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Tax Alerts cover significant tax news, developments and changes inlegislation that affect Indian businesses. They act as technicalsummaries to keep you on top of the latest tax issues. For moreinformation, please contact your EY advisor.
Financial Services Sector
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Introduction
This alert summarizes certain significant taxproposals contained in the Finance Bill, 2016(Bill) and policy announcements made by theFinance Minister (FM), Mr Arun Jaitley, duringthe Budget 2016-17 speech relevant to thefinancial services sector. The policypronouncements made by the FM are expected tobe implemented by the Government of India(GOI) through legislative/ administrativeannouncements (where required) in the ensuingmonths. The Bill will be discussed in theParliament before it is enacted and is subject toany amendments that may be made pursuant tothese discussions.
The direct tax proposals discussed in thismemorandum are effective from the financialyear commencing on 1 April 2016, unlessotherwise specified.
Key Policy InitiativesSome of the key initiatives announced by the FMin his budget speech are summarised as under:
Financial sector and capital markets
► The Reserve Bank of India (RBI) Act, 1934to be amended to provide statutory basis fora Monetary Policy Framework and MonetaryPolicy Committee.
► New derivative products to be developed bythe Securities and Exchange Board of India(SEBI) in the commodity derivatives market.
► To address the problem of stressed assets inthe banking sector, the Securitisation andReconstruction of Financial Assets andEnforcement of Security Interest Act, 2002(SARFAESI) to be amended to allow thesponsor of an Asset ReconstructionCompany (ARC) to hold upto 100% stake inthe ARC and to permit non-institutionalinvestors to invest in security receipts.
► A comprehensive code on resolution offinancial firms to be introduced in theParliament for providing a specialisedresolution mechanism to deal withbankruptcy situations in banks, insurancecompanies and financial sector entities.
► Set-up of a Financial Data ManagementCentre under the aegis of the FinancialStability Development Council to facilitateintegrated data aggregation and analysis inthe financial sector.
► Retail participation in government securitiesto be improved by facilitating theirparticipation in the primary and secondarymarket through stock exchanges.
► To make public sector banks strong andcompetitive, the Bank Board Bureau to beoperationalised and a roadmap forconsolidation of public sector banks to bespelt out.
► General insurance companies owned by thegovernment to be listed on the stockexchanges.
Reforms in Foreign Direct Investment (FDI) Policy
► Foreign investment in insurance andpension sectors to be allowed upto 49%under automatic route subject toverification by the relevant regulators ofextant guidelines on Indian managementand control.
► FDI in ARCs to be permitted upto 100%under the automatic route. Further, FPIs willbe allowed to invest upto 100% of eachtranche in security receipts issued by theARCs subject to sectoral limits.
► The limit for investing in Indian stockexchanges by foreign entities to beenhanced from 5% to 15% at par withdomestic institutions.
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► To obviate the need for prior approval forincreasing FPIs investment, the limit forinvestment by an FPI in Central PublicSector Enterprises (other than banks) listedon stock exchanges, is proposed to beincreased from 24% to 49%.
► The basket of eligible FDI instruments will beexpanded to include hybrid instrumentssubject to certain conditions.
► FDI to be allowed under the automatic routein activities [other than 18 specified Non-banking Financial Companies (NBFC)activities] which are regulated by financialsector regulators.
► 100% FDI to be allowed under the approvalroute in marketing of food productsproduced and manufactured in India.
Measures for deepening of corporate bondmarket
► RBI to issue guidelines to encourage largeborrowers to access their financing needsthrough markets instead of banks.
► Investment basket of FPIs to be expanded toinclude unlisted debt securities and passthrough securities issued by securitisationSpecial Purpose Vehicles (SPV).
Direct TaxesTax rates
Basic tax rates
► The basic tax rates applicable to foreigntaxpayers being corporate and non-corporate taxpayers remain unchanged.Also, the tax rate applicable to domesticnon-corporate taxpayers remain unchanged.
► However, the Bill proposes to reduce the taxrate applicable to domestic companies asfollows:
Particulars Rate of taxWhere the total turnoveror the gross receipt in thefinancial year 2014-15does not exceed INR 50million.
29%
Where the total turnoveror the gross receipt in thefinancial year 2014-15exceeds INR 50 million.
30%
Surcharge and education cess
► The rate of surcharge applicable to domesticand foreign corporates has remainedunchanged.
► For non-corporate taxpayers (other thanfirms, local authority and co-operativesocieties), the surcharge rate is proposed tobe increased from 12%2 to 15%.
► Education cess will continue to be levied atthe prevailing rate of 3% on the amount oftax computed inclusive of surcharge, in allcases.
Securities transaction tax (STT)
► The Bill proposes to increase the STT onsale of an option in securities where optionis not exercised, from 0.017% to 0.05% ofthe option premium.
Tax on dividend received
► The Bill proposes to levy a tax of 10% (on agross basis) on dividend in excess ofINR 1 million, received by residentshareholder being individual, Hinduundivided family (HUFs) or a firm. The saidtax will be over and above the dividenddistribution tax paid by the companydistributing the dividend.
2 Surcharge is currently leviable on non-corporatetaxpayers having total income exceeding INR 10 millionduring the relevant financial year.
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Deduction of taxes at source
► The existing threshold limit for deduction oftax at source and the rates of deduction oftax at source have been rationalised and areproposed to be revised with effect from1 June 2016.
Due dates for payment of advance tax
► The existing due dates for payment ofadvance tax by corporate and non-corporatetaxpayers are not aligned. In order to bringboth the advance tax due dates at parity,the Bill proposes to amend the due datesapplicable for payment of advance tax bynon-corporate taxpayers as follows:
Dates ofpayment ofadvance tax
Amount of taxpayable
On or before15th June of thefinancial year
Not less than 15%
On or before15th Septemberof the financialyear
Not less than 45%
On or before15th Decemberof the financialyear
Not less than 75%
On or before15th March ofthe financial year
100%
► Consequential amendments are alsoproposed to be made for computing theinterest liability for deferment of advancetax.
► These amendments will take effect from1 June 2016.
Non-applicability of theMinimum Alternate Tax (MAT)provisions to foreigncompanies prior to 1 April2015
► Currently, a company is liable to pay MATat the rate of 18.5% (plus applicablesurcharge and education cess) on its ‘bookprofits’, if the same is higher than the taxcalculated under the normal computationalprovisions. For the purposes of calculatingbook profits, a company is required toprepare its profit and loss account in aprescribed manner. Further, certainspecific additions and deductions arerequired to be made to the book profit asspecified under the MAT provisions.
► The Finance Act, 2015 provided thatspecified income of foreign companies (i.e.capital gains arising on transactions insecurities, interest, royalty, fees fortechnical services) are excluded from thepurview of MAT from the financial year2015-16 provided such income is creditedto the profit and loss account and taxpayable on such income is less than theMAT rate of 18.5%. Consequently, thecorresponding expenditure incurred forearning the said income are to be addedback while computing the book profits forthe purpose of MAT.
► The amendments made by the FinanceAct, 2015 led to questions on theapplicability of MAT to income of foreigncompanies for past years as the generallyunderstood position was that a foreigncompany not having a place of business inIndia, was not liable to pay MAT.
► Coupled with this, certain foreigncompanies were issued draft assessmentorders proposing to levy MAT for financialyear 2011-12 and past assessments were
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also sought to be reopened.
► In light of the uncertainty, a Committee onDirect Tax matters headed by Justice A.P.Shah (Committee) was set up by the GOI toexamine the matter relating to levy of MATfor the period prior to 1 April 2015 in thecontext of FPIs in view of the fact that FPIsnormally do not have a place of business inIndia.
► Considering the recommendations of theCommittee and to provide certainty intaxation of foreign companies, the Billproposes that MAT provisions shall not beapplicable to a foreign company if -
► The taxpayer is a resident of acountry/ specified territory withwhich the GOI/ specified associationhas a Double Taxation AvoidanceAgreement (DTAA) and the taxpayerdoes not have a PermanentEstablishment (PE) in India underthe provisions of such DTAA; or
► the taxpayer is a resident of acountry with which the GOI/specified association does not havea DTAA and the taxpayer is notrequired to seek registration underthe prevailing Company law.
The amendment is effective retrospectively from1 April 2000 effectively putting the MATcontroversy to rest for foreign companies nothaving PE in India/ establishing a place ofbusiness in India requiring company lawregistration.
Safe harbour for onshoremanagement of offshore fundsin India
► Presently, the special regime in respect ofoffshore funds prescribes several conditionsfor the fund and the fund manager in orderto enable the offshore fund avail safe
harbour from business connection and taxresidency in India. Since most of theconditions prescribed are onerous and posesignificant challenges, recommendationswere made to the GOI to relax therequirements in the conditions relating toinvestor diversification, investmentconcentration and certainty in benefits forthe life of the Fund.
► The Bill proposes to rationalise the followingconditions:
► The requirement that the Fund shouldbe a resident of a country or territorywith which India has entered into aDTAA or Tax Information ExchangeAgreement has been relaxed to includefunds established or incorporated orregistered outside India in a notifiedcountry or a specified territory.
► The requirement that the Fund shall notcarry on or control and manage anybusiness in India or from India isproposed to be made applicable only toactivities ‘in India’ and not ‘from India’.
Residential status of foreigncompanies
► Currently, a company (other than an Indiancompany) is said to be resident in India if itsPlace of effective Management (POEM) in afinancial year is in India. With a view toprovide guiding principles for determiningPOEM, draft guidelines have been issued on23 December 2015 for public comments.
► In order to provide clarity in respect ofimplementation of POEM based rule ofresidence and to address the concerns ofstakeholders, the Bill proposes to defer theapplicability of POEM based residence testby one year i.e. POEM is proposed to beapplicable from 1 April 2016 onwards andalso provide a transition mechanism (forissues relating to computation of income,
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treatment of unabsorbed depreciation, set-off of losses, provisions relating toavoidance of tax, etc.) for a foreigncompany which has not been previouslyassessed in India.
General Anti Avoidance Rules(GAAR)
► GAAR was introduced by the Finance Act,2012 with the objective of dealing withaggressive tax planning through the use ofsophisticated structures and codifying thedoctrine of ‘substance over form’. The GAARprovisions were initially introduced to beeffective from 1 April 2013 however theapplicability of the provisions was deferredby the Finance Act, 2013 to 1 April 2015and subsequently to 1 April 2017 by theFinance Act, 2015.
► The FM, in his budget speech has reiteratedthe GOI’s commitment to implement GAARfrom 1 April 2017.
