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April 2016

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India Budget Series

TAX BENEFITS UNDER RUPEE DENOMINATED BOND

In order to provide relief to the non-resident investor, it is proposed to amend Section 48 to exempt capital gains, in the hands of non-resident investor, arising in case of appreciation of the Indian Rupee between the date of issue and date of redemption against the foreign currency.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years

India Budget Series

TAX BENEFITS UNDER SOVEREIGN GOLD BOND SCHEME, 2015

The Sovereign Gold Bond Scheme was introduced with the dual intention of providing security as well as fulfilling a social obligation.

It is proposed that redemption of a Sovereign Gold Bond under the said Scheme by an individual shall not be considered as a transfer and shall be exempt from capital gains tax.

It is proposed to provide that indexation benefits in case of long term capital gains arising on transfer of sovereign gold bonds (from one person to another) issued under the Scheme.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years

India Budget Series

AMENDMENT OF SECTION 54GB

As per the existing provisions of Section 54GB, long term capital gains are exempted on account of transfer of residential property, if the proceeds are invested in subscription of shares of a MSME company, subject to other conditions specified therein

It is proposed to amend Section 54GB so as to widen the scope of exemption, which is as follows:-

– Long term capital gains arising on account of transfer of residential property shall be exempt in the hands of individual or HUF if proceeds are invested in subscription of shares of aforementioned eligible start-ups

The exemption shall be available only if individual or HUF holds more than 50% of shares of such start-ups and the start-ups shall utilise the invested funds to purchase new asset before the due date of filing of return of the investor

– New asset shall include computers or computer software in case the start-up is technology driven start-up as certified by Inter Ministerial Board of Certification, notified by Central Government

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years

India Budget Series

INSERTION OF NEW SECTION 54EE

In order to promote the Start-up India Action Plan with the intention to raise Rs.10,000 crores, in a span of 4 years, in order to finance start-ups through a specified Fund, the department has introduced a new Section on the same lines of Section 54EC. The provisions of the new Section are as follows:-

-Long term capital gains on any assets shall be exempt if proceeds are invested in units of specified Fund

-Investment shall be made within 6 months from date of transfer

-Lock-in period of investment shall be 3 years; however, if the amount is withdrawn before the expiry of 3 years, exemption erstwhile provided shall be revoked.

-Further, even if loan or advance is taken against the security of this investment, it shall be deemed that the said investments are transferred

-Maximum limit of investment shall be Rs.50 lakhs

The provisions are exactly similar to Sec 54EC except that the instrument for investment is different.

India Budget Series

APPLICABILITY OF MAT ON FOREIGN COMPANIES FOR THE PERIOD PRIOR TO 01.04.2015

Under the existing provisions of Section 115JB, if tax payable under the Income Tax Act is lower than 18.5% of the book profits, then such assessee shall be liable to pay taxes at the rate of 18.5% of the book profits.

There were issues whether the above provisions shall be applicable to Foreign Institutional Investors who do not have Permanent Establishment (PE) in India

The Finance Act, 2015 sought to amend this position, however the same was done only with prospective effect i.e. from A Y 2016-17.

It is proposed that with effect from 01.04.2001, the provisions of MAT shall not apply to a Foreign Company if either of the following conditions is satisfied:

-The foreign company is a resident of a country with which India has a valid DTAA and the foreign company does not have a PE in India pursuant to the said DTAA; or

-The foreign company is a resident of a country with which India does not have a valid DTAA and foreign company is not required to seek registration under any law for the time being in force in relation to companies.

 

India Budget Series

TAX INCENTIVES TO INTERNATIONAL FINANCIAL SERVICES CENTRE

In order to provide a fill-up to the growth of International Financial Services Centre, following proposals are made:-

-Capital gains arising from transaction undertaken in foreign currency on recognised stock exchange located in the International Financial Services Centre (IFSC) shall be exempt from tax even when STT is not paid in respect of such transactions.

