11 May, 2018
Some of the key amendments introduced by the Finance Act, 2018 (‘Finance Act’) are summarized below:
i. New long-term capital gains tax regime for listed shares etc.
- Under the unamended provisions of the Indian Income-tax Act, 1961 (‘IT Act’), with respect to transfer/redemption of units of an equity oriented mutual fund or an on-market3 sale of Indian equity shares (listed or as part of an initial public offer) or units of a business trust, long-term capital gains were exempt from tax in India, subject to payment of securities transaction tax (‘STT’) (which may vary from 0.001% to 0.2% of the transaction value).
- The Finance Act has withdrawn the aforesaid long-term capital gains tax exemption and has proposed a new long-term capital gains tax regime for the above asset class. Under the new regime, the long-term capital gains, in excess of ¤ 0.1 million (approx. US$ 1,500) in a tax year, arising from transfer/redemption of units of an equity oriented mutual fund or an on-market transfer of Indian equity shares (including sale of shares as part of initial public offer) will be taxed at the rate of 10% (plus applicable surcharge and cess) subject to payment of STT, as applicable as before.4 The computation of such capital gains will be subject to step up of the cost base till January 31, 2018. This amendment will apply on any capital gains arising on or after April 1, 2018.
ii. Scope of ‘Business Connection’ proposed to be widened:
- The scope of ‘business connection’ under the IT Act is similar to the provisions relating to Dependent Agent Permanent Establishment (‘DAPE’) in India’s Double Taxation Avoidance Agreements (‘DTAAs’). However, this scope is proposed to be widened pursuant to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (‘MLI’). In order to align the scope of ‘business connection’ with the expanded definition of DAPE, the Finance Act has introduced an amendment to the definition of ‘business connection’ to also include any business activities carried through a person who, acting on behalf of the non-resident, habitually plays the principal role leading to conclusion of contracts by the non-resident. This has taken effect from the financial year beginning April 1, 2018.
- Until now, the scope of ‘business connection’ under the IT Act provided for physical presence based nexus rule for taxation of business income of the non-resident in India. Therefore, emerging business models such as digitized businesses were not covered within its scope.
In light of the above, Section 9(1)(i) of the IT Act has been amended to provide that ‘significant economic presence’ in India should also constitute ‘business connection’.
This amendment in the domestic law will enable India to negotiate for inclusion of the new nexus rule in the form of ‘significant economic presence’ in the DTAAs.
Unless corresponding modifications to permanent establishment rules are made in the DTAAs, the cross border business profits will continue to be taxed as per the existing DTAA rules. However, where the foreign enterprise is not entitled to a DTAA protection, the above amendment would become immediately effective. This amendment has taken effect from financial year beginning April 1, 2018.
3 Sale on the floor of a recognized stock exchange in India.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
