"OFF THE RECORD"

business and law journalist

[menakadoshi]

Draft Yes, But Model?

Today the Finance Ministry released the draft Model GST. At 190 pages it’s a tough read...but the kind folk at SKP  and Lakshmikumaran and Sridharan have done some quick analysis. Enjoy 

MODEL GST LAW – PUBLISHED – TIME TO CAPITALISE: SKP Today, in a ground breaking move by the Government, the Centre made public the Model GST law after getting an in-principle nod from the Empowered Committee of State Finance Ministers. The Model GST Law has been announced with the purpose of soliciting comments from Trade, Professionals and Public at large. The Model GST Law is meant for the Public at large to engage in discussions regarding the provisions which might eventually be a part of the Final GST Law in India. The Model GST Law has been divided into two major parts (Acts), Goods and Services Tax Act, 2016 (hereinafter known as ‘GST Act’) and The Integrated Goods and Services Tax Act, 2016. (hereinafter known as ‘IGST Act’)

The GST Act consists of 25 Chapters, 4 Schedules and GST Valuation Rules explaining various aspects of the GST Act. And The IGST Act consists of 11 Chapters explaining various aspects of the IGST Act meant to regulate interstate supplies.

A cursory look over the Model GST Law in comparison with the current indirect taxes helps us understand that many concepts of the current law like Reverse charge, Assessments and Appeals, Refunds/Rebates etc. have been continued in the Model GST Law as well. However, there are many deviations which have also been noticed. The following key points can be highlighted based on our initial study:

·               Unification of ‘taxable event’ from sale/purchase, manufacture, provision of service, etc. to ‘Supply’. Thus GST will be levied on all forms of ‘supply’ of goods or services such as sale, transfer, barter, exchange, license, rental, lease, import of services etc of goods and/ or services made for a consideration (and in exceptional cases made without consideration)

 ·               Taxpayers having turnover upto Rs 50 lakhs may get an option of paying GST at a concessional rate. The Model GST law provides that this rate is expected to be more than 1%.

 ·               ‘Securities’ have now been included in the definition of goods. Given that goods & services are now brought on the same platform, inclusion of securities under the GST regime could enable every trade to be construed as a supply and thus chargeable under the GST.

 ·               The exhaustive definition of supply includes ‘Self-supply without consideration’. Clarity regarding taxability and valuation mechanism for self-supply is something which would require Trade’s representation.

 ·               The liability to pay GST will arise at the time of supply as determined for goods and services. In this regard, separate provisions prescribe what will be the time of supply for goods and services. Certain provisions from the current Point of taxation rules under the service tax law has been grandfathered to draft the time of supply provisions.  

 ·               It would be crucial to determine whether a transaction is an ‘intra-State’ or ‘Inter-State’ as GST (i.e. Cetral GST plus State GST or Integrated GST) will be applicable accordingly. In this regard, the draft GST law provides separate provisions which will help an assessee determine the place of supply for goods and services.  Typically for ‘goods’ the place of supply would be location where the good are delivered. Whereas for ‘services’ the place of supply would be location of recipient.

 ·               GST would be payable on the ‘transaction value’. Transaction value is the price actually paid or payable. The transaction value is also said to include all expenses in relation to sale such as packing, commission etc.

 ·               It appears that reverse charge will now be applicable on both Goods and Services.

 ·               Intangibles are deemed to be considered as ‘services’.  

 ·               With regard to input tax credit surprisingly, inter-alia, credit pertaining to specified procurements such as catering services, employee insurance would not available. This denial of credit will lead to substantial tax cascading.  

 ·               As per Model GST law a threshold limit of Rs 10 lacs is proposed and for north eastern States including Sikkim this threshold will be Rs 5 lakhs.

 This Model GST Law certainly portrays the general thought process of the Government on every aspect of the new GST Law in India. A humongous amount of research, technical knowledge and ground level efforts has gone behind creating this Model GST Law which showcases government GST preparedness and its intent to implement GST by April 2017.  

 As on 14th June 2016, in an recently concluded Empowered Committee meeting all the States consented to ‘no Constitutional cap on tax rate’ while unanimously agreeing  that contingencies may arise in future with respect to quantum fixed by GST Council and thus, same shall be best left to Council’s discretion in the future.  

 Now, that the Ruling Government’s (NDA Alliance) has strengthened its position in the Rajya Sabha (Upper House) and has also garnered favourable support (for GST) from many other parties, the tide have almost turned towards GST’s favour. And now with the release of the Model GST Law, Business organizations across India will also have to acknowledge that the Government is prepared for the mantle of implementing GST in India by April 2017. Going by the positive outlook of the Government, if April 2017 becomes a reality for GST, then Business organizations will have to begin their process of GST preparedness as soon as possible to ensure full optimization of the GST opportunity at their door step.

The article above is authored by Pratik Shah, Jigar Doshi and Ravi Soni from SKP and the views are personal.     -------------------------------------------------------------------------------------------------- Model GST Law: Lakshmikumaran & Sridharan

Overview

·         While the Empowered Committee meeting is underway at Kolkata, the Model GST Law as prepared by the Empowered Committee of State Finance Ministers has put up in the Government of India, Ministry of Finance website at http://finmin.nic.in/.

·         It may be recalled that the Constitutional (One Hundred and Twenty-Second) Amendment Bill, 2014 has already been passed by the Lok Sabha and is pending approval by the Rajya Sabha.  The Government of India had also released four Reports of the Joint Committee on Business Processes for GST on Registration, Payment, Returns and Refunds in October 2016.

·         The Model Law is in furtherance to these documents and should be read together for completion.

Model Law The Model Law covers the following:

1.    Goods and Services Tax Act, 2016

2.    Integrated Goods and Services Tax Act, 2016

3.    GST Valuation (Determination of the Value of supply of Goods and Services) Rules, 2016.

Goods and Services Tax Act, 2016

·         This is a Model Law which shall be customized by the Centre and the States for enactment.

·         This Model Law has 25 Chapters, 184 Sections and 4 Schedules

·         The Law amalgamates concepts and practices from the Central legislations such as Central Excise and Service Tax and also of State VAT legislations. A large number of the provisions have been borrowed from these existing legislations. The Law also borrows several concepts from the International GST practices.

Supply

The taxable event for levy of GST shall be ‘supply’ of goods and services or both. The term ‘supply’ is defined inclusively to inter alia include -

·         All form of Supplies for a consideration.

·         Specific Supplies without consideration including supplies between two units/branches of same entity having separate GSTIN.

·         Transactions between principal and agent is deemed to be supply.

·         Supply of branded services by aggregator.

 Levy of GST

·         Central GST (CGST) and State GST (SGST) will be leviable on intra-State supplies and Integrated GST (IGST) will be leviable on inter-State supplies.

·         The provisions for determination of whether a supply is inter-State or intra-State are in sections 3 and 3A of the IGST Act, 2016 respectively.

·         Supply of goods/services shall be inter-State if location of supplier and place of supply are in different States. Otherwise the supply will be intra-State.

·         Imports of both goods and services have been deemed as inter-State supplies leviable to IGST. Export is zero-rated.

·         Separate provisions have been made in sections 5 and 6 for determination of place of supply of goods and services respectively. Specific provisions have been introduced for bill-to-ship-to and in-transit supplies in POS.

·         Certain transactions involving both supply of goods and services such as works contract, restaurant service, etc. have been deemed as supply of service under Section 3 read with Schedule II of the Model Law. Various declared services of the current service tax law have also been deemed as supply of service. Transfer of Right to Use Goods has also been deemed to be a service.

·         Powers to grant exemptions, absolutely or conditional, by notification or by special order, have been given to the Central and State Governments, on the recommendation of the GST Council.

·         There are provisions for reverse charge payments in respect of both goods and services.

Time of Supply

·         In case of supply of services, the provisions relating to time of supply are broadly aligned with the Point of Taxation Rules, 2011 of the service tax law.

·         The concept of time of supply has been introduced for goods which are also based on similar principles as in respect of supply of services. The time of supply of goods is also dependent on removal or non-removal of goods.

Valuation

·         Transaction value shall be the basis for the levy of CGST / SGST and IGST. Section 15(2) provisions for certain inclusions and exclusions while determining the value.

·         Where transaction value is not available resort has to be taken to the GST Valuation (Determination of the Value of supply of Goods and Services) Rules, 2016. These Valuation Rules provide for a hierarchy of methods namely, transaction value of goods and/or services of a like kind and quality, computation value method (based on cost of production or provision) and the residual method.

 Input Tax Credit (ITC)

·         Input Tax Credit (ITC) is available in respect of inputs, capital goods and input services. There is a negative list of items on which no ITC is available.

·         ITC is available only on provisional basis (for 2 months) until the supplier makes the tax payment and files a valid return. There will be matching of supplier and receiver data and credit will be confirmed only after such matching. Where the data is not matched and where the supplier has not made the tax payment, the ITC shall be reversed with interest.

·         Interest is from the date of wrong availment or utilization.

Input Service Distributor (ISD)

 ·         Input Service Distributor has been introduced only for passing on credit of GST on services. No similar provision has been introduced for goods.

  Registration

·         The persons liable for taking Registration are specified in Schedule III. They include –

(a)  Persons crossing threshold of aggregate turnover of Rs. 9 lakhs in a financial year. Threshold is Rs. 4 lakhs for North-Eastern States.

(b)  Persons making inter-State taxable supply irrespective of threshold

(c)   Persons liable to pay GST under reverse charge

(d)  Input Service Distributor

(e)  Aggregator

(f)    E-Commerce Operator.

·         Separate registration is required to be taken in each State. There is no provision for centralized registration.

·         Existing taxpayers will be issued Registration Certificate on a provisional basis valid for 6 months.

·         Composition Scheme has been introduced in respect of taxable persons whose aggregate turnover does not exceed fifty lakhs.

Returns

·         Normal taxpayer has to file 3 Returns in a month namely for outward supplies, inward supplies and consolidated. Specific provision has been made in respect of filing their first Return. Taxpayers are also required to file an annual return.

·         Returns have also been prescribed for ISD, Tax Deducted at Source (TDS), Tax Collected at Source (TCS, applicable for e-Commerce Operators).

·         Final Returns is to be filed in case of surrender / cancellation.

Payment priority

·         Prioritization rule has been inserted for payment of taxes whereby taxes for the current period cannot be paid until the taxes/interest/late-fee/penalty in relation to returns of previous tax periods have not been deposited.

e-Commerce

·         Special provisions have been introduced in respect of e-Commerce operators and Aggregators.

·         E-Commerce Operators are required to collect and deposit tax at source (TCS) on payments made to the vendors. They are also required to file statement/return relating to the supplies made through their portal. These will be matched with the details given by the vendor in his Return for outward supplies and in case of mismatch, output liability of vendor will be re-determined.

·         Supplies of branded services by Aggregators has been deemed as a supply by the Aggregator.

Transitional Provisions

·         Amount of Cenvat credit carried forward in a Return will be allowed as ITC. Similar provision has been made for carry forward of Value Added Tax. However such carry forward is allowed only if the credit is admissible in terms of the ITC provisions of the GST Law. The procedure may require to await the Rules to be framed in this regard.

·         Unavailed Cenvat credit on capital goods, which is not carried forward in a return, will also be allowed in certain situations.

·         Credit of eligible duties and taxes in respect of inputs held in stock will also be allowed in certain situations.

Miscellaneous Provisions

·         Provisions have been made for Demands and Recovery, Appeals and Revision, Refund, Advance Rulings, Settlement of Cases, Offences, Penalties, Compliance Rating, etc.

 ---------------------------------------------------------------------------------------------

Looks like e-commerce companies might not be very happy...as for ‘model’ law...the jury’s still out on that...reading...

[menakadoshi]

MID COURSE CORRECTION!

