India – Tax Snapshot

1 May, 2016

 

Key Proposals to amend the Income Tax Act under the Finance Bill 

 

Some of the key amendments proposed to be made to the Income Tax Act, 1961 (‘IT Act’) under the Finance Bill, 2016 (‘Finance Bill’) are as under:

 

1. deferment of the applicability of ‘place of effective management’ based residence test by one year, which will now apply from the assessment year 2017-18;
2. exemption to non-resident recipients of taxable sum or income under the IT Act from the requirement of furnishing ‘Permanent Account Number’ subject to conditions prescribed;
3. in respect of payments made by investment funds to its investors, the person
4. responsible for making the payment will deduct tax at source at the rate of 10% where the payee is a resident, and at the rates in force where the payee is a non-resident. Further, a non-resident payee can approach the assessing officer for obtaining a certificate for deduction of tax at lower rate or no deduction of tax;
5. out of the 15 point action plan of Base Erosion & Profit Shifting, the following three points have been proposed to be implemented: (a) addressing challenges of digital economy; (b) implementation of patent box regime; and (c) master file and country-by-country reporting in transfer pricing documentation.
6. in case of a resident individual, a Hindu undivided family or a firm receiving any income by way of dividend in excess of ¤10 lakh (approximately US$ 15,000), will be chargeable to tax at the rate of 10% on gross basis;
7. exemption from levy of dividend distribution tax in respect of distributions made by a special purpose vehicle to the business trusts being REITs and InvIts;
8. introduction of the Income Declaration Scheme, 2016 (‘Declaration Scheme’) where persons who have not paid full taxes in the past can avail the benefit of the Declaration Scheme and declare the undisclosed income and pay tax surcharge and penalty totaling 45% of such undisclosed income declared. In such cases no scrutiny, enquiry and prosecution would be launched under the IT Act and the Wealth Tax Act, 1957 (‘WTA’) against such declarant. Cases covered by specific enactments including the Black Money Act, 2015 are ineligible for the Declaration Scheme;
9. introduction of Direct Tax Dispute Resolution Scheme, 2016 (‘Dispute Resolution Scheme’) wherein a taxpayer can settle his tax arrears by paying specified amounts in terms of the Dispute Resolution Scheme and thus avoid penalty and prosecution under the IT Act and the WTA;
10. taxpayers covered by retrospective taxation have been granted the option of settling their tax dispute by paying only the amount of tax outstanding, subject to specified conditions;
11. introduction of presumptive taxation scheme for persons earning professional income from certain specified professions and whose total gross receipts do not exceed ¤50 lakh (approximately US$ 75,000); and
12. increase in threshold limit for tax audit for persons having income from profession and increase in threshold limit for presumptive taxation scheme for persons having income from eligible business. 

 

Key Proposals with respect to Service Tax under the Finance Bill

 

 

Some of the key proposals in the Finance Bill with respect to service tax are as follows:

 

1. levy of Krishi Kalyan Cess (Cenvatable) on any or all taxable services at the rate of 0.5% of the value of taxable services with effect from June 1, 2016;
2. assignment by the Government of the right to use the radio-frequency spectrum and subsequent transfers thereof has been proposed to be declared as a service under Section 66E of the Finance Act, 1994 (‘Finance Act’) so as to make it clear that such assignment is to be taxed as a service and not as sale of intangible goods; 
3. the limitation period for recovery of service tax not levied or paid or short-levied or short paid or erroneously refunded, for cases not involving fraud, collusion, suppression, etc. is proposed to be enhanced from 18 months to 30 months;
4. a higher rate of interest is proposed to apply to a person who has collected the amount of service tax from the service recipient but not deposited the same with the Central Government;
5. penalty proceedings under Section 78A of the Finance Act will be deemed to be closed in cases where the main demand and penalty proceedings have been closed under Section 76 or Section 78;
6. the monetary limit for filing complaints for punishable offences is proposed to be enhanced to ¤2 crore (approximately US$ 300,000);
7. the power to arrest under service tax law is proposed to be restricted only to situations where the taxpayer has collected the tax but not deposited it with the exchequer, and amount of such tax collected but not paid is above the threshold of ¤2 crore (approximately US$ 300,000);
8. exemption in respect of the following services to be withdrawn: (a) services provided by a senior advocate to an advocate or partnership firm of advocates, and (b) a person represented on an arbitral tribunal to an arbitral tribunal. Service tax in the above instances would be levied under forward charge. However, the existing dispensation regarding legal services provided by a firm of advocates or an advocate other than senior advocate will be continued.
9. service tax has been proposed to be exempted in the case of canal, dam or other irrigation works with retrospective effect;
10. service tax exemptions have been introduced impacting the National Pension System, SEBI, Employees Provident Fund Organisation, Biotechnology Industry Research Assistance Council, National Centre for Cold Chain Development, IRDA, and Indian Institutes of Management;
11. services by way of construction, erection, etc., of original works pertaining to low cost houses up to a carpet area of 60 square meters per house in a housing project approved by the competent authority under the ‘Affordable Housing Scheme’;
12. change in rates of abatements are proposed in relation to services of construction of complex, tour operator, transport of goods by rail, transport of goods by vessel;
13. changes in reverse charge mechanism are proposed, e.g.: liability to pay service tax
14. on any service provided by a Government or a local authority to business entities, will be on the service recipient. Recipient of services availed from foreign shipping line by a business entity located in India will get taxed under reverse charge at the hands of the business entity;
15. interest rates on delayed payment of duty/tax across all indirect taxes is proposed to be made uniform at the rate of 15%, except in case of service tax collected but not deposited with the Central Government, in which case the rate of interest will be at the rate of 24% from the date on which the service tax payment became due; and The Indirect Tax Dispute Resolution Scheme, 2016 was introduced during the Budget 2016-17 to address the problem of plethora of cases pending before the first appellate authority of the revenue departments. Such provisions require more clarity for any kind of tangible success. 

 

No Set Off and Carry Forward of Business Losses if there is no Change in Shareholding of the Ultimate Holding Company 

 

 

The High Court of Delhi (‘Delhi HC’), by way of a judgment dated January 13, 2016 in the matter of Yum Restaurants4, has held that if there is a change at immediate shareholder level beyond 49%, then the losses of the company that are brought forward will lapse even if there is no change in shareholding at the ultimate holding company level. The Delhi HC refused to ‘pierce the corporate veil’ stating that there was nothing to show that there was any agreement or arrangement that the beneficial owner of Yum India’s shares is Yum USA, i.e. the ultimate holding company. 

 

4 Yum Restaurants (India) (P.) Ltd. v. Income Tax Officer, [2016] 380 ITR 637 (Delhi). 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com