Tax incentives to InternationalFinancial Service Centre (IFSC)
► IFSC is a designated area where financialservices providers such as banks,insurance companies, asset managementcompanies, brokers, etc. are envisaged toprovide high quality end to end financialservices to customers and wheretransactions take place in a currency otherthan the Indian Rupee. The IFSC regimehas been introduced by the GOI with thestated intention of encouraging foreignfinancial institutions/ players to set-up apresence in India. Gujarat InternationalFinance Tec-City (GIFT) is India’s first IFSCset-up in the state of Gujarat.
► Currently, the only tax deduction availableto a unit in an IFSC is in relation to thebusiness income derived by it fromactivities for which the unit is approved, as
follows:
► 100% deduction of income in thefirst 5 years;
► 50% deduction of income for thenext 5 years.
► The deduction is available from the year inwhich the necessary permissions havebeen obtained to undertake the approvedactivities.
► With a view to provide a competitive taxregime to IFSCs, the Bill proposes tointroduce the following additional taxbenefits/ exemptions:
► Transactions in securities/commodities undertaken in foreigncurrency on a recognised stockexchange located in an IFSC shall beexempted from levy of STT andCommodities Transaction Tax (CTT),respectively. These amendments willtake effect from 1 June 2016.
► Any income arising from transfer ofa long-term capital asset being anequity share or unit of an equityoriented fund or unit of a businesstrust shall be exempt from taxprovided the transaction isundertaken in foreign currency on arecognised stock exchange locatedin an IFSC.
► In case of a company, being a unitlocated in an IFSC and deriving itsincome solely in convertible foreignexchange:
► The applicable rate of MAT shallbe 9% (plus applicablesurcharge and education cess)
► No tax on distributed profitsshall be chargeable on anyamount declared, distributed or
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paid by such company by wayof any dividend (either in thehands of the distributingcompany or in the hands of therecipient).
Deduction in respect ofprovisions for bad anddoubtful debts (PDD) for NBFC
► Currently, banks, public financialinstitutions, state financial corporationsand state industrial investmentcorporations are allowed a specificdeduction in respect of PDD.
► NBFCs registered with the RBI are alsoengaged in financial lending but have notbeen provided a deduction for PDD madein accordance with directions issued by theRBI. The Bill proposes a deduction of 5% ofthe total income (computed in a prescribedmanner) for NBFCs subject to the actualexpenditure on PDD.
Taxation of AlternativeInvestment Funds (AIFs)
► Currently, any income (other than businessincome which is taxable at the AIF level)payable by a Category I or II AIF to its unitholders is subject to a mandatory taxwithholding at the rate of 10%. This resultsin tax withholding on exempt income (suchas dividend), or income payable to non-residents eligible for beneficial provisions ofDTAA.
► With an intention to make tax pass-throughprovision (for Category I and II AIFs) workeffectively, the Bill proposes to provide thatthe tax withholding at 10% by AIFs will nowonly apply to Indian residents; for non-residents, the tax withholding will be at therates in force i.e. tax rate as per the
domestic law or DTAA, whichever is morebeneficial. In other words, if income of thenon-resident investor is not taxable in Indiadue to a favourable DTAA provision, the AIFis not required to withhold any tax.
► Further, it is proposed to enable an investorobtain a certificate for lower deduction ofincome-tax or nil deduction of income-tax.
► This amendment will be effective from1 June 2016.
Exemption from DividendDistribution Tax (DDT) ondividend paid by a SPV to abusiness trust3
► Presently, there is a levy of DDT at the SPVlevel when it distributes dividends to thebusiness trust.
► Representations were made by variousstakeholders that levy of DDT at the SPVlevel makes the business trust structure taxinefficient and adversely impacts the rate ofreturn for the investor.
► In order to further rationalize the taxationregime for business trusts and theirinvestors, the Bill proposes to provide anexemption from levy of DDT.
► The amendments introduced by the Billinclude:
► Exemption from levy of DDT in respectof dividend declared, distributed or paidby SPV to the business trust;
► Such dividend received by businesstrust and investors shall not be taxablein their hands;
3 Business trusts comprise Real Estate Investment Trust(REITs) and Infrastructure Investment Trust (Invits)
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► The exemption from levy of DDT wouldonly be in the cases where the businesstrust either holds 100% equity sharecapital of such SPV excluding theportion required to be held by anotherperson as part of any direction of anygovernment or specific requirement ofany law to this effect or which is held bygovernment or government bodies;
► The exemption of DDT shall be only inrespect of dividends paid out of currentincome after the date when businesstrust acquires the desired shareholdingin the SPV. The dividends paid out ofthe accumulated or current profits uptosuch date shall be liable for DDT;
► This amendment will be effective from1 June 2016.
New taxation regime forsecuritisation trusts and itsinvestors
► Presently, income distributed bysecuritisation trusts to its investors issubject to an additional levy of tax to be paidby the securitisation trust on thedistribution of income.
Further, income received by the investorfrom the securitisation trust and the incomeof the securitisation trust itself is exemptfrom tax.
► The current tax regime applicable tosecuritisation trust does not apply to trustsset up under the SARFAESI.