The Companies (Amendment) Bill, 2016 was introduced in the Lok Sabha yesterday. This Bill is based on the recommendations made by the Company Law Committee. The Committee’s report sought to make over 100 changes to the Companies Act, 2013 by amending over 78 sections. I had discussed them here

As I scan through the Bill, I’m putting down some important changes it proposes

1. RE-DEFINED Clause 2 of the Bill seeks to amend section 2 of the Companies Act, 2013 (hereinafter referred to as 'the Act') for modifying the definitions of associate company, cost accountant, debentures, financial year, holding company, key managerial personnel, net worth, related party, small company, subsidiary company and turnover, and omit the definition of interested director SOME OF THESE NEEDED TO BE ALIGNED WITH DEFINITIONS IN OTHER LAWS, SOME (SUCH AS ASSOCIATE & SUBSIDIARY) NEEDED CLARIFICATION

2. UNRESTRICTED OBJECTS CLAUSE Clause 4 of the Bill seeks to amend sub-section (1) of section 4 of the Act to allow companies an unrestricted object clause, to engage in any lawful act or activity for the time being in force. It also proposes to amend sub-section (5) to modify the period of validity of a name reserved. The clause also seeks to insert new sub-sections (6A) and (6B) w.r.t. model memorandum. BEWARE COMPANIES WITH GENERIC OBJECTS, THEY MAY CHANGE THEIR CORE BUSINESS ANYTIME! 

3. ALIGNING WITH SEBI Clause 8 of the Bill seeks to amend sub-section (1) of section 26 of the Act to provide that contents of the prospectus with respect to information and reports on financial information shall be specified by SEBI in consultation with Central Government. The clause also provides for applicability of existing requirements on such matters specified by SEBI. THIS WILL HARMONISE RULES/REGULATIONS ON PROSPECTUS. ESPECIALLY AS SEBI MOVES TO LEANER PROSPECTUSES... 4. DIRECTORS vs EXPERTS Clause 9 of the Bill seeks to amend section 35 of the Act to hold experts liable for statements made by them and provide a defence to the directors who relied upon such statements.  GOOD NEWS FOR DIRECTORS, EXPERTS WILL HAVE TO BE MORE CAREFUL HERE ON...WHICH IS (BROADLY SPEAKING) GOOD NEWS FOR SHAREHOLDERS 5. EASIER PRIVATE PLACEMENT Clause 10 of the Bill seeks to substitute section 42 of the Act. The proposed provisions seek to simplify the requirements with reference to private placements such as doing away with separate offer letter, reduced number of filings, etc. This clause also seeks to modify penalty provisions for contravention of this section. It also seeks to provide for restrictions on utilisation of moneys raised through private placement unless allotment is made and return of allotment is filed with the registry THE COMMITTEE SOUGHT TO SIMPLIFY THE PRIVATE PLACEMENT PROVISIONS FOR EASIER FUND-RAISING 6. ENABLE SDR Clause 12 of the Bill seeks to amend section 53 of the Act to replace the words “discounted price” with the word “discount” and also to allow companies to issue shares at discount to its creditors when debt is converted into shares in pursuance of any statutory 27 28 resolution plan or debt restructuring scheme in accordance with guidelines or directions or regulations specified by Reserve Bank of India under the Banking Regulation Act, 1949, Reserve Bank of India Act 1934. Further issue of shares would continue to require approval of shareholders through a special resolution GOOD NEWS FOR BANKS, BUT SDRs HAVE YET TO PROVE SUCCESSFUL IN REVIVING AN ASSET 7. EASIER DEPOSIT RAISING Clause 15 of the Bill seeks to amend section 73 of the Act to omit requirement relating to deposit insurance and provide that deposit repayment reserve shall not be less than twenty percent. of the amount of deposits maturing during the following financial year. This clause also seeks to provide for acceptance of deposits by companies, if the default is made good and five years have lapsed since then. THIS DILUTES THE SAFEGUARDS THAT THE ACT HAD PUT IN PLACE. BUT AS MANY COMPANY LAW EXPERTS ARGUE, THOSE SAFEGUARDS WERE VIEWED TO BE RATHER ONEROUS 8. ‘BENEFICIAL INTEREST’ INTRODUCED Clause 21 of the Bill seeks to amend section 89 of the Act to include the definition of "beneficial interest in a share". Clause 22 of the Bill seeks to replace section 90 of the Act to provide that a declaration is to be given to the company by every individual acting alone or together or through one or more person including a trust and persons resident outside India, who holds beneficial interest of not less than twenty-five per cent or other prescribed percentage in shares of a company or the right to exercise or the actual exercising of significant influence or control under clause (27) of section 2 of the Act (to be called as significant beneficial owner). Further the significant beneficial owner shall while making the declaration specify the nature of interest and other particulars in prescribed manner and time to the company. It also seeks to empower the Central Government to specify class or classes or persons who shall not be required to make the said declaration. Further company shall maintain and keep available for inspection, by any member of the company, a register of significant beneficial owners. Further company shall file a return of significant beneficial owners of the company and changes therein with the Registrar. This clause also provides that company may give notice to any person whom the company knows or believes to be a significant beneficial owner of the company or who has knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge or who has been a significant beneficial owner of the company at any time during the immediately preceding three years. Further, if the person fails to give information required by the notice, the company shall apply to the Tribunal within a period of fifteen days for an order. The Tribunal may make an order restricting the rights 29 attached with the shares in question. If any person fails to make a declaration, he shall be punishable with fine. Similarly, where a company fails to maintain the register or file the return, the company and every officer of the company in default shall be punishable with fine.

9. RELAXATION OF INTER-CORPORATE LOANS PROVISION Clause 59 of the Bill seeks to amend section 185 of the Act to limit the prohibition on loans, advances, etc., to directors of the company or its holding company or any partner of such director or any firm in which such director or relative is a partner. It also allows a company to give loan or guarantee or provide security to any person in whom any of the director is interested subject to passing of special resolution by the company and utilisation of loans by the borrowing company for its principal business activities. EASE OF DOING BUSINESS 10. NO LIMIT ON LAYERS Clause 60 of the Bill seeks to amend section 186 of the Act by deleting the restrictions on layers of investment companies. It also seeks to provide for aggregation of loan and investments so far made and guarantees so far provided, for the purpose of calculating the limits of loans and investments. It also provides to exclude employees from the word “person” used in sub-section (2). Further it also seeks to provide that requirement of passing a special resolution at general meeting shall not be necessary where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company of the securities of its wholly owned subsidiary company. Further it also seeks to clarify when the company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities.  EASE OF DOING BUSINESS 11. NO RPT ROLLBACK Clause 61 of the Bill seeks to amend section 188 of the Act to provide that second proviso to section 188 (1) shall not apply to a company in which ninety per cent. or more members in numbers are relatives of promoters or related parties. It also seeks to provide that non-ratification of transaction shall be voidable at the option of the Board or shareholders, as the case may be. IT’S VERY SAD THAT THE AMENDMENT DOES NOT FOLLOW THE COMMITTEE RECOMMENDATION THAT - ALL RELATED PARTIES ABSTAIN FROM VOTING ON AN RPT. THAT’S HOW THE LAW IS WORDED, BUT IN A SUBSEQUENT CIRCULAR THE MCA NOTIFIED THAT ONLY THE INTERESTED RELATED PARTY MUST ABSTAIN. THIS LED TO PECULIAR INSTANCES WHERE A PROMOTER WOULD ABSTAIN, HIS WIFE WOULD NOT. HENCE THE COMMITTEE RECOMMENDED THAT THE CIRCULAR BE WITHDRAWN. THAT UNFORTUNATELY HAS NOT BEEN EFFECTED HERE IT SEEMS. 12. NO GOVERNMENT PERMISSION NEEDED FOR KMP REMUNERATION Clause 65 of the Bill seeks to amend section 197 of the Act to do away with requirement of obtaining approval of Central Government and to require special resolution for payment of managerial remuneration in excess of prescribed limits. It also seeks to provide that prior approval of bank or public financial institution or non-convertible debenture holder or secured creditor shall be obtained where any term loan is subsisting, before approval of shareholders. It also requires auditor of the company in his report under section 143 to make a statement as to whether the remuneration paid by the company is accordance with the provisions of section 197. THIS SEEMS FAIR. IF THE SHAREHOLDERS DON’T MIND PAYING MORE...WHY SHOULD THE GOVERNMENT HAVE A SAY? I can’t quite make out if the necessary amendments have been made to align the provisions of member selection to the NCLT/NCLA with the Supreme Court’s guidelines. 

This above is a quick first glance...will do a deep dive later. If you spot an unusual or noteworthy provision...do alert me!

[menakadoshi]

LESS PAPERWORK FOR INDIA INC, LESS WORK AND LESS MONEY FOR CCI!

Last week the Ministry of Corporate Affairs revised the exemption thresholds for deals that need to file with the Competition Commission Of India for approval. Now fewer deals/transactions will need to seek CCI approval. This in no way dilutes CCI’s ability to scrutinise a deal for its impact on competition, it simply reduces pre-filing for companies. Less paperwork is always good news...though for CCI that also means lower revenue as filing fees are the only source of independent income it has. I had expected this move by the MCA...only because the CCI had made its position clear to me.

In January 2016, on the day before he retired, former CCI Chairman Ashok Chawla told me this

ON EXEMPTION THRESHOLDS Menaka Doshi: Would you say that the current merger control regulations are good enough to deal with both the influx of cases and the type of cases coming into the CCI or would you call for changes to the merger control regulations. You had already told me in a previous interview that we did in the middle of last year that in fact the exemption threshold for target enterprises expires in March 2016, i.e. the notification regarding that comes to an end in March 2016. Can we expect to see some changes when it comes to exemption thresholds? Ashok Chawla: The exemption thresholds and the notification that you are talking about is something which the government handles. They do consult us and it will be a call, which of course the government will take at the end of the day but looking to the fact that business and industry need a shot in the arm that the ease of doing business is very critical for the Indian economy at this stage and the government is focusing on that. I would think that there is perhaps a case for the notification and the exemption, which it brings in its wake to continue for some more time. That is also useful from the point of view of the competition commission. In that it will give us the bandwidth and the time and energy to focus on cases, which are really big and important. Menaka Doshi: In your opinion do you think that there is a case to be made for enhancing the exemption limits thereby asking for fewer transactions to come to the CCI in the case of merger control? Ashok Chawla: It may not be a bad idea, I agree. ON FINANCIAL AUTONOMY Menaka Doshi: You have spoken on financial autonomy in one of your previous interviews just this last week or so and hence I asked you that question on whether you thought that the CCI was seriously under resourced. Have you made any suggestions to the government on how you can have financial autonomy, for instance your parallel other regulator, the Securities Exchange Board of India (SEBI) is an autonomous body financially?

Ashok Chawla: The point that I was making was and that holds gold, is that while on the one hand we are not, we kept the kind of money that we need, but it is that we have to necessarily go to the government for everything, because most regulators and that is what I said in the interview, when I said most, my hint was at SEBI which is not included in that category. The reason is that most regulators are not able to generate adequate income of their own. Therefore, you have to rely on funding from the state. One option is that every year you go, you get money and where you continue, which necessarily means that every kind of stipulation or rule of the government in terms of recruitment, in terms of salaries, in terms of compensation, in terms of all the rules and regulations, the financial variety would apply. The other is the kind of flexibility which let us say the RBI has or SEBI has which is one of the newer regulators, they are self sufficient, so they are in a position therefore, as a result of that, in a position to decide the staffing pattern, to decide their broad levels of compensation which of course will not be very much out of line with what the government pays, but they have flexibility. Menaka Doshi: Let me put it this way to you. Should CCI be financially autonomous as SEBI is? Ashok Chawla: I do not think it will ever be. Cannot be because SEBI deals with a host of intermediaries and the fees which they collect and have collected over the years have brought them to that situation. Now, the only fees that we earn is from merger filings and there also, I find very often when we increase it a bit, there is a house of protest that while the companies will be very happy to pay the lawyers’ fancy sum, but when it comes to paying chicken feed to the regulators, there are protests. So, in any case, that apart. That is the only avenue that we have and I do not think that will, at any stage, make the competition commission self-reliant.

