A. TAX UPDATES
1) Finance Act, 2016
- Distribution of non-business income by an Alternative Investment Fund (‘AIF) to a non-resident would be subject to withholding tax as per rates in force (beneficial tax treaty rate should be available). Further, it has been clarified that no withholding shall be made in respect of income that is not chargeable to tax under the Income-tax Act, 1961 (‘the Act’) where the payee is a non-resident.
- Beneficial tax rate of 10% extended to long term capital gains arising to a non-resident on transfer of shares of private company.
- Minimum Alternate Tax (‘MAT’) not applicable to foreign companies (with retrospective effect from 1st April 2001) subject to conditions
- Period of holding to qualify as long term capital asset for unlisted shares reduced to 24 months from 36 months
- Tax incentives for eligible start-ups, as mentioned below:
- A startup shall have the benefit of lower rate of tax i.e. 25% of the total income if the following conditions are satisfied:
- the company has been set-up and registered on or after the 1st day of March, 2016
- the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and
- the total income of the company has been computed without taking the benefit of profit linked deduction, without set-off and carry forward of losses of earlier years pertaining to these profit linked deductions and depreciation.
- Tax holiday for eligible startup companies for 3 consecutive years out of 5 years from their incorporation, subject to certain conditions. However MAT would be applicable.
- Capital gains arising to an individuals/ HUF on transfer of residential property to be exempt from tax if invested in an eligible start-ups subject, to conditions
- A startup shall have the benefit of lower rate of tax i.e. 25% of the total income if the following conditions are satisfied:
- Scope for the applicability of buyback distribution tax widened. Earlier, it was restricted to buy back under section 77A of Companies Act 1956 now extended to all buy back of unlisted shares conducted as per the provisions of law relating to companies
- Income by way of dividend from a domestic company received by an individual, HUF or firm, resident in India, in excess of Rs. 10 lakhs shall be taxable at the rate of 10%.
2) Period of holding of debentures before conversion to be considered- Rule 8AA notified
The Central Board of Direct Taxes (‘CBDT’) has, vide an amendment to the Income-tax Rules, 1962 (‘the Rules’), notified Rule 8AA. As per the new Rule, the period for which bond, debenture, debenture-stock or deposit certificate, was held by the taxpayer prior to conversion shall be considered for determining the period of holding of shares or debentures acquired upon conversion.
3) Income/loss arising from transfer of unlisted shares to be deemed capital gains
The CBDT vide its instruction has provided that income from transfer of unlisted shares (for which no formal market exists for trading) would be treated as ‘Capital Gain’ irrespective of period of holding. The above would not be necessarily applied in the following cases where the Tax Office would take an appropriate view:
- genuineness of transactions in unlisted shares itself is questionable; or
- transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or
- transfer of unlisted shares is made along with the control and management of underlying business.
4) Protocol for amendment of India-Mauritius tax treaty signed
On 10th May 2016, Governments of India and Mauritius signed a Protocol for amending the treaty dated 24 August, 1982, between India and Mauritius. The key features of the Protocol are as follows:
- Source-based taxation of capital gains on shares:With this Protocol, India gets taxation rights on capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India with effect from financial year 2017-18, while simultaneously protection to investments in shares acquired before 1st April, 2017 has also been provided. Further, in respect of capital gains arising (on shares acquired post 31st March, 2017) during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.
- Source-based taxation of interest income:From 1st April, 2017, interest arising in India and paid to a resident of Mauritius should be subject to tax in India at rate of 7.5% of the gross amount of interest if the beneficial owner of the interest is a resident of Mauritius.
- Taxation of Fee for Technical service:From 1st April, 2017, fees for technical services arising in India and paid to a resident of Mauritius should be taxable in India at the rate of 10% of the gross amount of fees for technical services if the beneficial owner of the fees for technical services is a resident of Mauritius
- Taxation of any Other IncomeFrom 1st April, 2017, as per the revised treaty, income not expressly dealt with in any other provision of the treaty may also be taxed in the country in which the income arises.
5) CBDT : Resident persons investing in start-ups not subject to taxation u/s 56(2)(viib)
The CBDT vide its notification has provided that resident persons investing in start-ups will not be subject to provisions of section 56(2)(viib) i.e. tax on excess consideration received upon issue of shares over its fair market value as Income from Other Sources in the hands of the issuing company.
