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DVS Research Foundation (DRF) is the CSR initiative of DVS Advisors LLP. DRF was set up as a virtual foundation for intellectual interactions and has more than 1600 members from 20+ countries. Our members span across diverse professional backgrounds including Academicians, Chartered Accountants, Lawyers, Bankers, Business owners (across sizes), Bureaucrats and Public representatives. Since inception we have conducted more than 300 programs on topics from Constitution, Economy, Taxation, Banking, Legal, Public policy and Global finance to name a few.

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India Budget Series

CLARIFICATION REGARDING DEFINITION OF THE TERM ‘UNLISTED SECURITIES’

Under the existing provisions of Section 112, long term capital gains arising from transfer of securities, whether listed or unlisted, shall be taxed at the rate of 10%. There was an ambiguity as to whether shares of a private company are “securities” for the purpose of this Section.

It is hereby proposed to clarify that long-term capital gains arising from the transfer of shares of a private company shall be chargeable to tax at the rate of 10 per cent.

The amendment shall apply in relation to assessment year 2017-18 and subsequent years.

India Budget Series

RATIONALISATION OF SECTION 56

The current provisions of Section 56 (2) (vii) provides for taxation of shares of company received by individual or HUF, as a consequence of demerger or amalgamation of company, in excess of Rs. 50,000. However, the taxation provision does not apply if the recipient is firm or company.

Thus, to ensure parity in tax treatment, it is proposed that any shares of company received by individual or HUF, as a consequence of demerger or amalgamation of company, shall not be liable for taxation as per Section 56 (2) (vii).

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 TREATMENT OF GOLD MONETISATION SCHEME, 2015

Under the existing scheme of Gold Deposit Scheme, 1999, interest on gold deposit bonds is exempt from tax. Further, these bonds are excluded from the definition of transfer and hence, shall be exempt from capital gains tax.

It is proposed to extend the benefits envisaged in Gold Deposit Scheme, 1999 to Gold Monetization Scheme, 2015.

Thus, interest on deposit certificates issued under Gold Monetization Scheme, 2015 shall be exempt from tax. Further, these deposit certificates shall be excluded from the definition of transfer and hence, shall be exempt from tax on capital gains.

This amendment will take effect retrospectively from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years

India Budget Series

TAXATION ON WINDING UP/ CONVERSION OF CHARITABLE TRUST

The existing provisions of Section 11, 12 & 13 provides for taxation of income derived from an asset or voluntary contribution of a Charitable Trust, exemption of income if the same is applied for charitable purpose, accumulation and investment in prescribed modes for claiming exemption, etc. However, there are no provisions in relation to exit of charitable organization or transfer of assets by charitable organization to non-charitable organizations on its dissolution. This can be misused for the Trusts by transferring the assets acquired from the exempted income over the years to a non charitable institution without payment of tax.

Finance Bill, 2016 proposes to introduce a new Chapter to provide for levy of additional income-tax in case of conversion of charitable institutions into, or merger with, non-charitable organisation or on transfer of assets.

The new regime provides for taxation of accreted income in the following circumstances:

– Conversion of trust or institution into a form not eligible for registration under Section 12 AA

– Merger of charitable trust or institution with an entity other not having similar objects and registered under Section 12 AA

– Non distribution of assets on dissolution to any charitable institution registered under Section 12AA or approved under Section 10 (23C) within a period of 12 months from dissolution

– Accreted income shall be taxed at maximum marginal rate of 30%

– Accreted income = Total assets less Total liabilities (excluding the assets and liabilities transferred by trusts to other charitable organisations within 12 months of dissolution).

 

The intent of the proposed levy is laudable however the following practical concerns may need to be addressed:

  • Many state laws provide for takeover of charitable trusts ceasing to be charitable.
  • Taxing assets at fair value could lead to serious cash outs and consequential litigations

The above mentioned amendments shall be effective from 1st June 2016

 

 

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

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