The full interview that appeared on The Firm, CNBC TV18 is available here  Now for a quick glimpse of the changes to the exemption thresholds...I’m going to borrow from the note written by Khaitan’s  Competition Partner Avaantika Kakkar...

Small Target Exemption

On 4 March 2011, the MCA had notified the small target exemption (also known as the de minimis exemption) exempting transactions from merger control approval requirements if, (a) the value of assets of the target enterprise in India was not more than INR 2.5 billion (USD 37.6 million/EUR 34 million approx.);  or (b) the turnover of such enterprise in India was not more than INR 7.5 billion (USD 112.8 million/EUR 102 million).

This notification was valid for a period of 5 years and expired on 3 March 2016.

On 4 March 2016, the MCA extended the small target exemption for a further period of 5 years (i.e., until 3 March 2021); and increased the financial thresholds so that there is no requirement to seek CCI approval where the target enterprise has:

(c) assets not more than INR 3.5 billion (USD 52.53 million/EUR 47.74 million approx.) in India; or (d) turnover of not more than INR 10 billion (USD 150.07 million/EUR 136.62 million approx.) in India.

While this is definitely a welcome step, the small target exemption continues to only apply to transactions structured as acquisitions of shares, voting rights, control or assets and, does not apply to transactions structured as mergers or amalgamations.

Increased Jurisdictional Thresholds

In another extremely significant move, the MCA has increased the financial thresholds for determining the CCI’s jurisdiction under the Competition Act, 2002 (as amended) (Competition Act) by a 100%. Previously, on 4 March 2011, the MCA had increased the thresholds mentioned in Section 5 of the Competition Act by 50%. Direct Parties Test: India

Acquisitions: Direct acquirer/Target Competitor Acquisitions: Target/Competing enterprise in acquirer group Mergers & Amalgamations: Direct transacting parties

Assets Combined Indian assets > INR 2,000 crore (approx. USD 300.14 million / EUR 273.24 million /GBP 201.56 million / JPY 35.79 billion) OR Turnover Combined Indian turnover > INR 6,000 crore (approx. USD 900.42 million / EUR 819.6 million / GBP 604.68 million / JPY 107.38 billion)

Direct Parties Test: Worldwide & India

Acquisitions: Direct acquirer/Target Competitor Acquisitions: Target/Competing enterprise in acquirer group Mergers & Amalgamations: Direct transacting parties

Assets Combined worldwide assets > USD 1 billion (approx. EUR 908.92 million / GBP 671.64 million /JPY 119.26 billion);

and Combined Indian assets > INR 1,000 crore (approx. USD 150.07 million / EUR 136.62 million /GBP 100.78 million / JPY 17.9 billion) OR

Turnover Combined worldwide turnover > USD 3 billion (approx. EUR 2.73 billion / GBP 2.01 billion / JPY 357.77 billion) and Combined Indian turnover > INR 3,000 crore (approx. USD 450.21 million / EUR 409.8 million / GBP 302.34 million / JPY 53.69 billion) Acquiring Group Test: India

Acquisitions (including competitor acquisitions): Acquiring Group/Target Mergers & Amalgamations: Group to which transacting parties will belong

Assets Combined Indian assets > INR 8,000 crore (approx. USD 1.2 billion / EUR 1.09 billion / GBP 806.24 million / JPY 143.17 billion)

OR

Turnover Combined Indian turnover > INR 24,000 crore (approx. USD 3.6 billion / EUR 3.27 billion / GBP 2.41 billion / JPY 429.5 billion)

Acquiring Group Test: Worldwide & India

Acquisitions (including competitor acquisitions): Acquiring Group/Target Mergers & Amalgamations: Group to which transacting parties will belong

Assets Combined worldwide assets > USD 4 billion (approx. EUR 3.64 billion/ GBP 2.69 billion / JPY 477.03 billion)

and

Combined Indian assets > INR 1,000 crore (approx. USD 150.07 million / EUR 136.6 million /GBP 100.78 million / JPY 17.9 billion)

OR

Turnover Combined worldwide turnover > USD 12 billion (approx. EUR 10.91 billion / GBP 8.06 billion / JPY 1,431.09 billion) and Combined Indian turnover > INR 3,000 crore (approx. USD 450.21 million / EUR 409.8 million / GBP 302.34 / JPY 53.69 billion)

Conversion Rates | USD 1 = INR 66.64, EUR 1 = INR 73.32, GBP 1 = INR 99.22, JPY 100 = INR 55.88 | 1 crore = 10 million.

Avaantika points out that ‘There is a divergent opinion among practitioners as to whether the financial thresholds as provided in the Competition Act have been increased or, whether it is the financial thresholds applicable immediately prior to this notification (i.e., the post- 2011 thresholds) that have been increased. It is our definitive view that the thresholds listed (above) are indeed the correct and appropriate thresholds. The 4 March 2016 notification of the MCA clearly uses the financial thresholds listed in the Competition Act as the basis of the increased value.

So net net, less paperwork for India Inc, less work for CCI and less money as well...hopefully though all of this will not amount to less protection for consumers.

[menakadoshi]

DEDUCTIONS, CESSES & PEACE

Budget 2016 has a lot to say on taxes! It lays down a  roadmap for eliminating deductions, takes a baby step towards the 25% corporate tax rate, creates a patent box regime, defers POEM, confirms GAAR for next year, levies a new tax on online ad revenue earned by non-residents, makes crorepatis & big dividend income earners pay more tax, introduces a new 0.5% cess on services, makes cars, jewellery, expensive clothes, tobacco products, listed stock options and coal more expensive and devises two new schemes to unearth black money and settle tax disputes.

I’ve listed what I think are the tax highlights of Budget 2016. If you find more let me know….

DIRECT TAX

BYE BYE DEDUCTIONS!

-          Accelerated depreciation limited to maximum 40% from 1.4.2017

-          Benefit of deductions for Research limited to 150% from 1.4.2017 and 100% from 1.4.2020

-          Benefit of section 10AA to new SEZ units available to those units which commence activity before 31.3.2020

-          Weighted deduction (Sec 35CCD) for skill development will continue up to 1.4.2020

BUT WAIT...NEW DEDUCTIONS!

-          100% profit deduction for 3 of 5 years for Startups setup between Apr ‘16 – Mar ‘19. MAT will apply

-          10%  tax on income from worldwide exploitation of patents developed & registered in India by a resident

-          100% deduction for profits in housing project for small flats approved during Jun ‘16 - to Mar ‘19 & completed in three years. MAT to apply

25% CORPORATE RATE

-          Manufacturing companies incorporated starting 1.3.2016 have option to be taxed at 25% + surcharge and cess. Cannot claim any deduction/allowance

-          29% corporate tax rate plus surcharge & cess for FY17 for companies with less than Rs 5 cr turnover in FY15

POEM, GAAR, DIGITAL ECONOMY!

POEM deferred

GAAR on schedule for April 2017

6% tax on online ad revenue of more than Rs 1 lakh received by non-resident from resident

TAX THE RICH

-          10% additional tax on gross dividend for those receiving dividend more than Rs 10 lakh p.a

-          Crorepati surcharge raised from 12% to 15%

TRUSTS

-          Complete income tax pass through for securitization trusts including ARC trusts

-          Securitisation trusts required to deduct tax at source

-          No Dividend Distribution Tax on Distribution of income of SPV to the REITs & INVITs

INDIRECT TAX

NEW CESSES

-          Krishi Kalyan Cess @ 0.5% on all taxable services w.e.f. 1 June 2016

-          Input tax credit of this cess will be available for payment of this cess

-          1% Infrastructure cess on small petrol, LPG, CNG cars

-          2.5% Infrastructure cess on diesel cars of certain capacity

-          4% Infrastructure cess on higher engine capacity vehicles and SUVs

HIGHER TAXES

-          1% TDS on luxury cars exceeding  Rs 10 lakhs

-          1% TDS on cash purchase of goods and services more than Rs 2 lakhs

-          STT on Options increased from 0.017% to 0.05%

-          1% Excise duty on jewellery (excluding silver jewellery)

-          2% Excise duty on readymade garments with retail price of Rs 1000 or more

-          Clean Energy Cess on coal, lignite and peat increased from Rs 200/tonne to Rs 400/tonne

-          Excise duties on various tobacco products other than beedi raised by about 10 to 15%

MAKE IN INDIA

-          Customs & excise duty lowered for IT hardware, capital goods, defence production, textiles, mineral fuels & mineral oils, chemicals & petrochemicals, paper, paperboard & newsprint, maintenance repair and overhauling [MRO] of aircrafts and ship repair

LOWER TAXES

-          Abolished 13 cesses, levied by various Ministries in which revenue collection is less than Rs 50 crore in a year

-          Basic custom and excise duty on refrigerated containers reduced to 5% and 6%

-          Extend excise duty exemption to Ready Mix Concrete

LITIGATION

INCOME DISCLOSURE SCHEME

-          Domestic taxpayers can declare undisclosed income by paying 30% tax + 7.5% surcharge + 7.5% penalty. Immunity from prosecution

DISPUTE RESOLUTION

New Dispute Resolution Scheme

-          0% penalty  in disputes upto Rs 10 lakhs. 25% of minimum imposable penalty  in other cases

-          Pending appeals can be settled by paying 25% of minimum imposable penalty + tax interest

-          One-time scheme of Dispute Resolution for ongoing cases under retrospective amendment

-          Penalty rates to be 50% of tax for underreporting of income &200% of tax for misreporting facts

[menakadoshi]

BANKRUPTCY BILL = MONEY BILL?

News is that the Government has tabled the Bankruptcy Bill in the Lok Sabha as a money bill. Really...is a Bankruptcy Bill a money bill?

To be clear - this column is not opposed to the Bankruptcy Bill. India desperately needs an improved law to effectively and speedily deal with bankruptcies. Though one might argue that more than a new law we need better institutions to process bankruptcies. And that the same flaws that rendered the SICA and BIFR ineffective could affect the Bankruptcy law and NCLT as well. But there are new features in this Bill that mark a landmark shift - for instance a move from the debtor-in-possession approach to a creditor-in-possession approach. And they make this legislative effort a worthwhile one. For more you can read/watch my discussion on the proposed Bankruptcy Bill.

But this is not about the merits of the Bill. It’s about how the Government of the day is attempting to legislate it. To overcome the Rajya Sabha impasse the Government has tabled the Bankruptcy Bill as a Money Bill. Rajya Sabha has little or no say in the passage of a money bill. The Constitution says in Article 109

A Money Bill shall not be introduced in the Council of States 

After a Money Bill has been passed by the House of the People it shall be transmitted to the Council of States for its recommendations and the Council of States shall within a period of fourteen days from the date of its receipt of the Bill return the Bill to the House of the People with its recommendations and the House of the People may thereupon either accept or reject all or any of the recommendations of the Council of States. 

If the House of the People accepts any of the recommendations of the Council of States, the Money Bill shall be deemed to have been passed by both Houses with the amendments recommended by the Council of States and accepted by the House of the People. 

If the House of the People does not accept any of the recommendations of the Council of States, the Money Bill shall be deemed to have been passed by both Houses in the form in which it was passed by the House of the People without any of the amendments recommended by the Council of States. 

If a Money Bill passed by the House of the People and transmitted to the Council of States for its recommendations is not returned to the House of the People within the said period of fourteen days, it shall be deemed to have been passed by both Houses at the expiration of the said period in the form in which it was passed by the House of the People. 

