Pranay is a Partner with the Tax and Regulatory practice. He has 20 years of professional experience specializing in cross border taxation issues, regulatory and tax compliances and double tax treaty planning. Before joining BDO, he has been with Economic Laws Practice (ELP) in the Direct Tax team.
His experience includes advising on Indian Private Equity transactions with focus on Infrastructure and Real Estate investments (including hospitals and hospitality), review of deal documentation and related structuring from tax and regulatory perspective.
He has assisted various groups in restructuring their business holding and mitigating taxes, using various structure s like LLP’s, trusts etc. He has also advised and assisted in implementing M&A transactions and other restructuring exercises from corporate and tax laws perspective.
On the back of its new electoral mandate, the Modi Sarkar 2.0 government recently presented its first budget. The budget focuses primarily on infrastructure spending and boosting investment from private and foreign investors, with the government forecasting that the Indian economy will grow to $5 trillion by 2025. Following the budget announcement, a slew of reforms and policies are expected in the coming months. This article highlights some of the key capital market-related amendments.
Over the years, India has witnessed a number of notable tax reforms. Now – in yet another attempt to enhance the country's attractiveness as a business destination, boost investment and encourage manufacturing – the government has introduced the Taxation Laws (Amendment) Ordinance 2019, which has amended the Income Tax Act 1961 and the Finance (No 2) Act 2019. In so doing, India has tried to bring its tax rate in line with other countries and has given domestic companies a level playing field.
In an attempt to curb tax evasion and avoid tax leakage, the government introduced the General Anti-avoidance Rule (GAAR), which took effect from April 2017. Following the introduction of the GAAR, businesses have had to revisit and revalidate their transactions. Further, as there are a number of potential issues that may be faced by taxpayers, they must observe the types of transaction that are likely to be affected.
The Central Board of Direct Tax (CBDT) recently issued a circular clarifying the applicability of Section 56(2)(viib) of the Income Tax Act and the procedure that must be followed by tax officers in assessment proceedings. Although an attempt has been made to end the confusion created in the start-up community, uncertainty surrounding the legal basis for the Department for Promotion of Industry and Internal Trade and CBDT notifications regarding the applicability of Section 56(2)(viib) remains.
On the back of its new electoral mandate, the Modi Sarkar 2.0 government recently presented its first budget. The budget focuses primarily on infrastructure spending and boosting investment from private and foreign investors, with the government forecasting that the Indian economy will grow to $5 trillion by 2025. Following the budget announcement, a slew of reforms and policies are expected in the coming months, including a draft of the much-awaited Direct Tax Code.
The Bombay High Court recently considered whether a taxpayer, which was resident in India and the sole owner of a business that provided personnel on an as-needed basis to foreign companies, had been required to deduct tax under Section 195 of the Income Tax Act when paying an employee who it had loaned to a Kuwait-based company. Section 195 of the act requires taxpayers to deduct tax on any payment (other than salary payments) made to non-residents.
With a clear mandate from Indian citizens, the newly elected government is expected to bring a fresh perspective to tax matters when it issues its budget on 5 July 2019. The tax rates are unlikely to change substantially and the amendments made in the interim budget will remain intact. However, to increase India's competitiveness from an investment perspective, the government may reduce the peak tax rate for all businesses and entities.
The Mumbai Tax Tribunal recently ruled in a case concerning the threshold for determining whether a taxpayer has a service permanent establishment in India, finding that the multiple counting of employees on a particular day is prohibited under the India-UK tax treaty. Further, the tribunal held that since the employee in question had been on leave and no other employee of the taxpayer had rendered services in India, the employee's leave period had to be excluded from the threshold calculation.
The Central Board of Direct Taxes (CBDT) has authorised the principal director general of income tax (systems) to share taxpayer information with the Goods and Service Tax Network (GSTN). The CBDT also confirmed that in order to facilitate the provision of information, it will enter into a memorandum of understanding with the GSTN, which will set out, among other things, the nature of data exchanges, the ways in which confidentiality will be maintained and mechanisms for the safe preservation of data.
Due to the uncertainty and unpredictability resulting from the application of Rule 10 of the Income Tax Rules, the Central Board of Direct Taxes formed a committee to examine the existing profit attribution scheme. The committee recently issued a report on this issue and is seeking comments from stakeholders. Broadly speaking, the report suggests amending Rule 10 to adopt a three-factor method to attribute profits with equal weight to sales (a demand-side factor) and manpower and assets (supply-side factors).
This article looks at notable tax decisions from the Indian courts, including a Supreme Court decision concerning the receipt of share capital in case of private share placements. It also examines the Bombay High Court's decision regarding the sale of an entire unit as a going concern and a recent case involving transfer pricing adjustments.
India and the United States recently signed an inter-governmental agreement on the exchange of country-by-country reports. As a result of this agreement, Indian constituent entities of international groups which are headquartered in the United States and have already filed country-by-country reports in that jurisdiction do not have to file such reports in India.
In a recent case before the tax tribunal, a taxpayer gave an unsecured loan to its associated enterprises for which it had charged interest equal to LIBOR plus 250 basis points based on the rate at which it had borrowed funds from a foreign bank. The tax tribunal upheld the taxpayer's benchmarking and rejected the lower tax authority's contention that had the taxpayer advanced the loan to a third party, it would have charged a mark-up for its administrative expenses and the risk borne therein.
The tax tribunal recently found that the lower tax authority had erred in making a transfer pricing adjustment at the entity level, rather than the transactional level. According to the tribunal, the lower tax authority had failed to understand that third-party transactions are in fact at arm's length and cannot be considered when calculating a transfer pricing adjustment.