► In order to rationalize the tax regime forsecuritisation trusts and its investors, theBill proposes to amend the currentprovisions and include a new special regimeas under:
► The new regime shall apply tosecuritization trust being an SPVdefined under SEBI (Public Offer andListing of Securitized DebtInstrument) Regulations, 2008 or asdefined in the guidelines onsecuritisation of standard assetsissued by the RBI or being set-up bya securitisation company or areconstruction company inaccordance with the SARFAESI or inpursuance of any guidelines ordirections issued for the saidpurposes by the RBI;
► The income of the securitisationtrust shall continue to be exemptbut would be taxable in the hands ofinvestors in same manner as if itwere the income accruing or arisingto or received by such investor hadthe investments by thesecuritisation trust been madedirectly by the investor;
► The securitisation trust shall deducttax at source at the following rates:
► 25% in case of payment toindividuals and HUFs,
► 30% in case of others;
► Rates in force (rate under thedomestic tax law or rate underthe applicable DTAA, whicheveris beneficial), in case ofpayments to non-residentinvestors.
► The facility for the investors toobtain certificate for deduction oftax at a lower/ nil rate would beavailable.
► These amendments will be effectivefrom 1 June 2016.
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Clarification in respect ofunlisted securities
► Currently, non-residents are subject to aconcessional tax rate of 10% on long-termcapital gains on transfer of ‘unlistedsecurities’.
► There is ongoing uncertainty on whetherthe aforesaid concession is available tolong-term capital gains on transfer ofshares of a private company given themanner in which courts have interpretedthe term ‘securities’ under SecuritiesContracts (Regulation) Act, 1956.
► To clarify the tax position, the Billproposes to amend the provisions to coverunlisted securities as well as “shares of acompany not being a company in whichpublic are substantially interested”.
Country-by-Country (CbC)Reporting introduced
► The Organisation for Economic Co-operationand Development (OECD) released its finalreport on Action 13, Transfer PricingDocumentation and CbC Reporting under itsAction Plan for prevention of Base Erosionand Profit Shifting (BEPS) in October 2015.
► The GOI in order to meet with itscommitment to BEPS initiative of the OECDand G-20, has proposed to implement theBEPS Action Plan 13.
Applicability of the CbC reporting requirement
► CbC reporting requirements apply only if theconsolidated revenues of the preceding yearof the group, based on consolidated financialstatements exceeds equivalent localcurrency of EUR 750 million (equivalent to
approximately INR 53.95 billion at thecurrent rates).
Who is required to furnish the CbC report?
► If the parent entity or the alternatereporting entity is a resident in India, thensuch entity shall furnish the report to theprescribed authority on or before the duedate of filing of return of income (ROI) forthe relevant accounting year.
Such report shall inter-alia include amountof revenue, profit or loss before income tax,amount of income tax paid and accrued,stated capital, accumulated earning, numberof employees, tangible assets, nature ofbusiness activity of each group entity, etc.
► If the parent entity of the group is not aresident in India, the Indian entity of thegroup is required to notify the prescribedincome-tax authority, the details of theparent entity or the alternate reportingentity (i.e. entity designated to furnish thereport on behalf of the parent).
► In case where the parent entity or thealternate reporting entity is a resident of acountry with which India does not have anarrangement for exchange of the CbC reportor such country is not exchanginginformation with India even though there issuch an agreement, the Indian entity of thegroup shall be required to furnish the CbCreport.
If there are more than one entities of thesame group in India, the group can nominateone entity that shall furnish the CbC reporton behalf of the group.
► The format and manner in which thedocumentation is required to be furnishedshall be notified by way of Rules.
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Period covered by the CbC report
► If the parent entity or the alternatereporting entity is resident in India, theperiod covered by the CbC report is thefinancial year (1 April to 31 March).
► In all other cases, the period covered by theCbC report will be the annual accountingperiod with respect to which the parententity of the international group prepares itsfinancial statements under any law for thetime being in force or the applicableaccounting standards of the country orterritory of which such entity is resident.
Maintenance of master file
► The Bill also proposes for an Indian entity ofan international group to maintaininformation and documents that shall benotified by way of Rules.
Such information and documents shall alsobe furnished with the prescribed income taxauthority within such period that shall benotified by way of Rules.
Penalty provisions
► The Bill has also introduced a graded penaltystructure for non-compliance and furnishingof inaccurate particulars:
Particulars PenaltyFailure to furnish thedetails of parent entity orthe alternate reportingentity on or before theprescribed date
INR 500,000
Failure to furnish CbCreport- If the period of failure does
not exceed one monthINR 5,000 forevery day offailure
- Failure beyond the periodof one month
INR 15,000 forevery day offailure beyond
Particulars Penaltyone month
- If failure continues afteran order directingpayment of penalty hasbeen served
INR 50,000 forevery day offailure from dateof service of theorder
Failure to furnishinformation or documentrequested- Failure to furnish within
the period allowedINR 5,000 forevery day offailure
- If failure continues afteran order directingpayment of penalty hasbeen served
INR 50,000 forevery day offailure from dateof service of theorder
Furnishing of inaccurateparticulars
INR 500,000
No penalty as mentioned above, shall be levied ifthe taxpayer can demonstrate a reasonablecause for the above mentioned failures or non-compliances.
Tax benefits to investors ofRupee Denominated Bonds(RDBs)
► The RBI in September 2015 permittedcertain ‘eligible’ borrowers to issue RDBsoutside India as a measure to enableraising funds from outside India within theoverarching External CommercialBorrowings policy.
► With respect to taxability of RDBs, the GOIin a Press Release dated 29 October 2015clarified the following:
► Interest income earned bynonresident investors from RDBswould be subject to withholding taxrate of 5% (plus applicable surchargeand education cess), which would
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also be the final tax that the non-resident investor would be subjectto.
