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.
The Authority for Advance Rulings recently considered the applicability of goods and services tax (GST) on expense reimbursements in the case of 'pure agents' – a key concept when evaluating taxable services, particularly for tax exemption claims in respect of expense reimbursements and applicable GST. While rulings are binding only on the taxpayer that raises the question, they carry persuasive value in identical situations.
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.
A recent advanced ruling examined the applicability of goods and services tax (GST) to back-office support services provided by an Indian company to a foreign client. The Advance Ruling Authority held that the back-office support services in question should be treated as intermediary services, which are not eligible to be exempt from the GST applicable to an export of services since, as per GST law, intermediary services provided by Indian companies are treated as services supplied in India.
The Advance Ruling Authority (ARA) was constituted under Indian goods and services tax law and entrusted with the responsibility of answering questions regarding the applicability of tax, the admissibility of input tax credit, the classification of goods and services and the eligibility to receive the exemption. While an ARA ruling is binding only on the taxpayer that raises the question, it carries persuasive value in identical situations.