books any transfer of shares or convertible debenture by way of sale from a resident to a non-resident and a non-resident to a resident shall disclose in its balance sheet for the financial yearthe details of valuation of share or convertible debentures, the pricing methodology adopted for the same as well as the agency that has given/certified the valuation. The detailed pricing guideline can be accessed at this link. (Circular No.4 dated 15.07.2014) Liberalised Remittance Scheme (LRS) for resident individuals: The RBI had earlier increased the limit of USD 75,000 to USD 1,25,000 per financial year under LRS for resident individuals for any permitted current or capital account transaction or a combination of both. It is now clarified that the Scheme can be used for acquisition of immovable property outside India. (Circular No.5 dated 17.07.2014) 3 P a g e
External Commercial Borrowings (ECB) All-in-cost-ceiling: Considering the developments in the global financial markets, the following all-in-cost ceiling for trade credits has been extended till December 31, 2014. Average Maturity Period Three years and up to five years More than five years All-in-cost Ceilings over 6 month LIBOR* 350 basis points 500 basis points * for the respective currency of credit or applicable benchmark (Circular No.17 dated 28.07.2014) INDIA BUDGET 2014 UPDATE The Finance (No.2) Bill 2014 received the assent of the President of India on August 6, 2014. The Bill has been passed with the following amendments undertaken to the proposals contained in the Budget presented by the Finance Minister (FM) on July 10, 2014. Income Tax Categorization of unlisted securities and units of debt oriented mutual fund as long term capital assets: Effective April 1, 2014, unlisted securities and units of a debt oriented mutual funds would constitute short term capital assets ( STCA ) if held for less than 36 months (erstwhile the threshold was 12 months). Given the ambiguity that this amendment presented with respect to transactions undertaken between April 1, 2014 and July 10, 2014, it is now been provided these provisions would be effective only from July 10, 2014. Tax rate on long term capital gains (LTCG) on mutual fund units transferred between 1-4- 2014 and 10-7-2014: Effective April 1, 2014 the FM had proposed to restrict the concessional tax rate of 10% on LTCG (computed without considering the indexation benefit) only to listed securities (other than a unit of a fund) and zero coupon bonds, which was until then applicable to units of nonequity oriented funds as well. Given the ambiguity that this amendment presented with respect to transactions undertaken between April 1, 2014 and July 10, 2014, it is now been provided these provisions would be effective only from July 10, 2014. Determination of arm s length price (ALP): In line with the FM s Budget proposal to align the Indian transfer pricing regulations with the best available practices on the range concept for determining ALP, a new proviso has been inserted to Section 92C to provide that where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction shall be computed in such manner as may be prescribed. The rules in this regard are yet to be notified. 4 P a g e
Income-tax Settlement Commission (ITSC) even for pending re-assessment cases: As proposed in the FM s Budget speech, it is now provided that a taxpayer can apply for settlement before the ITSC of even those cases which are pending before income-tax authorities for reassessment proceedings. Authority for Advance Rulings (AAR) for resident taxpayers: As mentioned by the FM in his Budget speech, amendments have now been made: (a) to enable resident taxpayers (as would be notified by the Central Government) to obtain an advance ruling from the AAR in respect of their income tax liability above a defined threshold; and (b) to strengthen the AAR by constituting additional benches and additional members. Service Tax Application for stay for filing of appeal dispensed with; prescribed amounts to be predeposited: Remittance of the following amounts will be pre-condition for preferring an appeal. Appeal before Commissioner (Appeals) and Appeal before CESTAT (against the order of Commissioner) Particulars Pre-deposit Dispute of duty or duty and penalty Dispute of penalty only 7.5 % of duty 7.5 % of penalty Appeal before CESTAT (against order of Commissioner (Appeals)): Particulars Pre-deposit Dispute of duty or duty and penalty Dispute of penalty only 10 % of duty 10 % of penalty Similar amendments have been made under the Central Excise and Customs laws CONSULTING PRIVATE LIMITED +91 (80) 2226 1371 www.accretiveglobal.com specialists@accretiveglobal.com Document date: 11.08.2014 The views expressed and the information provided in this newsletter are of general nature and are not intended to address the circumstances of any particular individual or entity. Further, the above content should neither be regarded as comprehensive nor sufficient for making decisions. Although we endeavor to provide accurate and timely information, there is no assurance or guarantee in this regard.no one should act on the information or views provided in this publication without appropriate professional advice. Accretive will not be responsible for any loss arising from any actions taken or to be taken or not taken by anyone based on this publication. This is meant for private circulation only. 5 P a g e