Finance Bill Select Key Direct Tax Proposals

Finance Bill 2016 - Select Key Direct Tax Proposals
© Shah V G & Co.

Table of Contents Contents
OECD BEPS Actions & Proposed Indian Amendments Taxation of Non Residents Introduction of Equalisation Levy Transfer Pricing Provisions Withholding Tax Provisions The Income Declaration Scheme, 2016 The Direct Tax Dispute Resolution Scheme, 2016 Some other Relevant Proposed Amendments Individual Taxation © Shah V G & Co.

OECD - BEPS & Proposed Indian Income Tax Amendments
© Shah V G & Co.

OECD’s BEPS Actions & Proposed Amendments
Organisation for Economic Cooperation and Development (OECD) - Base Erosion and Profit Shifting – Action 1 : Addressing the Tax Challenges of the Digital Economy Options to tackle Direct Tax challenges in digital economy Finance Bill 2016 – Proposed Amendment New Chapter – “Equalisation Levy” introduced 6% of consideration received by Non Resident for specified services Amendment to be effective from the date of notification by Central Government Chapter discussed in detail in subsequent slides © Shah V G & Co.

BEPS – Action 5 : Countering Harmful Tax Practices More Effectively, taking into account Transparency and Substance Income arising from exploitation of Intellectual Property (IP) to be taxed in jurisdiction where substantial Research and Development activities are undertaken Finance Bill 2016 – Proposed Amendment Insertion of new Section 115BBF Royalty income in respect of patent developed and registered in India to be taxed on gross 10% plus applicable surcharge and education cess Amendment to be effective from A.Y © Shah V G & Co.

BEPS – Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting Revised standards for Transfer Pricing Documentation and Country by Country Reporting Finance Bill 2016 – Proposed Amendment Amendment to Section 92D and new Section 286 – Provision relating to Country by Country Reporting and Maintenance of Master File Amendment to be effective from A.Y Amendment discussed in detail in subsequent slides © Shah V G & Co.

Taxation of Non Residents
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Tax Residency in India Foreign company to be considered as Tax Resident in India if its Place of Effective Management is situated in India Reference Finance Act 2015 and Draft Guidelines for determination of POEM Proposed Amendment to section 6 Residency Rule linked to POEM to be deferred by 1 year and be applicable from A.Y © Shah V G & Co.

Tax Residency in India Introduction of new Chapter XII-BC dealing with foreign company considered to be Tax Resident in India Transition mechanism for foreign company not earlier assessed to tax in India Central Government to notify exception, modification, etc. for computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, special provisions relating to avoidance of tax, collection and recovery of taxes etc. Normal provisions to apply after the end of transition period In case of failure of compliance of conditions specified in the notification Benefit / Exemption shall be deemed to have been wrongly allowed Power to Assessing officer to recompute the income Rectification provisions to apply, to the extent of its applicability © Shah V G & Co.

Taxation of Foreign Diamond Companies
Taxable income of Non Resident Income received / deemed to received in India (Section 5) Income accrued / deemed to accrue in India (section 9) Finance Bill 2016 – Proposed Amendments Amendment to section 9 Foreign company engaged in the business of mining of diamonds No income deemed to accrue in India from activities confined to display of uncut and unassorted diamond in a notified specific zone Display without any sorting or sale Amendment to be effective from A.Y © Shah V G & Co.

Taxation of Offshore Funds
Section 9A – Exemption from taxation in India for offshore fund on fullfillment of prescribed conditions Finance Bill 2016 – Proposed Amendments Eligible Investment Fund to also mean a fund established or incorporated or registered outside India in a country or specified territory notified by Central Government in this behalf Condition of fund not controlling and managing any business in India or from India to be restricted in the context of Indian activities Amendment to be effective from A.Y © Shah V G & Co.