-In case of company, located in IFSC and deriving its income solely in convertible foreign exchange, MAT shall be chargeable at the rate of 9% instead of 18.5%

-Dividend Distribution Tax shall not be applicable in respect of profits distributed as dividends by a Company located in IFSC and deriving its income solely in convertible foreign exchange out of its current income on or after 01.04.2017

– Further, no tax shall be levied on receipt of dividends by the shareholders from a Company located in IFSC

The above amendments shall be applicable from 1st April, 2017 and shall accordingly apply in relation to AY 2017-18 and subsequent years.

-In order to provide further impetus to IFSC, it is proposed that no Securities Transaction Tax (STT) or Commodities Transaction Tax (CTT) shall be levied on taxable securities or commodities transactions entered by any person on a recognised stock exchange located in IFSC wherein the consideration is in foreign currency

The above amendment shall be applicable from 1stJune,2016

India Budget Series

MODIFICATION OF CONDITIONS FOR OFF SHORE FUNDS

 

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In the above case, the investors invest in an offshore fund that is located outside India.

The fund, in turn, appoints a consultant outside India. Further, consultant, in turn, from its office outside India, appoints a fund manager in India to take care of its Indian Portfolio.

In this case, if the fund is an eligible investment fund, the fund management activity carried out through the eligible fund manager, shall not constitute a business connection in India.

The following core criterias needs to be satisfied for a fund to qualify as an eligible investment fund:

-The fund is not a person resident in India

– Fund is located in the country with whom India has a valid DTAA

– Resident Investor participation in the fund shall not exceed 5% of the Total Fund Amount

– The fund shall have a minimum of 25 members

– A single member’s investment shall not exceed 10% of the total fund value.

It is proposed to expand the criteria to include that a fund shall be regarded as to be Eligible Investment Fund if the fund is established or incorporated or registered outside India in a country or a specified territory notified by the Central Government in this behalf.

It is further proposed that the condition of fund not controlling and managing businesses in India or from India shall be restricted only in context of activities in India and not from India

 

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These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years

 

India Budget Series

TAXATION OF BUY BACK OF SHARES

It is proposed to amend Section 115QA to provide for:

-taxation of distributed income in case of buy back of shares by an unlisted company under any law relating to companies (currently it refers to only Companies Act 1956) and

-providing clarity on the method of determination of consideration received by the company at the time of issue of shares (including cases where shares are allotted for consideration other than cash)

Hence, buyback transactions, where the original allotments were made for consideration other than shares, like sweat equity, merger consideration, etc. would possibly be covered under this proposed rules.

The amendment is effective from 1st June 2016

India Budget Series

AMORTISATION OF SPECTRUM FEE FOR PURCHASE OF SPECTRUM

Territory of India is not limited to land and sea but it includes air as well. There is a levy of Spectrum fee for auction of air waves. There are uncertainties in tax treatments in relation to payments in respect of Spectrum.

In order to provide clarity and avoid any future litigation and controversy, it is proposed to insert a new Section 35ABA in the Act to provide for tax treatment of spectrum fee.

The proposed new Section 35ABA shall function on same lining as that of Section 35ABB which is in relation to “license to operate telecommunication business”, in respect of:-

-Deduction of capital expenditure

-Taxability at the time of transfer of spectrum

-Taxability of excess amount and ineligible expenses at the time of transfer

– A scheme of amalgamation

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

India Budget Series

TAXATION OF NON-COMPETE FEES AND EXCLUSIVITY RIGHTS IN CASE OF PROFESSION

Under the existing provisions of the Income Tax Act, there are provisions in relation to taxation of non-compete fees and exclusivity rights in relation to Business but there are no such provisions in relation to Profession.

Thus, it is proposed to make the following considerations:-

-Non-compete fees received/receivable, recurring in nature, in relation to not carrying out profession shall be taxed as “Profits and Gains of Profession”

-Capital receipts on transfer of rights to carry profession, shall be taxable under the head “Capital Gains” and not as “Profits and Gains of Profession”

-Further, the cost of acquisition and cost of improvement for calculating capital gains on account of transfer of rights to carry profession, shall be taken as ‘nil’

Non-compete fees in case of business shall be taxed as business income and not as capital gains.

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

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