6) GAAR – grandfathering of investments made prior to 1 April 2017
The CBDT has, vide its notification , amended Rule 10U of the Rules. As per the said Rules, the provisions of Chapter X-A (dealing with GAAR) shall not apply to any income accruing or arising to or deemed to accrue or arise to or received or deemed to be received by any person from transfer of investments made before 1 April 2017.
7) CBDT: Notifies rules relaxing TDS u/s 206AA; Payee to furnish Tax Residency Certificate (‘TRC’), Tax identification number
On 24 June 2016, the CBDT issued a notification and has inserted new Rule 37BC providing for details to be submitted by a non-resident payee for relaxation from deduction of tax at higher rate u/s 206AA (applicable when deductee PAN not available); New Rule provides that a non-resident deductee shall not be subject to higher tax u/s 206AA in respect of payments for interest, royalty, FTS, and transfer of capital assets , where the deductee furnishes ‘specified details/documents’; These include TRC and Tax Identification Number (‘TIN’) or unique identification number in the country of residence alongwith name and address.
- Credit shall also be allowed in respect of foreign disputed tax subject to compliance with conditions;
- To claim the FTC, taxpayer must furnish a statement of income from the overseas country offered for tax and details of foreign tax in prescribed Form.
B. REGULATORY UPDATES
1) Changes in key FDI Sectors- There are 10 sectors in which FDI norms has been relaxed.
2) Change in Foreign Exchange Management Act (‘FEMA’) Regulation 20 (FDI Regulations)
i) New revised Schedule 11 introduced replacing the existing Schedule 11 pertaining to investment by a person resident outside India in an Investment vehicle (includes AIF). Key change in the revised schedule 11 is that the ownership and control of an LLP is to be determined as defined in the FDI policy and the SEBI no longer has the power to determine whether an LLP is foreign owned and controlled in case LLP is acting as sponsor or manager or investment manager to an Investment Vehicle.
- FDI Policy defines the ‘owned and controlled’ of an LLP as follows:
- Owned : An LLP is considered as ‘owned’ by resident Indian citizens if more than 50% of the investment in such an LLP in contributed by resident Indian citizens and/ or entities that are ultimately owned and controlled by resident Indian citizens; and such resident Indian citizens and entities have majority of the profit share.
- Control: Right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of the LLP.
ii) New revised Schedule 4 introduced replacing the existing Schedule 4 pertaining to acquisition of securities or units by a Non-resident Indian on Non-repatriation basis
The key changes to revised Schedule 4 is as under:
- A Non-resident Indian (NRI), including a company, a trust and a partnership firm incorporated outside India and owned and controlled by non-resident Indians, may acquire and hold, on non-repatriation basis, equity shares, convertible preference shares, convertible debenture, warrants or units, which will be deemed to be domestic investment at par with the investment made by residents. Without loss of generality, it is stated that
- An NRI may acquire, on non-repatriation basis, any security issued by a company without any limit either on the stock exchange or outside it.
- An NRI may invest, on non-repartition basis, in units issued by an investment vehicle without any limit, either on the stock exchange or outside it.
- An NRI may contribute, on non-repatriation basis, to the capital of a partnership firm, a proprietary firm or a Limited Liability Partnership without any limit.
- The sale/maturity proceeds (net of applicable taxes) of the securities or units acquired under this Schedule shall be credited only to NRO account irrespective of the type of account from which the considerations for acquisition were paid.
iii) New revised Schedule 6 introduced replacing the existing schedule 6 for Foreign Venture Capital Investor (‘FVCI’) investment.
The key changes to revised Schedule 6 is as under:
- FVCI permitted to invest in units of a Venture Capital Fund (‘VCF’) or a Category I Alternative Investment Fund (‘AIF’) or units of a scheme or fund set up by VCF or Category I AIF;
- FVCI permitted to invest in equity / equity linked instruments / debt instruments issued by a start-up irrespective of the sector in which it is engaged. The definition of ‘start-up’ has been included in regulation 2;
- It has been specifically clarified that FVCI shall not require prior RBI approval for any investments made under Schedule 6;
- List of 10 sectors in which FVCI is allowed to invest has been added as Annexure to Schedule 6 and
- FVCI may acquire by purchase or otherwise, from, or transfer, by sale or otherwise to any person resident or non-resident, any security / instrument it is allowed to invest in at a price mutually acceptable to the buyer and the seller/ issuer. FVCI may also receive proceeds of liquidation of VCFs or of Cat-I AIFs or of schemes / funds set up by VCFs or Cat-I AIFs. This will be without any prior RBI approval.