As is evident - the Lok Sabha has the final say on Money bills. The Rajya Sabha plays, at best, a recommendatory role but with no obligation on the Lok Sabha to accept the Upper House’s recommendations. FYI the Finance Bill, quite obviously a money bill, is passed thus every Budget. Though I must mention here that (borrowing from the RS website) - Though Rajya Sabha does not vote on Demands for Grants of various Ministries - a matter exclusively reserved for Lok Sabha - no money, however, can be withdrawn from the Consolidated Fund of India unless the Appropriation Bill has been passed by both the Houses.  Similarly, the Finance Bill is also brought before Rajya Sabha.  Besides, the Department-related Parliamentary Standing Committees that examine the annual Demands for Grants of the Ministries/Departments are joint committees having ten members from Rajya Sabha.

Why has the Rajya Sabha been denied any say in Money Bills? The Constituent Assembly debates offer insight into the allocation of powers to each House. I’m reproducing some portions of a record of the debate on May 20th, 1949 -  ‘Shri Brajeshwar Prasad: Mr. President, Sir, I am opposed to clause (2) of article 87 wherein it is stated that no Bill shall be deemed to have been passed by the House of the Parliament unless it has been agreed to by both Houses. I do not see why in a democratic state, the representatives of the people should be placed on a par with the nominated representatives of the provincial governments. The supremacy of the Lower House must be recognised if democratic institutions are to function efficiently.’

That day’s discussions also include an interesting debate on Joint Sessions - 

‘Prof. Shibban Lal Saksena: Mr. President, Sir, in this article a provision has been made by which in the case of disagreement over Bills between the Lower House and the Upper House, there shall be a joint sitting to solve the dispute. I had given notice of an amendment which you have thought fit to rule out; but I hope that the purpose of that amendment is worth consideration by this House. Firstly, I do not think that an Upper Chamber is a very good institution. I am opposed to that itself. but as the House has accepted that, I do not want to say anything more about it. What I do want to say is that the Upper House should not have an authority out of all proportion to its importance. We have based our Constitution on the model of the British Parliament. There we have got the House of Lords and the House Commons; but, authority of the House of Lord is very much restricted What I want is that here too, the Upper House should have limited authority and this should not be almost equal in power with the Lower House, as it becomes if there are joint sittings. According to the present draft, a Bill which is passed in the House of the People will go to the Upper House and if rejected there, then there will be a joint session in which the members of both House will sit and decide the matter, by simple majority. Thus the Upper House may succeed in rejecting a Bill passed by the House of the People which will not have sufficient authority to give effect to that legislation by its own simple majority.’

‘Shri Chimanlal Chakubhai Shah: I speak in support of the article . Under article 87 we have provided that a Bill shall not become an Art unless assented by both the Houses. That is a thing which we are perfectly clear about. Then the question arises as to what to do when there is a difference of opinion between the two Houses. It is possible that we may say that where there is difference of opinion we will leave the matter at that stage and allow the Bill to lapse and not make it and Act. That would be following the American model but there are some who feel that it should not be left at that stage and we should provide some machinery by which the difference of opinion between the two houses can be resolved. There are three or four ways in which that machinery can be provided. One is the British model under which after a certain lapse of time the Bill passed by the Lower House automatically becomes an Act if certified by the Speaker. Then there is the Irish model under which the Lower House should again pass a Resolution accepting the Bill once more on which it will become an Act. But the analogy between these two models and our model has no application at all because both those are unitary constitutions where ours is a federal constitution. In a Federal Constitution, the Upper House is composed of the representatives of the various units or states. It is not like the House of Lords which is hereditary or which by its very character is conservative. Our Upper House is elected by the representatives of the various States and therefore it is as representative as the Lower House itself in a particular manner. The object of providing an Upper House in the Centre is to see that the States voice or the voice of the units is adequately represented. Therefore the third way of providing to resolve the deadlock is by Joint session. Now that is not a very ideal solution no doubt but it is a solution which is as good as possibly can be conceived of.’

There was also a discussion on reducing the time limit within which the Rajya Sabha can make recommendations to a money bill, from 30 days to 21days or even 14 days. The proposal was endorsed by none other than Dr. Ambedkar.

‘The Honourable Dr. B.R. Ambedkar: I would also agree to the further reduction of the period to fourteen days. If the House will permit me to make such an amendment I should like to move that the period of twenty-one days as mentioned in the amendment be further reduced to fourteen days. I shall give my reasons for this change. In the British Parliament the House of Lords merely concurs in the financial provisions passed by the House of Commons; it has completely abrogated itself so far as finance is concerned. We are here making a departure from that position and are allowing the upper chamber to have some voice in the formulation of the taxation and financial proposals which have been initiated by the Lower House. As I said, we are conferring a privilege which ordinarily the upper chamber does not possess. At the same time we must bear in mind that the budget is a very urgent matter. Even now, as Members know, we do not give the Lower House more than six or eight days for the Finance Bill. It seems to me that to allow such a long period of thirty or even twenty-one days would result in hanging up such an important matter for a considerable length of time. If the Upper House wants to express an opinion fourteen days is a more than enough period.’ 

The amendment was adopted. The excerpt offers interesting insights into why the authors of our Constitution thought the Rajya Sabha’s powers should be limited in the matter of money bills. The same approach is apparent when deciding the definition of a money bill.

One excerpt of the Constituent Assembly debates pertains to the definition of a money bill - a member sought to expand it to include  `duty, charge, rate, levy or any other form of revenue, income or receipt by Governments or of expenditure by Government' and ‘existing contract’. Here’s how he explains it

‘Prof. K. T. Shah: This Draft Constitution has not yet included any article giving definition of important terms used in it, and hence this attempt to elucidate a crucial term in this article.If it is intended that the word `tax', as included in this clause, is to include all those other forms of public revenue or income, which I have particularised and separately included, then I am afraid, in the absence of clear definition clause, this is liable to mislead. It is quite possible that the ingenuity of lawyers may lead to the connotation of the word `tax' to be so narrowed down, as to exclude many of the other items or categories of public revenues I have mentioned; and a Bill which would be substantially a Money Bill, but not include a "tax" by way of imposition, modification alteration, or regulation of "tax", narrowly construed, may not be regarded as a Money Bill. I think that would seriously increase the powers of the Council of States; and so it is of the utmost necessity that these other forms, also, of public revenue, income or receipt should be included, so that there could be no room for dispute in this matter.After all, any student of Constitutional history would be aware that the struggles for supremacy between the House of Commons and the House of Lords in England almost invariably centered round the definition or scope of a Money Bill. The powers of the House of Lords to deal with money bills have been successively curtailed by including many matters, which, perhaps, previously were not part of the budget. By that means the supreme power of the House of Commons on financial matters has been now made almost unchallengable.The wording of this article as it is here leaves, according to me, considerable room for apprehension that the powers of the House of the People over matters financial will not be as wide not be as wide and as complete as I had thought ought to be the correct position in representative democracy with responsible ministry.It is for that purpose that I have inserted all those items which have in the past, in one way or another, cause some difference in other countries, and therefore should be clearly specified. As regards the second part of my amendment, namely variation of any law or of any contract, that is still more important. The contracts of Government relate very often to borrowed money, and for the interest contracted to be paid on such borrowed money, there may be variations and there have been variations. These variations are one-sided modification of a contract, which a sovereign Legislature is, of course, entitled to make; but that power should be in the House of the People, as part of its sole authority over money Bills and financial administration. For instance, the rate of interest on the Funded Public Debt has been frequently reduced in England. Now that is an act of sovereign authority, which no doubt belongs to the Legislature under the Constitution we are drafting. But it is part of a financial legislation; and, as such, should be within the competence only of the Lower House.’

Professor Shah didn’t quite succeed. 

The Constitution defines a money bill in Article 110

(1) For the purposes of this Chapter, a Bill shall be deemed to be a Money Bill if it contains only provisions dealing with all or any of the following matters, namely:— (a) the imposition, abolition, remission, alteration or regulation of any tax; (b) the regulation of the borrowing of money or the giving of any guarantee by the Government of India, or the amendment of the law with respect to any financial obligations undertaken or to be undertaken by the Government of India; (c) the custody of the Consolidated Fund or the Contingency Fund of India, the payment of moneys into or the withdrawal of moneys from any such Fund; (d) the appropriation of moneys out of the Consolidated Fund of India; (e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or the increasing of the amount of any such expenditure; (f) the receipt of money on account of the Consolidated Fund of India or the public account of India or the custody or issue of such money or the audit of the accounts of the Union or of a State; or (g) any matter incidental to any of the matters specified in sub-clauses (a) to (f).

A Bill shall not be deemed to be a Money Bill by reason only that it provides for the imposition of fines or other pecuniary penalties, or for the demand or payment of fees for licences or fees for services rendered, or by reason that it provides for the imposition, abolition, remission, alteration or regulation of any tax by any local authority or body for local purposes.

If any question arises whether a Bill is a Money Bill or not, the decision of the Speaker of the House of the People thereon shall be final. (4) There shall be endorsed on every Money Bill when it is transmitted to the Council of States under article 109, and when it is presented to the President for assent under article 111, the certificate of the Speaker of the House of the People signed by him that it is a Money Bill.

None of these suitably describe a Bankruptcy Bill...though one could stretch the argument to show that such a Bill will help salvage the non-performing assets of Government owned banks and hence impact Government revenue. Or atleast be a ‘matter incidental’ to Government revenue (1g) There’s also provision 3 that gives the Speaker the power to decide whether a bill is a money bill or not - effectively giving that power to the ruling political party of the day. The Constituent Assembly debates, the wording of the Articles, they all suggest that the Rajya Sabha need not have a material role to play in the money laws. And that the determination of what is a money law is also granted with much latitude to the ruling party. Tough then to fault the Government for introducing a Bankruptcy Bill as a money bill? More so because the Rajya Sabha refuses to function?

@BhimaniHeman suggests that because the Bankruptcy Bill deals with Government dues of a bankrupt company, that qualifies it to be a money bill. 

Fair point. --------------------------------------------------------------------------------------- A few hours after I wrote this on Monday evening, my colleague in Delhi got a copy of the Bankruptcy Bill - it seeks to amend a few tax laws to reflect the change in credit hierarchy. That explains the classification as a money bill. Some might say that’s still flimsy justification. 

Infact I’m watching the Lok Sabha debate the Bill (Tuesday evening) and the Finance Minister admitted that his ‘first preference was not to table this as a money bill’.

Let that suffice as the final word in this debate.

[menakadoshi]

CHASING OUR OWN TAILS!

Once upon a time, not very long ago, India decided to rewrite its tax law (Income Tax Act, 1961). The premise of the new Direct Tax Code (2009) was

‘The Income-tax Act, 1961, has been subjected to numerous amendments since its passage fifty years ago. It has been considerably revised, not less than thirty-four times, by amendment Acts besides the amendments carried out through the annual Finance Acts. These amendments were necessitated by policy changes due to the changing economic environment, increasing sophistication of commerce, increase in international transactions as a result of globalisation, development of information technology, attempts to minimize tax avoidance and in order to clarify the statute in relation to judicial decisions. As a result of all these amendments, the basic structure of the Income-tax Act has been over burdened and its language has become complex. In particular, the numerous amendments have rendered the Act difficult to decipher by the average tax-payer. The Wealth-tax Act, 1957 has also witnessed amendments. The Government, therefore, decided to revise, consolidate and simplify the language and structure of the direct tax laws. A draft Direct Taxes Code along with a Discussion Paper was released in August, 2009 for public comments. It proposed to replace the Income-tax Act, 1961 and the Wealth-tax Act, 1957 by a single Act, namely the Direct Taxes Code.’