► Capital gains arising in case ofappreciation of rupee between thedate of issue and the date ofredemption against the foreigncurrency in which the investment ismade, would be exempted fromcapital gains tax.
► It was indicated in the Press Release thatlegislative amendments for the aforesaidwould be introduced in the Bill.
► While the Bill has introduced theamendment to ignore any gains arisingfrom the appreciation of the Rupee, theBill has not proposed any amendment withrespect to taxation of interest arising tothe non-resident investor.
Tax treatment of GoldMonetization Scheme, 2015(GMS)
► Currently, interest on Gold Deposit Bondsissued under Gold Deposit Scheme, 1999(GDS) is exempt from tax. Further, thesebonds are excluded from the definition of‘capital asset’ and therefore, the capitalgains arising from transfer of said bondsare exempt from tax.
► GMS was introduced with the intention tomobilise gold held by households andinstitutions of the country and facilitate itsuse for productive purposes, and in thelong run, to reduce country’s reliance onthe import of gold.
► With a view to provide tax parity betweenthe bonds issued under GDS and thedeposit certificates issued under the GMS,the Bill proposes to exclude these depositcertificates from the definition of ‘capital
asset’ and therefore, the capital gainsarising from transfer of said depositcertificates shall be exempt from tax.
► Further, the Bill also proposes that theinterest earned on deposit certificatesissued under GMS shall be exempt fromtax.
► These amendments are proposed to bemade effective retrospectively from thefinancial year 2015-16.
Tax benefits to investors ofSovereign Gold Bond Scheme,2015 (SGB Scheme)
► The GOI introduced the SGB Scheme withthe aim of reducing the demand forphysical gold so as to reduce the outflowof foreign exchange on account of importof gold.
► Bonds issued under the SGB Scheme areGovernment Securities denominated ingrams of gold and are a substitute forholding physical gold. Persons resident inIndia under the Indian exchange controlregulations are eligible to invest in the SGBScheme.
► With a view to provide parity betweenphysical gold4 and bonds issued under theSGB Scheme, the Bill proposes that anyredemption of such bonds by an individualshall not be treated as transfer andconsequently be exempt from capital gainstax.
► Where the capital gains are taxable (i.e.transfer prior to redemption), it isproposed that indexation benefits shall beavailable to long-term capital gains arising
4 Presently, no capital gains tax is payable on capital assetbeing jewellery held for personal use. The term ‘jewellery’ hasbeen defined to include, inter-alia, ornaments made of gold.
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on transfer of bonds issued under the SGBScheme.
Tax neutrality onconsolidation of plans within ascheme of mutual fund
► Currently, transfer of units by a unitholder of a mutual fund upon consolidationof schemes of a mutual fund is, subject tocertain conditions, not regarded as atransfer, provided the unit holders areallotted units in the consolidated schemeof the mutual fund. The aforesaid transferis exempt from capital gains tax.
► However, units transferred by unit holdersunder consolidation of mutual fund planswithin a scheme results in capital gains taxfor the unit holders given thatconsolidation of plans of a mutual fundscheme is distinct from schemeconsolidation.
► In order to extend the tax exemptionavailable on merger or consolidation ofmutual fund schemes to the merger orconsolidation of different plans in a mutualfund scheme, the Bill proposes to providethat any transfer of units by a unit holderheld in the consolidating plan of a mutualfund scheme made in consideration of theallotment of units in the consolidated planof that mutual fund scheme shall not beconsidered as a transfer and thereby shallnot be chargeable to capital gains tax.
Phasing out of deductionavailable to units in SpecialEconomic Zones (SEZ)
► Currently, units set-up in a SEZ whichcommenced business on or after
1 April 2005 are entitled to claimdeduction in respect profits derived fromexport of articles or things or services.
► The FM as a part of his Budget speech in2015 indicated that the rate of corporatetax (for domestic companies) will bereduced from 30% to 25% over the nextfour years along with correspondingphasing out of exemptions and deductions.
► To implement the above, the GOI hadreleased a phasing out plan, for publiccomments, outling the manner in whichvarious deductions will be phased out(which, inter-alia, included phasing out ofdeduction available to profits earned byunits in a SEZ).
► Based on the response received fromstakeholders, the Bill outlines the finalphasing out plan. As per the said plan,deduction of profits earned by a new unitin a SEZ will be allowed only where activityis commenced within the unit prior to 1April 20205 i.e. all new units commencingactivity on or after 1 April 2020 shall notbe eligible for a deduction of the profitsearned by them.
Rationalization of manner ofcomputing disallowance ofexpenditure relatable toexempt income
► Currently, no deduction is allowed forexpenditure incurred in relation to anyexempt income earned by a taxpayer. Theexpenditure to be disallowed is required tobe computed in accordance with aprescribed formula.
► The above provision has resulted intosignificant disputes for taxpayers.
5 The Press Release proposed a date of 1 April 2017.
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► With a view to reduce litigation andproviding certainty in taxation, the FM, inhis Budget speech has proposed torationalize the method of quantification ofdisallowance of expenditure pertaining toexempt income. The disallowance isproposed to be limited to 1% of theaverage monthly value of investmentsyielding exempt income, but not exceedingthe actual expenditure claimed. It isexpected that amendment to this effectshall be made to the Income-tax Rules,1962.
