Harsha Rawal (Director) & Richa Savla (Deputy Manager), Deloitte Haskins & Sells LLP Budget proposals for infrastructure sector - A big thumbs up! With the Union Budget 2016, the Indian Government has walked the talk. The Government has long maintained that robust infrastructure is needed for the growth and development of India. Keeping in line with this belief, the Budget has named infrastructure as one of its nine pillars and provided the necessary impetus with total outlay of INR  2,21,246 Crore. The Budget has taken due cognizance of the recommendations of the Easwar Committee, bold steps towards reforming the tax provisions with phasing out of exemptions and clarifying positions. Profit-linked tax holiday under section 80IA for development and operation of infrastructure facilities such as road, port, airport, irrigation project, etc. will be available only if the development or operation starts before 1 April 2017. However, a 100% deduction for capital expenditure will be available under section 35AD if such companies commence operations from 1 April 2017 onwards. This takes us back to the Direct Tax Code which proposed investment-linked incentives instead of profit-linked. For example, if a company invests 100 on capital expenditure and earns profits of 101, only the profit of 1 after recovery of capital expenditure will be taxable. For power sector, 80IA tax holiday already has a sunset clause and it is unclear why this sector has not been included in section 35AD. Further, depreciation which was currently availed by solar and wind projects at 80% will be restricted to 40% - the budget has proposed to limit accelerated depreciation that can be claimed under the Act to 40%. On a positive note, additional depreciation of 20% has been extended to transmission of power as well which was currently available for generation and distribution. The infrastructure investment trust models were introduced but did not become popular owing to tax inefficiency in repatriation of money from SPVs to investors. In this regard, the Budget has proposed an exemption from dividend distribution tax on income distributed by wholly-owned SPVs to the trust. Further, based on sections 10(23FC) and 10(23FD), such dividend income should be exempt in hands of the trust and the investors as well. In case of oil and gas sector, in order to encourage foreign participation in the cost of filling of the facility and encourage storage of oil, the storage and sale of crude oil has been exempted from tax in India. This positive amendment has taken place with retrospective effect from 1 April 2016. Further, the current tax holiday in case of undertakings engaged in production of mineral oil and natural gas has been terminated with a sunset date of 31 March 2017. Further, in relation to mining, while a Special Notified Zone had been created to promote India as a hub for diamond trading by global companies and reduce the costs of travel for purchase of raw materials by Indian diamond manufacturers, it was feared that the limited activity of mere display of diamonds even without actual sale may lead to a business connection and potential taxation. To allay such fears, it has been specifically provided that the mere activity of display without any trading or sorting of diamonds would not lead to a business connection in India. This amendment is also retrospective in its effect from 1 April 2016. Sunset dates have also been announced for tax holidays i.e. 1 April 2017 for Special Economic Zone (SEZ) development and 1 April 2021 for SEZ units. The phasing out of holiday for SEZs may not be too disappointing since SEZs have been languishing for long. Many other boosters were announced. In order to encourage employment, the Government has extended the deduction for employee cost under section 80JJA to all sectors. The section has been further tweaked to permit 30% deduction of additional cost of new employees over a period of three years and is subject to different conditions. Provisions for rationalisation of section 14A disallowance, rationalisation of penalty, settlement of disputes, digitisation of processes were also announced. The Government has been making multi-faceted efforts to continue India's growth story amid a bleak global backdrop - liberalisation of foreign investment norms, new policies for efficient utilisation of resources, simplification of regulations and now, a step towards a simplified and straightforward tax regime. Big cheer for the Government!

Sagar Wagh (Senior Consultant), EY India
International tax proposals in Budget 2016 - India's 'Digital Tax' googly!

The Indian budget 2016 has proposed several changes on international tax front. Majority of these proposals are outcome of the discussions or recommendations of OECD Base Erosion and Profit Shifting Project.

Inspired by the discussions on BEPS Action 1 Taxation of digital economy, the finance bill has introduced a new levy called 'equalisation levy' ('levy'). The levy is proposed by the way of separate Chapter VIII in Finance Bill, 2016 and does not form part of income tax proposals. Hence, the levy provisions will not form part of Income Tax Act, 1961.

The levy will be applicable from date of notification in official gazette and will not extend to state of Jammu and Kashmir.

The levy will be the tax leviable at the rate of 6% on the consideration received by
non-resident taxpayer from Indian tax resident or non-resident having permanent establishment (PE) in India in respect of provision of services in nature of online advertisement, any provision for digital advertising space, any other facility or service for the purpose of online advertisement.

The intent of the provisions is to levy tax on the income earned by non-residents from providing digital advertising space for advertising Indian business of a taxpayer. The provision is similar to tax on digital transactions introduced by Italy[1].

The Indian tax resident or PE (i.e. service recipient) is under obligation to deduct the levy while paying the consideration to non-resident service provider. In case of failure of service recipient to deduct tax, the tax authorities cannot send notices or penalise the non-resident service provider. Therefore, in case, there is failure of service recipient in India to deduct tax while making payment to non-resident service provider, the service recipient has to bear the levy on its own account. Further, failure to deduct or deposit levy or delay in depositing the same would attract both interest and penalty on part of payer. The service recipient would be allowed to avail deduction in respect of payment made to service provider only on deduction and payment of levy to government.

In following cases, the levy would not be payable:

• Service provider non-resident has PE in India and specified service if effectively connected to PE - as in this case, the tax would be payable by PE on its income earned in India at a higher rate of 40% on its net income, the levy would not be applicable.
• Aggregate amount of consideration received by  non-resident does not exceed
  INR 1 lac - this is to exempt small taxpayers and individuals from burden of levy
• Services is not utilised by payer for the purposes of carrying out the business  or profession in India - Nexus rule which requires the services to be utilised by service recipient for its business in India

It is important to note that, the equalisation levy does not fall under the purview of section 5 r.w. Section 9 of Income tax act, 1961. The Chapter VIII of Finance Bill, 2016 does not provide that, services are deemed to be provided from India. The only territorial nexus which it provides for is that, services should be utilised for business and profession carried on India. Hence, whether such chapter VIII is extraterritorial in nature and may invite constitutional challenge in near future is something to look out for.

The government has provided for assessment and dispute resolution mechanism in respect of equalisation levy.

The income received by service provider on which the levy has been imposed will exempt from Indian income tax. It is unclear as to whether the non-resident service provider will be able to avail foreign tax credit/exemption by virtue of tax treaty benefits in respect of the levy paid withheld by payer in India which is not the tax levied under Indian income tax statute. However, it needs to be examined whether such levy can fall under the purview of the term 'identical or substantially similar taxes' given by Article 2 Taxes Covered of certain treaties so as to avail tax treaty benefits.

One of the most welcome proposals in Finance Bill, 2016 is in respect of introduction of patent box regime. Similar regimes have been introduced by several countries. The proposed regime is applicable only to tax resident in India which receives royalty income in respect of a patent developed and registered in India.

Further, such patentee should be true and first inventor of the invention whose name is entered into patent register as patentee accordance with Patent's Act.

As per proposed regime, the royalty income on worldwide exploitation of patents would be taxable in hands of Indian tax resident being patent owner at the concessional tax rate of 10%. However, such concessional rate will not be applicable to consideration earned by tax resident in India which is in nature of capital gains or which emanates from sale proceeds of patented articles or products manufactured with the use of patented process.

It is important to note that, in case, the tax treaty between India and the country from where royalty payment is received provides for the withholding tax rate on royalty higher than 10% then, the effective tax rate for Indian tax resident would be higher on account of unavailability of the credit on incremental tax paid in foreign country.

Further, the patent box regime would be exempt from rigours of minimum alternate tax (MAT) regime under section 115JB of the Act. However, no deduction will be available to the Indian tax resident on the royalty income on which the benefit of the concessional rate of tax is availed under patent box regime.

The proposed amendment in respect of section 206AA is the silver lining for non-resident taxpayers. As of now, a penal rate of 20% is applied as withholding tax on payments made to non-resident taxpayers who do not have Permanent Account Number (PAN) for Indian tax purposes. There have been disputes wherein the taxpayers have argued that, penal rate under domestic law should not override the favourable withholding tax rate prescribed by tax treaties. As per new proposal, the penal rate of 20% will not be applicable in case the foreign company provides certain prescribed documents and fulfils certain conditions. The prescribed documents and conditions will be provided by the Indian government in due course. It is important that, government prescribes such conditions and documents which are compliance friendly for taxpayers.

The Budget 2016 has put the end to MAT controversy by providing that, MAT provisions will not apply in case non-resident does not have PE in India as per applicable tax treaty or in absence of tax treaty, no registration under any law is required for such non-resident tax payer. This will provide certainty to non-resident taxpayers and improve investor confidence in India.

The Finance Minister in his budget speech announced that, GAAR provisions would be enforced as scheduled i.e. from Assessment year 2018-19 onwards. However, it needs to be seen if the government would introduce new grandfathering provisions in respect of arrangement put in place before said assessment year. The taxpayers having cross border arrangements will have to undertake in-depth review of such arrangements 

As expected, the Budget 2016 announced new provisions in respect of transfer pricing documentation which are in line with recommendations given by BEPS Action 13 report on Transfer pricing documentation and country by country (CbC) reporting. The CbC reporting will be applicable to Indian taxpayers from FY 2016-17 if the consolidated turnover earned by them in previous accounting year (i.e. FY 2015-16) is higher than Euro 750 million. Detailed provisions in respect of exchange of reports through treaties and filing of report have been provided.

The proposed changes are mixed bag for the taxpayers. On one hand, the proposed changes in respect of equalisation levy have created uncertainty, undue burden on taxpayers; the proposed patent box regime will encourage the taxpayers to undertake the R&D activity in India so as to develop patents. This would also make the Indian tax regime competitive and investor friendly.

[1] http://www.bloomberg.com/news/articles/2013-12-23/italy-approves-google-tax-on-internet-companies

India's 'Patent Box' regime - Scorecard against BEPS Action 5

The 2016 Union Budget proposes to introduce a special provision in the tax law under which income earned by an Indian resident developer of a patent would qualify for a preferential tax rate of 10%. With this, India joins the group of many countries who have enacted the so called “patent or innovation box” regime in order to spur innovation. The regime typically grants a lower tax rate on profits from intangible property (IP), “boxing” them off from rest of the system.

IP regimes and BEPS Action 5

Introducing a “patent box” regime now requires the regime to be compliant with OECD's BEPS Action Plan 5 relating to Harmful Tax Practices - an agreed “minimum standard”. The final report calls for a revitalised peer review process to address harmful tax practices, including patent boxes where they include harmful features. The report adopts a “nexus approach” for preferential IP regimes, requiring alignment of the benefits of these regimes with substantive R&D activity. The report reviewed 16 existing IP regimes and concluded that a number of them are not fully consistent with the nexus approach. The concerned countries would need to amend the rules to make them compliant. Hence, it becomes important to assess whether India's proposed patent box regime passes the Action 5 criteria and at the same time whether the regime can be further improved, within the framework of Action 5, to make it more attractive for enterprises.

The Nexus Approach

The nexus approach looks at whether an IP regime makes its benefits conditional on the extent of R&D activities of taxpayers receiving the benefits. This requires a direct nexus between the income receiving the benefit and the expenditures contributing to the income. R&D expenditure therefore acts as an indicator of substantial activities. It is not so much the amount of expenditure, instead the proportion of expenditures directly related to development activities that demonstrate the value added by the taxpayer and acts as a proxy for how much substantial activity the taxpayer undertook. The purpose of the nexus approach is to grant benefits only to income that arises from IP where the actual R&D activity was undertaken by the taxpayer.

The patent box regime proposed in the Budget applies to royalty from a patent developed and registered in India. The term “developed” has been defined to mean expenditure incurred by the taxpayer for any invention in respect of which a patent is granted. By linking the reduced tax rate on IP income to expenditure incurred on development, at first brush, the regime does appear to satisfy the nexus approach of Action 5. However, there could be challenges in some situations in assessing whether the nexus approach is satisfied. For example, take the case of an enterprise which acquires an “in-process” IP and thereafter incurs expenditure on enhancement and further development which results in a patent. Going by the nexus approach, the preferential regime should apply only to the income proportionate to the development expenditure incurred post-acquisition of the in-process IP and not to the whole of the income. Similar issue can arise where the enterprise outsources R&D - either third-party or related party. The Action 5 report indicates that expenditure on related-party outsourcing should be excluded in measuring qualifying expenditure for the nexus approach. Some of the elements of the proposals may therefore need to be modified to satisfy the nexus approach.

Qualifying IP Assets

The regime currently applies to only income from patents registered under the Patents Act, 1970. It may be necessary to extend the scope to IP assets that are functionally equivalent to patents such as formulas, processes, designs, patterns, know-how, inventions even though they may not be eligible for or may not have sought patent protection. Copyrighted computer software may also need to be included in the category of qualifying IP assets. Even though computer software may not be eligible for patent protection, it arises from the type of innovation and R&D that IP regimes are typically designed to encourage. It may also be noted that obtaining a patent registration may be a time consuming process, while commercial exploitation of the invention may commence pending the registration. Going by the proposals, income arising from exploitation of IP prior to obtaining a formal patent registration may not qualify for the preferential tax rate. An IP intensive business model may have a bundle of IP rights which are exploited on an aggregate basis, while only some of the IPs may be eligible for patent protection. In such situations breaking the aggregate income from IP exploitation and allocating the same to patented IP may be a challenge.

Considering the above, the scope of qualifying IP assets may need to expand beyond registered patents. This will ensure a wider range of innovative and knowledge based enterprises are eligible to claim the benefits. It may be noted that BEPS Action 5 does not seek to limit the qualifying IP assets to only patents.

Qualifying IP Income

IP income which qualifies for the preferential tax treatment under the proposed law is consideration earned from exploiting the patent by transfer of use or other similar rights, including from rendering of services in connection with such exploitation. Income from sales of goods manufactured or services provided using the IP is not a qualifying income. It may be noted that IP income may also be embedded in sale of products and benefits may need to be granted to such income as well. A consistent and coherent method - based on transfer pricing principles - may be needed for separating income unrelated to IP (e.g. marketing and manufacturing returns) from the income arising from IP.

Expanding the coverage of qualifying IP income to IP income embedded in sale of manufactured products would also support the Government's “make in India” initiative by actively deploying the IP in manufacturing activities. The approach would also be compliant with BEPS Action 5 report.

In case the IP income is earned in a cross-border arrangement involving Associated Enterprises, the income attributable to the IP owner/ licensor (which would qualify for the preferential tax regime) would need to be determined under transfer pricing principles. The IP owner would need to perform important functions and control economically significant risks relating to the development, enhancement, maintenance, protection and exploitation (DEMPE) of the IP to optimize the tax benefits of the regime.

The proposal to introduce a patent box regime in the Indian tax law is a welcome move. With a strong technology and knowledge driven economy, India may be in a sweet spot to attract investors in such a regime. Given the proliferation of IP regimes worldwide, it must be recognized that India would be competing with a number of other countries to attract investors in their respective IP regimes. The Government should therefore consider further improving the regime to make it more attractive for investors.

Taxing non-compete and exclusivity rights for professionals - Rationalizing existing provisions

In today's commercial world intangible assets consisting of goodwill, patents, copyrigts, brand name , trademark and license and other commercial or business rights have become much more valuable than tangible assets owned by the company as they add to enterprise's income earning potential and enhance its future worth and can be crucial to its long-term success.
 
Exclusive right to harness and use the knowledge and individual skill gives rise to IP rights and income  therefrom to a person possessing them. The economic ownership of such right rests with the person. Giving up right to carry profession or refraining from use of such exclusive professional knowledge and skill in earning income by indulging in competing profession is a negative covenant for which valuable consideration is paid by the transferee to the person to ward off adverse impact.
 
Finance Bill 2016 proposes to bring within ambit of Section 28 (va) and Section 55 non compete fees received or receivable for giving up right to carry profession or for refraining from doing activity in relation to any profession. In the existing dispensation the expression right to carry on business or any activities in relation to any business have been used. The proposed amendments seek to add profession.   
 
The proposed simultaneous amendments to the two sections contemplate   following situations that are distinct and mutually exclusive-
 
1. The consideration paid by the transferee for the transfer of profession by giving up right to carry on profession 
2. Consideration paid for not carrying out any activity in relation to the profession 
 
The first situation contemplates existence of profession carried on by the transferor. The consideration paid to him for giving up right to carry on profession would be chargeable under Capital Gains being transfer of an intangible asset within the ambit of Section 45. The cost of the right given up to carry on profession would be arrived at by reference to the provisions of Section 55 (2) viz. cost of purchase if the rights have been acquired or nil in all other cases. The cost of improvement is also proposed to be taken on the same basis for the purposes of computing capital gains. This proposed amendment seeks to tax capital gains on the transfer of right to carry on profession on the same basis as the one on which capital gains on transfer of intangible assets viz. tenancy rights, state carriage permits, loom hours or goodwill are taxed under capital gains vide amendments brought in by Finance Act, 1987 and Finance Act, 1997. The amendments were brought in the machinery provisions to bring to tax self generated assets like goodwill, right to manufacture, process or produce any article or thing, loom hours, trade marks, brand name, state carriage permit or tenancy rights which by their very nature had no cost of acquisition and/ improvement. 
 
It would be recalled that Honourable Supreme Court in the case of B.C. Srinivasa Shetty (128 ITR 294) while dealing with the issue of taxability of self generated goodwill held that in a case where machinery provisions fail then such a case cannot be said to fall within the charging provisions and charging of consideration to tax would charge the entire capital value of self generated goodwill and not profit or gain on its transfer. 
 
The amendments were brought in Section 55 by Finance Act 1987 and 1997 to overcome the said difficulty and bring to tax capital gains on transfer of such self generated assets.
 
The proposed amendments are on the same line and further seek to clarify that receipts for giving up right to carry profession and taxable under capital gains would not be taxable under profits and gains of business or profession.
 
The second situation contemplated under the proposed amendments is the charging of the consideration received/ receivable under an agreement as income from business or profession for not carrying out any activity in relation to any profession under Section 28 (va). Recipient in such a case would not be himself carrying on own profession but would be associated with the profession. 
 
Reference can be made to the decision of Honourable Privy Council in CIT v. Shaw Wallace & Co. Ltd. 6 ITC 178 wherein it was explained that income is likened to the fruits of a tree being periodic return coming with some sort of regularity from a definite source. It was held that when amount is received with the source of income in tact the amount received was income. 
 
Prior to the amendment brought in by the Finance Act 2002 with effect from 1st April, 2003  income received/receivable under an agreement for not carrying out any activity in relation to any business compensation received was not chargeable to tax under business income. In number of decisions of High Court and Supreme Court it was held that compensation received for undertaking restrictive covenant of not competing with and carrying on business or profession were held to be capital receipts not chargeable to tax. Honourable Supreme Court long back held so in Gillanders Arbuthnot & Co. Ltd. 53 ITR 283 and in a relatively recent judgement in Guffic Chem P. Ltd. 332 ITR 602, 
 
In order to overcome the difficulties an amendment to Section 28 (va) was brought in by Finance Act 2002.  
 
The amendment proposed now seeks to bring to tax sum received/receivable under an agreement for not carrying out any activity in relation to any profession and is on the same basis as the one brought in by the Finance Act 2002.
 
It bears vital notice that compensation received by an employee e.g. managing director for termination of employment is profit in lieu of salary taxable under provisions of Section 17 (3). Reference can be made in this regard to the decision of Honourable Delhi High Court in the case of Ravindra Bahl (42 taxmann.com 404).
 
The proposed amendments now brought in seek to rationalise the existing provisions and clarify the legal position.

BEPS Proposals in Budget 2016 - A bold move?

BEPS - Fast forward
 
The BEPS Project of the OECD (which was an initiative to curb aggressive tax planning by multinational enterprises ('MNEs') on account of gaps and mismatches in taxation laws) has been the key subject matter of discussions in business circles since quite some time now and the final Action Plans for tackling BEPS which were released in October 2015 led to a high level of speculation about which proposals may be incorporated into the Finance Bill, 2016 ('the Bill').  The Bill, tabled before the Indian Parliament on February 29, 2016, proposes to introduce two significant changes to the Indian Income-tax Act ('Act') in line with the BEPS Action Plans: (i) Equalization Levy on foreign online advertisement service providers and (ii) Country-by-Country reporting for MNEs.
 
Equalization Levy on online advertisement payments
 
There has been a significant concern globally about the inadequacy of current tax laws to capture income of multinationals engaged in the digital economy.  These companies are not taxable in the countries where they have substantial customer-base as they do not create any taxable presence in such source country under the current tax rules.  To address this, BEPS Action Plan 1 had considered an alternative approach (though not recommended) to introduce an 'equalization levy', with the stated objective of ensuring equal treatment for foreign and domestic suppliers under the domestic laws and as an additional safeguard against BEPS by foreign suppliers.
 
Drawing inspiration from the BEPS proposal, the Government of India has introduced an 'Equalization Levy' in the Bill, which seeks to impose a levy of 6 percent on the amount of consideration for any specified services received or receivable by a non-resident from specified payers (provided the consideration is not effectively connected to a permanent establishment ('PE') of the non-resident in India).  The specified payers are (i) a person resident in India and carrying on business, or (ii) a nonresident having a PE in India (viz applicable only in case of B2B transactions).  Correspondingly, such income is proposed to be exempt in the hands of the non-resident service provider under section 10(50) of the Act. Currently, this levy is sought to be applied only to consideration for online advertisement services, though the Government has retained the flexibility to include other digital services within the ambit of this levy subsequently.
 
The obligation is cast on the payer to deduct the levy on consideration paid or payable to the non-resident and deposit the same with the Government within prescribed time.  Failure by the payer to do so would attract (i) disallowance of expenditure its hands (ii) liability to pay an amount equal to the levy and (iii) interest and penal consequences.
 
Exemption from the levy is provided if the aggregate consideration for the specified services does not exceed INR 100,000 per year.  However, currently, there is ambiguity as to whether this threshold limit should be applied per payer or per recipient.
 
The levy has been introduced as a separate chapter of the Bill and does not form part of the Act.  This raises questions on the nature of this levy ie whether it is in the nature of an additional income-tax or an altogether new form of taxation.  The bigger questions will also be whether such levy would qualify as 'tax' under India's tax treaties, whether a non-resident service provider will be eligible to claim the beneficial provisions of the tax treaty while determining applicability of such levy and whether it will be entitled to claim a tax credit against its corporate tax liability in the home country.
 
The equalization levy had not been recommended by the OECD as the preferable approach to tackle the tax problems of the digital economy, as they felt that this would require significant level of changes in the international tax framework and bilateral agreements between countries and could give rise to issues of double taxation in both source and residence countries.  India has become the first country to impose such a levy on online advertisements and it will need to be seen how such action is viewed in the context of India's obligations under its bilateral treaties as well as the impact that this will have on the entire digital ecosystem in India.
 
Country-By-Country Report and Master File
 
In order to standardize the approach for transfer pricing documentation maintained by MNEs and ensure higher levels of disclosure and transparency, BEPS Action Plan 13 recommended a three-tiered approach to such documentation, consisting of (i) master file (ii) local file and (iii) country-by-country report, to be furnished by MNEs and to be shared between the Governments.  In line with international consensus, the Indian Government has introduced a specific reporting regime in respect of CbC reporting and master file.
 
CbC Reporting: MNEs, where the parent entity is an Indian resident and the annual consolidated group revenue is equal to or exceeding EUR 750 million in the preceding financial year (equivalent INR amount to be determined based on prescribed exchange rate), are required to file annual CbC reports, based on their consolidated financial statements and reflecting prescribed details, for each tax jurisdiction in which they do business.  The prescribed details include financial data such as revenues, profits / loss before tax, income tax paid and accrued, capital, accumulated earnings, number of employees and tangible assets (other than cash or cash equivalents) in each tax jurisdiction as well as details of residential status of each constituent entity, nature and detail of main business activity and other information, as may be prescribed. The first CbC Report filing will be due along with the Indian return of income for the financial year 2016-17 on November 30, 2017.  Further, Indian resident subsidiaries in an MNE group having a non-resident parent are required to disclose the country of residence of the parent to the prescribed authorities.  In cases where Indian tax authorities are unable to access the CbC Report from the country of the non-resident parent due to limitation of exchange arrangements with such country, the Indian subsidiary may also be required to furnish the CbC Report.  Stricter graded penalty provisions for non-furnishing / inaccurate furnishing of particulars have been prescribed.
 
Master file: The master file is intended to provide a high-level overview about the MNE group and their transfer pricing practices in their global economic, legal, financial and tax context.  The detailed guidelines in relation to the information and documents for master file, furnishing of the master file to the prescribed authority etc are awaited.
 
Overall, the BEPS proposals introduced in the Bill are a bold move.  The CbC reporting is along the expected lines but would significantly increase compliance burden on Indian MNEs.  However, on equalization levy, India has pre-empted the rest of the world and become the first country to issue such a levy.  While the United Kingdom also introduced the 'diverted profits tax' last year to curb aggressive tax planning strategies by MNEs, it is not a separate tax on digital economy.  It would be interesting to see how other countries would react to such a unilateral action by India.

Tax Booster for Start-Ups - But will it serve the purpose?

The Finance Bill, 2016 has proposed 3 main changes in connection with taxation of startups effective FY 2016-17 (AY 2017-18). 
 
These are summarised below:
 
- As expected, Govt has proposed 3 year tax holiday to an eligible startup. This is proposed by introduction of new Section 80-IAC. The tax holiday will be available for 3 consecutive assessment years out of 5 years beginning from the year in which the eligible startup is incorporated.
 
It is specified that such startup should be set up before April 1, 2019. Thus there is a 4 year window for startup to be eligible for a tax holiday. Also the startup should not be formed by splitting up or reconstruction of business already in existence and also not formed by the transfer to a new business of machinery or plant already in existence (like 80-IA conditions). There is also restriction of turnover not to exceed Rs.25 crores in any year starting from April 1, 2016 and ending on March 31, 2021.
 
An eligible startup is defined as one which has business involving innovation development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. Thus important aspect is business 'driven by technology or intellectual property'. This definition is in line with the 'Startup India Action Plan'. 
 
- Section 54EE is proposed to be introduced which provides that there will be exemption from long term capitals gains tax if an assessee who earns such gains invests  such long term capital gains proceeds in eligible fund of funds to be established by the Govt to fund these startups. The amount should remain invested for 3 years or else the exemption is withdrawn in the year of withdrawal. There is a ceiling of amount of investment up to Rs.50 lakhs for the assessee. This is in line with similar exemption under Section 54EC for investment in notified Bonds. 
 
Whereas it is a good measure to permit exemption for investment in Govt set up fund of funds, it would also be appropriate if the exemption was given for investment directly in startups as capital contribution. Thus can address funding needs of such startups and not dependent on Govt fund of funds.
 
- section 54GB is proposed to be amended to provide that if an individual or HUF divests a residential property and invests the gains in the eligible startup as subscription of shares and also holds more than 50% of shares of the company, then such gains are exempt from taxation. It is also proposed that the invested startup company should utilise these proceeds to purchase new asset before due date of filing return of income. It is also clarified that new asset will include not only plant and machinery but also computers or computer software in case of approved technology driven startups. 
 
There are some issues which merit consideration.
 
- Whereas the objective of providing tax holiday is laudable, it remains to be seen if it may really serve a purpose considering that startups may be initially incurring losses for few years and may start making profits only after a reasonable period. Also the condition of turnover of Rs.25 crores is restrictive and low.
 
- The benefits of exemption under Section 54GB seems restrictive as it first applies only for gains arising on account of a residential property and does not cover other long term capital assets. Also there is a significant shareholding test for the investor and the invested startup to use these proceeds in a restricted time bound manner. This may reduce the interest of the investors to put in money in startup to avail capital gains tax exemption. 
 
- Startups may need to spend substantial sum in the initial stages on AMP expenses to build their brand depending on the needs of the business and incur losses. It would be appropriate to provide an option to startups to amortise these expenses both for book and tax purposes say over 3-5 year period.
 
- It would also be prudent to notify that eligible startup would not be affected by provisions of Section 79 dealing with restriction of losses carry forward as specified in that section.
 
- Ease of doing business in India
 
While delivering Budget speech, in the VIIth Pillar of his speech (Governance & Ease of Doing Business) in Para 102 of the Speech, the Finance Minister mentioned that to remove the difficulties and impediments to ease of doing business, Govt will introduce a bill to amend the Companies Act, 2013 which will also improve the enabling environment for startups. This is good reiteration of the promise and should incorporate changes suggested by the Committee's report on Companies Act (published on February 1, 2016) including startups provision on ESOPs for promoters and raising sweat equity limit from 25% to 50% of share capital for startups. As these changes are being implemented, the necessary enabling changes could also be introduced in income tax to tax ESOPs at the time of sale rather than exercise of options. This could help in attracting right talent for startups which is any way scarce.
 
Govt's initiative on 'Startup India Action Plan' is laudable. Having announced a broad Action Plan on January 16, 2016, there have been number of enabling regulatory changes already been announced in last 45 days by RBI and Company law Committee and now proposed changes in Finance Bill, 2016. It is clear that Govt's intention of making the plan operational on April 1, 2016 seems on target and with time bound implementation, the initiative is can be a great success and help in Make in India and take India to a new growth trajectory.