Taxation of Foreign Oil Companies
Insertion of section 10(48A) Income on account of storage of crude oil in a facility in India and sale there from not taxable in India Storage and sale is pursuant to agreement or arrangement entered into by Central Government or approved by Central Government and Foreign company and agreement / arrangement are notified by Central Government Amendment to be effective from A.Y © Shah V G & Co.

Capital Gains on Bond Redemption
Amendment to section 48 dealing with capital gains Gain on account of appreciation of rupee against foreign currency at the time of redemption of rupee denominated bond of India company shall be exempt from tax on capital gains Applicable to Non Resident Amendment to be effective from A.Y © Shah V G & Co.

Applicability of MAT provisions
Proposed Amendment to Section 115JB – Minimum Alternate Tax (MAT) provisions MAT provisions not applicable to foreign company If Foreign company resident of country with which India has a Double Tax Avoidance Agreement (DTAA) or Central Government has adopted DTAA with specified associations and the foreign company does not have PE in India in accordance with provisions of such DTAA or If Foreign company resident of country with which India does not have DTAA and the foreign company not required to seek registration under any law for the time being in force relating to Companies Retrospective Amendment from A.Y © Shah V G & Co.

Introduction of Equalisation Levy
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Insertion of Chapter VIII – Equalisation Levy Charge of equalisation 6% of consideration amount received / receivable by a Non Resident for any specified service Payer being Person resident in India and carrying on business or profession or Non Resident having a PE in India Specified Service to mean Online Advertisement Any provision for digital advertising space or any other facility or service for the purpose of online advertisement and Any other notified Service © Shah V G & Co.

Insertion of Chapter VIII – Equalisation Levy Exceptions Non Resident has a PE in India and the specified service is effectively connected with PE in India Aggregate consideration amount less than Rs. 1 lakh Payment is not for the purpose of business or profession Payer liable to deduct equalisation levy from the amount paid / payable to Non Resident and deposit the same by 7th of month immediately following the said calendar month Payer liable for payment even in case of failure to deduct such levy Payer to furnish annual statement in prescribed form and manner Possibility of revising the statement before expiry of 2 years from relevant financial year © Shah V G & Co.

Implications – Non Compliances 1% per month or part of the month for delay in payment of equalisation levy Penal implications Failure to deduct equalisation levy – Equivalent to amount of levy Failure to pay equalisation levy – Penalty of Rs per day subject to total amount of equalisation levy Failure to furnish annual statement – Penalty of Rs. 100 per day for the period of default Punishment for false statement in any verification / delivery of false statement or account – Imprisonment for a term which may extend to 3 years and a fine © Shah V G & Co.

Proposed insertion of clause (ia) to section 40(a) Disallowance in respect of consideration paid / payable for specified service on which equalisation levy is deductible and has not been deducted or after deduction has not been paid before due date of filing tax return To be allowed in the year of deduction or payment in subsequent year Amendment to be effective from 1st June 2016 Processing of annual statement and issuance of intimation Possibility of Appeals / Rectification of Mistake Applicability of specified provisions of Income Tax Act Chapter relating to equalisation levy to be effective from notified date © Shah V G & Co.

Insertion of section 10(50) Income arising from specified service provided on or after the date on which provisions of Chapter VIII comes into force and chargeable to equalisation levy under Chapter VIII, not to be included in total income Amendment to be effective from 1st June 2016 © Shah V G & Co.

Transfer Pricing Provisions
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Transfer Pricing Documentation
Proposed Amendment to section 92D – Maintenance of Transfer Pricing Documentation (Master File) A constituent Indian entity to be responsible for maintenance of prescribed information and document relating to the entire group In addition to information relating to international transactions Information and document to be furnished to prescribed authority in prescribed manner and in prescribed timeframe © Shah V G & Co.