In a bid to generate investment in start-ups and provide certainty regarding the so-called 'angel tax', the Ministry of Commerce and Industry recently issued another notification easing the criteria to avail of the exemption under the Income Tax Act. The notification will provide start-ups with a much-needed reprieve in terms of the increased threshold limits for paid-up share capital, allowing them to avail of the exemption more easily.
While the classification of gains arising from a sale of shares has previously been litigated, the Bombay High Court recently dealt with the issue of whether gains arising from such a sale by a private trust would be taxable as capital gains or business income. The ruling examines not only the treatment of shares, but also the use of sales proceeds to conclusively adjudicate on the intentions behind the sale.
The Mumbai Tax Tribunal recently considered whether the conversion of a company into a limited liability partnership could be considered a transfer even though it had failed to meet all of the conditions set out in Section 47(xiiib) of the Income Tax Act. In another case, the tribunal referred to a Delhi High Court ruling and stated that preference shares are part of a company's share capital and cannot be considered a loan.
Recent changes to direct tax-related policies and procedures include the newly reinstated task force – which was reconstituted in order to review the Income Tax Act and draft a new direct tax law. It is scheduled to submit its report to the government by the end of February 2019. Further, the Indian government has signed a protocol with the Chinese government, amending the India-China tax treaty. The protocol incorporates changes pursuant to Base Erosion and Profit Shifting Action Plan reports.
There have been several recent cases regarding transfer pricing. For example, the tax tribunal found that a taxpayer was not a contract manufacturer, as sales and purchases from an associated enterprise had been negligible. In another case, the tax tribunal ruled that high turnover is a relevant criterion for accepting or rejecting a comparable. Further, a high court found that final assessment orders cannot be passed without a draft assessment order.
Alongside new guidance from the Central Board of Taxes regarding securities transaction tax, potential legislative amendments may be introduced regarding interest income on rupee denominated bonds. Further, the Chennai Tax Tribunal recently considered whether a tax officer had been correct in invoking Section 56(2)(viib) of the Income Tax Act, citing an unrealistic premium, in a case where a company had issued shares to one of its shareholders at a premium.
A number of new circulars, notifications and press releases have been issued in recent months. Among other things, they introduce new valuation rules for the conversion or treatment of inventory as capital assets, grant taxpayers immunity from the penalty for under-reporting income and clarify the deductions available for free trade zone undertakings.
The Mumbai Bench of the Income Tax Appellate Tribunal has held that an Indian branch of a US entity was not a dependent agent permanent establishment of its group entities. The tribunal held that the branch was not a dependent agent as it had no authority on behalf of the group, it maintained no stock of goods and the orders relating to indent sale were only introduced and liaised by the assessee, not secured by it.
The Hyderabad Bench of the Income Tax Appellate Tribunal has held that payments received by an Indian branch from its US head office for providing software development and medical transcription services were taxable in India, as the Indian branch was rendering services of a commercial nature that had been outsourced by the US head office. The tribunal upheld the 10% mark-up on cost as reasonable.
The Delhi Income Tax Appellate Tribunal has held that an Indian subsidiary of a US-based company, which provided IT-enabled call centre or back office support services to the US company and its customers outside India, is a fixed-place permanent establishment in India. The tribunal observed that in practice, the Indian subsidiary was a projection of the US company's business in India.
The Chennai Bench of the Income Tax Appellate Tribunal has held that no tax should be deducted on payments made to a US company in relation to the reimbursement of expenses for employees seconded to an Indian company. However, the secondment of employees, the corresponding reimbursement of expenses and the taxability thereof continue to be areas of dispute, as there are conflicting views on taxability.
The Uttarakhand High Court recently ruled that as long as an employer is a non-resident, the state of residence is not relevant under the India-Denmark double tax avoidance agreement. However, the court noted that it is important to check that remuneration is not paid by the Indian permanent establishment, where such an establishment or fixed base exists.
The Hyderabad bench of the Income Tax Appellate Tribunal recently held that the transfer of shares of an Indian company with immovable property will not be treated as a transfer of immovable property, but only as a transfer of shares of the Indian company. The term 'immovable property' is not defined per se in the Income Tax Act. However, various sections of the act have implied different meanings for the term.
A proposal by the Tax Department contained in the recent budget examines the system of tax residence certificates for non-resident entities and sparks fears that the government is seeking to introduce an additional tool by which protection available under double tax treaties could be denied. The proposal states that submission of the certificate is a "necessary but not sufficient" condition for claiming such benefits.
In a recent ruling the Authority of Advance Rulings observed that the gifting of shares between two corporations is a 'strange' transaction. However, the the Mumbai Appellate Tribunal has also recently examined the same issue, observing that although such transaction may appear strange, it cannot be treated as a non-genuine transaction.
The Indian government recently entered into a tax information exchange agreement with the Cayman Islands. Based on international standards of transparency and exchange of information, the agreement covers "taxes of every kind and description". Information in respect of taxes sought under the agreement must be relevant to the administration and enforcement of the domestic laws of the contracting parties.
The Supreme Court of India recently issued a landmark judgment in the much-awaited Vodafone case. The judgment highlights that the Hutchinson transaction (in which Vodafone acquired a single share of an HTIL subsidiary) was a valid structural transaction and the Indian authorities had no jurisdiction to tax such an offshore transaction. It is hoped that the government will respect and accept the court's judgment.
On the back of its new electoral mandate, the Modi Sarkar 2.0 government recently presented its first budget, which proposes a number of amendments regarding electric vehicle (e-vehicle) manufacturing. Among other things, the government has proposed reducing the goods and services tax on e-vehicles, providing an additional income tax deduction on interest paid on loans taken to purchase e-vehicles and waiving customs duty on e-vehicle parts.