Union Budget 2016-17 -Simplified and clear Tax regime for Non-residents

 The Hon'ble Finance Minister presented the Union Budget 2016-17 on 29 February 2016. The Budget reflects the theme of moving towards non-adversarial tax regime of the new government. The FM seems to be firm on no retrospective amendment and has also provided an avenue to settle past tax demands raised on certain taxpayers due to application of retrospective amendment. 
 This budget seems to be more focussed on a stable tax regime and no major tax amendments have been introduced impacting non-residents. However certain tax proposals that will be welcomed by non-residents are as under:

• • Non-applicability of MAT to foreign companies
    The amendments made by Finance Act, 2015, exempting MAT in case of FIIs who do not have a Permanent Establishment ('PE') in India, had raised questions on its applicability on income of other foreign companies.  With a view to reduce litigation and to bring certainty in taxation relating to foreign companies, it is proposed in section 115JB that MAT shall not be applicable to those foreign companies which do not have PE in India or where no treaty applies and they are not required to seek registration under any law applicable to companies in India. This amendment puts to rest the concerns of foreign companies on applicability of MAT. This proposal is sought to be introduced with retrospective effect from 1 April 2001 to clear doubts even for past years.  
  • Place of Effective Management ('POEM')
    The concept of POEM was introduced in the domestic tax laws in the year 2015 as a rule to determine residency of a company. This amendment has great significance for Indian promoted companies having overseas subsidiaries. Various stakeholders had raised concerns regarding the implementation of the POEM based rule of residence (like applicability of advance tax provisions, TDS provisions, computational provisions, transfer pricing etc) especially where determination may happen after closure of previous year.  
    Thus, in order to provide clarity in respect of POEM implementation and to address concerns of the stakeholders, the provision relating to POEM is being deferred by one year.
  • Foreign mining companies in Special Notified Zone
    Special Notified Zones have been created to facilitate activities of Foreign Mining Companies for displaying rough diamonds without actual sales taking place in India. These activities would have lead to creation of business connection in India and accordingly, income arising or accruing may be taxable in India as per the current tax laws.
    In order to facilitate foreign mining companies to undertake the activity of display of uncut diamonds in Special Notified Zones, it is proposed to provide that no income shall be deemed to accrue or arise in India from the activity which is confined to display of uncut and unassorted diamonds in a Special Zone notified by Central Government.
  • Storage and sale of Crude oil as part of strategic reserves 
    Maintaining strategic reserves of crude oil is in the national interest and ensures price stability for Indian oil companies. In order to increase and maintain the strategic reserves of crude oil in India, the Government-run agencies are in the process of setting up an underground storage facility for storage of crude oil with active participation of Foreign National Oil Companies (NOCs)/ Multinational Companies (MNCs). 
    Under the existing tax laws, activity of storing crude oil and onward sale of crude oil to residents will attract taxability as it will create a business connection in India.
    In order to promote the storage of strategic oil reserves and to incentivise the NOCs/ MNCs to store crude oil in India , it is proposed to provide exemption to NOCs/ MNCs, from tax on income accruing or arising on account of storage of crude oil in a facility and onward sale therefrom to any resident provided that (a) such storage and sale is pursuant to an agreement entered into/ approved by the Central Government and (b) such agreements are notified by Central Government having regard to national interests. This provision will apply from AY 2016-17 and onwards.
  • Concessional rate of 10% on transfer of shares of Private Limited companies
    Finance Act 2012 provided for concessional rate of tax of 10% on transfer of 'unlisted securities' under section 112(1)(c)(iii) of the Indian Income-tax Act, 1961. The term 'securities' has the same meaning as provided under the Securities Contracts (Regulation) Act. Certain Courts had taken a view that shares of a 'private limited' company are not 'securities'. 
    In line with the government's commitment to reduce tax litigation, it is proposed that the concessional rate of 10% will now be applicable to transfer of capital asset being shares of a company, not being a company in which the public are substantially interested. Effectively, transfer of shares of private limited companies will also now get covered. The explanatory memorandum state that it is clarificatory in nature and hence it's applicability to past years is worth evaluating.
  • Relaxation in furnishing PAN 
    In case of non-resident tax payer not holding a valid Indian tax registration number (Permanent Account Number (PAN)), the withholding is required to be made at higher rate of 20%. 
    This caused hardships to non-resident taxpayers as obtaining PAN was considered to be an onerous obligation. In line with the government's commitment to make things easier, it is proposed that, instead of furnishing PAN, a non-resident can also submit alternative documents (to be notified) to the tax authorities.

 In addition to the above, the following provisions should also be noted by non-residents:

• • Equalisation Levy
    To address various tax challenges emerging from new digital economy, and also to align with OECD recommendations in BEPS Action Plan - 1, it has been proposed to introduce the concept of "Equalisation Levy".
    BEPS action plan had recommended equalisation levy to avoid difficulties emerging from digital economy. Concerns were raised regarding double taxation in cases where the non-resident would also be subject to normal tax levies in addition to equalisation levy on account of presence in the source country. To address these concerns, two approaches were recommended, first being, levy to be made applicable only in case of situations in which the non-resident would otherwise not be subject to tax or subject to tax at a low rate. In the alternate approach, where non-resident is taxable under normal tax and also subject to equalisation levy, credit to be made available to the non-resident of normal taxes and effectively the non-resident should be subject to tax only on the higher of the amount of normal tax or equalisation levy.
    Equalisation levy is sought to be levied at a rate of 6% on amount of consideration to be paid to a non-resident having no PE in India for specified services such as online advertisements and provision for digital advertising space by (a) resident in India who carries on any business or profession or (b) a non-resident having no PE in India. Equalisation levy is not applicable (a) where the non-resident has a PE in India and the specified service is effectively connected to the PE and (b) where the aggregate amount of consideration exceeds INR 1 Lakh. Further to ensure compliance by the payer, failure to collect the levy will result in disallowance of the expenditure to the payer.
    
    To address the issue of double taxation, it is proposed that, income arising on such transactions on which equalisation levy is applicable will be exempted from taxes under section 10 of the Act.
    While the levy is akin to withholding tax and needs to be paid by the payer on payment of consideration to the non-resident service provider, the same is sought to be charged under a separate chapter VIII of Finance Bill and seems to constitute a separate code in itself. If this levy is not part of income tax, a question that arises is whether any credit of this levy can be availed in the hands of Non-resident in their home country? Prima facie, the answer seems to be no.
  • BEPS Action plan - Country-By-Country Report and Master file
    The OECD report on BEPS Action Plan 13 relating to country by country reporting was in the news in last one year. In line with the expectations of the corporates, from the FY 2016-17 (1 April 2016 - 31 March 2017) onwards, a three tier reporting structure (i.e. master file, local file and country by country reporting (CbCr)) has been proposed for an international group with a consolidated revenue of more than Euro 750 million.  Essential elements relating to implementation of CbCr has been included in the budget proposals whilst remaining aspects are expected to be detailed subsequently through introduction of separate rules.
  • Buy-back tax:
     Tax on distributed income at the time of buy-back of shares was made applicable from 1 June 2013. Buy-back was defined to include buy-back as per section 77A of the Companies Act, 1956. There existed an ambiguity whether buy-back tax will also be applicable in case of buy-back under different provisions of the Companies Act as well. The amendment proposed can be argued as 'prospective'.
     With a view of reduce tax litigation and obtain clarity on applicability of buy-back tax, it is sought to be clarified that tax on distributed income at the time of buy-back will be applicable to any kind of buy-back under the company law. Also, rules for computing the distributed income will also be notified at a later date to provide determination in circumstances where shares are issued in different tranches, pursuant to company reorganisations like mergers, etc.
    To summarise, the amendments impacting the foreign players are a welcome change and will certainly repose repose better faith on the path being followed by the government in moving forward to a less litigative environment.

Shonna Misquita (Senior Manager), Ernst & Young LLP
Making REITs tax efficient - A welcome move!

The Securities and Exchange Board of India (“SEBI”) had introduced a framework for Real Estate Investment Trusts (“REITs”), by way of the SEBI (REIT) Regulations, 2014 (“Regulations”), to give an impetus to the Indian real estate market. These Regulations envisage the following parties in a REIT: the sponsor, the manager, the trustee and the investors/ unit holders; the sponsor sets up the REIT, which is managed by the manager; the trustee holds the property in its name on behalf of the investors. REITs may hold assets directly or through a Special Purpose Vehicle (“SPV”), being a company or a limited liability partnership. The income would flow from the SPV to the REITs who would then pass on the same to the investors. 
 
Recognizing that the initiative would not have the desired effect without concessions/ exemptions from an income-tax perspective and to bring about certainty in taxation, the Finance (No. 2) Act, 2014 had amended the Income-tax Act, 1961 (“Act”), to introduce a special regime of taxation for “business trusts” (defined to include a REIT). The Finance (No. 2) Act, 2014 and Finance Act, 2015 brought in substantial tax reforms to make REITs more tax efficient such that the returns from REITs which are based on asset yield are attractive to investors vis-à-vis other investments. 
 
As per the current tax regime, the different streams of income of the REIT and its taxability would be as follows:
•There is no tax withholding when the SPVs pay interest income to the REIT
•Distribution of dividend by SPVs to the REIT is liable to dividend distribution tax (“DDT”) at the rate of 20.36%
•Dividend is exempt from tax for the REITand the ultimate investors when distributed to them
•The REIT would be 'flow through' in respect of interest income subject to tax withholding by it at 10% when payment is made to investors
 
Despite the above amendment the enabling the beneficial taxation regime for REITs, non-grant of pass-through of dividend distribution by the SPV did not meet industry/ investor expectations. The applicability of a DDT on distributions by the SPV (being a corporate entity) to the REIT has widely been viewed as the roadblock to a successful launch of the REIT market in India. Under the SEBI Regulations, both the REIT and the SPV are obligated to distribute 90% of their operating income (unlike listed developers). Though upstream of monies received by the REIT to investors by way of dividend is exempt from tax in the hands of the investor, the applicability of DDT on distributions by the SPV (in addition to normal corporate tax, where the SPV is a company) has made the REIT structure unviable and has not appealed to investors, given that the returns are not as lucrative vis-à-vis other investments. 
 
Thus, pursuant to the representations made by the industry and in order to rationalize the taxation regime for REITs and their investors, the Finance Bill, 2016 proposes to provide a special dispensation and exemption from levy of DDT in respect of distributions made by SPV to the REIT. Further, such dividend received by the REIT and its investor shall not be taxable in the hands of either. However, the exemption from the levy of DDT is subject to fulfilment of prescribed conditions, which, inter alia, include:
 
•The exemption from levy of DDT would only be in the cases where the REIT either holds 100% of the share capital of the SPV or holds all of the share capital other than that which is required to be held by any other entity as part of any direction of any Government or specific requirement of any law or which is held by Government, or Government bodies
•The exemption from the levy of DDT would only be in respect of dividends paid out of current year income on or after the date when the REIT acquires a stake in the SPV. The dividends paid out of accumulated or current profits up to this date shall be liable for levy of DDT as and when any dividend out of these profits is distributed.
 
It would pertinent to note that the for the purpose of claiming other benefits under the REIT regime, an SPV is defined as an Indian company in which the REIT holds a controlling stake, i.e. at least 50% of the nominal voting capital. However, the Finance Bill, 2016, has extended the exemption from DDT only to companies in which the REIT holds the entire equity share capital. 
 
Despite the fact that the exemption is restricted only to those SPVs where the entire unreserved shareholding is held by the REIT, this proposed amendment is a welcome step on part of the Government. The industry however has reacted to say that two key changes are needed for REITs to take off, which are (i) exemption from capital gains when the SPV transfers the property to the REIT and (ii) stamp duty on the said transfer, which admittedly is a state subject. More action may be needed for these two issues to be resolved before REITs and InvITs really take off, providing an alternative investment avenue for the Indian diaspora.

Income declaration / Amnesty Scheme - Sizing up the irritants

The Finance Bill, 2016 presented on 29-02-2016 contains the proposal of amnesty by way of insertion of Chapter IX enabling a person to voluntarily declare undisclosed income. Salient features of scheme are as under. 

A)The Scheme is proposed to come into force on 01-06-2016.  

B)Any assessee (Individual, HUF, Company, Firm, AOP or Any Other Person) declare the Income? 

C)The income will be computed as under:- 

i)If the declaration is by way of undisclosed assets, The Fair Market Value (FMV) of such assets as on 01-06-2016. - The Rules of arriving at FMV will be prescribed in due course.

ii)Any other income, as per the amount so declared.  

iii)Any expenditure for earning such income shall not be allowed as deduction.

D) The declarant will pay following Tax and Levies

E)The Immunity is proposed to be granted are in relation to 

a. Income Tax and Wealth Tax liability including concealment and other penalties under the said Act and prosecution in relation to such declared income.

b. From the Operation of Benami Transactions (Prohibition) Act 1988, if, the assets so declared were held Benami and is transferred to the declarant. 

F)An assessee will be entitled to make only one declaration under the Scheme. 

G)Who are/ What is not eligible for the scheme?

•Income of Assessment Year in respect of which notices have been issued u/s 142(1) or 143(2) or 148 or 153A or 153C and the proceedings are pending before AO, or

•Where a search or survey has been conducted and the time for issuance of notice under the relevant provisions of the Act has not expired, or 

•Where information is received under and agreement with foreign countries regarding such income (such income or asset would probably be covered by The Black Money Act, 2015).

•Income which would become chargeable under the Black Money Act, 2015 or

•Person notified under Special Court Act, 1992, or

•Cases covered under Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (prevention) Act, 1967, the Prevention of Corruption Act, 1988.

H)Irritants and issues

1)The scheme states [Reference - S. 194(c)] that any income which has accrued, arisen or received or any assets acquired out of such income prior to the commencement of this scheme and if no declaration is made 

i)Such income shall be deemed to have accrued, arisen or received, as the case may be; or 

ii)The value of the asset acquired out of such income shall be deemed to have been acquired or made, 

in the year in which a notice under section 142, sub-section (2) of section 143 or section 148 or section 153A or section 153C of the Income Tax Act is issued by the Assessing Office, and the provisions of the Income- Tax shall apply accordingly. 

Does this mean the time barring provisions of 6 years (and 16 years in case of Foreign Assets - Income) relating to reassessment are subverted? As any undisclosed income/asset is deemed to have been accrued, arisen, received in the year of notice. This needs a large deliberation more so whether only machinery provisions of Income Tax Act would apply to such undisclosed income treated as income of the year of notice or whether substantive provisions of time barring cannot be ignored. 

2)In case of declaration by way of assets, the fair value as on 01-06-2016 is to be considered for levy of taxes, penalties etc. There is no clarity as to whether one declares a source of undisclosed income (Fully verifiable by Assessing Officer) and the same is converted into asset which also is undisclosed. For e.g. One is able to prove the receipt of Black Money of Rs. 1 Cr. in the year 2010 and establishes a nexus of the Flat purchased there from. The present value of the flat is Rs. 6 Cr. Can he declare Rs. 1 Cr. for 2010 and get the telescopic benefit for the undisclosed flat or whether he has to declare flat at fair Value Rs. 6 Cr? We should expect a clarification either in the Rules relating to Fair Market Value or otherwise. 

3)The scrutiny notices have already been issued for A.Y. 2014-15. No further action of actual assessment has taken place. The present wording does not entitle such assessees to be eligible for Scheme of Declaration. All fairness those assesses should be allowed to be eligible.

I)Poser 

Section 194(b) says, if the taxes are not paid on the declared income, such income shall be chargeable to tax in the year of declaration. He declares this income in the Return of Income for Previous Year 2016-17. He has also paid appropriate Advance Tax. 

Can one plead that there is no concealment for Previous Year 2016-17 and no Double Taxation can be made for the same Income/ Asset and therefore, there is no question of reopening or reassessment of earlier years to which Income relates. 

Aparna Parelkar (Senior Manager) & Dipika Shah (Deputy Manager), Deloitte Haskins & Sells LLP
Tax incentives for Startups & Presumptive tax for MSMEs - A critical appreciation

The Finance Minister in the Budget 2016 has set crystal clear agenda for “Transform India”. The Budget proposals have been outlined in this direction with nine distinct transformative agenda two of which are focussed on social sector and education, skills & job creation. In January 2016, the government had already set stage for Start-up India Stand-up India. 
 
With a view to provide an impetus to Start-ups and facilitate the growth in the initial phase of business many tax incentives have been proposed in the Finance Bill which are highlighted as under:
 
New provision Section 80-IAC for 100% tax holiday
 
1.To facilitate growth of Start-ups in their initial stage section 80-IAC has been inserted to provide 100% tax holiday for three consecutive years subject to certain conditions
 
2.The tax holiday at the option of eligible Start-ups can be claimed in 3 consecutive years out of 5 years beginning from the year in which eligible Start-up is incorporated. 
 
3.Conditions that imposed are similar to that of existing tax holiday provisions under section 80-IA summarised hereunder:
 
•Eligible Start-ups should not be formed by split up or reconstruction except if the Start-up is formed on account of re-establishment, reconstruction or revival of any business which was inoperative on account of any natural disaster like earthquake, flood or any civil disruptions  
 
•Start-ups should not be formed by transfer of previously used assets from any other business in India. However, relaxation is provided that used assets if any should not exceed 20% of total assets. 
 
•Other provisions which are existing in subsection 5 and 7 to 11 of Section 80-IA will also apply to Start-ups. These clauses are elucidated  below 
 
oStart-ups has to obtain audit report from CA and submit before tax authorities at the time of filing return of income to avail such tax holiday.
oInternal transfer of goods or services by Start-ups to inter or intra unit/undertakings should be at market value i.e., at arm's length. The provisions of specified domestic transactions in transfer pricing are applied even on Start-ups. The profits will be adjusted to include the impact of any deviation from arm's length price. This is to ensure Start-ups enjoying tax holiday do not charge more for its goods or services, transferred internally. 
oStart-ups will not be eligible to claim any other deductions under chapter VIA during the period of tax holiday. 
 
4.Eligible business for Start-ups has been defined in the Finance Bill. It covers businesses that involves innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. 
 
5.Start-up companies should be incorporated between 1.4.2016 to 1.4.2019 to be eligible for this section. 
 
6.The total turnover of eligible Start-ups should not exceed Rs.25 crores in any financial year beginning from FY 2016-17 upto FY 2020-21
 
7.Eligible Start-ups should hold a certificate of eligible business from the Inter-Ministerial Board of Certification failing which the tax holiday benefit will not be available. 
 
However, even if the Start-ups are claiming tax holiday and eventually on any occasion the units have book profits then they will be subject to Minimum Alternate Tax applicable at 18.5% plus surcharge and cess (effectively 20.388% or 21.341%). This gesture indicates that there is actually no 100% tax benefit.  Thus Start-ups earning good profit in initial years would have risk of paying taxes under MAT.  
 
The eligibility conditions like having inter-ministerial board approval and turnover not exceeding Rs.25 crores could pose hurdles for Start-ups to claim tax holiday benefit. In the eventualities if Start-ups get good response in initial years and turnover exceeds Rs.25 crores then the benefit under tax provisions would not be available. 
 
After the tax holiday period Start-ups can evaluate to claim deduction under provision of section 80JJAA which has now been extended to all taxpayers. 
 
It has been proposed in Budget speech that a bill to amend Companies Act, 2013 is in pipeline which will enable registration of Start-ups within 24 hrs. Whether registration and incorporation in a day will also make available CIN, DIN and other requirements for a company to be incorporated in a day need to be addressed. 
 
The amendments do not state anything on carry forward of loss. Hence the existing provisions may apply in common parlance. 
 
Capital Gains exemption for investors of Start-ups under new section 54EE and existing section 54GB
 
Section 54EE - Long term capital gains not chargeable on investment in units of specified funds
 
1.Capital gain from sale of any long term capital asset will not be taxed if the same is invested in regulated or notified fund set up by government. It is proposed to establish a fund of funds which intend to raise Rs.2500 crores per annum for four years to finance Start-ups. 
 
2.Such gains should be invested within 6 months from date of transfer 
 
3.Eligible amount of exemption
oWhere investment in specified assets > capital gains; entire capital gains are exempted 
oWhere investment in specified assets < capital gains; capital gains in proportion to cost of specified assets will be exempted. 
 
However, the maximum exemption that is restricted to Rs.50 lakhs even if the investments falls in two separate fiscal years.  
 
4.The investment has lock in period of three years. If the investment is transferred / sold within 3 years from the date of its investment then the amount of capital gains exempted previously will be taxed as long term capital gains. Further, investors are not allowed to obtain any loan or advance on the security of such specified investments. If they do so then it will be deemed as transfer and capital gains will be taxed.  
5.Long term specified asset/investment will be notified by government in due course. 
 
Section 54GB - Long term capital gains from sale of residential property invested in shares of Start-ups/ Micro and Small Enterprises (MSMEs). 
 
1.The existing benefit under section 54GB has been extended for investment in Start-up entities subject to conditions. 
2.The Start-ups should further invest the subscription money for purchase of new asset. Definition of new asset has been amended to include computer or computer software for eligible Start-ups certified by Inter-Ministerial Board as technology driven Start-ups. 
 
As envisaged in Start-ups India scheme, the Finance Bill has not brought any amendment to Section 56(2)(viib) with regard to non - application of this section to Start-ups as currently available to venture capital undertaking where the investment is received from venture capital company/fund. In absence of the same any amount received by Start-ups as consideration for issue of shares in excess of fair market value of shares will be taxed. 
 
Presumptive tax for MSMEs
 
The presumptive tax provisions available to small taxpayers wherein tax on 8% of gross receipts has to be paid if the total gross receipts do not exceed one crore rupees. The threshold limit of one crore is proposed to be increased to two crores bringing in further small taxpayers to avail beneficial provision of presumptive tax. Thus, MSMEs having gross receipts upto rupees two crores can avail this provision and pay tax on 8% of gross receipts. 
 
To reduce cost of compliance especially for small tax payers like MSMEs e-Sahyog project will be started to provide online mechanism to resolve mismatches in income tax returns without requiring taxpayers to attend income tax office. 
 
All the above provisions are applicable from AY 2017-18 (FY 2016-17).
 
Though it is welcome, it would have been more desirable if exemption or lower tax be provided in MAT. Further in consonance of the Start-up scheme, amounts received by Start-ups as consideration for issue of shares in excess of fair market value of shares should also not be subject to tax. 

FM's Affordable Housing pitch - Why it needs redrafting

Turning to the tax reforms, the Finance Minister in his budget speech for 2016-17 emphasized that the thrust of his tax proposals, inter-alia, included measures for promoting affordable housing. One significant proposal as a part of these measures include 100% deduction of profits derived by undertaking from a housing project satisfying certain conditions .This 100% deduction has been brought about by the introduction of sec 80IBA in the Finance Bill, 2016 which is sought to be inserted with effect from 01.04.2017. 

The Provision: 

The salient features of this measure are listed below:- 
1. 100% of the profits derived from the business of developing and building housing projects included in the gross total income of the assessee shall be allowed as a deduction.
2. The housing project has to fulfill following 8 conditions to be considered as eligible for this deduction: 

                    I.        The project has to be approved by the competent authority after 1^st of June, 2016 but on or before 31st March, 2019. 

                  II.        The project has to be completed within a period of three years from the date of approval and such completion has to be evidenced by a certificate of completion obtained in writing from the competent authority. The competent authority has been defined to be the authority empowered by the Central Government. Completion shall mean completion of the project as a whole. If the approval is obtained more than once then the first approval of the project shall be deemed to be the date of approval. 

                III.        The built up area of the shops and other commercial establishments in the housing project shall not exceed 3% of the aggregate built up area. 

                 IV.        If the project is located within the four metros i.e. Chennai, Delhi, Calcutta, Mumbai or within a radius of 25 Km from the municipal limits from these cities(referred hereinafter as metro project) then the plot of land in which the project is being executed shall not be less than 1000 sq mts. However, if the project is located within the jurisdiction of any other municipality or cantonment board(referred hereinafter as the non metro project) then the size of the plot of land shall be not less than 2000 sq mts. 

                   V.        The size of the residential unit shall not exceed 30 sq mts in a metro project and 60 sq mts in a non metro project.  

                 VI.        if a residential unit is allotted to an individual, no further residential unit shall be allotted to such individual or his spouse or minor children. 

               VII.        The project should necessarily utilize not less than 90% of the permissible FAR in a metro project and not less then 80% of the permissible FAR in non metro project. 

             VIII.        The assessee maintains separate books of accounts for the housing project. 

As the readers shall recall, the Income Tax Act already has a similar benefit incorporated by way of sec 80IB(10) in relation to housing projects. The said section which was brought in from 01.10.1998 underwent substantial amendments including a revamping by Finance Act, 2004. The amendments continued until Finance Act, 2010. Litigation in relation to the various provision contained in sec 80IB(10) continue to burden the appellate authorities and various High Courts as also the Hon. Supreme Court. 

The proposed section attempts to address some of the issues involved in the litigation, continues with most of the issues (which would mean more litigation) and in the process we have a section with a lot to be desired. There are, of course, things which are still unsaid like the guidelines to be prescribed for approval, facilities and amenities that the competent authority may specify and the competent authority itself which the section says the Central Government shall empower. 

Comparison: 

A comparison with the present sec 80IB(10) shall be in order:   

 Comments : 
1. There shall be two parallel authorities regulating the development and construction of the housing project i.e. one the local authority in whose jurisdiction the plot is located and second the Competent Authority to be empowered by the Central Government. We only hope and pray that there remains only a single authority, failing which there could be several issues in complying with the requirements of the two authorities.

• 2. The issue of completion has been the subject of litigation in the present section 80IB(10) on atleast two good counts.

                   I.        Partial completion and

                 II.        Issuance of certificate by the local authority. 

We have numerous decisions of the Tribunal and High Courts on the subject of issuance of completion certificate. The Hon. Bombay High Court in Hindustan Samuha Awas Ltd. (130 DTR 404) has held that once an application is made to the authority for issue of completion certificate after the architect has certified completion, the issuance of certificate by the local authority beyond the due date was irrelevant. One cannot loose sight of the Hon. Supreme Court decision in Sarkar Builders (119 DTR 241) wherein the Supreme Court observe that it is  ludicrous on the part of the Revenue authorities to expect the assessee to do something which is almost impossible. Expecting the developer to obtain a completion certificate from the competent authority after he has done everything possible in respect of completion is asking him to do something beyond his control...

The second issue with reference to completion arose from partial completion wherein Courts and Tribunals have held that the benefit of deduction can be granted with reference to the portion of the housing project that is completed (CIT Vs. B.M.N Brothers)(86 CCH 194)(Guj).The proposed section requires completion of the project as a whole.
3. On the issue of location of the plot, the proposed clause appears to be erroneously drafted as much as it does not cover plots located in areas other than the jurisdiction of municipality or cantonment board.
4. On the size of the unit, the clause omits to specify whether it is 30/60 sqmts of “built up area” or otherwise.
5. On the issue of allotment, the clause thankfully refers only to direct allotment to either the individual or his spouse or minor children unlike the present provision which also refers to HUF and other person representing the individual or his spouse or minor children.. 
6. On the issue of utilization of FAR, the proposal appears to unnecessarily burden the conditions by providing for the percentage of FAR to be utilized by the project. No developer worth his salt shall underutilize the FAR. It would have been another matter to provide that the profit on sale of unutilized FAR of an eligible project shall not be entitled to the benefit of the deduction. 
7. It appears from a reading of the clause relating to books of accounts that if the assesse was to be carrying  out the business of developing and building multiple housing projects, then he shall have to maintain separate book of account for each of the project. 
8. The connotation of 'built up area' had been a bone of contention prior to the definition brought in by the Finance Act, 2004. Unfortunately even the definition could not eliminate the plague of litigation. Even today, there are numerous cases pending before the appellate authorities on the issue of built up area as defined in the section. The present proposal worsens the situation with an ill-drafted definition by using the phrase “including any open terrace so shared”. The connotation of this phrase is beyond comprehension and unless a drastic surgery is carried out to this definition, developers shall be hounded by litigation.
 9. Similar is the position of the definition of the “residential unit”. It appears that the draftsman endeavored to use every arsenal in his armoury to plud every possible loophole. However, it would have been wiser to realize that all such attempts have always meant endless litigation.

10. Even the definition of housing project, is poised to bring in trouble with the use of the subjective word “predominantly”and a new term “dwelling unit” instead of the oft used “residential unit”. It needs to be noted that dictionary meaning of dwelling is 'house' or residence. Further, a house does not necessarily mean a residential unit. In fact, these very arguments were advanced while advocating the case of commercial development in housing project under the present section. Lastly, having already defined the maximum permissible commercial presence in a housing project, it was really not necessary to independently define a housing project and that too with words like “predominantly”. 

11. The only solace in the entire section comes in the form of a sub-section which provides that in case the housing project is not completed within the stipulated time period and if there has been a deduction allowed under this section in any earlier year, then the amount of deduction so allowed shall be deemed to be the income of the previous year in which the period for completion of the project expires.

In sum, though a laudable measure for promoting affordable housing, it shall be meaningful only when this new section 80IBA is modified or redrafted in the light of the above comments.

India introduces Master File and CbC reporting - Opportunity to revisit supply chain models

The Union Budget 2016-17 proposes to introduce the concepts of Master File and Country by Country (CbC) reporting in the Indian transfer pricing (TP) regulations with effect from the fiscal year beginning 1^st April, 2016, in line with BEPS Action Plan 13, being an initiative of OECD and G20 countries, of which India had been a major contributor.

A brief background to the concepts of Master File and CbC reporting requirements is that the BEPS Action Plans relating to the fundamentals of TP, namely Action Plans 8 to 10, predominantly enforce the principle that risks in; and value drivers of, business operations and their related rewards, are closely associated with strategic functions or “substance”; and that they cannot be disassociated from each other merely through formal intercompany agreements between associated enterprises (AEs).

In order to ensure adherence to the above principles, BEPS Action Plan 13, had revised the entire Chapter relating to TP documentation of the OECD TP guidelines, namely Chapter V, to provide for robust documentation and disclosure mechanisms, which are expected to provide necessary information to tax administrators across the world, for monitoring the entire philosophy of aligning risks, rewards, value, etc with substance, by selectively identifying cases for TP audits, based upon “risk assessment”.

Action Plan 13 had provided for a three tier structure of TP documentation, namely - (a) Master File; (b) Local Documentation File; and (c) Country by Country (CbC) reporting. Majority of the countries having TP regulations, including India, already provide for mandatory TP documentation for the local entities with respect to transactions entered into with their overseas AEs. It is thus the preparation of Master File and CbC reporting, which are the added obligations cast upon MNEs, under the revised TP documentation guidelines.

The Union Budget provides for the prescription of detailed rules with respect to the manner of preparation of Master File and CbC reporting, which the Indian Revenue Board is expected to release once the Budget is enacted as a statute. However, given the intentions of the Parliament, as manifested in the relevant object's clause, it is apparent that India intends to introduce the concepts of Master File and CbC reporting exactly on similar lines as BEPS Action Plan 13, a brief overview of which is provided in the following paragraphs.

The Master File is expected to provide an overview or blue print of an MNE group's global business model, specifically covering the following aspects - (a) organisational structure; (b) description of the various businesses; (c) intangibles used in the businesses; (d) intercompany financial transactions; and (e) financial and tax positions.

The guidelines in BEPS Action Plan 13 have correctly not prescribed the manner of presentation of; or the exhaustive list of details to be mandatorily incorporated in, the Master File, since that would have restricted the flexibility of taxpayers to prepare the Master File in a manner most appropriate for their respective businesses, as the business model of each MNE group would be quite unique and different from the others. The guidelines have asked the taxpayers to use prudent judgement in determining the appropriate level of details for the information to be incorporated in the Master File, keeping in mind the objective of the Master File to provide tax administrators with a high level overview of the MNE group's global operations and policies. Given the flexibility provided, as above, each MNE group is encouraged to prepare the Master File as a real-life novel, depicting the overall TP policy and supply chain model for each of the businesses run by it, in a manner that any person reading the document, would understand the intercompany pricing policies adopted by the MNE group.