Insertion of section 286 (Country-by-Country Report or CbCR) Every constituent entity in India of international group having parent company not a resident in India to provide information regarding residency of parent company / alternate reporting entity to prescribed authority In prescribed form and manner Constituent entity to mean: Separate entity of international group that is included for the purpose of consolidation or includible, if equity share of entity of international group was to be listed on stock exchange Entity excluded from consolidation solely on the basis of materiality or Permanent Establishment (PE) of any separate business entity of international group if such business unit prepares separate financial statement for such PE for financial reporting, regulatory, tax reporting or internal management control purposes © Shah V G & Co.

Insertion of section 286 (CbCR) Parent company to mean an entity required to prepare consolidated financial statements under applicable law or which would have been required to prepare such statement, in case of listing of equity shares of any of the enterprise in India and there is no constituent entity of such group, which is required to prepare consolidated financial statements that includes the financial of so mentioned entity International group to mean any group that includes Two or more enterprises which are resident of different countries / territories or An Enterprise being resident of one country / territory carried on business through a PE in other country / territory Resident parent company / alternate reporting entity to furnish Report in respect of its group to prescribed authority before due date for furnishing tax return © Shah V G & Co.

Insertion of section 286 (CbCR) An constituent entity resident in India responsible for furnishing Report to prescribed authority if parent company is resident In country with which India does not have arrangement for exchange of CBC report or Such country is not exchanging information with India even though there is an agreement and this fact is intimated to entity by prescribed authority A single entity can be nominated to furnish report on behalf of group, in case of multiple entities of same group in India In case of designation of alternate entity for filing of its report, Indian entity not obliged to furnish report, if the same can be obtained under agreement of exchange of such reports by Indian authorities © Shah V G & Co.

Insertion of section 286 (CbCR) Report to be furnished in prescribed manner and in prescribed form and include Aggregate information relating to revenue, profit and loss before income tax, etc. (based on template provided in OECD BEPS Report on Action 13) Details of each constituent entity of group Nature and details of the main business activity or activities of each constituent entity and Other prescribed information © Shah V G & Co.

Insertion of section 286 (CbCR) Power to prescribed authority to call for information and document to determine accuracy of the Report Memorandum explaining Finance Bill 2016 Provisions not applicable if consolidated revenues of preceding year of the group, based on consolidated financial statements does not exceed Euro 750 million. The threshold in INR would be determined based on the exchange rate of the last day of previous year (currently, INR 5,395 Cr.) Amendment to be effective from A.Y © Shah V G & Co.

Penal Implications for non- compliance of TP provisions
Insertion of new section 271GB – Penal implications Penalty for non furnishing of CbCR Penalty of Rs. 5,000 per day, if default is not more than a month Penalty of Rs. 15,000 per day, if default is more than a month Penalty of Rs. 50,000 per day, if default continues even after the service of above penalty orders Penalty for non furnishing of CbCR information called for Penalty of Rs. 50,000 per day, if default continues even after the service of above penalty order Penalty for inaccurate information in the CbCR Penalty of Rs. 500,000 Amendment to section 271AA – Penalty for not furnishing Master File © Shah V G & Co.

Extension of Time in specified cases
Proposed Amendment to section 92CA Extension upto 60 days In case of stay of assessment proceedings by the Court or In case of reference for exchange of information has been made by the Competent Authority Time limit to TPO for passing order after the expiry of above proceedings is less than 60 days Amendment to be effective from 1st June 2016 © Shah V G & Co.

Withholding Tax Provisions
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Exemption from Mandatory Requirement of PAN
Non Residents liable to procure Permanent Account Number (PAN) in India in case of earning of income liable to withholding tax in India Higher withholding tax of 20% in the absence of PAN in India Proposed Amendment to section 206AA Provisions relating to PAN to not be applicable to Non Residents subject to prescribed conditions Amendment to be effective from 1st June 2016 © Shah V G & Co.

