A. TAX UPDATES
- CBDT clarification on taxability of income/loss arising from transfer of unlisted shares – removal of exception for AIFs I and II
CBDT had clarified that where any income arises from transfer of unlisted shares the same would be considered under the head “Capital Gains” irrespective of the period of holding. The said clarification shall not apply in cases where:
1) the genuineness of transactions in unlisted shares itself is questionable; or
2) the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or
3) the transfer of unlisted shares is made along with the control and management of underlying business.
Now, On 24 January 2017, the CBDT has clarified that exception (3) as mentioned above will not apply in the case of Category I and II AIF rationale being investment by such AIFs are predominantly in unlisted shares of start-ups / ventures and hence some level of control and management is required / exercised to safeguard the interest of the investors.
- Union Budget 2017
On February 1, 2017, the Finance Minister presented the Budget 2017 proposals. The thrust of this year’s Budget is to “Transform, Energise and Clean India”. In line with said agenda and with a view to build stable and stronger institutions in the financial sector, the Finance Minister announced key policy measures entailing the abolition of the Foreign Investment Promotion Board, proposal for further liberalisation of the foreign direct investment policy, categorisation of systemically important NBFCs as QIBs, trading and listing of Securitisation Receipts, etc.
On the tax side, the thrust has been inter alia, on stimulating growth, promoting affordable housing, simplifying tax administration etc. The key tax proposals listed by the Finance Minister include the following:
- Measures for stimulating growth (e.g., sunset provisions for interest income earned from Non convertible debentures (NCDs)/External Commercial Borrowings (ECBs) extended, lowering of corporate tax rates for MSME’s, etc.);
- Ease of doing business (e.g., restricting the scope of domestic transfer pricing, exempting investors in Category I and II FPIs etc.)
Further, the Finance Minister reiterated the commitment of the Government to implement the Goods and Service Tax as per schedule.
- Central Board of Direct Taxes (CBDT) clarification on applicability threshold for Place of effective management (POEM)
On 23 February 2017, the CBDT issued a circular clarifying that provisions of Sec 6(3)(ii) relating to POEM would not apply to companies having turnover or gross receipts less than Rs 50 crores during financial year.
- CBDT Requests for Stakeholder’s comments on Draft Notification to be issued under Section 10(38) of the Income-tax Act, 1961
On April 3, 2017, CBDT issued a press release requesting for stake-holders comments on draft notification to be issued under section 10(38) of the Income-tax Act, 1961. In order to curb the practice of declaring unaccounted income as exempt long term capital gain by entering into sham transactions, the Finance Act, 2017 amended the provisions of section 10 (38) of the Income- tax Act, 1961 to provide that exemption under this section for income arising on transfer of equity share acquired or on after 1st day of October, 2004 shall be available only if the acquisition of share is chargeable to STT.
The stakeholders were requested to submit their comments/suggestions on the draft notification by 11th April, 2017.
- CBDT issued draft rules for determining fair market value
On May 5, 2017, the Central Board of Direct Taxes (CBDT) had issued draft rules for determining the fair market value of unquoted equity shares for the purposes of section 56 (2)(x) and section 50CA of the Income-tax Act, 1961 and it had invited comments from the public on the same.
The draft notification takes into account the assets and liabilities of the company. In this regard, the valuation of assets should be as follows:
- FMV of jewellery, artistic work, shares & securities;
- Stamp duty value in case of immovable property; and
- Book value for the rest of the assets.
For the purposes of valuation of liabilities, the book value of liabilities after making specified adjustments (e.g. paid-up capital of equity shares, reserves and surplus balance, etc.) is to be considered.
On 12 July, 2017, the Central Board of Direct Taxes (CBDT) has issued final rules (Annexure 1) for the determination of fair market value of unquoted equity shares for the purposes of section 56(2)(x) and section 50CA of the Income-tax Act, 1961. The rules apply to all the transactions taxable during financial year(s) ending on or after 01 April, 2017. The final rules are broadly in line with the draft rules released by the CBDT in May this year.
- CBDT issues final Notification providing exemption of tax on long term capital gains where no STT has been paid on purchase
On June 5, 2017, CBDT issued final notification (Annexure 2) specifying a list of transactions which should be eligible for long term capital gain tax exemption on sale of such shares, even if no STT was paid at the time of its acquisition.
- India signs Multilateral Instrument (MLI)
On June 7, 2017, over 65 countries, including India sign historic MLI in Paris, that will amend thousands of bilateral tax treaties, with a view to implement the OECD BEPS Action Plans. Government of India vide its. Press Release on MLI signing stated it will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreement. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the Base Erosion and Profit Shifting (BEPS) measures.
Additionally, Organisation for Economic Co-operation and Development (OECD) and the Ministry of Finance and Economic Development of Mauritius vide a press release on 05 July, 2017 announced that Mauritius has become the 69th country to have signed the MLI. 23 Double Taxation Avoidance Agreements (tax treaties) (Covered Tax Agreements – [CTAs]) have been included by Mauritius in the provisional list of reservations and notification submitted to OECD. However, the India-Mauritius tax treaty has not been included in the provisional list submitted by Mauritius. The press release states that Mauritius will have a bilateral discussion with countries not covered by the MLI to implement the Base Erosion and Profit Shifting (BEPS) minimum standards latest by end of 2018.
B. REGULATORY UPDATES
- RBI allows issue on Convertible Notes
On 10 January 2017, the RBI has issued a notification wherein it has introduced a new instrument in case of startups. The notification has amended Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2000 (FEMA 20) to provide for the following key aspects:
- The definition of ‘Convertible Note’ (CNs) has been inserted in FEMA 20 to mean –
- an instrument issued by a startup company evidencing receipt of money initially as debt,
- which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company,
- within a period not exceeding five years from the date of issue of the CN,
- upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.
- A new Regulation 6D on Issue of CNs by startup companies has been inserted to state the following:
- A person resident outside India may purchase CNs issued by an Indian startup company for an amount of twenty-five lakh rupees or more in a single tranche.
A ‘startup company’ means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.
- Government approval to be obtained in cases where the startup company is engaged in a sector where foreign investment requires Government approval.
- Consideration on issue of CNs to be received by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account.
Escrow account to be closed immediately after the requirements are completed or within six months, whichever is earlier.
- NRIs are permitted to invest in CNs on non-repatriation basis in compliance with Schedule 4 of FEMA 20.
- Acquisition or transfer of CNs to be in accordance with the pricing guidelines prescribed by RBI. Prior approval from the Government to be obtained for such transfers in case the startup company is engaged in a sector where foreign investment requires Government approval.
- Reporting to be done by the startup company as prescribed by RBI
- SEBI (Foreign Portfolio Investors) Regulations, 2016 (FPI Regulations)
On 27 February 2017, FPI Regulations, 2014, have been amended to include the following two new categories of permissible investments:
- Unlisted non-convertible debentures/ bonds issued by an Indian company subject to guidelines issued by Ministry of Corporate Affairs, Government of India from time-to-time.
- Securitised debt instruments, including- (i) any certificate or instrument issued by a special purpose vehicle set up for securitisation of asset/s with banks, financial institutions or non-banking financial institutions as originators; and (ii) any certificate or instrument issued and listed in terms of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008.
- Reserve Bank of India (RBI) amends Foreign Direct Investment (FDI) norms in Limited Liability Partnership (LLP)
On March 3, 2017, RBI issued a notification amending norms for FDI in LLPs.
FDI in LLPs is permitted, subject to the following conditions:
- FDI is permitted under the automatic route in LLPs operating in sectors / activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions. For ascertaining such sectors, reference shall be made to Annex B to Schedule 1 of these Regulations
- An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI linked performance conditions. Onus shall be on the Indian company / LLP accepting downstream investment to ensure compliance with the above conditions.
- FDI in LLP is subject to the compliance of the conditions of Limited Liability Partnership Act, 2008.
- A company having foreign investment can be converted into an LLP under the automatic route only if it is engaged in a sector where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions.
Reporting of foreign investment in LLPs and disinvestment/transfer of capital contribution or profit shares between a resident and a non-resident may be made in a manner as prescribed by Reserve Bank of India from time to time.