3) Cross border transfer of shares of an Indian company permitted on deferred basis
On 20th May 2016, the RBI issued notification to permit transfer of shares on a deferred basis, subject to compliance with following conditions:
- Maximum 25% of the total consideration can be paid by the buyer on a deferred basis
- The total consideration paid for shares must be compliant with applicable pricing guidelines
- The parties can enter into an escrow arrangement for the consideration payable on deferred basis
- If the total consideration is paid, the seller can furnish an indemnity for the amount of consideration payable on deferred basis
- The consideration payable on deferred basis should be paid within a period of 18 months from date of transfer agreement. Also, the escrow arrangement / period of indemnity cannot exceed 18 months.
The above conditions need to be complied with for transfer of shares on a deferred basis between a resident buyer and a non-resident seller, or vice versa.
4) Companies (Share Capital and Debentures) Third Amendment Rules, 2016
Amendments in relation to startup companies:
- The existing rules restricted companies from issuing sweat equity shares in excess of 25% of the paid up capital at any time and had limitation in terms of the issuance of sweat equity shares per year to 15% of the paid up capital or issue value of Rs.5 crores, whichever is higher. The amendment expressly allows notified start-ups to issue sweat equity shares not exceeding 50% of its paid up capital up to 5 years from the date of its incorporation or registration. However, the yearly limits of 15% of paid up capital or Rs.5 crores, whichever is higher has to be complied with.
- The existing rules restricted issuance of ESOP to employees who are (i) promoters or belong to the promoter group and (ii) director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company. The amendment allows the notified start-ups to issue shares to these classes of employees upto 5 years from the date of incorporation or registration.
Other relevant amendments:
- The existing rules mandated that the securities allotted by way of a preferential issue to be fully paid up at the time of their allotment. Per the amendment, preferential issue of partly paid securities is now permitted.
- The existing rules mandated upfront determination of the price of resultant shares on the basis of a valuation report in case of convertible securities offered on a preferential basis. The amendment permits the issuer to fix the conversion price upfront (at time of issue) or fixing the price 30 days in advance to date when the holder of convertible security becomes entitled to apply for shares based on a valuation report given by the registered valuer not earlier than sixty days of the date when the holder of convertible security becomes entitled to apply for shares. However, the issuer shall take a decision on such fixation of the conversion price at the time of offer of convertible security itself and make such disclosure in the explanatory statement annexed to the notice of the general meeting.
- The existing provisions permitted creation of charge or mortgage as security for debentures issued only on the assets of the issuing company. The amendment allows companies to create charge on the assets of their subsidiaries or holding or associates also in addition to their own assets.
5) Companies (Acceptance of Deposits) Amendment Rules 2016
On 29 June 2016, the Ministry of Corporate Affairs has notified Companies (Acceptance of Deposits) Amendment Rules 2016. The key amendments are:
The Rule 2 of the Deposit Rules has been amended to provide as under:
- Any amount received by the company under any collective investment scheme in compliance with SEBI regulations shall not be regarded as deposit;
- Any amount received by a company from AIF, Domestic Venture Capital Fund (‘DVCF’) and Mutual Funds registered with SEBI in accordance with its regulations shall not be regarded as deposit;
- An amount of INR 25 lakh or more received by a start-up company by way of a convertible note (convertible into equity shares or repayable within a period not exceeding 5 years from the date of issue) in single tranche from a person shall not be regarded as deposit;
- Any amount raised by inter-alia issue of bonds or debentures compulsorily convertible into shares of the company within 10 years shall not be regarded as deposit (earlier, it was convertible into shares within 5 years)
On 17 February 2016, The Department of Industrial Policy and Promotion (DIPP) has issued a notification providing a definition of ‘startup’ to bring uniformity in identifying enterprises which can take benefits of the initiatives taken by various Ministries of the Government of India.
The Notification also states the identified startups as per the definition shall obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification to obtain benefits available to startups.