Regulatory Updates – Quarterly Report – December 31, 2017

A. TAX UPDATES

• Union Cabinet approves DTAA with Hong Kong

On November 10, 2017, Union Cabinet approves entering into an Agreement between India and the Hong Kong Special Administrative Region (‘HKSAR’) of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income (‘DTAA’).The Agreement will stimulate flow of investment, technology and personnel from India to HKSAR & vice versa, prevent double taxation and provide for exchange of information between the two contracting parties. This Agreement is on similar lines as entered into by India with other countries.

• Indirect transfer provisions: CBDT clarifies in case of redemption of share or interest outside India

On November 7, 2017, the CBDT has issued a circular clarifying that the provisions of section 9(1)(i) of the Income-tax Act, 1961 (the ‘Act’) read with Explanation 5 thereof (i.e. indirect transfer provisions) shall not apply in respect of income accruing or arising to a non-resident on account of redemption or buy-back of its share or interest held indirectly in the specified funds, if such income accrues or arises from or in consequence of transfer of shares or securities held in India by the specified funds and such income is chargeable to tax in India.

B. REGULATORY UPDATES

• Foreign investment in India – Rationalisation

On November 7, 2017, the Reserve Bank of India (‘RBI’) has revised FEMA 20 which deals with foreign investment into India.

Some of the key takeaways pursuant to the above changes are:

1. FDI, has been defined to mean investment through capital instruments by a person resident outside India in an unlisted Indian company, or in 10% or more in a listed Indian company
2. The timeline of issue of Capital Instruments has been aligned with the Companies Act, 2013. The period was 180 days under the erstwhile regulations. In case of non-issuance of capital instruments within 60 days, money will be required to be refunded within 15 days.

• The following transfers have now been permitted under the automatic route
• Transfer by non-resident of India (NRI) or OCI to person resident outside India by way of sale or gift subject to prescribed conditions;
• Transfer from person resident outside India to another person resident outside India pursuant to liquidation, merger, demerger, amalgamation of foreign companies.

1. Consequent changes made in various regulations in relation to investment under Schedule 4 (NRI on non-repatriation basis) considered as investment by resident.
2. The definition of “Downstream Investment” has been amended to include investment by Limited Liability Partnership (LLP)/ Investment Vehicle in downstream Indian company or LLP.

• RBI Directions on NBFC – Peer to Peer lending platform

On 4 October 2017, RBI issued the Peer to Peer (P2P) Lending directions . The directions provide a detailed framework for registration of P2P lending platforms as “Non-banking financial company – Peer to Peer Lending Platform” (NBFC-P2P), eligibility criteria, scope of activities, prudential norms, operational guidelines, information technology/security, governance, disclosure and reporting requirements.

• Changes in classifying MSME from ‘investment in plant & machinery/ equipment’ to ‘annual turnover’

The Union Cabinet chaired by Prime Minister Narendra Modi on Wednesday (Feb 7, 2018, New Delhi) approved change in the basis of classifying Micro, Small and Medium enterprises from ‘investment in plant & machinery/equipment’ to ‘annual turnover’.

This will encourage ease of doing business, make the norms of classification growth oriented and align them to the new tax regime revolving around GST (Goods & Services Tax).

Section 7 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 will accordingly be amended to define units producing goods and rendering services in terms of annual turnover as a micro enterprise will be defined as a unit where the annual turnover does not exceed Rs five crore; a small enterprise will be defined as a unit where the annual turnover is more than Rs five crore but does not exceed Rs 75 crore and a medium enterprise will be defined as a unit where the annual turnover is more than Rs 75 crore but does not exceed Rs 250 crore.

Read more at : http://bit.ly/2sKF0ot

1. BUDGET 2018: KEY TAX PROPOSALS

• Taxation of long term capital gains
• Exemption for LTCG on transfer of listed equity shares, units of equity oriented mutual fund and units of business trust withdrawn w.e.f. April 01, 2018
• LTCG above INR 1 lakh on following transfers taxable at 10%:
  • listed equity shares (STT paid on acquisition and transfer)
  • units of equity oriented mutual fund (STT paid on transfer); and
  • units of business trust (STT paid on transfer)
• Government to notify transactions exempted from condition of STT on acquisition
• Computation of gains in foreign currency and indexation benefits not available
• Cost of equity shares to be higher of:
  • Actual cost of acquisition; and
  • Lower of:
  • FMV as on 31 January 2018; and
  • Value of consideration received upon transfer
• Fund of Funds to be covered in definition of equity oriented mutual fund
  • Funds where 90% of assets are invested in other fund and such fund in turn have invested minimum 90% in listed equity shares.
• Dividend distribution tax on deemed dividend
• Deemed dividend under section 2(22)(e) to now attract DDT in the hands of the payer @ 30% without grossing up (instead of withholding tax earlier)
  • Income exempt in hands of recipient
  • Section 115BBD not to apply to such income
• In case of amalgamated company, accumulated profits for deemed dividend to include accumulated profits of amalgamating company on the date of amalgamation.
• Startups and VCs
• Tax holiday benefit now available to eligible startups incorporated prior to 01 April 2021 (currently 01 April 2019)
• Definition of eligible business substituted to mean “innovation, development or improvement of products or processes or services or scalable business model with high potential of employment generation or wealth creation”
• Turnover should not exceed INR 25 crores for seven years from incorporation (earlier restriction was applicable only up to FY 2020-21).