Clarification pertaining to taxon distributed income
► Presently, the domestic tax law providesfor an additional income-tax at the rate of20% (plus applicable surcharge andeducation cess) on the distributed incomearising on buy-back of unlisted shares by acompany (BBT). For the purpose of thisprovision, the term ‘buy-back’ has beendefined to mean the purchase by acompany of its own shares in accordancewith the provisions of section 77A of theCompanies Act, 1956. Further, the term‘distributed income’ has been defined tomean consideration paid by the companyon buy back of shares as reduced by theamount which was received by thecompany for issue of such shares.
► The Bill proposes to amend the aforesaiddefinition to broaden its scope and provideclarity on determination of distributedincome especially where shares are issuedin tax neutral reorganisation.
► The term ‘buy-back’ is proposed to meanpurchase by a company of its own sharesin accordance with any law for the timebeing in force relating to companies.
► The proposed amendment would bringwithin the ambit of BBT, buy-back of
shares by companies under High Courtapproved schemes, which are presentlyconsidered to be not subject to BBT.
► The term ‘distributed income’ is proposedto mean consideration paid by thecompany on buy-back of shares as reducedby an amount, which was received by thecompany for issue of such shares,determined in the manner as may beprescribed. The rules providing themanner of determination of the amount invarious circumstances including sharesissued under tax neutral reorganisationare yet to be notified.
► The above amendments are proposed tobe made effective from 1 June 2016.
Conditions for tax-neutralconversion of a company intoa Limited Liability Partnership(LLP)
► Currently, the conversion of a private oran unlisted public company into a LLP shallnot be regarded as a transfer, if certainconditions are fulfilled, which inter-alia,include a condition that the company’sgross receipts, turnover, or total sales inany of the preceding three years did notexceed INR 6 million.
► The Bill proposes to introduce anadditional condition for such tax neutralconversion; it is proposed that the totalvalue of the assets in the books ofaccounts of the company in any of thethree preceding financial years should notexceed INR 50 million.
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Relaxation in furnishingPermanent Account Number(PAN) by non-residents
► Currently, if the recipient of any sum onwhich tax is deductible at source fails tofurnish PAN to the payer, the rate of taxdeduction shall be the higher of 20% orapplicable tax rate under the tax law orDTAA.
► These provisions however do not apply topayment of interest on specified long-termbonds to non-residents.
► It is proposed to amend the provisions tocover any other payments tonon-residents, subject to such conditionsas may be prescribed. The speech of theFM indicates that the aforesaid exemptionshall be available on furnishing ofalternative documents.
► This amendment is proposed to be madeeffective from 1 June 2016.
Tax incentives for Start-ups
► The GOI unveiled its flagship initiative, the‘Start-up India: Action Plan’ on 16 January2016 detailing India’s start-up policy withmeasures to promote, boost and incentivisestart-ups in India. Further, a supplementarynotification was released on 17 February2016 explaining when an entity shall beconsidered as a ‘Start-up’.
► With a view to provide an impetus tostart-ups and facilitate their growth in theinitial phase of their business, the Billproposes the following incentives:
► Deduction of 100% of profits and gainsderived by an eligible start-up from aneligible business for three consecutive
years out of five years beginning fromthe year in which the start-up has beenincorporated.
The term ‘eligible start-up’ has beendefined to mean a company engaged ineligible business (defined as a businesswhich involves innovation,development, deployment orcommercialisation of new products,processes or services driven bytechnology or intellectual property)which fulfils the following conditions:
► It is incorporated on or after1 April 2016 but before1 April 2019;
► The total turnover of the businessdoes not exceed INR 250 million inany of the financial yearsbeginning from 1 April 2016 andending on 31 March 2021; and
► It holds a certificate of eligiblebusiness from the Inter-MinisterialBoard of Certification as notified inthe Official Gazette by the CentralGovernment.
► Long-term capital gains arising toindividuals/ HUF on account of transfer of aresidential property shall not be charged totax, if such capital gains are invested inshare of a company which qualifies to be aneligible start-up. This exemption is subject tothe individuals/ HUFs holding more than 50%of share of such company and such companyutilises the amount invested in shares topurchase new asset (including computer orcomputer software in case of technologydriven start-ups) before the due date offiling ROI.
► To promote the start-up eco-system in thecountry, a ‘Fund of Funds’ is proposed to beestablished to raise INR 25 billion annuallyfor four years to finance the start-ups. It isproposed to provide exemption from capital
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gains tax if the prescribed long-term capitalgain proceeds are invested by a taxpayer inunits of a specified fund, provided theamount remains invested for three years(upto INR 5 million).
Automation of variousprocesses and paperlessassessment
► The Bill proposes to provide a legalframework for paperless assessment withthe objective of enhancing the efficiencyand reducing the burden of compliance.
► It is proposed to define the term 'hearing'to include communication of data anddocuments through electronic mode.
► To this effect, notices can now becommunicated in an electronic form inaccordance with such procedure as may beprescribed.
► The above amendments are proposed to bemade effective from 1 June 2016.
Processing of the ROI
► Currently, ROI is processed and income orloss is computed after making theadjustments on account of arithmeticalerrors or incorrect claim, if such claim isapparent from information in the return.
► It is proposed to expand the scope ofprocessing the ROI to give effect to thefollowing:
► Disallowance of loss claimed, if ROI forwhich loss is claimed is furnishedbeyond the due date;
► Disallowance of expenditure indicated inthe audit report but not taken into
account while computing the totalincome;
► Disallowance of deductions claimedunder certain beneficial provisions, ifthe ROI is not filed within prescribedperiod;
► Addition of income appearing inForm No. 26AS or Form No. 16A orForm No. 16 but not appearing in theROI.