The then Finance Ministry listed the objectives of the DTC as

(i) To consolidate and integrate all direct tax laws and replace both the Income Tax Act, 1961 and the Wealth Tax Act, 1957 by a single legislation. (ii) To simplify the language by using direct, active speech, expressing only a single point through one sub-section and rearranging the provisions into a rational structure which would assist a lay person to understand the provisions. (iii) To indicate stability in direct tax rates by proposing the rates of taxes in a Schedule to the Code, thereby obviating the need for annual legislation if no change in the tax rate is proposed. (iv) To strengthen taxation provisions for international transactions and to provide a stable framework for taxation of international transactions and global capital. (v) To rationalise exemptions to expand the tax base in order to achieve a higher tax-GDP ratio, enhance GDP growth, improve equity and allocative efficiency, reduce compliance costs, lower administrative burden, reduce discretion and provide moderate rates of tax to all taxpayers. (vi) To replace profit linked tax incentives with investment linked incentives. Profit-linked deductions are being phased out of the Income Tax Act and have also been dropped in the DTC. They are being replaced by investment-linked deductions for specified sectors. Investment-linked incentives are linked to creation of productive capacity and therefore superior instruments which target the incentive specifically to the capital investment. Profit linked deductions being currently availed have been protected for the unexpired period in the DTC.

The DTC steered, by then Finance Minister P Chidambaram and star IRS officer Arbind Modi, focused on reducing exemptions, lowering tax rates, simplifying the law and through measures ‘To strengthen taxation provisions for international transactions and to provide a stable framework for taxation of international transactions and global capital’ also reduce litigation. But it was met with tremendous opposition from corporate lobbies. Or what I call the ‘exemption lobbies’. Arbind Modi eventually moved on…to a foreign assignment if I remember correctly. Meanwhile the DTC got lost in a maze of drafts and Parliamentary Committee reviews. In 2013 a new, substantially revised DTC made an appearance. Here’s what the Finance Ministry said then…

‘The Income-tax Act was passed in 1961 and has been amended every year through the Finance Act. The Wealth-tax Act was passed in 1957 and has also been amended many times. Numerous amendments have rendered the two Acts incomprehensible to the average taxpayers. Besides, there have been several policy changes due to change in economic environment, complexity in the market, increasing sophistication of commerce, and development of information technology. There has also been a multitude of judgments (at times conflicting) rendered by the courts at different levels. This necessitated drafting of a Code to consolidate and amend the law relating to all direct taxes. Accordingly, a draft Code along with a concept paper was released on 12th August, 2009 inviting suggestions from the public. The Code sought to consolidate and amend the law relating to all direct taxes so as to establish an economically efficient, effective and equitable direct tax system which would facilitate voluntary compliance and also reduce the scope for disputes and minimize litigation. Having considered the suggestions received from various stake holders a revised discussion paper was released on 15th June, 2010. Thereafter, taking into account the suggestions which were accepted by the Government, the Direct Taxes Code Bill, 2010 was introduced in the Lok Sabha on 30th August, 2010. The Bill was referred to the Standing Committee on Finance (SCF) on 9th September, 2010 for examination and report thereon. The SCF presented its report to the Speaker, Lok Sabha in March, 2012. The report contains general recommendations in Part-I and deals with specific clause wise recommendations in Part-II. A large number of recommendations of the SCF along with other suggestions which were forwarded at the examination stage have been accepted by the Government. Further, the Kelkar Committee in its report on ‘Road Map for fiscal consolidation’ submitted to the Government in September, 2012 made the following observations on the Bill:- “The Direct Taxes Code Bill, 2010 which intends to revamp the law relating to direct taxes is likely to result in considerable unacceptable losses on a continuing basis. Given the low tax-GDP ratio and the existing fiscal crisis, there is absolutely no fiscal space for such large revenue loss. Therefore, the Direct Taxes Code Bill, 2010 should be comprehensively reviewed before it is enacted into law for implementation.” Since the Direct Taxes Code Bill, 2010 was introduced in the Parliament, amendments were carried out in the Income-tax Act, 1961 and the Wealth-tax Act, 1957 through Finance Acts, 2011, 2012 & 2013. These amendments were consistent with the policy laid down in the DTC Bill, 2010. Incorporating these amendments in the DTC Bill, 2010 would require a large number of official amendments making the Bill incomprehensible and the legislative process cumbersome. Hence, it was decided to revise the Direct Taxes Code incorporating all the amendments and presenting it as a fresh Bill. Accordingly, a new revised Direct Taxes Code was drafted.’  

Last year the new, revised DTC 2013 was posted for public comments…but soon after the Government changed and the NDA decided to junk the DTC altogether. In his Budget speech in February this year Finance Minister Arun Jaitley said “Most provisions of Direct Taxes Code have already been included in the Income-tax Act, therefore, no great merit in going ahead with the Direct Taxes Code as it exists today”. That is true…many measures such as Place Of Effective Management (PoEM), Advance Pricing Agreements (APAs), Indirect Transfers tax and others have already been incorporated in the Income Tax Act via Finance Acts. Others such as General Anti-Avoidance Rules (GAAR) are proposed but pending.

In the same speech the FM also spoke of a  “Vision of putting in place a direct tax regime, which is internationally competitive on rates, without exemptions” and that he presents a “Proposal to reduce corporate tax from 30% to 25% over the next four years, starting from next financial year”

Net, net many of the provisions of the DTC are either already implemented or proposed to be implemented…but without the accompanying simplicity that a new law was tasked to deliver. (Though there is no guarantee a new law will do that – the half notified, half dead, soon to be fully revised Companies Act, 2013 is evidence of that).

Anyways…now the Mr Jaitley has decided to constitute a ‘Committee to Simplify The Provisions of The Income Tax Act, 1961’. The terms of reference for the Committee are

 i)          To study and identify the provisions/phrases in the Act which are leading to litigation due to different interpretations ii)         To study and identify the provisions which are impacting the ease of doing business iii)        To study and identify the areas and provisions of the Act for simplification in the light of the existing jurisprudence iv)        To suggest alternatives and modifications to the existing provisions and areas so identified to bring about predictability and certainty in tax laws without substantial impact on the tax base and revenue collection

I suppose the recommendations of this Committee will add to the more than 100 amendments to the Income Tax Act since its inception. But if there is no guarantee that a new law can provide simplicity, there is even less hope that amendments will do that. Just look to the complications created by this year’s Finance Act and you’ll know that the best of intentions are often waylaid by bureaucratic bungling.

The point I’m trying to make is that for atleast 6 years (2009-2015) we have been saying the same thing in many different ways, through different committees and Parliamentary panels, through different Finance Ministers and Finance Secretaries. The only constant (somewhat) in all this is Arbind Modi – who is back in the Finance Ministry and is also a member of the new tax committee. And to end – please read the Committee’s terms of reference carefully…they say ‘to bring about predictability and certainty in tax laws without substantial impact on the tax base and revenue collection’. Don’t pop the bubbly yet!

[menakadoshi]

FINANCE MINISTRY INTROSPECTS!

It’s that time of the year - when Ministries release Annual Reports to recount all that they did...all that they didn’t!

As I read through the Finance Ministry’s Annual Report for FY 2014-15 I’m putting down some highlights that you might find interesting...

TAX EVASION - During the financial year 2014-15 (upto 30.11.2014), 2068 (provisional) search warrants were executed leading to the seizure of assets worth `538.23 Crore (provisional). 

- During the financial year (upto 30.11.2014), 1174 surveys (provisional) were conducted which yielded a disclosure of undisclosed income of `4673.11Crore (provisional). - As regards assessees, the number of new assessees added during the F.Y. 2013-14 upto 31.12.2014 was 24,35,612. - 847 cases of evasion of Central Excise duty involving `2045.52 crore were detected - In respect of Service Tax, during the financial year 2014-15 (upto November 2014), 3700 cases involving Service Tax evasion amount of `7537 crore were detected and an amount of `2524.06 crore was recovered during investigations. - As regards evasion of Customs duty during April-December 2014, 2550 cases involving duty of `685.08 crore were detected during same period. - During April-December 2014, in 13941 outright smuggling cases, contraband goods worth 12173.21 crore were seized. 

FOREIGN INVESTMENT -  Total net investments (equity and debt) made by FIIs/FPIs in 2014 is US$ 42.30 billion as against US$ 12.13 billion in 2013.

GDRs: Bharat Depository Receipts Guidelines (BhDR) The draft BhDR Guidelines as prepared by Sahoo Committee to revamp the Indian Depository Receipts Regime will be operationalized shortly with enabling guidelines from SEBI and Ministry of Corporate Affairs.  As part of the new scheme, two levels of BhDRs with Level-I being restricted to sophisticated investors and Level-II being made available for all investors, including Indian retail investors will be created

SECURITIES APPELLATE TRIBUNAL At present 289 appeals are pending before SAT  114  are pending for over 3 months 88 are pending for over 6 months 11 are pending for over a year 0 are pending for over 2 years BANKRUPTCY LAW REFORMS  A Committee has been set up for recommending an entrepreneur friendly legal bankruptcy framework. The mandate of the Committee is to study the corporate bankruptcy legal framework in India, including preventive measures for early detection and resolution of financial distress, and liquidation procedure for all companies. An Interim Report has been submitted by the Committee on 5th February 2015. A Final Report with a Bankruptcy Code will be submitted in early 2016. PPP: 3P India An institution to provide support to mainstreaming PPPs called 3P India with a corpus of Rs. 500 crores, was announced in the Budget Speech for 2014-15. Work for establishing the institution is in progress.

PPP Approval Committee           Number     Total Project Cost (Rs cr) From Inception (January 2006)  282             3,17,390.87 2014-15 (upto Dec 2014)           10               16,719.24 FIPB Since its constitution, 215 meetings of the Foreign Investment Promotion Board (FIPB) have been held. The Board is the Single Window clearance mechanism for the Foreign Investment Proposals in compliance with the FDI Policy. During the period 1st January 2014 to 31st March, 2015, 15 meetings were held in which 447 proposals were considered and 229 proposals with FDI/NRI inflow of approximately Rs 52,937.38 crore were approved. MASALA BONDS IFC issued a 10-year, 10 billion Indian rupee bond (equivalent to $163 million) on November 8, 2014. The “Masala bonds” mark the first rupee bonds listed on the London Stock Exchange. The bond yield was 6.3 percent. They are the longest-dated bonds in the offshore rupee markets, building on earlier offshore rupee issuances by IFC at three-, five-, and seven-year maturities. The vast majority of investors in masala bonds are European insurance companies. Proceeds from the offering were invested in infrastructure bond issuance by Axis Bank.

MAHARAJA BONDS IFC launched a US$ 2.5 billion rupee onshore bond programme in India on August 20, 2014 to strengthen capital markets and support infrastructure development in India. IFC launched and priced the four inaugural tranches of the Maharaja Bond Programme on September 23, 2014. The four tranches were issued in total for INR 6 Billion (USD100million). Proceeds from the Bonds will be invested in infrastructure projects in India. The programme is expected to provide an alternative source of investment in India. It would also result in broadening of Indian capital market

DBT Total number of beneficiaries for 19 DBT schemes are about 73, 12,484. Out of this, 42.2% have bank accounts, 35.3% have Aadhaar number and 32.8 % have seeded bank accounts. The total estimated number of beneficiaries for remaining 8 schemes is about 25, 75,452. Thus, total number of beneficiaries for the identified 27 schemes, expected to be covered under DBT in 2013-14, is about 98, 87,936.

Cumulative Aadhaar saturation of 83.95% has been achieved for the identified DBT districts. Lowest Aadhaar saturation of 34.08% has been reported for Tehri Garhwal district of Uttarakhand.

Overall, Rs 5,391.37 Crores against 8.97 crore successful transactions have been transferred to 2.84 Crore LPG consumers of 291 districts. It is also mentioned that out of 4 Cr LPG consumers who were linked to Aadhaar in all six phases of DBTL rollout, 6.18 Lakh duplicate connections have been identified. Saving in the subsidy to the tune of ` 251 Cr has been achieved. It is estimated that if this scheme could have been rolled out throughout the country then saving in the subsidy of Rs.9000 Cr would have been achieved.

Okay that’s the first 100 pages approx...more tomorrow...

MAY 2015

[menakadoshi]

Hey Menaka, I find your blog very insightful. Thanks for sharing your insights is there any way I can get your tumblr entry in my mailbox, it would be very helpful. Keep up the good work :)

I wish I knew how to do that! Let me see if there is an email alert available...