Payments by Alternate Investment Funds / Securitisation Trust
Amendment to Section 197 dealing with issuance of Certificate for Lower rate / Nil deduction of taxes Section 194LBB included in the list of sections for which Certificate for Lower rate or No deduction of taxes can be obtained Section 194LBB provides for withholding taxes to be in respect of income paid by investment fund to its investor Amendment proposed to section 194LBB for deduction of taxes at rates in force in case of Non Residents Proposed Section 194LBC included in the list of sections for which Certificate for lower deduction or no deduction of taxes can be obtained Section 194LBC proposed to be inserted to provide for withholding tax to be made at rates in force in respect of income paid by securitisation trust to its investors Amendments to be effective from 1st June 2016 © Shah V G & Co.

Rationalisation of TDS Provisions
Amendment to be effective from 1st June 2016 © Shah V G & Co.

Filing of Form 15G / 15H for rental payments
Amendment to section 197A Recipient of rental income eligible to file Form 15G / Form 15H for non deduction of TDS in accordance with provisions of section 197A Amendment to be effective from 1st June 2016 © Shah V G & Co.

The Income Declaration Scheme, 2016
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Declaration of undisclosed income Non filing of Tax Return Non disclosure of income in Tax Return Income escaped assessment Scheme effective from 1st June 2016 to the date of notification Applicable for undisclosed income of any financial year upto Value of asset in case income is declared in the form of investment in asset Fair Market Value (FMV) of the asset as on the date of commencement of scheme FMV to be determined in prescribed manner Applicable 30% plus surcharge (Krishi Kalyan 25% and 25% © Shah V G & Co.

No deduction of expenditure or allowance from undisclosed income Certain cases not eligible for scheme Search / Survey cases, Cases covered under Black Money Act, Cases involving notices issued under section 142(1), 143(2), 148, 153A or 153C, cases involving information received from foreign countries, etc. Tax and Penalty to be paid before the notified date Declaration deemed to be not made in case of failure to pay the applicable amount Amount paid not refundable Undisclosed income represented by assets exempt from wealth tax No scrutiny and enquiry under Income Tax Act and Wealth Tax Act © Shah V G & Co.

Immunity from Prosecution under Income Tax Act, Wealth Tax Act and Benami Transactions Declaration made by misrepresentation / suppression of facts to be void In case of non payment of tax and penalty in respect of declaration made, undisclosed income to be charged to tax in previous year in which such declaration is made Non declaration under this Scheme of income earned prior to commencement of scheme shall be deemed to have been earned / acquired in the year of issuance of specified notices and the provisions of Income Tax Act to apply accordingly Provisions prescribed for the manner of declaration, applicability of certain provisions of Income Tax Act, powers to Central Board of Direct Taxes to make rules, etc. © Shah V G & Co.

The Direct Tax Dispute Resolution Scheme, 2016
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Scheme effective from 1st June 2016 Scheme applicable to “Tax Arrears” Tax Arrears – Amount of tax, interest or penalty under Income Tax Act or Wealth Tax Act in respect of which appeal pending before Commissioner, as on 29th February 2016 Declarant to pay applicable tax and interest upto assessment date. in cases involving disputed tax exceeding Rs. 10 lakhs and cases involving penalty order Appeal in respect of disputed income and disputed wealth shall be deemed to have been withdrawn Immunity from interest and penalty to the extent it exceeds interest and penalty payable as per the Scheme Immunity from prosecution © Shah V G & Co.

Scheme applicable to “Specified Tax” Specified Tax - Tax determined in consequence of or is validated by retrospective amendment in Income Tax Act or Wealth Tax Act and relates to period prior to date on which amended Act received the assent of President and dispute in respect of such tax is pending on 29th February 2016 Declarant to withdraw any writ petition or appeal filed against specified tax and furnish the proof of such withdrawal Declarant to withdrawn arbitration conciliation or mediation proceeding or notice given under investment protection regime or any other agreement Declaration to be furnished in prescribed manner for waiving right to seek or pursue any remedy available to him under any other law or agreement Immunity from interest and penalty under Income Tax Act or Wealth Tax Act Immunity from prosecution © Shah V G & Co.

