New Form 26AS is the Faceless hand-holding of the Taxpayers
July 18, 2020: CBDT :The new Form 26AS is the faceless hand-holding of the taxpayers to e-file their income tax returns quickly and correctly. From the current AY, taxpayers will see an improved Form 26AS which would carry some additional details on taxpayers’ financial transactions as specified in the Statement of Financial Transactions in various categories.
CBDT issues detailed guidelines for implementation of Faceless Assessment Scheme
August 14, 2020: CBDT has laid down various guidelines for implementation of faceless assessment scheme.
The Taxation & Other Laws (Relaxation & Amendment of Certain Provisions) Bill, 2020
September 29, 2020: The Government of India notified the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) after receiving the President of India’s assent.The TOLA gives legislative effect to the relaxation in due dates for various tax compliances announced by the Government. Further, surcharge is capped on dividend income earned by Foreign Portfolio Investors. Please refer Alert for detailed updates.
ITAT – Allows TDS-credit to ’pass-through’ Venture-capital Trust, though income taxable in contributors’ hands
October 2, 2020: Mumbai ITAT holds assessee (a venture capitalTrust, a pass through enti claiming exemption on income from investments u/s. I 0(23FB)) entitled to TDS credit on TDS deducted on income from investments.
CBDT has now notified the Equalisation Levy (Amendment) Rules, 2020
The CBDT has now notified the EL (Amendment) Rules, 2020 (Rules), to amend the original EL Rules, 2016 dealing with the procedural framework for compliances and the appeals process to be followed for such levy. The amended Rules are effective from 28 October 2020.
Karnataka HC affirms Special Bench’s Biocon ruling allowing ESOP discount u/s 37
HC affirms ITAT Special Bench ruling and dismisses Revenue’s appeal, holds that discount on issue of ESOPs, i.e. diPerence between grant price and the market price on the shares as on the date of grant of options is allowable as deduction u/s.37 of the IT Act
56(2)(vii) on receipt of bonus shares not applicable
Karnataka HC held that when there is an issue of bonus shares, the money remains with the company and nothing comes to the shareholders as there is no transfer of the property and the provisions of section 56(2) (vii) are not attracted
Shares issued against book adjustments not an unexplained cash credit
Calcutta High Court, in its decision, had held that when the cash did not pass at any stage and since neither the respective parties received any cash nor paid any cash, there was no real credit of cash in the cash book and the question of inclusion of the amount of the entry as unexplained cash credit could not arise
Valuation method for sec 56(2)(viib) cannot be changed by AO
Delhi ITAT holds that Revenue cannot change the valuation method for determination of FMV of shares u/s 56(2)(viib) adopted by assessee, remits the matter for de novo adjudication based on DCF method adopted by assessee
Issue of CCPS at premium to a I”lauritius Investor is not taxable
Delhi ITAT held that there was no doubt about creditworthiness and genuineness of the investment made by the Investor and directed the AO to delete the addition under section 68 of the Act.
Explanation 6 to section 9 (Indirect Transfer provisions) of the Act is clarificatory in nature
Explanation 5 and 6 to section 9(I) of the Act shall apply on transfer of partnership interest
Extension of due date to file income tax return and other reports
The CBDT has on December 3 I , 2020 notified revised due dates for filing of income tax return and other reports under the provisions of the Act. The due date for Companies / partnership firms liable for audit under section 44AB / Assessee required to furnish report under section 92E is February 15, 202 I . Further, due date for furnishing the tax audit report and the report in respect of international/specified domestic transaction for AY 2020-2 I has been extended to january 15, 2021 .
Also, the last date for making declaration under Vivad se Vishwas Scheme and passing of orders under this scheme has also been extended to january 3 I, 202 I .
ITAT : ESOP exercised by NR, granted for employment in India, not eligible for treaty benefits
Mumbai ITAT rejects Assessee’s appeal for AY 20 I 3- 14 and 20 14- 15, denies treaty benefit u/s 90 on taxation of ESOP exercised by non-resident assessee, granted for employment in India; ITAT rejects assessee’s contention that ESOP was in connection with employment in Dubai and as such income did not accrue or arise in India u/ s 5(2) of the Act
CBDT notifies Faceless Penalty Scheme, 202I
SEBI (Alternative Investment Funds) (Amendment) Regulations, 2020
October 19, 2020: SEBI has amended the regulations pertaining to the Investment team and members of the Investment Committee of the SEBI AIF Regulations.
SEBI Guidance on minimum corpus required to be maintained at the AIF level
December 29, 2020: The Securities and Exchange Board of India (’SEBI’) provided Informal Guidance on the request of Scale Management Consultants LLP (the ‘Applicant’) under the SEBI (Alternative Investment Funds) Regulations, 2012 (’AIF Regulations’) on 29 December 2020 (the ’Informal Guidance’). A brief snapshot of the Informal Guidance is given below.
Amendment to SEBI (AIF) Regulations 20I2
January 2021: To give elect to the October amendment, the SEBI has now vide its notification dated 8 january 2021, specified that the aforementioned conditions shall not apply to AIFs provided that each investor of the AIF (other than the manager, sponsor, employee/ director of the AIF/ investment manager) has:
°committed to invest not less than INR 70 crores; and
°furnished a letter of waiver, in the prescribed format.
PROPOSED DIRECT TAX CHANGES
Tax Rate and Residency
• Tax rate for income up to INR 15 lakh for individuals and HUFs reduced if they do not avail of specified exemptions/ deductions
• Residency rules for individual amended as under:
– Indian citizens or PIOs on visits to India to be resident if the visit is 120 days or more (as against 182 days earlier)
– Condition for Resident and Ordinary resident amended to residency in India for 4 out of 10 preceding previous years
• Indian citizens not liable to tax in any country shall be deemed to be resident in India
• Tax incentive for startups extended for startups incorporated between April 1, 2016 to April 1, 2021 having turnover not exceeding INR 100 cr (earlier INR 25 cr). Further, exemption shall be available for 3 consecutive years out of 10 years (earlier 5 years).
• ESOP issued by startups to be taxable in the hands of the employee at the earlier of (a) 60 months from the end of the previous year of exercise; (b) sale of the security; or (c) cessation of employment. Tax is to be computed based on rates in force in year when the security is allotted or transferred.
Vivad Se Vishwas – Direct Tax Dispute Resolution Scheme 2020 Tabled in Parliament
February 05, 2020: In line with the announcement made in the budget speech by the Finance Minister on 1 February 2020, the Government tabled ‘The Direct Tax Vivad se Vishwas Bill, 20201’ (the Scheme) on 5 February 2020 before Parliament. The Scheme aims to provide resolution a mechanism for pending direct tax disputes across various appellate forums viz. Commissioner of Income-tax (Appeals), Income Tax Appellate Tribunal, the High Court and the Supreme Court of India.
Clarification in Respect of Residency under Section 6 of the Income-tax Act, 1961
May 6, 2020: CBDT: A press release has been issued relaxing ‘residency’ norms under section 6 of the Income tax Act, 1961 (the Act) for individuals stranded in India owing to Covid-10 lockdown. It has been clarified that for the purpose of determining residential status under section 6 of the Act during FY 2019-20 in respect of individual who has come to India on a visit before March 22 and has been unable to leave India on or before March 31 owing to travel restrictions/quarantine/departure on an evacuation flight, his period of stay from March 22/date of quarantine to March 31/date of departure shall be ignored.
‘Instant PAN’ facility through Aadhaar-based e-KYC
May 28, 2020: CBDT: The facility for instant allotment of PAN (on near- to real-time basis) has been launched in line with the announcement made in the Union Budget 2020. The facility is made available for those PAN applicants who possess a valid Aadhaar number and have a mobile number registered with Aadhaar.
New Form 26AS is the Faceless Hand-holding of Taxpayers
July 18, 2020: CBDT: The new Form 26AS is the faceless hand-holding of taxpayers to e-file their income tax returns quickly and correctly. From the current AY, taxpayers will see an improved Form 26AS which would carry some additional details on taxpayers’ financial transactions as specified in the Statement of Financial Transactions in various categories.
Central Government amends E-assessment Scheme, 2019 to conduct faceless assessments
August 11, 2020: The Prime Minister (PM) launched a platform for ‘Transparent Taxation – Honoring the Honest.’ The tax system aims at being Seamless, Painless and Faceless with three pillars under consideration: (a) Faceless Assessment, (b) Faceless Appeals, and (c) Taxpayers’ charter, with faceless assessment and taxpayers’ charter coming into force from 13 August 2020, and faceless appeals to be available from 25 September 2020.
Disclosure Standards for Alternative Investment Funds (AIFs)
SEBI decided to introduce template(s) for Private Placement Memorandum, subject to certain exemptions, and mandatory performance benchmarking for AIFs with provisions for additional customized performance reporting. This move comes as a part of SEBI’s initiatives to streamline disclosure standards in the growing AIF space
COVID-19 update: Relief measures relating to statutory and regulatory compliance matters announced by Finance Minister
March 24, 2020: In view of the Novel Coronavirus (COVID-19) outbreak, the Union Finance & Corporate Affairs Minister (FM), Nirmala Sitharaman, announced several important relief measures being taken by the Government of India. The relief measures announced are on statutory and regulatory compliance matters relating to the Income-tax Act, 1961, Central Goods and Services Tax Act, 2017 (CGST Act), Customs Act, 1962 (Customs Act) and cognate Acts, Companies Act, 2013 and Insolvency & Bankruptcy Code, 2016 (IBC 2016). This news flash is based on the information released by the Press Information Bureau.1 Necessary notification and circulars shall be issued in due course by the respective authorities.
Clarification on Know Your Client (KYC) Process and use of Technology for KYC
April 24, 2020: SEBI: In order to enable the online KYC process, SEBI stated that an investor’s KYC process can be completed through online or app-based KYC, in-person verification through video and online submission of documents through e-signature (eSign). Further, detailed procedure is laid down in the circular.
Holding of Annual General Meeting (AGM) through Video-conferencing (VC) or Other Audio-visual Means (OAVM)
May 5, 2020: MCA: In view of Covid-19, MCA has decided to allow Companies to conduct their AGM through VC or OAVM during the calendar year 2020, subject to the fulfilment of the certain requirements.
COVID-19 update: Economic and regulatory measures announced by Finance Minister to help boost the Indian economy
May 17, 2020: MoF : The Finance Minister (FM), over a span of five days, has announced a special economic and comprehensive package which, when added to the earlier stimulus announcement and the liquidity infusion through previous monetary measures announced by the RBI, adds up to over INR 20 tn – equivalent to about 10% of India’s GDP. The measures have been directed at providing relief to the poor and needy and providing a helping hand to businesses towards getting the Indian economy up and running again post the COVID-19 pandemic fallout. The FM has announced the intent to undertake several short-term and long-term reform measures along with the monetary and fiscal stimulus package. The announcements include measures and reforms to enhance Ease of Doing Business for corporates, Insolvency and Bankruptcy Code, public sector enterprise policy for a new, self-reliant India, technology-driven education, healthcare, Companies Act and support to State Governments.
Monetary Policy Statement, 2020-21
May 22, 2020: RBI: Monetary Policy Committee on the basis of an assessment of the current and evolving macro-economic situation has decided to:
• Reduce the policy repo rate under the Liquidity Adjustment Facility (LAF) by 40 bps to 4.0% from 4.40% with immediate effect;
• The marginal standing facility rate and the Bank Rate stand reduced to 4.25% cent from 4.65%; and
• The reverse repo rate under the LAF stands reduced to 3.35% from 3.75%.
• Continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
June 04, 2020: SEBI: Due to the COVID-19 pandemic, SEBI has decided to extend the due date for regulatory filings for AIFs and VCFs for the months ending March, April, May and June 2020 to 7 August, 2020.
June 12, 2020: SEBI: SEBI had issued a circular dated February 05, 2020 providing for certain disclosure standards to be followed by SEBI registered AIFs in India. Subsequently, on June 12, 2020, SEBI issued a new circular clarifying the mechanism and timelines for compliance specifically in relation to the annual audit requirement and performance benchmarking.
Collection of stamp duty on issue, transfer and sale of units of AIFs
June 30, 2020: SEBI: SEBI stated that stamp duty is not applicable on redemption of mutual fund units but switching in mutual fund would attract stamp duty. SEBI released the FAQs on stamp duty collection with the provisions of the amended Indian Stamp Act coming into effect. The regulator said that the units of mutual fund schemes are to be considered as securities for the purpose of applicability of stamp duty.
Key Income-Tax Updates
Clarification regarding tax ability of income earned by a non-resident investor from off-shore investments routed through an Alternate Investment Fund
July 3, 2019: CBDT: As section 115UB(1) of the Income-tax Act, 1961 (the Act) provides that the investments made by Category I or Category II AIFs are deemed to have been made by the investor directly. It is clarified that any income in the hands of the non-resident investor from off-shore investments routed through the Category I or Category II AIF, being a deemed direct investment outside India by the non-resident investor is not taxable in India under section 5(2) of the Act.
It is further clarified that loss arising from the off-shore investment relating to non-resident investor, being an exempt loss, shall not be allowed to be set-off or carried-forward and set off against the income of the Category I or Category II AIF.
Union Budget 2019-20
July 5, 2019: The key highlights of Budget inter-alia are as under:
• Increase in applicable surcharge now – @ 25%, where total income exceeds INR 20m and @ 37%, where total income exceeds INR 50m.
• Reduced tax rate of 25% will be extended to companies with turnover of INR 4bn in FY 2017-18
• Proposal to introduce faceless assessment in electronic mode involving no human interface.
• Tax incentives for units located in the IFSC
Protocol Amending the Agreement between the Government of the Republic of India and the Government of the People’s Republic of China
July 17, 2019: MoF: The Governments of India and the People’s Republic of China, on 26 November 2018, signed a Protocol amending the Double Taxation Avoidance Agreement between India and China. India notified this Protocol on 17 July 2019.
Exemption from furnishing return of income for non-residents earning income from
investment fund set-up in IFSC
July 26, 2019: GoI: The Central Government (CG) issued a notification under sub-section (1C)
of section 139 of the Act exempting a non-resident (not being a company) or a foreign company from furnishing a return of income in India who earns income from investment in an investment fund set- up in IFSC. An investment fund has been defined to mean a Category I and II AIF, which have been granted a certificate of registration and are regulated by the SEBI (AIF) Regulations, 2012. The above exemption from furnishing return of income is subject to the satisfaction of the certain conditions.
United Investments v. ACIT (ITA No. 511/Kol/2017)
July 1, 2019: The Kolkata bench of the Tribunal in its order dated 01 July 2019 has allowed assessee’s claim for carry forward of long term capital loss from sale of listed shares on which securities transaction tax has been paid.
CBDT issues clarification on eligibility of small Start-ups to avail tax holiday
August 22, 2019: CBDT: CBDT has clarified that small start-ups with turnover upto Rs. 25 crore will continue to get the promised tax holiday as specified in Section 80-IAC of the Income Tax Act, 1961 (the Act) which provides deduction for 100 percent of income of an eligible start-up for 3 years out of 7 years from the year of its incorporation.
CBDT constitutes Start-up Cell for redressal of grievances related to Start-ups
August 30, 2019: CBDT: To redress grievances and address various tax related issues in the cases of Start-ups, a Start-up Cell has been constituted by CBDT.
Consolidated circular for assessment of Startups
August 30, 2019: CBDT: CBDT has issued circular providing clarity on several aspects relating to the assessment of startups under section 56(2)(viib) of the Act and the recovery of demand therefrom. The Circular is said to be a consolidated one and is intended to provide a hassle-free tax environment to the Startups as promised by the Hon’ble Finance Minister.
Gift of shares made by a company under an internal restructuring exercise not a “colourable device” – rejection of revision under section 263 of the Income-tax Act, 1961 (the Act)
November 1, 2019: The Mumbai bench of the Income-tax Appellate Tribunal holds transfer of shares of a company as “gift” by a taxpayer to its group company is not a colourable device. It rejected the Revenue’s contention that the taxpayer had resorted to circular transaction of transfer of shares to avoid capital gains tax. In addition, the Tribunal quashed the Commissioner of Income-tax’s revisionary order under section 263 of the Act, as the Tribunal observes that the tax officer had made due enquiries during the assessment proceedings and the CIT was only trying to substitute its opinion, which cannot be done by exercising revisionary jurisdiction under section 263 of the Act.
Tribunal holds that valuation of shares under section 56(2)(viib) of the Act, based on the fair value of assets, cannot be rejected
November 6, 2019: The Delhi bench of the Income-tax Appellate Tribunal held that where
the taxpayer has demonstrated with evidence that the fair market value (FMV) of an asset is much more than the book value, the tax officer cannot use the book value of the asset, ignoring its FMV, for valuation of shares under clause (ii) of Explanation (a) to section 56(2)(vii)(b) of the Act. The Tribunal further ruled that shares should be valued based on various relevant factors and not merely based on financials.
A. Key Income-Tax Updates
1. Angel Tax exemption
January 31, 2019 : CBDT: ‘Angel tax’ exemption granted vide notification dated May 24, 2018 has modified pursuant to revised DIPP notification dated January 16, 2019. As per the modified notification, provisions of Sec. 56(2)(viib) of the Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if such issue of shares is approved by the CBDT under modified para 4(3) of DIPP notification of January, 2019. This notification shall be deemed to have come into force retrospectively from the 16th January, 2019.
2. Definition of start-ups widened and conditions for exemption from “angel tax”amended
February 19, 2019 : DIPP: The definition of start-ups has been expanded. Further, the conditions for claiming exemption under section 56(2)(viib) of the Income-tax Act, 1961 for start-ups has been amended. The notification is issued in supersession of the previous notifications dated 11 April, 2018 and 16 January, 2019.
3. HC rules that a Trust is “revocable” in case contributions are revocable, and the income of such Trust should be taxable in the hands of the contributors
May 18, 2019 : High Court: Madras High Court dismissed the Revenue’s appeal and held that in case the funds transferred by the contributors to the Trust were revocable, section 62(2) read with section 61(1) of the Income Tax Act, 1961 (the Act) would become applicable. Accordingly, the income of such Trust should be taxable in the hands of the contributors and not in the hands of the Trust. The HC, in its decision, further noted that section 164 of the Act does not apply, as the contributors, their respective shares and the extent of their beneficial interest in the Trust are identifiable.
4. Non-allowability of set-off of losses against the deemed income under section 115BBE prior to AY 2017-18
June 14, 2019: CBDT: In order to remove any ambiguity of interpretation, it is clarified that since the term ‘or set-off of any loss’ was specifically inserted by the Finance Act, 2016, with effect from 1 April 2017, the taxpayer is entitled to claim set-off of loss against the income referred under section 115BBE of the Income-Tax Act, 1961 till the AY 2016-17.
B. Key Indian Regulatory Updates
1. Relaxation from requirement to furnish a copy of PAN for transfer of equity shares of listed entities executed by non-residents
February 11, 2019 : SEBI: In order to address the difficulties faced by non-resident investors (such as NRIs, PIOs, OCIs and foreign nationals), it has been decided to grant relaxation to non-residents from the requirement to furnish PAN and permit them to transfer equity shares held by them in listed entities to their immediate relatives subject to conditions prescribed.
2. Transfer of securities held in physical mode – clarification
March 27, 2019 : SEBI: Certain clarification has been issued with respect to transfer of securities held in physical mode:
1. The above decision does not prohibit the investor from holding the shares in physical form; investor has the option of holding shares in physical form even after April 01, 2019.
2. Any investor who is desirous of transferring shares (which are held in physical form) after April 01, 2019 can do so only after the shares are dematerialized.
3. The transfer deed(s) once lodged prior to deadline and returned due to deficiency in the document may be re-lodged for transfer even after the deadline of April 01, 2019.
3. Informal Guidance in the matter of VCF JM Financial India Fund
May 2, 2019 : RBI: In the said informal guidance note, it has been clarified by SEBI that VCFs may invest unutilised funds of investable fund in the units of liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, commercial papers, etc. during the term specified in the private placement memorandum.
4. Consultation Paper on Innovators Growth Platform (IGP)
May 20, 2019 : SEBI: SEBI has floated a consultation paper on norms for startups listed on IGP, to trade under regular category of main board of stock exchanges. Some of the key proposals are as under:
• The regulator proposed that the companies listed on IGP, wanting to list on the mainboard, should complete at least one year of listing on the former platform, and should have minimum 200 shareholders.
• The company, its promoters or directors should not have been debarred from accessing the capital markets, and should not have been a willful defaulter or fugitive economic offender.
• Minimum promoters’ contribution will be 20 per cent of the total capital, and if there is shortfall, it can be made up to 10 per cent through contribution from alternative investment funds (AIFs), foreign venture capital investors, commercial banks, public financial institutions or insurance companies. Such capital shall be locked for a period of 3 years.
5. Discussion paper on review of buy-back of securities
May 22, 2019 : SEBI: SEBI has issued discussion paper to seek comments / views from the public on suggestions relating to review of conditions for buy-back of securities. The issue raised is whether SEBI should consider different approach or similar approach if the subsidiaries of a listed company proposing buybacks are NBFCs, HFCs and Infrastructure companies.
6. SEBI signs MoU with Ministry of Corporate Affairs (MCA)
June 7, 2019 : SEBI: SEBI has signed a MoU with MCA for data exchange between the two regulatory organizations. It will enable sharing of specific information such as details of suspended companies, delisted companies, shareholding pattern from SEBI and financial statements filed with the Registrar by corporates, returns of allotment of shares, audit reports relating to corporates. The MoU will ensure that both MCA and SEBI have seamless linkage for regulatory purposes.
7. Annual Return on Foreign Liabilities and Assets
June 28, 2019 : RBI: RBI has operationalized a web-based system online reporting portal – Foreign Liabilities and Assets Information Reporting (FLAIR) system for submission of foreign liabilities and assets (FLA) return by 15 July of every year, to enhance the security-level in data submission and improve data quality. This replaces the present email-based reporting system for submission of FLA return. Further, the circular has now specifically mentioned AIFs and Investment Vehicles as reporting entities required to file FLA return.
In this quarter, angel tax has been the topic of attention for the startup ecosystem. The following two changes are worth reporting:
V. No coercive measures on startups to recover demand w.r.t additions u/s 56(2)(viib), directs CBDT.
January 02, 2019: CBDT: CBDT directs AOs not to take coercive action till further instructions, to recover outstanding demand in case of start-ups if additions have been made u/s 56(2)(viib) after modifying /rejecting valuation under Rule 11UA; Also states that the matter is under consideration of the Board.
VI.Government eases process for startups to seek tax exemption
January 16, 2019: DIPP: Government eases procedure for start-ups to seek income tax exemption on investments from angel funds as part of efforts to address concerns of budding entrepreneurs. The application procedure has been simplified by making application to CBDT through DIPP. The earlier requirement for startup to submit a report from the merchant banker specifying the fair market value of shares has also been removed.
As per the revised procedure, a startup, which is recognised by the DIPP, would be eligible to seek exemptions, subject to certain conditions. Apart from INR 10 crore threshold for paid-up share capital and share premium, the conditions also include that:
• An Investor should have returned income of INR 50 lakh or more for the financial year preceding the year of investment.
• The net worth exceeding INR 2 crore or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of iinvestment/proposed investment.
Application for approval under this para shall be made in specified form to DIPP:
• Provided that in case the approval is requested for shares already issues by the startup, no
application shall be made if assessment order has been passed by assessing officer for the relevant financial year.
• The application of the recognised startup shall be transmitted by DIPP to CBDT with the necessary documents.
• The CBDT, within a period of 45 days from the date of receipt of application from DIPP, may grant approval to the startup for the purposes of clause (viib) of sub-section (2) of section 56 of the Act or decline to grant such approval.
I. The Companies (Amendment) Ordinance, 2018
November 06, 2018: MCA: Amendments to certain provisions of the Companies Act, 2013 have been carried out with effect from November 02, 2018. The key aim of the amendments are, as follows:
• Re-categorisation of certain offences, which are in the category of compoundable offences to an inhouse adjudication framework, wherein defaults would be subject to the penalty levied by an adjudicating officer.
• Instituting a transparent and technology driven in-house adjudication mechanism on an online platform and publication of the orders on the website.
YourNest India VC Fund II: Quarterly Report December 2018 16
Tax & Regulatory Updates
• De-clogging the National Company Law Tribunal by introducing certain amendments and enhancing the role of the Regional Director.
• Tackling the larger issue of “shell companies,” enhancing accountability with respect to filing documents related to charges, non-maintenance of registered office, etc.
II. Operating guidelines for AIFs in IFSC
November 26, 2018: SEBI: A circular issued specifying the operating guidelines for AIFs in IFSC. Circular providing guidelines in relation to: registration process, investment conditions, minimum investment and corpus requirements, set-up requirements for manager/sponsor of AIFs, requirement to appoint custodian, requirements for angel funds, and the overseas investments requirements.
III.Extension of deadline for transfer of securities only in demat form
December 03, 2018: SEBI: A notification issued extending the timeline from December 5, 2018 to April 1, 2019 to allow transfer of securities, other than transmission and transposition, only if they are held in dematerialised form with a depository.
IV.Report of the expert committee for listing of equity shares of companies incorporated in India on foreign stock exchanges and vice-versa
December 04, 2018: SEBI: Expert Committee submitted its report on listing of equity shares of companies incorporated in India on foreign stock exchanges and of companies incorporated outside India on Indian stock exchanges.
V. SEBI Board meeting
December 12, 2018: SEBI: SEBI in its meeting decided on certain matters such as creation of segregated portfolio by Mutual Funds, review of framework for Institutional Trading Platform, clubbing of investment limits for FPIs, review of framework for OFS of shares through Stock Exchange mechanism, consultation paper on uniform valuation methodology for pricing of Corporate Bonds, etc.
VI.FEMA Update – e-Commerce – Clarification issued by DIPP
January 04, 2019: DIPP: In relation to FDI in entities engaged in e-commerce, DIPP has issued clarification in support of PN 2 / 2018. The clarification specifies the following:
• e-Commerce platform operating on inventory-based model is a violation to FDI under e-Commerce section as well as under multi-brand retailing;
• PN 2/2018 is applicable only to entities which operate a marketplace for e-commerce and thus, FDI in other sectors continues to be governed by the specific provisions pertaining to them.
1) Applicability of Section 56(2)(viib) in case of start-ups
On February 06, 2018: CBDT: An instruction issued stating that, in cases of start-up Companies (as per the DIPP definition), no coercive measure would be taken by the Assessing Officer to recover the outstanding demand for additions made under section 56(2)(viib) of the Income-tax Act, 1961 and also requires expeditious disposal of pending appeals by Commissioner (Appeals).
2) FATCA and CRS – New reporting mechanism
On April 05, 2018: CBDT: A notification issued summarising the updated procedure for registration and submission of Statement of Reportable Account for the purpose of Foreign Account Tax Compliance Act (FATCA) and Common Reporting System (CRS) reporting.
3) Notification on person allowed to issue Valuation report
On May 24, 2018: CBDT: A notification issued wherein the definition of ‘accountant’ has been deleted from Rule 11U of the Income-tax Rules, 1962 (‘the Rules’), and also reference to the word ‘accountant’ has been removed from Rule 11UA(2)(b) of the Rules, which provides the manner for determining the fair market value and the persons to provide the certificate. Accordingly, the CBDT has made it mandatory to obtain a valuation certificate from a Merchant Banker for the purposes of Section 56(2)(x), 56(2)(viib) and Section 50CA of the Income-tax Act, 1961 (‘the Act’).
4) Angel tax exemption notification
On May 24, 2018: CBDT: A notification issued in supersession of its earlier notification, stating that the provisions of Section 56(2)(viib) (i.e. taxability of income from other sources) of the Act, shall not be applicable in case of start-ups. This notification shall be deemed to have come into force retrospectively from April 11, 2018.
5) Overseas investment by AIFs/ VCFs
On July 03, 2018: SEBI: A circular issued increasing the limit for overseas investment by AIFs/ VCFs from US$ 500 mn to US$ 750 mn and prescribing certain disclosures.
Conduct of e-assessment proceedings in scrutiny cases
On February 12, 2018: CBDT: CBDT has directed to conduct the pending scrutiny assessments through ‘EProceeding’ facility available in E-filing website:
Case records and note sheet to be maintained electronically
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.
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.
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:
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.
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.
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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.
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:
Further, the Finance Minister reiterated the commitment of the Government to implement the Goods and Service Tax as per schedule.
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.
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.
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:
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.
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.
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.
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:
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.
Escrow account to be closed immediately after the requirements are completed or within six months, whichever is earlier.
On 27 February 2017, FPI Regulations, 2014, have been amended to include the following two new categories of permissible investments:
On March 3, 2017, RBI issued a notification amending norms for FDI in LLPs.
FDI in LLPs is permitted, subject to the following 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.
1) Change in Corporate Tax Rates
2) Scope of Tax on Dividend in the hands of recipient
3) Tax deduction to Start-ups Extended Period
4) Carry forward and set off of loss in case of Eligible Start-ups
In case of eligible start-ups, the loss incurred in any year prior to the previous year shall be carried forward and set off against the income of previous year, if all the shareholders of such company which held shares carrying voting power on the last day of the year or years in which the loss was incurred:
5) Carry forward of MAT and AMT credit – Extended period and restriction on carry forward
6) Indirect transfer provisions- clarification
7) Fee on delay in filing of Return of Income (Section 234F – newly inserted)
For AY 2018-19 and onwards in case, return is not filed within the due dates as per Section 139(1), following fee shall be levied:
8 ) Exemption of long term capital gains tax u/s 10(38)
9) Fair Market Value deemed to be the consideration in certain cases
Where consideration for transfer of share of a company (other than quoted share) is less than the Fair Market Value (FMV) of such share determined in accordance with the prescribed manner, the FMV shall be deemed to be the full value of consideration for the purposes of computing capital gains income;
1) SEBI Board Meeting
On 23 November 2016, the SEBI held its Board Meeting wherein the following decisions were taken:
2) External Commercial Borrowings (ECB) for Start-ups
On 4 October 2016, the Reserve Bank of India (‘RBI’) issued statement on developmental and regulatory policies whereby ECBs were permitted up to USD 3 million in start-ups. Guidelines on the same have been issued on 27 October 2016.
3) RBI Circular on Investment by FVCI
On 20 October 2016, RBI issued an A.P. (DIR Series) Circular in continuation to the FEMA Notification 363/2016 dated 28 April 2016. Two important clarifications in the A.P. (DIR Series) Circular are as follows:
4) Notification of various sections under the Companies Act, 2013
The Ministry of Corporate Affairs has notified the much-awaited sections in the Companies Act, 2013 dealing with amalgamation, compromise, arrangement, liquidation and winding up. The notified sections will be effective from 15 December, 2016, and are likely to bring a paradigm shift in the manner in which these important restructurings are implemented. Going forward, the National Company Law Tribunal (NCLT) will have jurisdiction over these matters, which until now were within the jurisdiction of the High Court. NCLT has been setup as a specialised body to deal with Company Law matters.
1) Central Board of Direct Taxes (CBDT) notifies final Buy Back Distribution tax rules
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.
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:
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:
1) Finance Act, 2016
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:
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:
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.
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.
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:
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:
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:
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:
Other relevant amendments:
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:
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.
Non-residents including FPIs and NRIs permitted to invest in units of inter-alia, SEBI registered AIFs under the Automatic Route
Downstream investment by AIF to be regarded as foreign investment if neither Sponsor nor Investment Manager of the said AIF is Indian “owned and controlled” as defined under the FEMA Inbound Regulations:
In case Sponsor or Investment Manager is organized in a form other than a company (i.e. LLP, etc), SEBI to determine whether the Sponsor or Investment Manager is foreign owned and controlled
Downstream by AIF having foreign investment to conform to sectoralcaps and conditionalities.
AIF having foreign investment to make such report and in such format to RBI or SEBI as may be prescribed.
No Government approval required for investment in automatic route sectors by way of swap of shares
Compliance Regime based on Self- Certification: To reduce the regulatory burden on Startups thereby allowing them to focus on their core business and keep compliance cost low.
Rolling-out of Mobile App and Portal: Governments shall introduce a Mobile App to provide on-the-go accessibility.
Legal Support and Fast – tracking Patent Examinations at Lower Costs.
Faster Exit for Startups: To make it easier for Startups to wind up operations.
Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000crore: The Fund will be in the nature if Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds and Life Insurance Corporation (LIC) shall be a co-investor in the Fund of Funds.
Credit Guarantee Fund for Startups: To catalyse entrepreneurship by providing credit to innovators across all sections of society.
Tax Exemption on Capital Gains: To promote investments into Startups by mobilising the capital gains arising from sale of capital assets.
This exceptional initiative that shall make investors to invest in start-ups rather than capital gains bonds or house property. This exemption must allow capital gains to be invested in SEBI registered AIFs, Fund of Funds, and angel investments in the start-ups validated by Inter-Ministerial Board. A clarification in the notification on its scope is essential.
Tax Exemption for Startups for 3 years: To promote the growth of Startups and address working capital requirements.
This shall give a huge relief on working capital blocked in TDS for the start-ups. In reality our start-up are loss-making in the initial 3-7 years as they are chasing growth, but we hope the notification shall clarify that the clients of start-ups shall be exempted from deduction of TDS on the invoices. A saving of cash flow that today gets blocked in TDS for 12-18 months shall enable them to run faster.
Tax Exemption on Investments above Fair Market Value (Start-up Tax (Section 56(2)(vii b)): To encourage seed-capital investment in Startups.
This is only an incremental step of exempting the incubation enters in addition to venture capital funds. The CBDT needs to exempt all angel investments for the start-ups to raise funds freely from angels.
SEBI had constituted a standing committee ‘Alternative Investment Policy Advisory Committee’ (AIPAC) under the chairmanship of Shri. N. R. Narayan Murthy in March 2015. AIPAC has submitted its first report to SEBI with various recommendations (the same is attached). Public comments on the said report are invited by February 10, 2016.
We have summarized below the key recommendations made under the said report:
2. FDI in AIF regulation:
3. Reforms to unlock domestic capital pool
4. Reforming AIF Regulatory Regime: To regulate the Fund manager instead of the Fund
Overseas investment by AIFs: Limits to be extended to (a) 25% of the corpus of an AIF (currently provided by SEBI) or (b) 50% of the offshore component of the corpus of AIF, whichever is higher; SEBI’s requirement of ‘Indian connection’ to be liberalized.
A) VCFs like YourNest permitted to invest upto 25% vs 10% in offshore startups.
Guidelines on overseas investments for AIFs/VCFs circular dated October 1, 2015 (CIR/IMD/DF/7/2015) issued by SEBI as under:
Key changes with respect to overseas investment by VCFs
B) Fund Tenure period to start from close date:
Guidelines on other issues/clarification circular dated October 1, 2015 (CIR/IMD/DF/7/2015) issued by SEBI as under:
Tenure of any scheme of the AIF shall be calculated from the date of final closing of the scheme (fund launched with effect from 1st October, 2015).
C) Startup Act in Works To Crank up Innovation: Govt plans to simplify rules to unleash entrepreneurial energies & create jobs:(ET, November 3, 2015)
The Narendra Modi government wants to provide a powerful launched for start-ups by drastically simplifying the rules and ensuring that innovators are able to take advantage of such an enabling environment, thus unleashing entrepreneurial energies and creating jobs.
At the heart of the initiative is distilling the cumbersome process of compliances under 22 different laws into a two-page Startup Act, a senior government official told. The Department of Industrial Policy and Promotion (DIPP) is looking to turn India into a startup haven.
On the Agenda of Startup Act:
D) New Bankruptcy Bill to Speed up Shutdown of Cost (ET, November 5, 2015):
The Bankruptcy Law reforms commission headed by former secretary TK Viswanathan has proposed insolvency resolution within 180 days and a new regulator oversee the process. It’s also laid down clear and speedy systems for early identification of financial distress and revival of companies.
E) Relatives excluded from definition of “Deposits”
MCA amended the Companies (Acceptance of Deposits) Rules, 2014 on 15th September, 2015 that:
F) Firms can claim Income-Tax deduction on expenses for IPR acquisition
The Supreme Court on 28th October 2015 (Mangalore Ganesh Beedi Works vs CIT) has held that a firm can claim deduction or depreciation in income tax on expenses incurred for acquisition of intellectual property, such as patent and trademarks rights, copyrights and know-how, as they are capital in nature.
GAAR: Applicability deferred to FY 2017-18 onwards. Exits made before March 31, 2017 won’t attract GAAR. All investments made upto March 31, 2017 will be protected from applicability of GAAR by amendment to be made in Income tax rules (to be notified).
Permanent Establishment Safe Harbour- Fund management activity undertaken in India by an eligible fund manager on behalf of an eligible offshore fund will not trigger business income taxation for the offshore fund in India.
Qualifying criteria for an eligible fund include:
Key qualifying criteria for the eligible fund manager include:
Residency of Foreign Companies: Any foreign company with place of effective management in India (“POEM”) at any time during the year will qualify as Indian resident- may not be entitled to claim tax treaty. Currently, only 100% management and control in India triggers residency. POEM linked to key management and commercial decisions of an entity as a whole. Specific exemption for eligible Fund Managers covered in 4 above.
Global Depository Receipts: Definition modified to cover only GDRs with underlying listed Securities- tax planning opportunity curtailed.
Tax Pass-through for AIF 1 and 2:
Indirect Transfer Taxation related relaxation:
Income Computation Disclosure Standards (ICDS): CBDT notified 10 ICDS on March 31, 2015, which is applicable from FY2015-16.
Specified Domestic Transaction: Transfer pricing provisions to apply for transaction above INR 20crores as against INR 5crores.
Direct Tax Code (DTC): DTC is history.
3) Corporate Law
Changes introduced by Companies (Amendment) Act, 2015:
Exemption/Relaxations for private companies notified by Ministry of Corporate Affairs (MCA):
CBDT clarification on Taxation of AIF
3) Company Law
Companies (Amendment) Bill, 2014-Passed by Lok Sabha
Draft Notification for exemption to Private Company
Foreign Direct Investment (FDI) in India – issue / transfer of shares or convertible debentures – revised pricing guidelines
The RBI has issued A. P. (DIR Series) Circular No. 4 dated 15 July 2014, whereby the extant pricing guidelines in respect of transfer / issue of shares and for exit from investment in equity shares with or without optionality clauses of listed / unlisted Indian companies have been reviewed so as to provide greater freedom and flexibility to the parties concerned under the FDI framework.
The new pricing guidelines shall be as under:
– In case of listed companies:
The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures shall be as per the SEBI guidelines;
The pricing guidelines for FDI instruments with optionality clauses shall continue to be in accordance with A.P. (DIR Series) Circular No. 86 dated 9 January 2014, i.e., the non-resident investor shall be eligible to exit at the market price prevailing on the recognised stock exchanges subject to lock-in period as stipulated, without any assured return.