Thank you for the appreciation

[menakadoshi]

SFIO: ‘MISERABLE FAILURE’

That’s not me calling the SFIO a miserable failure...it’s the Parliament Standing Committee on Finance. In it’s April 2015 report the PSC on Finance made the following observations...

‘ the Committee find to their discomfiture another instance of over-allocation of funds, wherein the budget allocation for the investigating arm of the Ministry, namely, the SFIO, has been enhanced by about 20% vis-a-vis the previous year's BE, even as this organisation struggles with a crippled capacity, with as many as 75 vacancies out of a sanctioned strength of 130 personnel.’

‘Surprisingly, even after three years of its existence, no Recruitment Rules have been finalised so far. Even now, the Ministry have only been able to submit to the Committee that "it is not feasible to confirm the date of finalisation of Recruitment Rules at this stage." ...’

‘ As per the statement furnished to the Committee, the average time taken to complete the investigations is 542 days and, 1028 cases are still pending in various fora at different stages of prosecution; only six investigation reports have been successfully presented resulting in conviction and; the number of cases referred to the SFIO for investigation has declined from 83 in 2013-14 to 52 in 2014-15.’

‘Taking into account the afore-mentioned facts about the overall functioning of SFIO, which was conceived as a cutting-edge multi-disciplinary investigative body to unravel corporate frauds, the Committee cannot but conclude that its track-record has been far from satisfactory.’  

Here’s where the SFIO goes from being ‘far from satisfactory’ to ‘miserable failure’...

‘The Committee are constrained to observe that SFIO has miserably failed in developing a coherent and efficacious fraud prediction/prevention framework. The Committee observe that the major reason for this failure appears to be the trial and error approach followed by SFIO in formulating modules/ systems for detecting and preventing fraud. Initially, the Early Warning System (EWS) designed by the Ministry/SFIO was projected as an effective tool for detecting cases of potential fraud and malfeasance. However, the Committee now find that this system has been shelved mid-way on account of unsatisfactory results. The SFIO has also failed to explain the outcome of the Fraud Prediction Module, for which a token allocation of Rs. 1 lakh was made last year. The Committee further observe that for this year SFIO has sought an allocation of Rs. 75 lakh to implement the new institutional mechanism to detect fraud at an early stage through its Market Research Analysis Unit (MRAU). The Committee hope that this mechanism brings some sort of certainty and finality in instituting effective fraud prediction/prevention model and utilisation thereof.’

Ouch!

May 2015

[menakadoshi]

PEANUT BUTTER & MUTUAL FUNDS: More Tax! Budget 2015

BUDGET 2015: KEY CHANGES TO INDIRECT TAXES

All changes in Customs, Excise Duty rates, education cess and clean energy cess – effective 1st March, 2015. The higher rate of Service tax will become effective when notified. But all exemptions extended, withdrawn and changes to negative list apply from 1st April, 2015.

CVD ON IMPORTS INCREASED The levy of Education cess and Secondary and Higher Education cess on imported goods has been retained. Imported goods would also be subject to levy of higher rate of countervailing duty (CVD) equal to central Excise duty at 12.5% instead of the present rate of 12%.

EXCISE DUTY INCREASES, CESS DISAPPEARS! The standard basic Excise duty (BED) has increased from 12% to 12.5%. The concessional BED rate remains unchanged at #2% and @6%. Education cess and Secondary and Higher Education cess on all goods fully exempted. With subsuming of the Education Cess and Secondary and Higher Education Cess, assessees are now faced with a financially disadvantageous situation.

The credit of both these cesses lying unutilised will not be permitted to be utilised in the absence of any enabling provision permitting the utilisation of the said cesses for payment of Excise duty.

HYBRID HAPPINESS CONTINUES The exemption on specified goods for use in the manufacture of hybrid and electrically operated vehicles is extended by one more year up to 31 March 2016. Concessional Excise duty rate of 6% applicable to specified goods used in manufacture of electrically operated vehicles and hybrid vehicles has been extended up to 31 March 2016.

ALSO FOR THE ENVIRONMENT Clean energy cess on coal, peat and lignite has been increased from INR 100 per tonne to INR 200 per tonne.

STOP SMOKING! Basic Excise Duty on cigars and cheroots, cigarillos, cigarettes and tobacco substitutes has bn increased by 15% to 25%. The rate of national calamity contingency duty and health cess remains unchanged.

FOOT FETISH Basic Excise Duty rate has dropped from 12% to 6% for footwear priced at an MRP of more than Rs 1000.

RSP abatement on all kinds of footwear has been decreased from 35% to 25%.

SERVICE TAX INCREASED! The rate of Service tax increased from 12.36% to 14% (effective from date to be notified after enactment of the Bill.

The Government is empowered to impose a Swachh Bharat Cess as Service tax at a rate of 2% on the value of taxable services (effective from date to be notified after enactment of the Bill).

In respect of certain services where the service provider has been allowed to pay Service tax at an alternative rate subject to the conditions as prescribed, consequent to the upward revision in the Service tax rate, the said alternative rates shall also be revised proportionately (effective from date to be notified after enactment of the Bill).

NO LONGER IN THE SERVICE TAX NEGATIVE LIST Admission to entertainment events or access to amusement facilities (however, certain services like exhibition of cinema, sports events etc. are covered under exemption).

Services of contract manufacturing/job work for production of potable liquor.

All services provided by the government or local authority to a business entity, except the services that are specifically exempted, or covered by any another entry in the Negative list.

SERVICE TAX EXEMPTIONS WITHDRAWN Construction, erection, commissioning or installation of original works pertaining to an airport or port.

Services provided by a performing artist in folk or classical art form of (i)music; or (ii) dance; or (iii) theater, where amount charged is more than INR 0.1 million for a performance.

Exemption of construction, repair, maintenance, renovation or alteration service provided to the government, a local authority, or a governmental authority except (a) a historical monument, archaeological site, remains of national importance, archaeological excavation or antiquity; (b) canal, dam or other irrigation work; and (c) pipeline, conduit or plant for (i) water supply; (ii) water treatment; or (iii) sewerage treatment or disposal.

Exemption to transportation of food stuff by rail, vessels or road except transport of milk, salt and food grains including flours, rice and pulses.

Services provided by a mutual fund agent to a mutual fund or assets management company (AMC), distributor to a mutual fund or AMC, selling or marketing agent of lottery ticket to a distributor.

Services of intermediate production process of job work for potable alcoholic liquor (effective from a date to be notified after enactment of Bill).

Services by departmentally run public telephone, Guaranteed public telephone operating only local calls; Service by way of making telephone calls from free telephone at airport and hospital where no bill is issued.

Exemption to services provided by a commission agent located outside India to an exporter located in India is withdrawn with immediate effect due to its redundancy in light of the definition of intermediary under Place of Provision of Services Rules, 2012.

SERVICE TAX EXEMPTIONS EXTENDED Services provided by a common effluent treatment plant operator for treatment of effluent.

Pre-conditioning, pre-cooling, ripening, waxing, retail packing, labeling of fruits and vegetables.

Life insurance provided under Varishta Pension Bima Yojana.

Admission to a museum, zoo, national park, wild life sanctuary and a tiger reserve.

Exhibition of movie by the exhibitor (theatre owner) to the distributor or an association of persons consisting of such exhibitor as one of its members.

The scope of the exemption provided by way of transportation of a patient to and from a clinical establishment by a clinical establishment is widened to include all ambulance services.

The scope of exemption to goods transport agency service provided for transport of export goods by road is widened to exempt such services from the place of removal to a land customs station.

Services of (i) exhibition of cinematographic film, circus, dance, or theatrical performances including drama or ballet; (ii) recognized sporting events; or (iii) concerts, pageants, award functions, musical performances or any other sporting event where the consideration for such admission is up to INR 500 per person. These services are covered under exemption notification after being deleted from the negative list. (effective from date to be notified after the enactment of the Bill) REVERSE CHARGE MECHANISM: When Receiver of Service Pays (But that too has changed)

Service tax will be payable under full reverse charge on services provided by mutual fund agent or distributor to a mutual fund or asset management company.

Service tax will be payable under full reverse charge on services provided by selling or marketing agent of lottery tickets to a lottery distributor or selling agent.

Service tax will be payable under full reverse in respect of services provided by a person involving an aggregator in any manner (effective from 1 March 2015)

Service tax will be payable under full reverse charge on manpower supply and security services provided by an individual, HUF or partnership firm which was earlier payable under partial reverse charge.

Source: All data, charts, information is courtesy Khaitan. 

[menakadoshi]

GDRs: Enabling Depository Scheme, 2014! Budget 2015

The Finance Bill makes changes to the tax treatment of Depository Receipts after the Depository receipts Scheme, 2014 was notified in December . Analysis by various experts

Global depository receipts (GDRs) - Amendments relating to The Depository Receipts Scheme, 2014 have been notified by the Department of Economic affairs (DEA) vide Notification F.No.9/1/2013–ECB dated October 21, 2014. This scheme replaces ‘Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through depository receipt mechanism) Scheme, 1993’.

- Current taxation scheme of income arising in respect of depository receipts under the Income-tax Act is aligned with the earlier scheme which was limited to issue of Depository Receipts (DRs) based on the underlying shares of the company issued for this purpose (i.e. sponsored GDR) or FCCB of the issuing company and where the company was either a listed company or was to list simultaneously. Besides, the holder of such DRs was a non-resident only.

- In terms of the new scheme, DRs can be issued against the securities of listed, unlisted or private or public companies against underlying securities which can be debt instruments, shares or units. Further, both the sponsored issues and unsponsored deposits and acquisitions are permitted. DRs can be freely held and transferred by both residents and non-residents. (Source: JSA)

Recently, the Global Depository Receipts (GDR) scheme was liberalised and under the new scheme, new asset classes (such as debentures, mutual funds, etc.) were introduced, against which GDRs could be issued. Further, it also allows Indian unlisted companies to issue GDRs to raise capital and Indian resident investors to subscribe to GDRs. However there was no clarity on the taxation of the GDRs under this liberalised scheme.

The Bill proposes that the concessional rate of 10% for long term capital gains on transfer of GDRs (where the underlying security comprises of listed equity shares) will apply to all class of investors as specified under the liberalised scheme. Therefore, resident as well as non-resident investors will be taxed at the rate of 10% on sale of such GDRs. This benefit will not be available to GDRs with an underlying security not being listed equity shares.

Where such GDRs are transferred outside India by a non-resident investor to another non-resident, the same would continue to be exempt from tax.

This amendment is proposed to be made effective for FY 2015-16 and onwards. (Source: Khaitan)

[menakadoshi]

INDIRECT TRANSFERS: ‘Substantial’ defined! Budget 2015

The Vodafone related retroactive change in law relating to indirect transfers has been given some much needed clarity! But they apply prospectively…and some important details will only be available when the Rules are issued.

Analysis by various experts

Currently, the provisions of the Income Tax Act, 1961 (IT Act) provide that the capital gains earned on transfer of shares or interest in a foreign company which derive ‘substantial value’ from underlying Indian assets are liable to tax in India. These provisions were introduced by the Finance Act, 2012 by way of a retrospective amendment in order to negate the ruling of the Hon’ble Supreme Court of India (SC) in the Vodafone case.

The retrospectively active provisions were however beset with a number of uncertainties and ambiguities. In order to address this situation, the previous Government set up an Expert Committee chaired by Dr Shome to evaluate these provisions. The Expert Committee presented its report recommending several amendments to the law.

The present Government took cognisance of these recommendations of the Expert Committee and has accepted many of them. They intend to implement the recommendations by amending the IT Act itself and also by issuing circulars in the coming months. The Finance Bill, 2015 (the Bill) proposes to amend the provisions of the IT Act by providing the following:

􀂾 Definition of ‘substantial value’ – The share or interest of a foreign company or entity shall be deemed to derive its value substantially from Indian assets, if on the ‘specified date’, the value of Indian assets-

– exceeds INR 100 million; and

– represents at least 50% of the value of all the assets owned by the foreign company or entity.