An MNE group should map each of the business lines separately; and provide a complete blue print of each such business line, apart from its overall legal and ownership structure, specifically covering some of the key aspects, as per few illustrations provided by the guidelines in Annexure I of the revised OECD TP guidelines, being a fallout of BEPS Action Plan 13, namely :
1. Value drivers of the business, i.e. what propels the premium returns of the business, which could be unique intangibles, marketing strategies, etc. 
2. Overall global supply chain model of the business vertical, covering the following information with reference to adequate functional analyses -
a. Whether the MNE group follows a centralised business model, i.e. whether the MNE group adopts a central and/ or regional principal structure, where there is an overall principal or entrepreneur in the system, which houses the valuable intangibles and also key strategic functions; and appoints various entities within the MNE group located in different countries for rendering specific services against payments of arm's length remuneration, e.g. contract or toll manufacturing; contract research and development (R&D); procurement; shared functions; selling, either through buy-sell distribution or agency models, etc ?
b. In case the MNE group follows a decentralised business model, with entities located in the various countries independently carrying out manufacturing, distribution, procurement and other functions, whether and to what extent, the legal owner of the valuable intangibles or ultimate operating parent company of the MNE group retains operational control, over the different group entities, namely through intercompany licenses, rendering intragroup services, etc ?
3. Strategy around development, ownership and exploitation of intangibles, namely which entity within the MNE group owns valuable intangibles; and the strategy adopted for ongoing development and exploitation of present and future intangibles, i.e. through contract R&D structure, license agreements, cost contribution arrangements, etc.
4. Policy around leveraging of finance by the MNE group, specifically covering information on whether the group has any entity playing central treasury functions, strategy around intercompany loans and guarantees, etc.

5. The MNE group's consolidated financial statements; and information regarding unilateral APAs and other tax rulings relating to allocation of income, which might have been obtained in different countries.    

The CbC reporting is required to be presented in a tabular format, setting out crisp information about the functions performed, assets owned, personnel employed, revenue generated, profits earned, taxes paid, capital structure, retained earnings, etc, with respect to each entity of the MNE group located in different countries, as highlighted in Annexure III of the revised Chapter V of OECD's TP guidelines, again being a fallout of BEPS Action Plan 13. 

Thus, CbC reporting is the platform to vindicate the veracity of the blue print provided in the Master File. The CbC reporting would highlight any possible mismatch between the level of profits or revenues residing in, or intangibles owned by, an entity of the MNE group; and the functions carried out by, or capital infused in, the said entity, thus raising an alarm for tax administrators to examine the structure in detail.

The BEPS guidelines provide that the Master File would need to be filed by each entity of the MNE group with the tax administrator of the respective country, at the time of audit, namely in addition to the local TP documentation. CbC reporting is supposed to be prepared by the ultimate parent company of the MNE group, who shall file the same with the tax administrator of its country, who in turn would share the said document with tax administrators of other countries, wherever the MNE group has footprints in the form of subsidiaries or permanent establishments (PE), through official multilateral channels for sharing of information. 

Though the BEPS guidelines do not mandate as to which entity of the MNE group should prepare the Master File, given that the CbC Reporting is the obligation of the ultimate parent of the MNE group, it is only imperative that the Master File should also be prepared by the same entity, namely the ultimate parent, since firstly, from an efficiency standpoint, the same entity, namely the ultimate parent, is best suited to prepare the two documents, which are complimentary and harmonious to each other; and secondly, the ultimate parent can only have the best panoramic view of the overall blue print of the various business lines of the MNE group. 

BEPS Action Plan 13 provides for a minimum threshold of consolidated annual turnover of Euro 750 million for MNE groups to be obliged to comply with CbC reporting, which the Indian Government also seeks to follow, with the corresponding value in Indian rupees working out to appx INR 5395 crore. Incidentally, no threshold has been provided for the maintenance of Master File by MNE groups in BEPS Action Plan 13. One has to wait and see as to whether the Indian Revenue Board prescribes any monetary threshold in this regard, as otherwise small taxpayers may unnecessarily be saddled with additional compliance burden. 

In line with BEPS Action plan 13, the Union Budget proposes that every Indian entity, being a subsidiary or PE, of a foreign parented or headquartered MNE group, would need to disclose the name and country of residence, of its ultimate parent entity, with the Indian tax authorities, who would then obtain the CbC report of the MNE group from the tax authorities of the country of residence of the said parent entity under an arrangement of mutual exchange of information. 

If the ultimate parent of a foreign MNE group is located in a country that does not have either requirements of CbC reporting in its domestic tax laws; or an arrangement for exchange of CbC report with India, then the Indian entity of such foreign MNE group would be required to inform the Indian tax authorities regarding an alternate reporting entity designated by the MNE group, which may be located in a country that has both CbC reporting requirements in its domestic tax laws; and also an arrangement to exchange CbC reports with India, in which case, the Indian tax authorities shall obtain the CbC report of the MNE group from the tax authorities of the country of residence of such alternate reporting entity. Alternatively, if the MNE group designates the Indian entity to be such alternate reporting entity for the group, then the Indian entity would need to provide the desired information with the Indian tax authorities for the MNE group as a whole. 

A graded penalty structure has been provided in case of non-furnishing of report or necessary information in this regard, with the penalty ranging between INR 15,000 to 50,000 per day, depending upon the stage and recurrence of the default. Further, furnishing of inaccurate information, might attract penalty of INR 500,000. 

It goes without saying that both the Master File and CbC Reporting have their main relevance for the headquarter or ultimate parent of an MNE group. Thus, in the context of India, the Indian outbound MNE groups, particularly those having consolidated annual turnover in excess of Euro 750 million (i.e. appx INR 5395 crore), would need to gear up for the exercise as the requirement for compliance would kick start effective 1^st April, 2016. It is most critical for the Indian houses to carry out clinical analyses of their businesses at the earliest to find out whether there are any exposures in terms of mismatches between risks, rewards and functions, which might not have been detected during the course of normal local TP documentations carried out thus far; and take corrective measures with respect to the supply chain models, as the new regulations get enacted with effect from 1^st April, 2016. 

The concepts of Master File and CbC Reporting may not be looked at as a mere compliance requirement under the TP regulations; and should be viewed as an excellent opportunity to revisit the overall supply chain models of the businesses of Indian MNEs; and create value in the system through introduction of efficiencies, synergies, etc. Also, thorough analyses of the overview or blue print of the organsiational and operational structures, as required by Master File and CbC Reporting, would also help Indian MNEs to identify any possible exposures around tax residency rules for their foreign subsidiary companies under the new regulations of place of effective management; and mitigate any such unnecessary exposure through valid corrective measures, strictly within the four corners of law.

Dispute Resolution Scheme 2016 - will it reduce litigation?

In the Budget speech the Finance Minister said that:

“Litigation is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the tax payers and administrative cost for the Government. There are about 3 lakh tax cases pending with the 1^st Appellate Authority with disputed amount being 5.5 lakh crores. In order to reduce this number, I propose a new Dispute Resolution Scheme (DRS).

A taxpayer who has an appeal pending as of today before the Commissioner (Appeals) can settle his case by paying the disputed tax and interest up to the date of assessment. No penalty in respect of Income-tax cases with disputed tax up to Rs. 10 lakh will be levied. Cases with disputed tax exceeding Rs. 10 lakh will be subjected to only 25% of the minimum of the imposable penalty for both direct and indirect taxes. Any pending appeal against a penalty order can also be settled by paying 25% of the minimum of the imposable penalty. Certain categories of persons including those who are charged with criminal offences under specific Acts are proposed to be barred from availing this scheme.”

Thus, this new scheme is aimed at reducing the number of pending appeals.

This scheme would open on 1^st June 2016 and end on a date to be notified. Thus, it would provide a short window to a taxpayer to withdraw pending appeal and settle the dispute with the income-tax department.

The tax payer (known as declarant under this scheme) can make a declaration of the amount of tax, interest and penalty pending as on 29th February 2016 before any Commissioner of Income tax (Appeals) or Commissioner of Wealth tax (Appeals). The pending appeal can be against assessment order or penalty order.

The Scheme makes a distinction between normal demands raised against an assessee and demands arising on account of a retrospective amendment to the Income-tax Act or the Wealth-tax Act. Thus, a declarant can also make a declaration in respect of the tax that has been levied due to any retrospective amendment made in either of these Acts and for which appeal is pending as on 29^th February 2016 before the Commissioner of Income tax (Appeals) or Commissioner of Wealth tax (Appeals) or Appellate Tribunal or High Court or Supreme Court. The tax so determined would be called a “Specified Tax”.

The declarant should make an application in the prescribed form to any authority above the level of a Commissioner. Once the declaration is made, any appeal pending before the Commissioner of Income tax (Appeals) or Commissioner of Wealth tax (Appeals) shall be deemed to be withdrawn. In respect of the appeals where a declaration is made due to “specified tax”, the relevant appeal will actually need to be withdrawn and a proof of the withdrawal is also required to be furnished along with the undertaking in the prescribed form and manner waiving the right to claim the remedy under any law in force which is available to him at present.

The Commissioner would then, within a period of 60 days of the declaration, determine the amount payable by the declarant. The declarant must pay the amount within a period of 30 days of the order and furnish the proof of payment. The order passed by the Commissioner would be final and no matter covered under this order would be re-opened under the Income tax Act, Wealth tax Act or any other law in force.

The declarant is required to pay tax and interest upto the date of assessment / reassessment order. Where the disputed tax exceeds Rs. 10 lakhs, 25% of the minimum penalty leviable would also be payable in addition to the tax and interest. Where the appeal is against a penalty order, 25% of the minimum penalty leviable would be payable in addition to the tax and interest on the total income finally determined. In case of “specified tax”, the entire amount of the tax would be payable.

Once the amount is paid under this scheme, no amount would be refunded to the tax payer under any circumstance.

The declarant under the said scheme would get immunity from prosecution for any offence under the Income tax Act or the Wealth Tax Act. Immunity from penalty would be in respect of the amount which exceeds the penalty that would be paid under this scheme.  Similarly, immunity from interest would be in respect of the amount which exceeds the interest that would be paid under this scheme. The waiver / immunity would be only in respect of the matters for which the declarant has made an application under this scheme.

In case the tax payer violates any conditions of the scheme or makes a false declaration, it would be deemed to have never been made and the appeal proceedings would be revived.

This scheme is not applicable in the following scenarios:-

• Cases where prosecution has been initiated before 29^th February 2016.
• Search or survey cases where the declaration is in respect of tax arrears.
• Cases relating to undisclosed foreign income and assets.
• Cases based on information received under Double Taxation Avoidance Agreement under section 90 or 90A of the Income-tax Act where the declaration is in respect of tax arrears.
• Persons notified under Special Courts Act, 1992.
• Cases covered under Narcotic Drugs and Psychotropic Substances Act, Indian Penal Code, Prevention of Corruption Act or Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

For efficient administration of the scheme, it is also proposed that the Central Government may be given the powers to issue orders, instructions and directions to the persons engaged in execution of the scheme. The said orders can be passed upto 31^st May 2018. Further, every order passed after 31^st May 2018 would have to be presented in both the houses of the Parliament.

Based on a combined reading of all the provisions of the Scheme, the following points emerge:

a)     In case of demands that have been raised in pursuance of a retrospective amendment to the Acts

Here, the concerned tax payer can withdraw the appeals filed by him and which are pending before any of the authorities - CIT(A)/ITAT/High Court/Supreme Court and pay the entire amount of tax demanded by the department. Thus, in such cases, the taxpayer will be absolved of the interest and the penalty.

b)    In cases other than above relating to tax and interest demands disputed in appeal

The tax payer will have to pay the full tax demanded from him alongwith interest upto the date of the assessment/reassessment order. Further, in case the tax exceeds Rs. 10 lakhs, then a further amount equal to 25% of the minimum penalty that would have been leviable will also have to be paid. Therefore, in such cases, the taxpayer will be saving on the penalty that would otherwise have been levied at anywhere between 100% to 300% of the tax.

c)     In cases where the penalty is disputed in appeal

Here, the entire penalty demanded has to be paid. Therefore, there is really no saving in such cases.

However, in all the cases mentioned above, the taxpayer would be relieved of the sword hanging on his head threatening prosecution.

The question that arises will this Scheme really succeed? Will taxpayers who are in appeal at present at various stages be motivated to withdraw their appeals and buy peace with the income-tax department?

The answer cannot be a simple yes or no. Every taxpayer would have different facts relating to his case. One must bear in mind the fact that litigation in India is an extremely long drawn out process. The period beginning with the assessment order and ending with the final outcome in the Supreme Court often lasts several decades. Apart from the financial stress of the demands, there is also the emotional and physical stress that go hand in hand with litigation. Not many people or companies are comfortable with protracted litigation that goes on for years together. Having continued contingent liabilities on one's balance sheet is not exactly a happy situation for any CFO. Also, as a nation, our past track record of amending the law retrospectively after a Supreme Court order goes in favour of a taxpayer is not exactly encouraging for a taxpayer to risk fighting the income-tax department all the way to the apex Court. Of course, all this would vary from one taxpayer to another. It would also depend on who is advising the taxpayer.

My personal view is that in those cases where the facts are not very strongly in favour of the taxpayer and where the possibility of penalty being levied for concealment is very strong, the taxpayer could opt to settle the matter under this Scheme. Where the demand has been raised on account of a retrospective amendment to the law, in all probability, the taxpayer would be a foreign company. In such cases, where the concerned taxpayer sees a huge commercial market in India in the years to come, and where the company has a long term interest in India, it is possible that the Scheme may be considered as a viable option of settling the dispute with the Indian tax authorities without losing face and at a relatively lesser price.

One will need to wait and watch how the taxpaying community - especially the foreign companies who have had to bear a lot on the tax front in India in the past decade - perceive this Scheme and how they react to it.

Dividend Income Taxation and DDT - A good arbitrage opportunity for promoters?

Following the philosophy of taxing the well-off proposed by the Economic Survey 2016, the Finance Bill, 2016 has not only increased the surcharge from 12% to 15% for individuals having total income above Rs. 1 crore, but has also proposed to impose an additional tax on dividend income of the super-rich investors. It is now proposed that dividend income (in addition to the dividend distribution tax (DDT) already levied) received from a domestic company exceeding Rs 10 lakhs will now be taxable @ 10% on a gross basis in the hands of recipient (being an individual, HUF or a firm resident in India).

Before we analyze the impact of this proposed additional tax on dividend, it will be useful to turn the pages of history and recapitulate the evolution of taxation of dividend income over the years.

Dividend Taxation

Dividend taxation has seen numerous changes in the last two decades. Prior to 1997, dividend was taxable in the hands of recipient at the applicable tax rates. Since 1997, dividend income has been made exempt in the hands of the recipient and DDT has been made payable by companies distributing the dividend. The initial DDT rate of 10% was consistent with the rate of withholding tax on dividends in most Indian and international tax treaties.

In the initial years, the DDT regime was not favorable to multilayered corporate structures, since it resulted in DDT at each level of corporate dividend distribution, even within the same group structure. This led to a cascading effect of DDT.

This cascading effect of DDT was eliminated in two stages. First, with effect from 1 April 2008, it was limited to two tier structures. Later, with effect from 1 July 2012, the cascading effect of DDT in multi-tier holding structures too has been eliminated. This provided much relief to promoters holding their investments through multi-tier entities.

DDT has been one of the biggest concerns of corporate India with the primary contention being that it leads to double taxation - dividend is nothing but distribution of profit of the companies which already suffer tax. Furthermore the moderate DDT rate of 10% in 1997 has doubled with the current effective rate of DDT @ 20.36%. Such a high rate of DDT prevalent today has certainly affected the dividend distribution ability of corporates. Further it has also created difficulties for foreign investors on account of the uncertainty surrounding the availability of credit of DDT in their home countries, under the respective tax treaties.  

Finance Bill, 2016 - Proposed amendment

While the Finance Bill, 2016 has not addressed these issues surrounding DDT, it has now turned its attention to taxing the dividends further - now in the hands of the super-rich recipients. It is now proposed that dividend income received from a domestic company exceeding Rs 10 lakhs will now be taxable @ 10% on a gross basis in the hands of recipient (being an individual, HUF or a firm resident in India). Even though the dividend has already been subject to DDT, the Memorandum to the Finance Bill 2016 states (and implicitly justifies) that “the DDT creates vertical inequity amongst the tax payers as those who have high dividend income are subjected to tax only at the rate of 15%whereas such income in their hands would have been chargeable to tax at the rate of 30%”.