Declaration to be void if conditions of scheme not fulfilled or furnishing of false facts Scheme not applicable to certain specified persons Procedure prescribed for manner of declaration, disposal of declaration, payment of due amount Order under the Scheme to be conclusive and no reopening permissible under Income tax Act or Wealth Tax Act or any other law for the time being in force Amount paid under the Scheme will be non refundable Central Government to make Rules for carrying out provisions of this Scheme © Shah V G & Co.

Tax Rates Individual, Hindu Undivided Family, Association of Persons or Body of Individual No change in income tax slab rates and education cess Surcharge increased to 15% from 12% in cases involving income exceeding Rs. 1 crores Companies Foreign Companies - No change in income tax, surcharge and education cess Domestic Companies Corporate Tax 29% if total turnover / gross receipts in F.Y does not exceed Rs. 5 crores Newly Set up Manufacturing Companies Introduction or new section 115BA Corporate tax 25% subject to fullfillment of specified conditions © Shah V G & Co.

Other Relevant Amendments
Concessional Tax Rate of 10% on gross basis on royalty income in respect of patent developed and registered in India Related amendment under MAT provisions Phasing out of profit linked / weighted deductions / accelerated depreciation available to companies Initial additional depreciation to be allowed to assessee engaged in business of generation and distribution of power Tax Incentives for start ups engaged in specified business Insertion of new section 80-IAC Insertion of new section 54EE / Amendment to section 54GB dealing with exemption from capital gains © Shah V G & Co.

Tax Incentive to International Financial Services Centre Exemption from capital gains in respect of transaction on recognised stock exchange in any International Financial Services Centre where consideration is paid / payable in foreign currency 9% if income derived solely in convertible foreign exchange No Dividend Distribution Tax if income derived solely in convertible foreign exchange No Securities Transaction Tax / Commodities Transaction Tax if consideration paid / payable in foreign currency Tax Incentives for assessee developing and building affordable housing Insertion of new section 80-IBA © Shah V G & Co.

Deduction for employment generation Amendment to section 80JJAA Tax 30% in respect of cost incurred on additional employee whose total emoluments do not exceed Rs. 25,000 per month Applicable to all sectors subject to fulfillment of prescribed conditions Insertion of new section 35ABA to deal with tax treatment / amortisation of spectrum fee © Shah V G & Co.

Deposit Certificates issued under Gold Monetisation Scheme 2015 not to be considered as capital asset and exempt from tax on capital gains Interest on Deposit Certificates exempt from income tax as well Stamp duty value on the date of agreement may be considered for computing full value of consideration of immovable property in cases where the payment is made by account payee cheque or account payee bank or use of electronic clearing system on or before the date of agreement of such transfer Clarification regarding applicability of tax 10% under section 112 in respect of long term capital gains arising from transfer of shares of company not being a company in which public are substantially interested © Shah V G & Co.

Deduction under section 24 in respect of interest payable on borrowed capital Permissible if the acquisition or construction of property is completed within 5 years from end of financial year in which capital was borrowed Rent in arrears / unrealised rent to be taxed in the year of receipt Irrespective of whether or not the assessee is owner of property 30% of rent in arrears / unrealised rent to be allowed as deduction Specific amendments to provisions dealing with payments by Category-I and Category-II Alternate Investment Funds and Securitisation Trusts to its investors © Shah V G & Co.

Insertion of new section 44ADA to provide for presumptive basis of taxation for professionals Applicable to individual, HUF or partnership firm but not LLP Cases involving gross receipts less than Rs. 50 lakhs during previous year Income deemed to be 50% of total gross receipts No maintenance of accounts and tax audit unless claim of lower income Threshold limit for professionals increased to Rs. 50 lakhs for applicability of tax audit provisions Threshold limit for computation of profits from eligible business under section 44AD on presumptive basis increased to Rs. 2 crores from Rs. 1 crore Relaxation in advance tax provisions (Amendment to section 211) Other related amendment to section 44AB and 44AD © Shah V G & Co.

