A. TAX UPDATES
1) Central Board of Direct Taxes (CBDT) notifies final Buy Back Distribution tax rules
- The buy-back of shares (both equity / preference shares) by an unlisted company is subject to buy-back distribution tax (‘Buyback Tax’) at the rate of 23.072% in the hands of the said company which is calculated as difference between (i) the buy-back consideration and (ii) the amount received by the Company for issue of such shares.
- The manner of determining the “Amount received by the Company” under various possible scenarios has been prescribed by the Ministry of Finance by inserting Rule 40BB (‘the Rule’) vide Notification dated October 17, 2016 (attached as Annexure 2). The Rule is effective from 1 June 2016.
- In case of a buyback which involves tender of original shares as well as bonus shares by a shareholder (or buyback of shares subscribed to at different prices), the provisions of the IT Act read with the Rules are not explicit whether the Buyback Tax ought to be calculated qua each shareholder or qua each share. Say in a bonus situation, this issue becomes relevant where the buyback price is less than the original subscription price per share, thereby, buyback of original shares could result in a loss whereas buyback of bonus shares (cost deemed to be nil) will result in an income (in a case where Buyback Tax is to be computed on a per share basis, the loss on original shares cannot be set off against the positive difference on buyback of bonus shares).
- However, a good view appears to be that Buyback Tax ought to be calculated on the aggregate consideration qua each shareholder and not qua each share. Accordingly, it may be argued that Buyback Tax may be calculated on the difference between the aggregate buyback consideration on all shares and original subscription consideration (zero being cost of bonus shares).
2) Frequently Asked Questions (FAQs) on Goods and Services Tax (GST)
On 3 August 2016, Rajya Sabha, the Upper House of Indian Parliament passed the Constitution Amendment Bill paving the way for introduction of GST. Separately, the Government of India has released a set of FAQ on the GST.
3) Constitution Amendment Bill for Goods and Service Tax (GST Bill)
On 8 September 2016, the President of India has given his assent to the Goods and Services Tax (GST) Bill, paving the way for the formation of the GST Council. Thereafter on 12 September 2016, the Union Cabinet, under the chairmanship of the Prime Minister, approved the setting up of the GST Council and its secretariat.
B. REGULATORY UPDATES
1) FAQs on Alternative Investment Fund (AIF)
2) Scheme for grant of Permanent Residency Status (PRS) to foreign investors
On 31 August 2016, the Union Cabinet has approved the scheme for grant of PRS to foreign investors subject to specified conditions. PRS will serve as a multiple entry visa without any stay stipulation, and will provide exemption from the Foreigners Regional Registration Office (FRRO) registration.
3) Amendment to exchange control norms for foreign investment in financial service sector
On 9 September 2016, the Foreign Exchange Department issued a notification in the Official gazette of India to amend exchange control norms for foreign investment in financial service sector on the following key aspects:
- Purely from an exchange control standpoint, FDI upto 100% is allowed under the automatic route in financial services activities regulated by financial sector regulators viz. RBI, SEBI, IRDA, PFRDA, NHB or any other notified regulator [earlier, FDI under the automatic route, was permitted in 18 eligible FS activities enumerated in the FDI regulations – this list of 18 eligible activities is deleted].
- Minimum capitalisation norms as mandated under the FDI policy have been eliminated.
4) Consultation Paper for “Amendments/ clarifications to the SEBI (Investment Advisers) Regulations, 2013
SEBI notified the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) on January 21, 2013. Under IA Regulations, exemptions from registration as an investment adviser were granted to certain entities who were providing investment advice as an incidental activity to their primary activity.
In order to specify uniform standards and to address the gaps or overlaps in legal or regulatory standards governing all the intermediaries/persons engaged in providing investment advisory services, SEBI Board has approved bringing out a consultation paper proposing certain changes and clarifications in the IA Regulations.
5) Consolidated Foreign Direct Investment Policy Circular of 2016 dated June 07, 2016
Government of India issued consolidated FDI Policy of 2016. The present consolidation subsumes and supersedes all press notes/press releases/circulars issued by DIPP, which were in force as on June 06,2016 and reflect the FDI Policy as on June 07, 2016. Following amendments have been made in the consolidated FDI Policy Circular of 2016:i. Some definitions have been amended and some new definitions have been added to the FDI Policy of 2016. Amended and new definitions are as under:
a) Definition of “Capital” has been amended and warrants and partly paid shares have been included in definition of capital. In erstwhile Policy of 2015, warrants and partly paid shares could be issued only under government approval route. The revised definition is as under:
‘Capital’ means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily &mandatorily convertible debentures and warrants.
Note: The equity shares issued in accordance with the provisions of the Companies Act, as applicable, shall include equity shares that have been partly paid. Preference shares and convertible debentures shall be required to be fully paid, and should be mandatorily and fully convertible. Further, ‘warrant’ includes Share Warrant issued by an Indian Company in accordance to provisions of the Companies Act, as applicable.
b) New definition of “Employees Stock Option” is included. It reads as under:
“Employees’ Stock Option” means the option given to the directors, officers or employees of a company or of its holding company or joint venture or wholly owned overseas subsidiary/ subsidiaries, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.
c) New definition of “Investment Vehicle” is included in FDI Policy of 2016. It reads as under: ‘Investment Vehicle’ shall mean an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012.
d) Definition of “Non-Resident Indian” is amended and the new definition reads as under:
‘Non-Resident Indian’ (NRI) means an individual resident outside India who is a citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955. ‘Person of Indian Origin’ cardholders registered as such under Notification No. 26011/4/98 F.I. dated 19.8.2002 issued by the Central Government are deemed to be ‘Overseas Citizen of India’ cardholders.
e) Definition of company “owned” by resident India citizens is amended and Limited Liability Partnership is also included in the amended definition. In terms of amended definition a Limited Liability Partnership will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian
f) New definition of “Sweat Equity Shares” is included in FDI Policy of 2016. It reads as under:
‘Sweat Equity Shares’ means such equity shares as issued by a company to its directors or employees at a discount or for consideration other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
g) New definition of “unit” is included in FDI Policy of 2016. It reads as under:
‘Unit’ shall mean beneficial interest of an investor in the Investment Vehicle and shall include shares or partnership interests.
h) Definition of “Venture Capital Fund” is amended. The revised definition reads as under:
‘Venture Capital Fund’ (VCF) means an Alternative Investment Fund which invests primarily in unlisted securities of startups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund as defined under Chapter III-A of SEBI (AIF) Regulations, 2012.
i) Following shall be treated as eligible investors:
- A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy.
- A Non-Resident Indian may subscribe to National Pension System governed and administered by Pension Fund Regulatory and Development Authority (PFRDA), provided such subscriptions are made through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA.