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India – Taxation Updates.

 

23 October, 2014

 

 

  • Following are some of the key proposals from the Finance Act, 2014 (‘Finance Act’):

 

i. Income arising to FIIs from transfer of securities will be in the nature of ‘capital
gains’.

 

ii. Long term capital gains arising from transfer of units of a debt – based mutual fund will be taxable @ 20% (plus applicable surcharge and education cess). However, this change will not be applicable to any transfer of units of such debt -based mutual funds between April 1, 2014 and July 10, 2014.

 

iii. Only the (a) shares of a listed company and (b) units of an equity oriented mutual fund will be treated as short term capital asset if they are held for not more than 12 months. In all other cases i.e. in case of shares of a private company, unlisted public company and units of a debt mutual fund, they will qualify as short term capital asset if they are held for not more than 36 months. However, there is a grandfathering provision for the latter category of transfers already effected between April 1, 2014 to July 10, 2014, and they will continue to be governed by the previous law in this regard.

 

iv. Dividend Distribution Tax (‘DDT’) payable by domestic companies, effective October 1, 2014, is required to be calculated on the dividend income after grossing up the said income upto the extent of the rate of DDT.

 

v. The option of approaching the Authority for Advance Ruling (income-tax) (‘AAR’) will now be available to specified classes of resident taxpayers.

 

vi. Reduced withholding tax rate of 5% on interest paid by an Indian company to nonresidents on moneys borrowed by it in foreign currency (from a source outside India) will now be available in respect of all long term bonds. In addition, the Finance Act has further extended such benefit by a period of two years and the concessional rate of withholding tax will now be available in respect of all borrowings made before July 1, 2017.

 

vii. Any expenditure incurred by a taxpayer on the activities relating to corporate social responsibility referred to in section 135 of the 2013 Act will not be deemed to have been incurred for the purpose of business and hence will not be allowed as deduction under Section 37 of the Income-tax Act, 1961 (‘ITA’).

 

viii. The Finance Act has provided for special provisions to grant limited pass through treatment to trusts registered as infrastructure investment trusts or real estate investment trusts under the SEBI Act, 1992 (collectively ‘Business Trusts’).

 

a. Income of a Business Trust in the nature of interest from a Special Purpose Vehicle (‘SPV’) will be exempt from tax in the hands of the Business Trust, and will not be subject to any tax withholding at the level of the SPV. However, such interest income will be taxable in the hands of the unit holders. Accordingly, tax withholding at the rate of 5% (plus applicable surcharge and education cess) on interest income distributed to non-resident unit holders, and at 10% (plus applicable surcharge and education cess) to resident unit holders will be affected by the Business Trust.

 

b. DDT will apply on dividend income received by Business Trusts at the level of the SPV. Such dividend income will be exempt from tax in the hands of the Business Trust as well as the unit holders and will not be subject to any tax withholding.

 

c. Capital gains on disposal of assets by the Business Trust will be taxed in its hands at the applicable rates under the ITA. However, further distribution of such capital gains will be exempt in the hands of the unit holders.

 

d. Any other income of the Business Trust (i.e., except capital gains, dividend and interest from SPV) will be taxable in the hands of the Business Trust at the maximum marginal rate.

 

e. Long term capital gains arising to non-sponsor unit holders from transfer of units of a Business Trust will be exempt from capital gains tax where the transaction is subject to securities transaction tax (‘STT’).

 

f. Short term capital gains arising to non-sponsor unit holders from transfer of units of a Business Trust will be taxable at the rate of 15% (plus applicable surcharge and education cess) where the transaction is subject to STT.

 

g. Transfer of shares in SPVs by the sponsors in exchange of units in Business Trust at the initial stage will be deferred from capital gains tax in the hands of the sponsors till the time units of Business Trust are disposed by the sponsors. No preferential capital gains regime whether short term or long term (consequential to levy of STT) will be available to the sponsor on disposal of units of Business Trust that were acquired in consideration of transfer of shares of SPVs. For computing capital gains, cost of shares of SPV to the sponsor will be deemed to be the cost of Business Trust units. Further, the holding period of such SPV shares will be included in the holding period of the Business Trust units.

 

  • The Finance Act had amended the ITA to provide that offshore transfer of shares/ interest in a foreign entity will be taxable in India if such shares/ interest derived their value “substantially” from assets located in India. In a recent decision (Director of Income-tax (International tax) v. Copal Research Limited, Mauritius, 2014-TII-47-HC-DEL-INTL), while setting aside the earlier AAR ruling (Moody’s Analytics Inc., USA, In re, [2012] 348 ITR 205 (AAR – New Delhi), the Delhi High Court (‘Delhi HC’) has interpreted the term “substantially” to mean “50% or more”.

 

  • In a recent ruling (Zaheer Mauritius v. Director of Income-tax (International Taxation) -II, [2014] 47 taxmann.com 247 (Delhi), Delhi HC, while reversing the ruling of the AAR (Z Mauritius, In re, 2012-TII-16-ARA-INTL), has held that the gains arising to a non-resident investor from sale of compulsorily convertible debentures (‘CCDs’) in an Indian company do not assume the character of interest and should be treated as capital gains. The decision of Delhi HC was based on an analysis of the peculiar facts of the case including, inter alia, the fact that the CCDs were capital assets in the hands of the holder, and that there was commercial justification for investment through CCDs.

 

AZB  

 

For further information, please contact:

 

Zia Mody, AZB & Partners
zia.mody@azbpartners.com

 

Abhijit Joshi, AZB & Partners 
abhijit.joshi@azbpartners.com


Shuva Mandal, AZB & Partners 

shuva.mandal@azbpartners.com

 

Samir Gandhi, AZB & Partners
samir.gandhi@azbpartners.com


Percy Billimoria, AZB & Partners 

percy.billimoria@azbpartners.com

 

Aditya Bhat, AZB & Partners 
aditya.bhat@azbpartners.com

 

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