– In case of unlisted companies
The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures with or without optionality clauses shall be at a price worked out as per any internationally accepted pricing methodology on arm’s length basis. Thus, the guiding principle will be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment / agreement and shall exit at a fair price computed as above at the time of exit subject to lock-in period requirement as applicable in terms of A.P. (DIR Series) Circular No. 86 dated 9 January 2014.
The changes in the existing pricing guidelines for FDI applicable to transfer / issue of shares and for exit from foreign direct investment with optionality clauses for the unlisted Indian companies are given in the Annex 1 and Annex 2 to the Circular respectively.
An Indian company taking on record in its books any transfer of its shares or convertible debenture by way of sale from a resident to a non-resident and a non-resident to a resident shall disclose in its balance sheet for the financial year, in which the transaction took place, the details of valuation of share or convertible debentures, the pricing methodology adopted for the same as well as the agency that has given / certified the valuation.
1) The Securities and Exchange Board of India (‘SEBI’) updates regulation in relation to Alternative Investment Fund (“AIF”) and notifies regulation for “Angel Fund”.
With an aim to encourage entrepreneurship in the country by financing small start-ups, SEBI, vide its notification dated 16 September 2013, amended AIF Regulations to notify new norms for angel investors, who provide funding to companies at their initial stages. Such angel funds are to be a sub-category in Category I – Venture Capital Fund.
(Note: YourNest Angel Fund is a SEBI registered Venture Capital Fund. It does not fall under the new regulations & notification announced by SEBI for an Angel Fund on dated 16 September 2013.)
2) Amendment to Securities Contracts (Regulation) Act, 1956 (‘SCRA’)
SEBI has issued a notification on 3 October 2013 wherein the SEBI has relaxed certain provisions under Securities Contracts (Regulation) Act, 1956 (‘SCRA’) to boost the interest of investors by allowing them to include preferential clauses like right of first refusal (‘ROFR’), tag-along, drag-along and call-put option in the share purchase agreements / Articles of Association subject to certain conditions.
3) Listing of SME
SEBI has notified on 9 October 2013 “SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013” to permit listing of Startups and Small and Medium Enterprises (‘SMEs’) in Institutional Trading Platform (‘ITP’) without making an Initial Public Offering (‘IPO’).. The move is aimed at providing easier exit options to informed investor (such as Angel Investors, Venture Capital Funds and Private Equities).
The key eligibility criteria’s for SMEs are given below:
4) Unlisted Indian companies allowed to list and raise capital abroad
The Ministry of Finance (MoF) in its Press Release dated 27 September, 2013 dealing with listing of Unlisted Indian Companies on overseas exchanges decided that unlisted companies allowed on a pilot basis for 2 years to raise capital abroad without the requirement of prior or simultaneous listing in India.
Further notification and amendment issued on 11thOctober, 2013 by MoF & on 8th November, 2013 by RBI are as under:
5) Insurance Companies allowed to invest in Category II AIFs
In March 2013, life and general insurance companies were allowed to invest in Category I AIFs, comprising infrastructure funds, SME funds, venture capital funds and social venture funds. The Insurance Regulatory and Development Authority (‘IRDA’), vide its circular dated 23 August 2013, has now expanded the permissible investment category to Category II AIFs subject to the condition that at least 51 per cent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities. Insurers, however, are not permitted to invest in AIFs that have the nature of funds of funds and leverage funds.
The overall exposure to venture funds and AIFs put together should not exceed 3 per cent in the case of a life insurance company and 5 per cent in the case of a general insurance company. Exposure to a single AIF or venture fund should not be more than 10 per cent of the fund size (20% of the fund size in case of Infrastructure Funds).
B) Corporate Laws
The Companies Act, 2013, which seeks to replace the Companies Act, 1956 in consonance with changes in national and international economic environment, was notifies on August 30, 2013.
The Companies Act, 2013, has, inter alia, introduced enhanced corporate governance standards particularly in relation to the independent directors, audit, corporate social responsibility, mandatory valuation, private placement of securities, cross-border mergers (including merger of Indian companies into foreign companies) and class action suits.
The Companies Act, 2013 has introduced the concept of ‘One Person Company (OPC)’ and a “Small Company” that is a good step for Indian Start-ups. An idea or an Intellectual Property can be floated in an OPC with the benefits of limited liability and perpetual succession. Further, Small Company brings some ease in doing business during the early days of a venture.
SEBI (Investment Advisers) Regulations, 2013
The Securities and Exchange Board of India (“SEBI”) issued the SEBI (Investment Advisers) Regulations, 2013 vide notification dated 21 January, 2013. It is applicable on
The exempted person from registration includes any fund manager, by whatever name called of a mutual fund, alternative investment fund or any other intermediary or entity registered with the Board.Companies Bill, 2012
The Companies Bill, 2011 was laid before the Parliament in December 2011 and was then referred to the Parliament Standing Committee on Finance headed by Mr. Yashwant Sinha (‘the Committee’). Based on the recommendations of the Committee, the Companies Bill, 2011 was amended and introduced as the Companies Bill, 2012. The Companies Bill, 2012 was passed in the Lok Sabha on December 18, 2012. The Bill has 470 clauses and divided into 29 chapters.
It includes changes such as –
The Finance Bill 2013 (“the Bill”) was introduced as part of the Union Budget 2013 on February 28, 2013. The Bill received the assent of the President of India on 13 May 2013.
The key amendments to the Act by the Finance Act 2013, which would be relevant to the Fund and its investors are given below:
Other key announcement from the speech of the Finance Minister include