By that reasoning, perhaps scrapping DDT and reverting to taxing dividends in the hands of the recipients could have been a better option?

Further, a close look at the proposed amendment (a new section 115BBDA) reveals that the amendment itself is not happily worded and can lead to multiple interpretations. One of the issues is whether the additional tax of 10% is applicable on aggregate amount of dividend received by the recipient during the year or only on dividend in excess of Rs 10 Lakhs? Whether the limit of Rs 10 Lakhs is to be determined qua each company or aggregate dividend received by the recipient?

While the provisions are unclear, it appears more reasonable that the intention is to levy the additional tax only on the aggregate dividend which is in excess of Rs. 10 lakhs. Accordingly, where a recipient receives dividend from various companies aggregating to Rs. 15 lakhs during a year, the additional tax of 10% should be levied only on Rs. 5 lakhs. Hopefully, these issues should get clarified in due course.

It must be noted that this additional tax is not applicable on dividends received from mutual funds. Also, corporate shareholders as well as non-resident recipients are not liable to this tax.

Impact on Promoters / Corporate Holding Structure

Given that the proposed amendment of further taxing dividends in the hands of the recipients @ 10% will impact the promoters of domestic companies, we will surely see a big push in Corporate India rushing to declare interim dividends before March 31, 2016, before the proposed amendment is effective.

Promoters over the years have been making amends to their holding structures to maximize their returns. While traditionally, promoters' investments were mostly held through holding companies, however post introduction of DDT and the subsequent DDT rate hikes, promoters started holding their investments directly to minimize the DDT leakage. The proposed additional tax on dividends, therefore will again drive promoters to relook at how they can receive profits in a tax efficient manner. One of the possible avenues could be for companies with large promoter holdings to distribute profits via a share buy-back route. Currently buy-backs are subject to Buyback Tax of 23.07% (including surcharge and cess). With effective DDT rate of 20.36% coupled with the additional tax on dividend of 10%, share buy-backs, albeit with its limitations, will provide a good arbitrage for promoters to optimize their returns.   

Of late, promoters had also started adopting the Limited Liability Partnership (LLP) route for carrying out their business operations. With no DDT levied on profits distributed by the LLPs, LLP is being looked upon as a favourable vehicle (besides having other advantages like reduced compliances and operational flexibility). However LLPs, being firms, will also now be subject to the additional tax on dividends. Accordingly, where LLPs have investments in companies, it may not be more tax advantageous ultimately for the promoters, in as much as while the profits from LLPs will not suffer DDT, LLPs in turn will have to bear the brunt of the additional tax on the dividends they receive. 

The super-rich promoters have certainly lots to think over on optimizing their returns post April 1, 2016!

Co-authored by Vishal Lohia (Manager, Dhruva Advisors LLP).

Surajkumar Shetty ( Senior Associate), Khaitan & Co.
Retrospective provisions for offshore transactions: Indian Government extends an olive branch!

The Indian Budget for the financial year 2016-17 was presented in the Indian Parliament on the 29^th February wherein the Government has proposed to introduce a 'The Direct Tax Dispute Resolution Scheme, 2016' (“Scheme”). The Scheme will allow certain categories of taxpayers to resolve their pending tax disputes by making payment of such portion of tax, interest and penalty as may have been prescribed therein. This portion of tax, interest and penalty has been prescribed on the basis of the nature of pending litigation matter in India. 

There are certain controversies in Indian taxation which have over shadowed the silver linings in the more positive developments in Indian tax laws. The biggest and most talked about controversy was the spate of retrospective amendments made over the past few years which changed certain key provisions relating to taxation of non-residents and had an impact of their past transactions. Some of the amendments relate to taxation of indirect transfer of Indian assets, amendments to definition of 'royalty', etc. Some of the big names who have been caught in the retro-net of taxes are Vodafone, Cairn and Nokia. 

The famous retrospective amendment made to section 9 of the Indian Income Tax Act by Finance Act 2012 immediately after the Supreme Court ruling in the case of Vodafone came as a surprise and caused discomfort for foreign investors. It was a shock to them that despite the Indian Supreme Court ruling that the relevant statutory provisions did not cover offshore transactions for purchase and sale of an offshore company / offshore shares within its ambit, despite that a retrospective amendment was made to overcome this ruling.

These disputes are now sought to be settled by the Indian Government once and for all seeking to implement the Scheme.

A brief structure of the law has been discussed hereunder, which will throw light on the intention of the Government and the manner in which this 'settlement' could potentially work out.

Eligibility

A taxpayer will be eligible to file a declaration for resolving a dispute in relation to 'tax arrears' or 'specified tax'. The term 'tax arrears' in this context means an amount of tax, interest and penalty determined under the Income Tax Act or Wealth Tax Act in respect of an appeal pending before the Commissioner of Income Tax (Appeals) (“CIT (A)”). This is a general definition under which the benefit of this settlement could be availed by a larger number of taxpayers. 

However, the term that we are concerned with for the purposes of this article is 'specified tax'. 'Specified tax' is defined as a tax emanating from any retrospective amendment made to the Income Tax Act or Wealth Tax Act and which relates to a period prior to such amendment. Also, the dispute in relation to such tax should have been pending as on 29 February 2016 (i.e. the day the present Budget was placed before the Indian Parliament). 

Accordingly, this settlement option is only available to such taxpayers in relation to whom: 

1. tax liabilities have arisen due to a retrospective amendment to the Indian Income Tax Act (or the Wealth Tax Act); and
2. where, as on 29 February such disputes are pending for disposal / resolution before the Courts in India or where an arbitration, conciliation or mediation proceeding has been initiated by the taxpayer under any of the agreements signed by India with some other country. 

Relevant procedural mechanism 

In order to avail of this opportunity of settling the tax dispute, the taxpayer will be required to withdraw the appeal or writ petition, etc. pending before the relevant Court(s) or the notice or claim pending for mediation / arbitration / conciliation. Also, the taxpayer would need to pay the entire tax amount as has been determined to be payable by it in order to be able to file the declaration for settlement. Post withdrawing the matter as above, a declaration is required to be filed before designated authority seeking to settle the dispute. The 'designated authority' would be a high ranking officer such as the Commissioner of Income Tax or a notified Principal Commissioner of Income Tax. 

The procedure before the designated authority is a time-bound process. The designated authority is required to determine the amount of tax payable by the declarant and issue a certificate in this regard within a period of 60 days from receipt of the declaration. Post such determination, the declarant is required to pay the amount determined by the designated authority within a period of 30 days from the receipt of the certificate. 

This Scheme will be effective from 1 June 2016. 

The likely outcome? 

It seems that the Government has opted for a middle path in order to try and settle disputes and collect as much tax as it possibly could. These disputes which have arisen due to retrospective changes in various provisions had brought a lot of negative publicity to the Indian tax regime. 

However, the new Government has taken on the mantle of making a paradigm shift in the image of the Indian tax laws and administration. The Government has time and again reiterated that resort to retrospective tax provisions shall be avoided in order to maintain a clear and certain tax regime in India. 

Some of the taxpayers which were impacted by the retrospective amendments have sought to invoke arbitration / conciliation proceedings on the basis of the Bilateral Investment Protection Agreements that have been entered into by India with other countries. One such example is of Vodafone. Vodafone had earlier sent an arbitration notice to the Indian Government for settling their dispute which arose as a result of acquisition of a share from Hutch of an offshore company which supposedly derived substantial value from India. Vodafone was sent tax recovery notices in spite of them having received a favourable ruling from the Supreme Court of India that the offshore transaction did result in tax liability in India. These recovery notices were sent on the strength of a retrospective amendment to the law relating to 'source' based taxation in India. 

As per media reports, the Government had previously made a similar offer to Vodafone wherein it was asked to pay the principal tax amount whereas the interest and penalty were supposed to be waived. But there has been no further news or update regarding this offer in the public domain. Recently however, Vodafone was served a notice in February this year to pay approx. INR 14,000 crores in tax demand of which approx. INR 8,000 crores pertain to the principal tax. 

The success of this new offer now made by the Government in the Finance Bill would depend on the belief of the concerned multi-nationals (for example Vodafone, etc.).  If they believe that they have very strong case to succeed in arbitration proceedings against tax liability raised by the Indian Tax Authorities pursuant to retrospective amendment levying tax on offshore transactions, then they may not be inclined to go for this offer.

BEPS Implementation in India- A discordant Note in Budget 2016

1.         Base Erosion & Profit Shifting ("BEPS"), being the scourge of tax systems the world over, India has played a very pro-active and constructive role with G-20  nations and other OECD member states in the deliberations and formulations leading to  15 point action plan of BEPS released about 6 months ago in October 2015.  The hallmark of BEPS has been the spirit of consensus and co-operation among the international community to come out with measures which address concerns of almost every country in the world, which is something unique and never seen in the last almost 100 years since some kind of international Tax Treaties have been in existence. This Article attempts to highlight a discordant note with regard to Equalisation Levy, in Finance Bill, 2016 ("FB"), where apparently there is a deviation from international consensus in BEPS deliberations.

2.         Out of 15 point action plan of BEPS, India Budget 2016 proposes to implement the following 3 points:

• Action 1:    Addressing challenges of digital economy
• Action 5:    Implementation of Patent Box Regime.
• Action 13:  Master File and CbC reporting in Transfer Pricing documentation.

3.         While Action 5 and Action 13 are implemented through amendments to Income Tax Act, 1961 ["ITA"], which is the expected usual mechanism; Action 1 is implemented not through ITA but by Chapter VIII of FB by enacting a tax called  Equalisation Levy.

4.         Main features of Equalisation Levy are:

• Supposedly, a tax on non-resident not having a traditional brick and mortar PE but having a website PE, thereby not taxable in source state on its business receipts under traditional PE rules.
• However resident to pay 6% tax  on gross amounts  paid to such non-resident
• Non-resident recipient exempt from tax in India under proposed section 10(50) of ITA
• Entire liability on payer resident to deduct and pay to the government. All consequences of non-compliance including disallowance under newly proposed section 40(a)(ib) on payer resident.

5.         Equalisation Levy is one of the other 3 options considered in BEPS deliberations as stated below (Para 345 of Final Report on Action 1)

“345. The technical details of the other three options were developed over 2015 in a way that allows them to be applied individually (i.e. a new “significant economic presence” nexus for net-basis taxation based with deemed profit attribution methods, the application of a withholding tax, or an equalisation levy) or combined. The application of these options would generally allow countries to impose a tax in situations where a foreign enterprise derives considerable sales income from the country without a physical presence therein, and/or uses the contributions of in-country users in its value chain, including through collection and monitoring of data.”

 6.        A multilateral treaty instrument has been considered as the most desirable approach for implementing BEPS vide Action Point 15. For ready reference, relevant extract reproduced below: 

"8. A multilateral instrument facilitates speedy action and innovation. A multilateral instrument will implement agreed treaty measures over a reasonably short period and at the same time it would preserve the bilateral nature of tax treaties. This innovative approach has at least three important advantages. First, it would help ensure that the multilateral instrument is highly targeted. Second, it would allow all existing bilateral tax treaties to be modified in a synchronised way with respect to BEPS issues, without a need to individually address each treaty within the 3000+ treaty network. Third, it responds to the political imperatives driving the BEPS Project: it allows BEPS abuses to be curtailed and governments to swiftly achieve their international tax policy goals without creating the risk of violating existing bilateral treaties that would derive from the use of unilateral and uncoordinated measures.”

7.         The agreed approach is further embodied in para 383, fourth and fifth bullet of Final Report on Action 1 i.e. Digital Economy:

            "383. As regards the different options analyzed, the Task Force on Digital Economy          ["TFDE"] concluded that:

            …………………………………….

• ………………………………..
• ………………………………..
• Some aspects of the broader direct tax challenges currently raised by the digital economy are expected to be mitigated once the BEPS measures are implemented. A quick implementation of the BEPS measures is needed, together with mechanisms to monitor their impact over time.

•  None of the other three options analyzed by the TFDE were recommended at this stage. This is because, among other reasons, it is expected that the measures developed in the BEPS Project will have a substantial impact on BEPS issues previously identified in the digital economy, that certain BEPS measures will mitigate some aspects of the broader tax challenges, and that consumption taxes will be levied effectively in the market country.

•  Countries could, however, introduce any of the options in their domestic laws as additional safeguards against BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties. Adoption as domestic law measures would require further calibration of the options in order to provide additional clarity about the details, as well as some adaptation to ensure consistency with existing international legal commitments."

8.       The above discussion shows that multilateralism, reciprocity and a conscious regard to international treaty obligation has been the hallmark of BEPS deliberations all along and unilateralism is sought to be discouraged (please see underlined portion in later part of para 6 above). Even Constitution of India vide Article 51(c) requires the Government of India to endeavor to:

            “Article 51 - Promotion of international peace and security

The State shall endeavour to-

(a) ………………………….

(b) ……………………………

(c) foster respect for international law and treaty obligations in the dealings of organised peoples with one another; and

(d) ………………………….”

9.         As against the above back-ground, what we see is that Equalisation Levy does not fall within the charging sections of ITA namely section 5 and 9. Ex consequenti, the effect of imposing this levy through FB rather than ITA results in defeating the option available to a non-resident of choosing the more beneficial option between the Treaty and ITA under section 90 of the ITA. Assuming the payer includes the Equalisation Levy as cost in the consideration payable to service provider thus effectively passing on the tax burden on the non-resident service provider, it is difficult to see whether the non-resident will be eligible to take credit of Equalisation Levy as foreign tax credit in his country of residence. This leads to double-taxation. It is important to note that both: avoidance of double-taxation and avoidance of double non-taxation are the paramount concerns of BEPS.

10.       India currently is one of the large economies growing at a very fast clip. Such nation should not, ideally, be seen to be bypassing international treaty obligations. It is therefore expected that this new levy may be brought within the fold of ITA, so that the levy eventually gets covered by the multilateral treaty instrument, thus promoting the true objective of BEPS project, which in any case is beneficial to the comity of nations at large.

Stay of Demand - Addresses taxpayer hardship, but implementation key!

There has been a lot of efforts by this Government in pushing through various reforms such as Make in India, Digital India, etc. and ease of doing business in India.

In the recent past, one of the major cause of concern for the businesses has been the process of recovery of tax demand and the manner in which the tax authorities were collecting the outstanding tax demand. The tax authorities have been insisting for payment of at least 50% of the outstanding tax demand and in certain cases, there have also been instances of attachment of bank accounts of the tax payers, for recovery of the outstanding demand, which had caused genuine hardship to the taxpayers, especially, cases of high-pitched assessments.

The Central Board of Direct Taxes ('CBDT') had issued several circulars / internal instructions to streamline the process of collection of demand and granting of stay, keeping in mind the hardship caused to the taxpayers.

In order to address the above issue and also considering the various industry representations, the Ministry of Finance had set-up an IT simplification committee, led by Retd. Justice R V Easwar, to reform various tax issues. One of the key focus area was to reform the collection and recovery of demand by the tax authorities and the committee had suggested for certain relaxation / reliefs in favour of taxpayers, in collection of outstanding tax demand.

Taking a cue from the committee's report, the Finance Minister in his budget speech of 2016, mentioned about easing the process for collection and recovery of outstanding demand and appropriate instructions would be issued for streamlining the process for collection of demand.