􀂾 Value to mean ‘fair market value’ (FMV) – The value of an asset shall mean the FMV of such asset without reduction of any liabilities in relation to the asset. 􀂾 Specified date for valuation – The specified date for valuation shall be the last day of the accounting period of the foreign company immediately preceding the date of transfer (Cut Off Date). However, if the ‘book value’ of the assets of the foreign company on the date of transfer exceeds the ‘book value’ of the assets as on the Cut Off Date by 15% or more, then the Cut Off Date shall be the date of transfer itself.

􀂾 Manner of determination of FMV – The manner of determination of FMV of the Indian assets vis-a-vis global assets of the foreign company shall be prescribed in the IT Rules, 1962 (IT Rules).

􀂾 Gains to be taxed on a proportionate basis – If a foreign company or entity which substantially derives value from Indian assets has assets in places outside India as well, then the gains arising on transfer of shares or interest in such foreign company or entity shall be taxed in India only to the extent that they are reasonably attributable to the Indian assets.  However, the attribution principles are proposed to be provided in the IT Rules.

􀂾 Exemption to small shareholders and transfers in the course of foreign mergers and demergers 

– There would be no levy of Indian taxation in the following cases of indirect transfer of Indian assets:

– If the transferor, along with its related parties:

• does not hold the right of management or control; and

• holds less than or equal to 5% of the voting power and share capital, in the foreign company which holds the Indian assets directly and whose shares are being transferred (i.e., direct holding company). – In cases of transfer of shares/interest in a foreign company or entity which holds the Indian assets indirectly (i.e., indirect holding company) if the transferor, along with its related parties:

• does not hold the right of management or control in relation to the indirect holding company; and

• does not hold any rights in the indirect holding company which would entitle it to either exercise control or management of the direct holding company or entitle it to voting power exceeding 5% in the direct holding company.

– In cases of transfer of shares of a foreign company deriving substantial value from Indian assets in the course of merger of one foreign company into another, provided that the following conditions are satisfied:

• at least 25% of the shareholders of the merging foreign company continue to remain shareholders of the merged foreign company;and

• such transfer does not attract tax on capital gains in the country in which the merging company is incorporated. – In cases of transfer of shares of a foreign company deriving substantial value from Indian assets in the course of demerger of an undertaking from one foreign company into another, provided that the following conditions are satisfied:

• the shareholders, holding at least 3/4th in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company; and

• such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated.

􀂾 Reporting obligation on the Indian concern through which or in which the underlying Indian assets being transferred are held 

- Given that the indirect transfer of Indian assets usually takes place between two NRs and involves the shares of a foreign company, in order to ensure that the transactions are reported, an obligation shall be placed on the Indian entity to furnish information regarding the offshore transaction. Failure to do so shall be punishable with prescribed penalties.

The changes proposed by the Bill in the provisions relating to indirect transfer of Indian assets were much awaited, essential and extremely welcome. While greater clarity will come once the rules determining FMV, proportionality etc. are introduced, the proposed amendments have the potential to ameliorate most of the significant uncertainties associated with the law as it stands today. 

These amendments are proposed to be made effective from FY 2015-16 onwards. In view of the fact that the amendment in 2012 was made retrospective, these clarifications should also be made effective retrospectively so as to provide relief in case of all the transactions which would otherwise fall under the amended provision. Even by making these provisions applicable retrospectively, the Government would not jeopardise its position with regard to the ongoing arbitration with Vodafone. (Source: Khaitan)

 Finance Act, 2012 inserted certain clarificatory and retrospective amendments providing that any share or interest in a company or entity registered or incorporated outside India will be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

In order to give effect to the recommendations of the expert review committee constituted by the Government, following amendments are proposed in relation to indirect share transfer: - The share or interest of a foreign company or entity will be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of Indian assets exceeds the amount of INR 100 million and represents at least 50% of the value of all the assets owned by the company or entity.

- Value of an asset will mean the fair market value of such asset without reduction of any liabilities in respect of the asset.

- Specified date of valuation will be the date on which the accounting period of the company/entity ends preceding the date of transfer.

- The date of transfer will be the specified date of valuation if the book value of the assets of the company on the date of transfer exceeds the book value of the assets as on the last balance sheet date preceding the date of transfer, by at least 15%.

- The manner of determination of fair market value of the Indian assets vis-a-vis global assets of the foreign company will be prescribed in the Income-tax rules.

- Importantly, the taxation of gains arising on indirect share will be on a proportional basis to be provided in the Income-tax rules.

Exemption from the tax on indirect share transfer will be available to the transferor of a share or interest in a foreign entity, if the transferor along with its associated enterprises:

- neither holds the right of control or management in the foreign company or entity directly holding the Indian assets (i.e. immediate or direct holding company);

- nor holds voting power or share capital or interest exceeding 5% of the total voting power or total share capital in the foreign company or entity directly holding the Indian assets (i.e. immediate or direct holding company).

- In case the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly, exemption will be available to the transferor if the transferor along with its associated enterprises:

- neither holds the right of management or control in relation to such company or the entity;

- nor holds any rights in such company which would entitle it to either exercise control or management of the direct holding company or entity or entitle it to voting power exceeding 5% in the direct holding company or entity.

- Importantly, exemption will be available in respect of any transfer in a scheme of amalgamation of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company.

Similarly, exemption will be available in respect of any transfer in a demerger, of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company.

- Indian concern through or in which the Indian assets are held by the foreign company or the entity will be obligated to furnish information relating to the off-shore transaction having the effect of directly or indirectly modifying the ownership structure or control of the Indian company or entity.

- Please note that there is lack of clarity in relation to retrospective application of the indirect share transfer provision.

- These amendments will apply in relation to tax year 2015-16 beginning April 1, 2015 i.e. assessment year 2016-17 beginning April 1, 2016. (Source: JSA)

[menakadoshi]

BIG TRANSPORTERS IN TROUBLE? Small is beautiful! Budget 2015

Changes regarding withholding tax on payments made to transporters will impact big transporters.

 Analysis by various experts

Currently, tax is not required to be deducted under Section 194C on payments made to transporters if they furnish their PAN.

It is now proposed to provide this benefit only to small transporters who are engaged in the business of plying, hiring or leasing goods carriages not owning more than 10 goods carriages at any time during the previous year on furnishing of a declaration to this effect to the payer.

This amendment is effective from 1 June, 2015 (Source: SKP)

[menakadoshi]

AIFs: All Pass Through! Budget 2015

Great news for Category I & II funds!!

Analysis by various experts The AIF Regulations issued by the Securities and Exchange Board of India (SEBI)classifies AIFs under three broad categories. Under the existing tax regime, a tax pass through is available only to those Category I AIFs that are sub-categorised as ‘venture capital funds’. The Bill proposes to extend the benefit of a tax pass through status to all Category I and Category II AIFs.

Thus, going forward any income earned by an investor in a Category I or II AIF shall be chargeable to tax directly in the hands of the investor, as if such investor had directly made an investment in the underlying portfolio company.

However, at the time of distribution of such income to the investor, a withholding tax of 10% shall apply for which credit can be claimed by the investor. No tax shall be payable by the AIF on such income. The exception to this rule shall be a situation where the income earned by the Category I or II AIF is categorised as business or professional income or gain. For such income or gain, tax shall be payable by the AIF at the applicable rates in case the AIF is setup as a company or a limited liability partnership and at the maximum marginal rate in case the AIF is setup as a trust. However, in case this exception becomes applicable, no further tax would be payable by the investor upon receipt of such income from the AIF, and no withholding tax shall apply while distributing this income to the investors. 

The Bill also proposes to allow Category I and II AIFs to carry forward unutilised losses incurred by the AIF and set-off such losses against future income. However, such losses cannot be passed on to the investors. These measures are intended to accord single layer of taxation for investment in Category I and II AIFs.

Further, in order to place corporate and non-corporate AIFs at par, the Bill proposes that no dividend distribution tax or tax on buy back of shares shall be payable by Category I and II AIFs when distributing income to its investors. Another important relief that has been promised is that in the coming days, the IT Rules shall be amended such that no tax need be deducted at source by the portfolio company when making a payment to an AIF. Given the challenges faced by investors in the past in claiming a tax credit for taxes withheld at the portfolio company level, this move is most welcome, since it eliminates a major irritant for investors. One, however, hopes that this relief is extended to all categories of AIFs. These amendments are proposed to be made effective for FY 2015-16 and onwards. (Source: Khaitan)

· In a welcome move, with effect from fiscal 2015-16, Budget 2015 proposes to extend the tax pass through status to all sub-categories of Category I AIFs and all Category II AIFs. By virtue of a tax pass through status, the investment funds (as Budget 2015 refers to them) will be exempt from tax on qualifying income; instead, the investors in the investment fund will be liable to tax in the like manner and to the same extent as they would be liable to tax, if they were to implement underlying investments directly. 

· Thus, in addition to VCFs / VCCs which presently enjoy tax pass through status, investment funds which are established as (a) SME funds, social venture funds, infrastructure funds, etc and (b) private equity funds and debt funds which do not fall in Category I and III AIFs and which do not procure borrowings, are now proposed to be exempted from tax at the investment fund level. · Category III AIFs are not covered by this proposal and will continue to be liable to tax per the general provisions of the domestic law, depending on how such Category III AIFs are constituted. · The following specifics in relation to the above proposal are noteworthy: - Budget 2015 indicates that all income of the investment fund, except Business Income will be governed by the tax pass through status. Business income earned by investment funds will not be entitled to the tax pass through status (to the extent of such business income) and will be liable to tax in the hands of the investment fund at applicable tax rates (if the investment fund is a company or a limited liability partnership) and, otherwise, at the maximum marginal rate; - The proposal recognises that such investment funds may also be set up as limited liability partnerships and extends the tax pass through status to them as well; - A subsequent distribution of Business Income (which has been taxed at the investment fund level) would be exempt from tax in the hands of the recipient investors; - A dispensation from the obligation to withhold tax is proposed to be provided to parties who are responsible for making payments to the investment funds by notifying the investment funds under section 197A(1F). In its place, the investment fund will be required to deduct tax at source at 10 percent from the distribution of income which is liable to tax in the hands of the investors (ie, income other than Business Income); - Income of an investment fund tends to predominantly be in the nature of Capital Gains; regular income such as dividend and interest tend to be smaller components. To the extent that an AIF has resident investors, income in the form of Capital Gains would ordinarily not have suffered withholding tax; such resident investors will need to claim credit for tax deducted at source by the investment fund against their respective tax liability. Moreover, Budget 2015 proposes to allow foreign investors into AIFs. Where such non-resident investors are entitled to an exemption from taxability of Capital Gains pursuant to the applicable tax treaty, this withholding tax requirement may result in a liquidity concern for the foreign investor. Such taxpayers will need to claim a refund / credit for tax deducted at source by the investment fund in their respective tax returns. Finally, to the extent that dividend income is distributed by the investment fund, such dividend will also suffer a 10 percent withholding, although dividend is exempt in the hands of the recipient shareholders, if the distributing Indian company has paid dividend distribution tax; - If the investment fund suffers a loss in a particular financial year or has unabsorbed brought forward loss, such loss will not be allowed to be passed on to the investors but will be carried forward at the investment fund level for set-off against future income; please refer to the illustrations below for a better understanding; - Provisions pertaining to dividend distribution tax and tax on distributed income shall not apply to distributions made by an investment fund to its investors; - From a disclosure perspective, the investment funds will be required to file income-tax returns irrespective of whether they earn income which is taxable at the investment fund level or not. The investment fund will also be required to furnish various details to its investors and the prescribed income-tax authority; (Source: BMR)

[menakadoshi]

FOREIGN BANK BRANCHES: Good News & Bad News! Budget 2015

Finally some clarity but leading to negative news

Analysis by various experts Currentlythere are opposite views on the taxability of interest payment by a branch of aforeign bank in India to its head office or other Permanent Establishments outside India.

In order to clarify this it is proposed that the interest payable by the Indian branch, engaged in the business of banking with its head office or other offices outside India, would be taxable in India and would attract withholding tax provisions. (Source: JSA)

Currently, in case of a foreign banking company eligible to claim the benefits of a tax treaty entered into between India and its country of residence, the interest paid by its Indian branch (which is its PE in India) to its foreign head office and other branches is allowed as a deduction treating such branch as an independent enterprise. Further, the tax administration, i.e., the Central Board of Direct Taxes (CBDT) had issued a circular clarifying that a branch of a foreign company in India is a separate entity for the purpose of taxation under the IT Act and thus tax would need to be withheld as per the applicable law on payment of interest to the head office or other branches of the NR.

However, the courts have, in certain cases disregarded the above mentioned circular and held that though the interest paid is not taxable in India in the hands of the foreign bank since it is a payment received from itself - branch is not a separate entity- such interest is deductible to the branch while computing its taxable income. This is because of the application of the computation mechanism provided under the relevant tax treaty.

This is seen as the erosion of tax base and in order to address the same being created by such an interpretation, the Bill proposes to amend the IT Act to inter alia provide that such interest payments shall be subject to a withholding tax in India.

This amendment is proposed to be made effective for FY 2015-16 and onwards. (Source: Khaitan)

[menakadoshi]

REITs & InvITs: Ready For Takeoff! Budget 2015

Budget 2015 offers REITs & InvITS tax relief, but there's sill some confusion says BMR, though I’m not quite clear what it is about. Yesterday EY’s Pranav Sayta indicated that MAT will apply to REITs& InvITs as well! Will find out more about this through the week… Analysis By various experts  The Budget…amends the taxation framework for Real Estate Investment Trusts (“REITs”) but still leaves a number of critical stakeholder concerns un-addressed…(this BMR note doesn’t specify what they are)

The taxation framework for REITs was first introduced in Budget 2014. This framework envisaged a deferral of tax on capital gains arising to Sponsor on transfer of shares of an asset holding SPV to the REIT in exchange for units of the REIT until the disposal of the relevant REIT units. It is now proposed to exempt such capital gains from tax if the aggregate holding period of the units and the exchanged shares is more than 36 months, and securities transaction tax is paid on the sale of the REIT units; if the aggregate holding period is 36 months or less, and securities transaction tax is paid on the sale of the REIT units, the capital gains would be taxable at 15 percent, plus applicable surcharge and cess. · Further, under the earlier framework, any interest income received by a REIT was taxable for the unit-holders, while all other income was taxable at the REIT level. It is proposed to expand the pass-through framework by providing that any rental income earned by the REIT from directly-owned assets will also be taxed in the hands of the unit-holders. The rental income received by the REIT will be exempted from withholding tax; such distributions by the REIT will be liable to withholding tax at the following rates:

 Taxpayer                                                            Withholding tax rate (plus                                                                                                surcharge & cess)

Resident                                                              10 percent

Non-resident (other than a company)  30 percent

Foreign company                                           40 percent (Source: BMR)

The deferral of capital gains provided to the sponsor of business trust places such a sponsor at a disadvantageous tax position as compared to a direct listing of the shares of the real estate special purpose vehicle (“SPV”).

- In case, the sponsor holding the shares of the SPV decides to exit through the Initial Public Offer  (“IPO”) route, then the benefit of concessional tax regime relating to capital gains arising on transfer of shares subject to levy of securities transaction tax (“STT”) is available.

- Income-tax on short term capital gains (“STCG”) in such cases is levied at 15% (plus applicable surcharge and education cess) and the long term capital gain (“LTCG”) is exempt from tax.

However, the benefit of concessional regime is not available to the sponsor at the time it offloads units of business trust acquired through initial offer at the time of listing of business trust on stock exchange in exchange of its shareholding in the SPV. Proposed changes in tax regime for the sponsor (developer) of REIT

- It is proposed that the sponsor will get the same tax treatment on the sale of units acquired under an initial offer on listing of units as available in case of sale of shares through an IPO. - STT will be levied at 0.2% of the transaction value on the sale of such units of business trust which were acquired under an initial offer at the time of listing of units of business trust in exchange for the shares held in SPV.

- Benefit of concessional tax on STCG at 15% (plus applicable surcharge and education cess) and exemption on LTCG will be available to the sponsor on sale of units received in exchange for the shares of SPV subject to levy of STT.

- These amendments will take effect from the tax year 2015-16 beginning April 1, 2015 i.e. assessment year 2016-17 beginning April 1, 2016.

Constraints faced by the Business trust/REIT in the existing tax regime

- In case of business trust/REITs, a major portion of the income is in the nature of rental income arising from the assets held directly by REIT or held through an SPV.

- Rental income earned by the asset owning SPV is reflected in the interest or dividend income earned by the REIT from SPV. However, the rental income directly received by the REIT is taxable at REIT level and does not get pass through benefit.

Proposed changes in tax regime for the sponsor (developer) of REIT

- In order to provide pass through to the rental income arising to REIT from real estate property directly held by it, it is proposed that any income of a business trust/REIT by way of renting or leasing or letting out will be exempt.

- Income distributed by REIT and received by a unitholder in the nature of income from renting or leasing or letting out any real estate asset owned directly by the REIT will be deemed to be income of such unit holder and will be charged to tax.

- REIT will withhold tax on rental income allowed to be passed through at 10% in the case of resident unitholder and at rates in force as applicable for tax withholding on payment to the non-resident of any sum chargeable to tax India in case of non-resident unit holder.

- No tax withholding will be required from rental income paid or credited to a business trust/REIT in respect of any real estate asset held directly by such REIT.

- These amendments will take effect from the tax year 2015-16 beginning April 1, 2015 i.e. assessment year 2016-17 beginning April 1, 2016. (Source: JSA)

[menakadoshi]

FUND MANAGERS: Welcome To India & Its Many Conditions! Budget 2015

Good news but over a dozen criteria for funds & fund managers to meet!

Analysis by various experts

· In order to promote India as a fund manager jurisdiction and to encourage offshore funds to appoint India-based fund managers, a specific regime has been proposed in line with international best practices, subject to fulfillment of certain conditions by the offshore funds and the India based fund manager: - The tax liability in respect of income arising to the offshore fund from investment in India would be neutral to the fact as to the whether the investment in made directly by the fund or through engagement of a fund manager located in India; and - The income of the fund from investment outside India would not be taxable in India solely on the basis of the arrangement that the fund has with the India based fund manager. · The amendment is being made effective from fiscal year 2015-16. · The offshore fund shall be required to fulfill the following conditions during the relevant year for being an eligible investment fund: - The fund is not a person resident in India;

- The fund is a resident of a country or a specified territory with which an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A has been entered into; - The aggregate participation or investment in the fund, directly or indirectly, by persons being resident in India does not exceed 5 percent of the corpus of the fund; - The fund and its activities are subject to applicable investor protection regulations in the country or specified territory where it is established or incorporated or is a resident; 

- The fund has a minimum of 25 members who are, directly or indirectly, not connected persons;

- Any member of the fund along with connected persons shall not have any participation interest, directly or indirectly, in the fund exceeding 10 percent;

- The aggregate participation interest, directly or indirectly, of 10 or less members along with their connected persons in the fund, shall be less than 50 percent;

- The investment by the fund in an entity shall not exceed 20 percent of the corpus of the fund; 

- No investment shall be made by the fund in its associate entity;

- The monthly average of the corpus of the fund shall not be less than INR 1 bn (approximately USD 17 mn) and if the fund has been established or incorporated in the previous year, the corpus of fund shall not be less INR 1 bn (approximately USD 17 mn) at the end of such previous year;

- The fund shall not carry on or control and manage, directly or indirectly, any business in India or from India;

- The fund is neither engaged in any activity which constitutes a business connection in India nor has any person acting on its behalf whose activities constitute a business connection in India other than the activities undertaken by the eligible fund manager on its behalf; and

- The remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken on its behalf is not less than the arm’s length price of such activity. · The following conditions shall be required to be satisfied by the person being the fund manager for being an eligible fund manager:

- The person is not an employee of the eligible investment fund or a connected person of the fund;

- The person is registered as a fund manager or investment advisor in accordance with the ‘specified regulations’;

- The person is acting in the ordinary course of his business as a fund manager; and

- The person along with his connected persons shall not be entitled, directly or indirectly, to more than 20 percent of the profits accruing or arising to the fund from the transactions carried out by the fund through such fund manager. · For the purpose of the above, ‘specified regulations’ is defined to mean the SEBI (Portfolio Managers) Regulations, 1993 or the SEBI (Investment Advisers) Regulations, 2013, or such other regulations made under the SEBI Act, 1992 which may be notified by the Central Government for the purpose of this section. · Separately, from a disclosure perspective, the fund will be required to furnish prescribed information in a prescribed form indicating the satisfaction of the aforementioned eligibility criteria, within 90 days from the end of the relevant financial year. Failure to furnish such information will entail a penalty of INR 500,000 on the overseas fund. (Source: BMR)

At present, under the provisions of the IT Act, income earned by a non-resident through or from any ‘business connection’ in India is deemed to be sourced in India and is liable to tax in India. 

The concept of ‘business connection’ while similar in some ways to the concept of PE in tax treaties, is in effect a term of much wider import.

If the presence of the fund manager results in a PE being constituted in India as per the terms of the tax treaty or alternatively a ‘business connection’ in India as per the terms of the IT Act, it would potentially expose the income/a larger part of the income of the offshore fund to taxation in India. Thus, care was taken by offshore funds to ensure that their fund managers were located outside India. This resulted in brain drain from India.

In order to ensure that the off-shore funds are incentivised to locate their fund managers in India, the Bill proposes to amend the law to provide that the activities of an ‘eligible fund manager’ (Manager) in the ordinary course of its business for an offshore non-resident investment fund (Fund) shall not constitute the Fund’s ‘business connection’ in India provided that the following conditions are satisfied:

􀂾 The Fund has at least 25 investors who are not connected persons;

􀂾 The Fund is resident in a country with which India has entered into a tax treaty including tax information exchange treaty;

􀂾 The aggregate Indian participation in the Fund (direct as well as indirect) does not exceed 5% of its corpus;

􀂾 The Fund is subject to applicable investor protection regulations in its home country;

􀂾 No single investor (along with connected persons) has a participation interest in the Fund in excess of 10%;

􀂾 The participation of 10 or less investors in the Fund (along with their connected persons) is less than 50%;

􀂾 The investment by the Fund in a single Indian entity shall not be in excess of 20% of its corpus;

􀂾 The Fund shall not make any investment in its associate entities;

􀂾 The monthly average corpus of the Fund shall not be less than INR 1 billion (approx. USD 16 million) and if it has been established in a given FY, its corpus shall not be less than INR 1 billion at the end of such year;

􀂾 The Fund shall not carry on or control and manage, directly or indirectly, any business in India or from India;

􀂾 The Fund does not engage in any other activity which constitutes its ‘business connection’ in India apart from the activities of its Manager;

􀂾 The Fund pays remuneration to its Manager on an arm’s-length basis;

􀂾 The Manager is not an employee or connected person of the Fund;

􀂾 The Manager is registered as a fund manager or an investment advisor in accordance with the applicable SEBI regulations; and

􀂾 The Manager (along with its connected persons) shall not be entitled to more than 20% of the profits of the Fund from the transactions carried out by the Fund through the Manager.

The proposed exclusion of the activities of a Manager from the ambit of ‘business connection’ is a welcome step and will incentivise relocation of Managers. Such a shift will be mutually beneficial for both the Indian economy as well as the Funds.

This amendment is proposed to be made effective for FY 2015-16 and onwards. (Source: Khaitan)