► The aforesaid adjustments shall not bemade unless intimation is given to thetaxpayer proposing such adjustment.
► Currently, the processing of ROI is notnecessary, if ROI is selected for detailedscrutiny assessment. As per the proposedamendment, the ROI shall be processedbefore passing of the assessment order.
Time limit for completion ofassessments andre-assessments
► The time limit for completion of amongstother, assessment and reassessmentproceedings are proposed to be amendedas follows:
Particulars As per theexistingprovisions
As per theproposedamendment
Assessment 3 years or 4years (wherereference tothe transferpricingofficer ismade) fromthe end ofthe relevantfinancialyear
33 monthsor 45months(wherereference tothe transferpricingofficer ismade) fromthe end ofthe relevant
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Particulars As per theexistingprovisions
As per theproposedamendmentfinancialyear
Re-assessment
1 year or2 years(wherereference tothe transferpricingofficer ismade) fromthe end offinancialyear in whichthe notice isserved
9 months or21 months(wherereference tothe transferpricingofficer ismade) fromthe end offinancialyear inwhich thenotice isserved
Effect toCommissioner(Appeals)/Tribunal/ HighCourt/SupremeCourt orderand order ofrevision byCommissionerof Income-tax(CIT)
No limitprescribed
3 monthsfrom the endof month inwhich orderis received.This can beextended bya further 6monthsperiodsubject toappropriatepermission
Rationalisation of penaltyprovisions
► Presently, the Indian Revenue Authorities(IRA) may levy a specified amount ofpenalty on a taxpayer on account ofconcealment of particulars of income orfurnishing inaccurate particulars ofincome.
► With the intention of rationalising andbringing objectivity/ clarity in the penalty
provisions, the Bill proposes to replace thecurrent penal provisions with new penalprovisions which shall govern cases ofunder-reporting and misreporting ofincome. The amendments proposed by theBill are as follows:
Under-reporting of income
► A taxpayer shall be considered to haveunder-reported his income in the followingscenarios:
► the assessed income is greater thanthe income determined in theintimation processing the ROI; or
► where no ROI is filed, the assessedincome is greater than the maximumamount not chargeable to tax; or
► in a re-assessment case, the re-assessed income is greater than theincome assessed or re-assessedimmediately before such re-assessment; or
► the deemed total income assessedor re-assessed under MAT/Alternate Minimum tax (AMT)provisions is greater than thedeemed total income determined inthe intimation processing the ROI;or
► where no ROI is filed, the amount ofdeemed total income assessedunder MAT/ AMT provisions isgreater than the maximum amountnot chargeable to tax; or
► the income assessed or re-assessedhas the effect of reducing the loss orconverting such loss into income.
► A specific manner has been prescribed forcomputing the under-reported income by ataxpayer in different scenarios.
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► The following scenarios are proposed to beexcluded from the ambit of under-reporting of income:
► where the IRA is satisfied that theexplanation offered by the taxpayeris bonafide and all material factssupporting the explanation aredisclosed;
► where such under-reported incomeis determined on an estimated basis,if the accounts are correct/complete but the method employedis such that the income cannotproperly be deduced therefrom;
► where the taxpayer suo-motoestimates a lower amount ofaddition/ disallowance on the issueand includes the same in thecomputation of his income anddiscloses all the facts material to theaddition/ disallowance;
► where the under-reported incomerepresents additions made to thearm’s length price provided that thetaxpayer had maintained all theprescribed information anddocuments in connection with thedeclared international transactionand has disclosed all the materialfacts relating to the saidtransaction;
► where the undisclosed income is onaccount of a search operation andpenalty is leviable.
Misreporting of income
► Instances of misreporting of income are asfollows:
► misrepresentation or suppression offacts;
► non-recording of investments inbooks of account;
► claiming of expenditure notsubstantiated by evidence;
► recording of false entry in books ofaccount;
► failure to record any receipt inbooks of account having a bearingon total income;
► failure to report any internationaltransaction or specified domestictransaction (SDT) to which thetransfer pricing provisions apply.
Amount of penalty
► Under-reporting of income – 50% ofamount of the tax payable on under-reported income.
► Misreporting of income – 200% of amountof the tax payable on misreported income.This penalty is in addition to the penalty of2% on value of the internationaltransaction/ SDT for failure to report suchtransactions.
► The tax payable on under-reported incomeshall be determined in a manner that hasbeen prescribed.
Immunity from imposition ofpenal provisions
► A taxpayer shall be eligible to make anapplication to the IRA to grant immunityfrom penal provisions pertaining to under-reporting of income, subject to fulfilmentof the following conditions:
► The tax and interest payable as perthe assessment/ re-assessmentorder has been discharged withinthe specified time;
► No appeal has been filed against thesaid assessment/ re-assessmentorder.
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► Immunity from imposition of penalty shallnot be granted by the IRA where thepenalty proceedings were initiated onaccount of misreporting of income by thetaxpayer.
► The IRA shall accept/ reject the applicationwithin one month from the end of themonth in which the application seekingimmunity is filed. Where the IRA proposesto reject the application, an opportunity ofbeing heard is required to be provided tothe taxpayer.
Indirect Taxes
Service tax
Changes in rate of service tax
► Effective Service tax rate increased to 15% -comprising of Service tax at 14% plusSwachh Bharat Cess (SBC) of 0.5% plus anew Krishi Kalyan Cess (KKC) of 0.5%(effective from 1 June 2016).
► Unlike SBC, the KKC should be creditable tothe service provider against the output cessliability of KKC.
► For annuity life insurance policy with singlepremium, presumptive rate of tax reducedfrom 3.5% to 1.4% of the premium (wherethe premium allocated for investment orsavings in not provided to the policy holder)(effective from 1 April 2016).
New Service Tax exemptions (effective from 1April 2016)
► Services provided by SEBI by way ofprotecting the interests of investors insecurities and to promote the developmentand regulation of the securities market.
► Services provided by Insurance Regulatoryand Development Authority of India toinsurers under the Insurance Regulatory andDevelopment Authority of India Act, 1999.
► Services of life insurance business providedby way of annuity under the NationalPension System regulated by the PensionFund Regulatory and DevelopmentAuthority of India.
► General insurance business servicesprovided under ‘Niramaya’ Health InsuranceScheme exempted.
Shift to a normal forward charge of service tax(effective from 1 April 2016)
► Services provided by mutual fund agents/distributors to the mutual fund/ assetmanagement company, taxable in the handsof the mutual fund agent/ distributor.
New reverse charge (effective from 1 April 2016)
► All services provided by the Governmenttaxable under reverse charge basis, otherthan three services currently taxable viz.post & insurance, transport and agency.
Changes in abatement
► Services of a foreman to a chit fund, withoutCENVAT credit on inputs, input services andcapital goods, now taxable at 9.8%.
Tax controversy
► Interest rates on delayed payment ofservice tax reduced to 15% per annum.However, where service tax has beencollected but not deposited, interest to belevied at the rate of 24% per annum (fromdate of enactment of the Bill).
► Period of limitation in cases of non-evasionextended to 30 months (presently 18months) (from enactment). Extended period
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of limitation of five years in cases ofevasion, remains unchanged.
► Penalty and prosecution provisions havebeen rationalized. Power to arrest restrictedto offences in the nature of collection ofduty and non-payment (from enactment ofthe Bill).
► Monetary limit for punishable offences andarrest provisions enhanced to INR 20 million(from enactment of the Bill).
► Indirect Tax Dispute Resolution Scheme,2016, introduced in respect of casespending before Commissioner (Appeals).For closure of proceedings under thescheme, the assessee to make payment ofduty, interest and 25% of the penalty andfile a declaration to that effect (from 1 June2016).
Other key changes
► Annual return to be filed by taxpayers, by30 November of the succeeding financialyear (in the format that is yet to beprescribed).
Cenvat credit
► Rule mandating banks/ NBFCs (engaged inproviding services by way of extendingdeposits, loans or advances) to reverseCenvat credits on adhoc 50% basis underRule 6(3B) of the Cenvat Credit Rules,2004, now been made optional with effectfrom 1 April 2016. Alternatively, suchbanks/ NBFCs can reverse Cenvat credits onactual basis of taxable and exempt turnover.
► Impact of removal of the non-obstanteclause i.e. Rule 6(3B) to be analysed.
► Method of computing Cenvat crediteligibility and reversals to service providersengaged in both taxable and exemptbusiness streamlined. Clarity provided on
the method of computing credits under Rule6(3) of the Cenvat Credit Rules (effective 1April 2016).
► Ambiguity on time limit in filing refund claimby exporter of service now resolved.Refund applications to be filed within 1 yearof:
► Receipt of consideration inconvertible foreign currency, whereprovision of service is completedprior to receipt of such payment; or
► Date of invoice, where payment forservices have been received prior toissuance of invoice (effective 1March 2016).
► Annual return to be filed for Cenvat Creditsby 30 November of the succeeding financialyear (format to be notified).
Customs and Excise
► No change in the median rate for bothcustoms duty and excise duty.
► To incentivize ‘Make In India’ Scheme,custom duty rate reduced on inputs relatingto IT hardware, defense production, textiles,etc.
► Period of limitation in case of non-evasionextended to 24 months.
Goods and Service Tax (GST)
► The GOI has reiterated its commitment forintroduction of GST.
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Comments
� The Union Budget, 2016 revolved aroundthe theme of ‘Make in India’ and ‘Ease ofdoing business in India’. While agriculture,social welfare, manufacturing andinfrastructure remained key focus areas,the financial services sector also receivedmeaningful attention – both in terms ofstructural changes, future trajectory aswell as taxation.
� Although the Union Budget, 2016 enforcesthe commitment of the GOI to introduceGAAR with effect from 1 April 2017,further clarifications with respect to theGAAR provisions (i.e. issuance ofguidelines for GAAR, incorporating therecommendations based on the report ofthe Expert Committee, etc.) would need tobe issued for smooth implementation ofGAAR.
� Further, though the FM as part of hisspeech indicated that the period forgetting benefit of long-term capital gainstax regime in case of unlisted companies isproposed to be reduced from three to twoyears, no amendment to this effect hasbeen proposed in the Bill.
While there is an unfinished agenda withregard to further liberalisation ofconditions to kick-start the fund managerregime, measures to increase retailparticipation in the capital markets, taxclarity for the GDR scheme, further clarityon taxation of AIFs (i.e. characterisation ofincome and pass through for Category-IIIAIFs); it is noteworthy that the UnionBudget, 2016 has focused differentially onthe financial services sector andstrengthened it further to signal a clearand decisive shift towards stability,consistency and clarity of tax policies.
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