The CBDT has now issued an office memorandum, modifying the guidelines and standardizing the process for collection of demand, whereby the tax authorities have been instructed to collect upto 15% of the outstanding tax demand (subject to the conditions laid down during the course of such stay proceedings), provided the taxpayer has filed an appeal before the first appellate authority i.e. Commissioner of Income-tax (Appeals).

The memorandum also provides for various situations, like where the matter has been decided in favour of the taxpayer by the courts or the matter has been decided in favour of the tax authorities, which would enable the tax authorities to collect more or less than the prescribed 15% of the outstanding tax demand.

Further, the memorandum provides the taxpayers an option to approach the jurisdictional administrative Principal Commissioner of Income-tax / Commissioner of Income-tax for a review of the decision of the lower tax authorities, in a situation where they are still aggrieved by the tax authorities collecting the prescribed limit of 15% of the outstanding tax demand.

It is important to note that the memorandum also provides the timeline to dispose the stay applications of the tax payers i.e. 2 weeks from the date of filing of such petition, which is a positive step towards faster disposal of such applications.

This is a welcome step by the CBDT   in streamlining the process of collection of demand and also in addressing the hardship caused to the tax payers. Having said this, it is important to see how these guidelines gets implemented by the tax authorities on the ground.

Information for the editor for reference purposes only

K. S. Prasad, Partner, Raghavendra N, Manager and Abhimanyu Murarka, Senior Executive with Deloitte Haskins & Sells LLP. 

Advocates Mr. Sandeep Chilana and Ms. Abhilasha Singh
Service Tax On Senior Advocates - A 'Class' Apart?

Every union budget is expected to be a harbinger of goods news with friendly policy changes, tax reliefs, ease of doing business and the like. The recently announced union budget for the fiscal year 2016-17 (“Budget”) ticked quite a few of these boxes. However, it did propose certain changes which have received mixed reactions from the industry and the experts alike.  

One such proposal is the levy of service tax on legal services provided by senior advocates. Currently, legal services provided by all advocates (including senior advocates) and law firms to any business entity[1] attracts service tax at the rate of 14.5%[2]. However, tax on such legal services is required to be deposited under reverse charge mechanism i.e. the liability to deposit such tax with government has been shifted from advocates and law firms to the service recipients i.e. business entities. In other words the advocates and law firms are not required to undertake any compliance with respect to payment of tax on legal services provided by them. Further, currently the following legal services provided by advocates (including senior advocates) or law firms are exempt: 

1. when provided by an advocate (including senior advocate) or a law firm to other advocate or law firm; or
2. provided by an advocate or a law firm to any person other than business entity.

In the Budget, the Hon'ble Finance Minister, who interestingly is also a designated senior advocate, has proposed to withdraw the service tax exemption on legal services when provided by senior advocates to an advocate or a law firm, with effect from April 1, 2016. By virtue of the proposed amendment, the legal services provided by senior advocates to advocates or law firms would also become chargeable to service tax at the rate of 14.5%[3]. 

It is also proposed in the budget that senior advocates would be removed from the exception of payment of tax under the reverse charge mechanism where the tax is payable directly by the service recipient. It is now proposed that senior advocates would be required to obtain service tax registration, deposit service tax with the Government on all services rendered by them, whether to advocates or law firms or directly to clients. 

While the larger question of the constitutional validity of levy of service tax on legal services per se, is currently sub judice before the Hon'ble Supreme Court[4], it is important to note that the proposed amendment differentiate the senior advocates from the advocates or laws firm on the following two counts: 

Firstly, the status quo with respect to services provided by junior advocates to advocates or senior advocates or by associates to law firms would continue, i.e. such services would continue to be exempt from levy of service tax. However, legal services when provided by a senior advocate to other independent advocates or law firms would now attract service tax. 

Secondly, the status quo with respect to mechanism for payment of tax for advocates and law firms would continue to be covered under reverse charge mechanism i.e. the clients (business entity) would deposit the tax with government directly. However, in case of services provided by senior advocates to advocates, law firms or business entities, the burden of payment and related compliances has been shifted to senior advocates. 

It is therefore clear that the proposed amendment seeks to treat advocates/law firms and senior advocates as two separate classes of advocates and tax only one of the class when providing services to other class of advocates. It is this differential treatment amongst the same set of professionals, which has triggered the debate on the constitutionality of the proposed amendment. 

The budget speech of the Hon'ble Finance Minister only made a passing reference to the proposed change and did not throw any light on the objective behind the same. Further, no objective is also forthcoming from of reading the fine prints of the notification proposing the amendment or other budget documents, which has left many questions unanswered. 

In absence of any such reasonable objective being put forth, it is being debated that the proposed change created an arbitrary distinction between legal professional providing same services only on the basis that one such class has been designated as senior advocate by the courts and is therefore infringes the fundamental right to equality as enshrined in Article 14 of the Constitution of India.

At this juncture, it is pertinent to note that the Advocates Act, 1961 (“Act”) specifically recognises two classes ofadvocates, namely, senior advocates and other advocates. It provides that an advocate may be designated as a senior advocate by the Supreme Court or High Courts by virtue of their ability, standing at the Bar or special knowledge or experience in law. The two classes of advocates therefore emerge from the provisions of the Act itself and the argument that the present amendment attempts to create two arbitrary classes of lawyers without any intelligible differentia may not be appreciated by courts. 

It is important to note that Hon'ble Supreme Court in recent past has adopted a very liberal view while determining what amounts to different class. In a very recent judgment relating to grant of bar licenses in Kerala, the Hon'ble Supreme Court[5], upheld that grant of bar licences to five star hotels alone differentiating it with four star or three star hotels, was constitutional. The Hon'ble Court recognised that while five star hotels and other hotels provide similar services, the five star hotels were a separate class within the said class. 

In light of the above, in the event that the constitutional validity of proposed amendment is challenged, the Government may argue on the grounds that the proposed amendment stands the test of 'intelligible differentia' or reasonable classification as contemplated under Article 14 of the Constitution, specially keeping in mind that it is a taxing statute. 

Keeping in mind the fact that service tax is a consumption tax, the senior advocates may pass on the burden of the said levy to the advocates, law firms or business entities, as the case may be. In such case, the proposed amendment will have considerable impact on the cost of obtaining justice for the litigants (both business entity or otherwise), where senior advocates are engaged through advocates or law firms appointed by the litigant, as any additional service tax charged by senior advocate from advocates or law firms would be passed on by such advocates or the law firms to the litigant. 

It is important to note that the effect of the proposed withdrawal of exemption would not only be limited to increased litigation cost as discussed above, but would also lead to an additional burden of 'tax on tax'. In a situation, where the client receiving legal service from an advocate or law firm is a 'business entity', it would be required to pay service tax under reverse charge mechanism on all legal fees and reimbursements charged by such advocate or law firm. Unlike other business, the advocates of law firms would not be able to take the Cenvat credit of service tax charged by the senior advocates and therefore would claim the service tax fees by such senior advocate as reimbursements. Therefore, in such cases, the client would end up paying additional service tax on the service tax amount charged by senior advocates. 

The below pictorial representation may be useful to understand the increased burden on the client: 

Present Scenario

Post April 01, 2016

Keeping in mind such financial impact on cost of obtaining justice it is no surprise that the proposed amendment is receiving mixed reactions from the industry. It is also appropriate to mention here that the current Government seems very committed towards the introduction of the Goods and Services Tax (“GST”), wherein the focus would be to tax all kinds of goods and services, prune exemptions to the minimum and introduce an efficient credit mechanism. It may have been more appreciable if the Government would have used GST to introduce levelling factor where all legal services rendered directly or indirectly to business entities would get taxed with complete credit flow.

On a lighter note, the only benefit that seems to emerge from the proposed amendment is job creations for accountants and finance professionals, as senior advocates would need to engage them to ensure accurate and timely deposition of service tax and filing of tax returns.

Divya Jeswant (Senior Associate), Economic Laws Practice (ELP), Advocates & Solicitors
CENVAT credit budget amendments: Taking the bad with the good

The Union Budget 2016-17 has amended the CENVAT Credit Rules, 2004 ('Credit Rules') significantly, which has far-reaching impact for industry.  

While the CENVAT scheme is one of beneficiation for manufacturers and service providers, most disputes currently arise out of the interpretation of the provisions of the Credit Rules. The Union Budget amendments have taken a step forward to provide certainty on disputed issues, which amendments involve all four segments of the credit provisions - availment, reversal, distribution and utilisation of credit. 

Availment of credit 

Certain noteworthy amendments have been made to the definitional and the eligibility provisions, i.e. under Rules 3 and 4 of the Credit Rules.

(a)           Capital goods: 

The definition of “capital goods” has been modified to enable credit of wagons and also of equipments and appliances used in an office of a manufacturer. The former was held not to be available in terms of Bulk Cements Corporation (India) Ltd. vs. CCE [2013 (294) ELT 433 (Tri-Mum)], while the latter was previously specifically excluded from the definition. 

CENVAT credit has been disallowed in respect of “capital goods” where they are used exclusively for exempt manufacturing / service for two years starting from the date of installation (or from the date of commencement of commercial production / rendition of service). Previously, there were two schools of thought on this issue - (i) credit could be availed if the assessee was not involved only in exempt activity on the date of receipt of the capital goods; or (ii) credit could be availed if the assessee had no intention to carry out only exempt activity on the date of receipt of the capital goods. This amendment now subverts both these tests to some extent and overcomes the decision in Brindavan Beverages Pvt. Ltd. vs. CCE, Meerut [2014-TIOL-2136-CESTAT-DEL], wherein it was held that the length of usage of the capital goods for exempt activity is not the requisite criteria to avail the credit of capital goods. 

(b)           Inputs 

The definition of “inputs” has been amended to include any “capital goods” which have a value up to Rs. 10,000. Corresponding exclusion from the definition of “capital goods” has also been made. The impact of shifting such items from the category of “capital goods” to “inputs” is fourfold: (i) the entire amount of credit can be availed in one shot in the initial financial year; (ii) at the time of removal of used inputs, there may be no requirement for reversal of credit on depreciated value (as in the case of capital goods); (iii) for availing abatements where credit of inputs is not allowed, credit of capital goods costing less than Rs. 10,000 will also have to be forgone; and (iv) such items will have to be considered for reversal of credit under Rule 6. 

(c)            Services 

Credit in respect of assignment of “right to use” any natural resources must be availed in a staggered manner, i.e. on Straight Line Method basis for the duration of the assignment. While this amendment affirms the right to credit in respect of such assignment of right to use, at the same time, the credit is not made available in one shot. This amendment also raises the interesting issue of whether a category of “capital services” is being evolved under the CENVAT scheme. 

The definition of “exempted service” has also been amended to exclude transportation of goods by a vessel from a customs station in India to a place outside India. This amendment effectuates zero-rating for outward transport for export goods, as basic ocean freight which was previously under the negative list has been brought into the tax net from this Budget. 

Alignment of reversal provisions 

Rule 6 of the Credit Rules has been revamped to provide as follows:

(a)           Manufacturers exclusively engaged in exempt activity will not be eligible for credit of any inputs and input services;

(b)           Manufacturers engaged in both exempt and taxable activity may follow either of the following options for reversal:

(i)             pay an amount equal to 6%of value of the exempted goods and 7%of value of the exempted services (subject to a cap of the total credit available with the assessee at the end of the period to which the payment relates); or  

(ii)           pay an amount of ineligible CENVAT credit proportionate to exempt activity. 

For banking and financial institutions including a non-banking financial company, which are engaged in providing services by way of extending deposits, loans or advances, a third option is available to pay an amount equal to 50% of the CENVAT credit availed on inputs and input services in each month. 

Two positives emerge from this overhaul - first, the cap on payment at the rate of 6/ 7% is a welcome step, in line with decisions such as Sirpur Paper Mills Ltd. vs. Commissioner of C. Ex., Hyderabad [2006 (205) ELT 188 (Tri.-Bang.)]; secondly, the amendment lays to rest the issue raked up by the case of Thyssenkrupp Industries Pvt. Ltd. vs. CCE [2014 (310) ELT 317 (Tri-Mum)], where the Hon'ble Tribunal expressed the prima facie view that proportionate reversal is to be carried out qua the entire credit pool and not only qua the common credit pool. 

On the other hand, the scope and ambit of the term 'exempted service' has been thrown open to encompass any activity even if it is not a service. This has dangerous ramifications as potentially any transactions (including sale of goods, sale of immovable property, investment activity etc.) will now count as 'exempted service' going by the strict wording of the definition. Therefore, very few businesses will be left which do not have any exempted service. Assessees are accordingly required to analyse not only the receipts qua their regular business, but also those which are captured under the head 'other receipts', while carrying out reversals under Rule 6. 

Relaxation of ISD provisions 

An overall relaxation of the ISD provisions has been brought in through this Budget. 

The definition of ISD has been extended to an office of an 'outsourced manufacturing unit', which includes both a job worker who pays duty on goods manufactured for the ISD, as well as a contract manufacturer who produces goods for an ISD under the latter's brand name and pays duty. Rule 7 has correspondingly been amended to enable distribution of input service credit to an outsourced manufacturing unit in addition to own manufacturing units. Outsourced manufacturing units are required to maintain separate accounts of credit received from each ISD and use such credit for payment of duty on goods manufactured for the respective ISD. This provision applies only prospectively, and credit of input services available with an ISD as on March 01, 2016 cannot be distributed to an outsourced manufacturing unit. 

The amendment overcomes the decision in Sunbell Alloys Co. of India Ltd. vs. CCE, Belapur [2014 (34) STR 597 (Tri.-Mumbai)], which denied CENVAT to a jobber against the ISD invoice issued by the principal manufacture. 

Furthermore, it has also been made clear that Rule 6 is not to be applied by an ISD while distributing the credit; rather, the unit to whom the credit has been distributed must apply Rule 6 upon receiving the distributed credit. 

Additionally, Rule 7B has been inserted to enable manufacturers with multiple manufacturing units to avail CENVAT on the basis of an Excise invoice issued by the warehouse storing inputs (raw material, packing material etc.) of the said manufacturer. The procedure as applicable to a first stage dealer or a second stage dealer would apply to such warehouse in this regard. 

All of the aforesaid amendments effectively remove existing blockages to enable free flow of credits for both manufacturers and service providers.

 Utilisation of credit 

Certain restrictions have been placed on utilisation of CENVAT under the Credit Rules. In respect of the newly imposed Krishi Kalyan Cess, which will come into force from June 01, 2016, credit of the Cess paid on input services will be permitted to be utilized only for payment of the Cess on output services. Further, no provision for inter-sectoral credit of the Cess has been made for manufacturers. 

A similar restriction on utilisation has been introduced for the proposed Infrastructure Cess (also to come into force from June 01, 2016) which is to be levied on certain motor vehicles. 

The existing provisions in respect of the levy of National Calamity Contingent Duty (NCCD) have also been modified to provide that only NCCD can be utilised for payment of output NCCD on any products. 

On the upside, the 'deemed utilisation' provision for purposes of calculation of interest liability has been done away with. 

Concluding comments 

The aforesaid alignment of the CENVAT provisions has to some extent improved fungibility in the credit chain, cleared up certain ambiguities on reversals, and enabled ease of distribution of credit. The nature of changes suggests that they are possibly geared towards a liberalisation of the credit regime, with the proposed GST in mind. 

However, as can be observed, most of the amendments usher in the good along with the bad. 

In so far as the provisions have brought in consequences which are possibly unintended or have resulted in ambiguity, given that the CENVAT amendments will come into effect from April 1, 2016 (unless otherwise specified), there is a window of opportunity to address these issues, either legislatively or by way of clarification, in order to minimise any confusion and adverse fallout. 

DISCLAIMER: This article has been authored by Rohit Jain, who is a Partner and Divya Jeswant, who is a Senior Associate at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at rohitjain@elp-in.com  or divyajeswant@elp-in.com for any comment or query.The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.

Patent Box Regime in India

Multinational Companies are known to adopt innovative strategies to take advantage of unintended gaps and mismatches between varying tax systems and favourable tax treaties to lower their effective tax rate through double non-taxation of income or taxation at a lower rate. One of the popular tax planning tool is Intellectual Properties (IP) tax planning. Many corporations register IP in lower tax jurisdictions even when major expenses to develop such IP are incurred in home country/other countries (i.e. high tax jurisdiction). This type of tax planning results in NIL/lower tax outflow on income earned from exploiting such IP. Multinational Companies such as Apple, Google etc. which derive majority of their profits from IP rights and are highly dependent on IP creation for their future growth are known to use such innovative strategies to reduce their overall tax outflow.    

To tackle the menace, OECD[1] in its action plan 5 on Base Erosion Profit Shifting (BEPS) Project[2] has envisaged a nexus based approach wherein it is proposed that income arising from exploitation of IP should be attributed and taxed in the jurisdiction where substantial R&D activities are undertaken rather than the jurisdiction of legal ownership.

Keeping in mind the problem highlighted by the BEPS Project, the Indian Finance Minister (FM) has announced a tax regime for taxing income derived from patents. This regime provides a favourable tax rate which would act as an incentive for Indian corporations to register patents in India. In his budget speech, FM also acknowledged that innovation plays a very critical role in economic growth of a country and to encourage innovation it is important to give impetus to research and development related activities.

In order to encourage indigenous research & development activities and to discourage registration of patents in lower tax jurisdictions, the Finance Bill, 2016 proposes to introduce a concessional tax regime for royalty income earned from patents. The salient features of the scheme are as follows:

• The concessional regime, popularly known as 'patent boxes', provides for lower tax rates for Indian residents earning royalty income in respect of patents registered in India. The patent box regime proposes to tax income from royalty at the rate of ten percent (plus applicable surcharge and cess) on gross basis.  It is pertinent to note that no deduction of any expenditure or allowance would be against the royalty income which means that it would be taxed at the rate of ten percent on gross basis.

• Royalty income would include consideration from:

• transfer of all or any rights (including the granting of a licence) in respect of a patent; or
• imparting of any information concerning the working of, or the use of, a patent; or
• use of any patent; or
• rendering of any services in connection with the activities specified above.

However, the concessional tax rate will not be available when income is derived in relation to the patent, where:

• consideration would be chargeable under the head Capital gains; or
• consideration for sale of product manufactured with the use of patented process or the patented article for commercial use.

The benefits from the patent regime can be availed only by a Patentee who is a person resident in India. The term 'Patentee' has been defined to mean a person who is, exclusively or jointly, a true and first inventor of the invention and whose name is entered on the patent register as the patentee, in accordance with the Patents Act in respect of that patent.

The concessional regime has been proposed with an intention to encourage companies to retain and commercialise existing patents and to develop new innovative patented products in India. This will also help in creation and location of more innovation-based jobs in the India. Also, such regime would make it easier for knowledge-based establishments located in India to compete against establishments in nations providing robust innovation incentives.

Similar patent box regimes have already been implemented by many countries to incentivize commercialisation of research and development. We have analysed below various patent box regimes[3] already implemented by some of the countries and analysed as to how India fares as compared to the rest:

As can bee seen from the above analysis, the proposed patent box regime by the government seems attractive at the first blush, it is not so when compared to the similar scheme adopted by some of the advanced countries. Most of the countries provide for deduction of expenses along with beneficial tax rate for patent boxes. Further, it would also be pertinent to note that certain countries also provide beneficial regime on capital gains earned on sale of such IP's which is specifically excluded by India.

It appears that beneficial patent box regime in India would not be available for patents which are developed outside India. This shows that the intent of the government is to encourage indigenous research which will help in developing and nurturing innovation.

SKP Comments

• The proposed regime is a clear indication that India is moving towards globally accepted practices. This regime certainly gives an impression that India is eager and ready to take pro active measures to implement various proposals suggested in the BEPS Project.
• Currently, the beneficial tax rates provided are marginally higher than rates provided by most of the countries with patent box regime, which should not come as a surprise since India has higher corporate tax rates.
• However, this measure may go a long way in promoting registration of patents in India and thereby reducing tax leakages.
• It would be pertinent to note that where corporates have incurred huge Research & Development costs for development of patents, there could be a possibility that in initial years there is a loss or marginal profit on exploitations of such patents. In such cases, Patent Box Regime may not be beneficial. Currently, no option has been explicitly provided to opt out of the Patent Box Regime.  This could be one of the major areas of concern for the corporate.
• This proposed regime is in sync with the other measures introduced by the government to encourage innovation and to promote India as a business friendly destination

[1] The Organisation for Economic Cooperation and Development is a forum established with an intention to promote global economic growth and development. Though India is not a member country, it actively contributes and participates in initiatives undertaken by OECD.

[2] The BEPS Project is a comprehensive package which proposes reform of the international tax system to tackle tax avoidance

[3] Based on the data available in public databases

Finance Bill 2016 - Re-writing the penal provisions

The Income-tax Act, 1961 (“Act”) prescribes numerous penalties for contraventions and defaults committed by an Assessee.  The penalty can be either mandatory or at the option of the tax authority.  In this article we look at the various amendments proposed to be brought in by the Finance Bill, 2016 in relation to penal provisions.

In his budget speech, on February 29, 2016, the honorable Finance Minister (“FM”) said that, currently the tax authorities has discretion to levy penalty at the rate of 100 percent to 300 percent of tax sought to be evaded.  In order to rationalize the penalty provisions, and to reduce the discretionary powers of the tax authorities, FM proposed to modify the entire scheme of penalty provisions by providing different categories of offence with graded penalty. The said proposal is a welcome move and will go a long way in reducing litigation.

The Finance Bill, 2016, in order to bring objectivity, certainty and clarity in the penal provisions,  has proposed to do away with Section 271 of the Act, being the foundation provision and basis for the levy of penalty and introduce a new section 270A in the Act.  As per the proposal, section 271 will apply only to Assessment Year (“AY”) 2016-17 and the prior assessment years, AY 2017-18 onwards penalty will be levied under section 270A in case of under reporting and misreporting of income.

The new section 270A envisages imposing penalty in two cases i.e. in cases of “under reporting” and “misreporting of income”.  The penalty rates will be 50 percent of tax payable in case of under reporting of income and if the under reporting of income results from misreporting of income the penalty shall be 200 percent of tax payable. 

Consequential amendments have also been proposed in sections 119, 253, 271A, 271AA, 271AAB, 273A and 279 of the Act to provide reference to newly inserted section 270A.

What is “Under reporting” and “Misreporting” of income:

The instances of “under reporting” and “misreporting” of income as provided by section 270A are as follows:

Calculation of under reported Income:

Sub section (3) of section 270A provides mechanism to calculate the “under reported” income under various scenarios as tabulated below:

Mechanism has also been prescribed for computing the under reporting of income in case of Minimum Alternate Tax, Alternate Minimum Tax and loss scenarios.

Quantum of tax payable and corresponding penalty

The quantum of 'tax payable' on the 'under reported' income shall be as follows:

• In the case of company, firm or local authority - tax payable is computed by treating under reported income as the total income;
• In any other case - tax payable is thirty per cent of the under reported income.

As already discussed above, the penalty rates will be 50 percent of tax payable in case of under reporting of income and if the under reporting of income results from misreporting of income the penalty shall be 200 percent of tax payable. 

What does not amount to “under reporting”:

On a first look, the above instances of “under reporting” seem dreadful and are likely to come up in every tax assessment.  However the Bill has listed out instances where the under reporting of income does not apply.

• Where the taxpayer offers explanation and the Tax officer is satisfied that the explanation is bona fide and all the material facts have been disclosed;
• Where such under reported income is determined on the basis of estimate;
• Where the taxpayer estimated a lower addition or disallowance, however disclosed all facts material to such addition or disallowance;
• Where the taxpayer has maintained all requisite documents in respect of an international transaction and disclosed all material facts relating to that;
• Where an undisclosed income is detected on account of search operation under Section 271AAB.

The above list of exceptions still carries and uses subjective languages that are prone to varied interpretations as to what constitutes bona fide explanations, disclosure of material facts, and most importantly who shoulders the burden of proving mens rea or malfide intention. To insulate from these potential interpretational exposures, taxpayer, for the time being, has only recourse to judicial precedents issued in the light of old provision of Section 271 of the Act!

Immunity from penalty and prosecution:

The Finance Bill 2016 has also proposed to empower, the Tax Officer to grant immunity from penalty relating to under-reporting of income and initiation of proceedings for prosecution.  This immunity however will not apply to misreporting of income. 

To avail such immunity, the Assessee may file an application, within one month from the receipt of order of assessment or reassessment, with the Tax Officer under the new section 270AA after paying the tax and interest within the period specified in the notice and does not prefer an appeal against such assessment or reassessment order.

Subsequently, the Tax Officer shall pass an order accepting or rejecting the application within one month from the end of receipt of application. In case of rejecting the application an opportunity of being heard shall be given to the assessee and the period beginning from the date on which such application is made to the date on which the order rejecting the application is served on the assessee shall be excluded for calculating the period of limitation for filing of appeal before the first appellate authority.

The wording of section seems that the Tax Officer shall have to provide immunity in respect of all applications satisfying the prescribed conditions without any independent discretion.   One of the prescribed conditions being waiver of right to appealby the taxpayer comes as a Yorker.  Although the intention is laudable and would reduce the litigation, the question which can arise and likely to be challenged is the constitutional validity of this provision as the principle for granting immunity cannot be made at the cost of losing the right of appeal for the taxpayer.  A suitable amendment in this regard is surely expected.

Others:

• In case where search has been initiated under section 271AAB of the Act, a discretionary penalty ranging from 30 percent to 90 percent of the undisclosed income is leviable.  It is proposed to amend the penalty levied in such case to a flat rate of 60 percent of the undisclosed income.

• To address the problem of more than three lakh cases pending involving an amount of about Rs 5.5 lakh crore under the first appellate authority and to reduce the huge backlog of pending cases and to enable the Government to realise its dues expeditiously, the Direct Tax Dispute Resolution Scheme, 2016 has been proposed in the Finance Bill, 2016. This scheme would permit the taxpayers whose appeals are pending before the first appellate authority to settle the case by paying the tax and interest up to the date of assessment where disputed tax is up to Rs 10 lakh. In cases where disputed tax exceeds Rs 10 lakh, 25 percent of the minimum penalty leviable shall be payable. Any pending appeal against a penalty order can also be settled by paying 25 percent of the minimum of the imposable penalty.

• Currently, section 272A of the Act provides for levy of penalty of Rs 10,000 for failure or default in answering the questions raised by an income-tax authority or refusal to sign any statement or failure to attend to give evidence or produce books or documents as required.  It is proposed to extend such levy of penalty for each default or failure to comply with notice under section 142(1) or 143(2) of the Act or directions under section 142(2A). The penalty shall be levied by the authority issuing such notice or direction.  The same shall be applicable from April 1, 2017.

Conclusion:

To conclude, this Budget has made a remarkable departure from the most litigated and complicated penal provision of the past and had drawn a clear road map to address this issue. The exception list and immunity provision provides sufficient leeway and guidance to the taxpayer to protect oneself from the wrath of penal provisions. Although the intention of legislature is to rationalize, bring objectivity, certainty and clarity in the penal provisions, one needs to wait and watch the pros and cons of defining the instances of penalty within the expression “under-reporting and misreporting of income”.

Phasing out exemptions/ deductions - Zero sum game for India Inc?

The Finance Minister in his Budget Speech in 2015 had indicated that the rate of corporate tax would be reduced from 30% to 25% over the next four years along with corresponding phasing out of exemptions and deductions. The Government had proposed to implement this decision in a phased manner.

Based on the above proposed plan, the following incentives under the Income-tax Act, 1961 (Act) are proposed to be phased out in the manner mentioned below:

Proposed Phase out plan of incentives (Profit linked Deductions/Weighted deduction) under the Act:

Proposed Phase out plan of Profit linked Accelerated Depreciation/ Weighted Deduction w.e.f. AY 18-19 under the Act:

The following case study gives a broad picture of the corporate tax scenario pre and post the implementation of the plan of phasing out the aforesaid incentives under the Act:

The above case study is illustrative. The difference between the tax liability @ 30% with deductions/exemptions and without deductions/exemptions could be more or less. However, a company claiming three or four deductions/exemptions may be worse off under the new provisions and phasing out of deductions/exemptions in lieu of the low rate of corporate tax could be a zero sum game for a corporate while the Government may earn only a marginally high revenue.  

Amendment to 56 (2)(vii) of the Income-tax Act, 1961

History

Finance Act, 2009 introduced recipient based taxation for individuals and Hindu undivided family ('HUF') by legislating section 56(2)(vii) to the Income-tax Act, 1961 ('Act'). The provision of section 56(2)(vii) of the Act was introduced as an anti-abuse provision to prevent laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act.

The intent was to tax value of any property (including shares) received without consideration or for inadequate consideration by an individual or an HUF and which is not in the normal course of business or trade the profits (which are taxable under specific head of income). Consequently, the definition of property was amended so as to provide that section 56(2)(vii) of the Act will have application to the 'property' which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.

Subsequently, a similar provision was introduced for taxing receipt of shares by company or firm without consideration or for inadequate consideration by Finance Act, 2010 by introducing section 56(2)(viia) of the Act.  However, the provision of section 56(2)(viia) of the Act specifically excluded transactions which are not regarded as transfer under section 47 clause (via), clause (vic), clause (vicb), clause (vid) and clause (vii) i.e. primarily receipt of shares by company or firm on account of merger, demerger and business reorganisation (by co-operative bank).

Unlike section 56(2)(viia) of the Act, section 56(2)(vii) of the Act did not provide aforementioned exclusion for shares received by individuals and HUF pursuant to merger, demerger and business reorganisation.

However, despite  no specific relief for shares received by individuals/ HUF pursuant to merger and/ or demerger, the common belief which existed with both, the tax department and corporates was that, once the merger or demerger satisfies the conditions laid down in section 2(1B) of the Act and 2(19AA) of the Act respectively, it could not be said that the shares have been received without consideration or for inadequate consideration.

Another view which exists amongst the shareholders with respect to applicability of section 56(2)(vii) of the Act is that, the shares issued pursuant to merger and/ or demerger are in lieu of the shares held by shareholders in the merging and/ or demerging company respectively and thus the issue of shares is for a commercial consideration.

Budget 2016 proposal

The Finance Bill, 2016 proposes to amend section 56(2)(vii) of the Act so as to provide that any shares received by an individual or HUF as a consequence of merger or demerger of a company shall not attract the provisions of section 56(2)(vii) of the Act.

The amendment is proposed with a view to bring parity in tax treatment of individuals and HUFs with that of a company or a firm as provided in section 56(2)(vii) of the Act.

These aforementioned amendments are proposed to be made effective from financial year 2016-17 (i.e. assessment year 2017-18) and subsequent years.

Our observations

The government stated position is not to make any retrospective amendments. This amendment, which is in the nature of clarification and has been introduced with a prospective date. However, this being beneficial amendment should be applied retrospectively to cover the cases of merger/ demerger prior to the financial year 2016-17.
Co-authored by Parthiv Kamdar (Senior Manager), Madhvi Jajoo (Manager) and Shefali Ganatra (Assistant Manager) at Deloitte Haskins & Sells.