Amendments to section 139 dealing with filing of Tax Returns Tax Return to be filed within due date by person earning income exempt under section 10(38) if income of such person prior to said exemption exceeds maximum amount not chargeable to tax in India Tax Return to be filed within due date for set off and carry forward of loss of specified business (reference section 73A) Belated Tax return to be filed before the end of relevant assessment year or completion of assessment, whichever is earlier Return including belated tax return could be revised at any time before expiry of one year from end of relevant assessment year or before completion of assessment, whichever is earlier Return which is otherwise valid not to be considered as defective for non payment of self assessment ax and interest before the date of furnishing of Return © Shah V G & Co.

Proposed Advance Tax Provisions for all assessees except covered under section 44AD Assessee covered under section 44AD to pay whole of advance tax on or before 15th March Related amendment to section 234C dealing with interest for deferment of advance tax © Shah V G & Co.

Amendment to section 220, 273A and 273AA Time Limit of 12 months prescribed for passing of orders Pending case as on 1st June 2016 to be disposed of before 31st May 2017 Opportunity of being heard to be provided to the assessee Rationalisation of time limit available for assessment, reassessment, recomputation and search cases Amendments to specific sections Rationalisation of provisions relating to Appellate Tribunal Amendments to sections 252 to 255 Specific Provisions amended to provide validity to notices / documents issued in electronic form / electronic processing of information © Shah V G & Co.

Specific amendments to section 244A dealing with interest on refund relating to the period for which interest on excess payment is to be granted Amendment to section 281B - Provision of bank guarantee In substitution of provisional attachment of property Provisions relating to tax collection at source to be applicable in respect of sale of motor car, goods in cash and services in specific scenarios. © Shah V G & Co.

Rationalisation of penalty provisions Section 271 to not apply from A.Y Penalty to be levied under proposed new section 270A, effective from 1st April 2017 Distinction between under reporting of income and misreporting of income Cases for under reporting of income and misreporting of income provided Penalty equivalent to 50% of tax payable on under reported income Tax payable in case of company, firm or local authority Under reported income is total income Tax payable in other cases 30% of under reported income Penalty equivalent to 200% of tax payable on misreported income © Shah V G & Co.

Rationalisation of penalty provisions Amendment to section 271AAB Penalty to be levied at flat rate of 60% of undisclosed income Immunity from penalty and prosecution – Insertion of new section 270AA Application to Assessing officer for grant of immunity from penalty and punishment Payment of tax and interest as per assessment / reassessment order No appeal preferred against such assessment order Time frame – 1 month from end of month in which assessment order / reassessment order is received © Shah V G & Co.

Immunity from penalty and prosecution – Insertion of new section 270AA Application to be made in prescribed form and manner Immunity not available in specified cases Assessing order to pass order accepting or rejecting application within 1 month from end of month in which application is made Order to be final No appeal under section 246A / No application under section 264 in cases involving order accepting the application. © Shah V G & Co.

Individual Taxation Rebate under section 87A increased to Rs in cases where total income does not exceed Rs. 5,00,000 Dividends in excess of Rs. 10 lakhs received by a Resident individual, HUF or firm from a domestic company to be taxed on gross 10% Reference section 10(34) and proposed new Section 115BBDA Redemption by an individual of Sovereign Gold Bond to not be considered as transfer and exempt from capital gains Amendment to section 47 Deduction under section 80EE Additional deduction for interest on loan taken for residential property upto Rs. 50,000 Fullfillment of prescribed conditions Deduction under section 80GG in respect of rent paid increased to Rs per month © Shah V G & Co.

Finance Bill Select Key Direct Tax Proposals

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