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Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

Fax : (+91 22) 2351 5275.

Email : [email protected]

 
Home Articles Taxation         Share :

Budget 2017Chapter A


Date: 4th March 2017.

Dear Reader,

Finance Bill 2017 – Direct Tax Provisions
Analysis of Important Income-tax Amendments

 

This year’s budget has been presented on 1st February instead of 28th February – breaking the colonial tradition. It will therefore be possible to make the amendments effective from 1st April 2017.

 

This budget does not contain major policy changes. It has however continued to tighten rules and plug the gaps. Some reliefs have been granted.

 

Though the budget does not have major tax changes, during the entire year, there have been important announcements made by the Government. This note therefore also covers important issues brought in during past one year.

 

We request you to go through the amendments pertaining to anti-avoidance measures particularly (Parts A and B).

 

In short, now if an assessee wants to do any tax planning; it will be as if he is Abhimanyu at the centre of a Chakra Vyuha. There are several legal provisions all ready to pounce on him. If caught, very serious consequences await him.

 

Probably, the position of an assessee can be presented by this simple chart given on the next page.

 

Most tax planning will meet the fate of Abhimanyu in Mahabharat. Some tax consultants relying on tax planning; and all tax havens are in for serious loss of business.

 

Now next few years will be required to digest all the anti-avoidance provisions.

 

The changes will be applicable from FY 2017-18, unless specified otherwise.

 

Kindly see the note. If you have any queries, you may contact us.

Yours sincerely,
Rashmin Sanghvi & Associates

Abbreviations

 

 

AE

 

Associated Enterprise

 

Ind–AS

 

Indian Accounting Standard

 
 

ALP

 

Arms Length Price

 

ITA

 

Income Tax Act

 
 

AMT

 

Alternate Minimum Tax

 

JDA

 

Joint Development Act

 
 

AO

 

Assessing Officer

 

MAT

 

Minimum Alternate Tax

 
 

AOP

 

Association of Persons

 

MCA

 

Ministry of Corporate Affairs

 
 

AY

 

Assessment Year

 

MF

 

Mutual Funds

 
 

BCAS

 

Bombay Chartered Accountants’ Society

 

MLC

 

Multi Lateral Convention

 
 

BEPS

 

Base Erosion and Profit Shifting

 

MNC

 

Multi National Company / Corporation

 
 

BOI

 

Body of Individuals

 

NHAI

 

National Highways Authority of India

 
 

CbCR

 

Country by Country Reporting

 

NR

 

Non-Resident

 
 

CBDT

 

Central Board of Direct Taxes

 

OCI

 

Other Comprehensive Income

 
 

CFC

 

Controlled Foreign Company / Corporation

 

OECD

 

Organisation for Economic Co-operation and Development

 
 

DR

 

Development Rights

 

PE

 

Permanent Establishment

 
 

DTA

 

Double Tax Avoidance Agreement

 

POEM

 

Place of Effective Management

 
 

EBITDA

 

Earnings before Interest, Tax Depreciation and Amortisation

 

REC

 

Rural Electrification Corporation

 
 

EU

 

European Union

 

S/Ss

 

Section/Sections

 
 

FEMA

 

Foreign Exchange Management Act

 

SAAR

 

Specific Anti Avoidance Rules

 
 

FII

 

Foreign Institutional Investor

 

SC

 

Supreme Court

 
 

FY

 

Financial Year

 

SCRA

 

Securities Contract (Regulation) Act

 
 

G20

 

Group of 20 Countries

 

SEZ

 

Special Economic Zones

 
 

GAAR

 

General Anti-Avoidance Rules

 

SPV

 

Special Purpose Vehicles

 
 

HUF

 

Hindu Undivided Family

 

TDS

 

Tax Deducted at Source

 
 

ICDS

 

Income Computation and Disclosure Standards

 

TPO

 

Transfer Pricing Officer

 
         

U/s

 

Under Section

 

 

Finance Bill, 2017
Analysis of Important Income-tax Amendments

 

 

A. Anti-Avoidance measures:

1. The Governments across the world have been enacting anti-avoidance measures to plug tax leakages – especially after the US crisis of 2008. India is an active participant in the Global fora of G20 and OECD. Several countries look forward to Indian measures for plugging tax leakages.

2. There are different colours given to tax planning. These are as under:

i) Tax planning is - considered as steps taken to take advantage of tax reliefs provided by the Government. These steps have substance – i.e. the transactions are bonafide. However, now even “tax planning” has acquired a negative meaning.

ii) Tax Avoidance is - taking legal steps to reduce tax. These steps are more in form than in substance. In cross border transactions, these involve taking advantage of different tax rules to reduce tax. When tax rates were high, tax avoidance, by taking just legal steps, was considered all right by the courts. Now with tax rates low, courts also frown upon tax avoidance – even if it is legal.

iii) Tax evasion is - outright fraudulent steps to avoid tax.

    The above divisions are not water-tight. There can be overlap of all three divisions.

2.1 With various anti-avoidance measures, there will be no difference between Tax Avoidance and Tax Evasion. Importance will only be for Substance and not the Form. Please refer to our note on GAAR in the Budget document of 2012 for more details at

http://www.rashminsanghvi.com/downloads/taxation/budget_notes/Finance_Bill_2012_An_Analysis.pdf.

2.2 As far as Tax Planning is concerned, it will involve – availing tax relief where it is specifically provided (e.g. obtaining tax relief provided for specific industries).

2.3 Now Tax Risk Mitigation will be important – how to comply with the law and avoid penal consequences, rather than avoid any taxes.

3.Various steps taken by the Government for Anti-Avoidance:

The following gives a list of measures which have been taken by this Government since 2014 when it came to power.

3.1 Enacting Black Money Law for untaxed foreign income. It has penal and prosecution provisions for evasion of tax on foreign income. Legally the law can apply to untaxed foreign incomes however old the incomes may be. In other words, even the time limit of sixteen years can be crossed by the tax department.

3.2 Similarly, in case of foreign assets which were acquired in violation of FEMA regulations, there can be a seizure of Indian assets of equivalent value – only on the basis of suspicion! See our note on the same here:

http://rashminsanghvi.com/downloads/taxation/international-taxation/Budget_2015_Direct_Tax_and_FEMA.htm#I

3.3 Income Declaration Scheme where untaxed Indian income was taxable at 45% without penal consequences. Those who have not availed of the scheme will now be liable for penal consequences. The period for taxing past incomes is proposed in this Finance Bill to be increased to 12 years from 8 years from the beginning of financial year (in case of search or survey operation). Beyond a period of 12 years, if Indian income has escaped tax, no action can be taken.

3.4 Enactment & Implementation of Benami Property Law. Any property which is held Benami can be confiscated and concerned persons can be prosecuted.

3.5 Demonetisation: Old notes of Rs. 500 and 1,000 were cancelled. Further, those who have deposited the old notes in banks exceeding Rs. 2.5 lakhs between 8th November and 30th December, have to give explanation online under Operation Clean Money as initiated by the tax department.

3.6 Restrictions on use of cash for transactions. Beyond the specified limits, there are penal consequences introduced as part of this Budget.

3.7 POEM: Place of Effective Management (POEM) – POEM test has been incorporated in the ITA for foreign companies. If a foreign company has POEM in India, it will be considered as resident of India. Thus Indian residents opening shell companies abroad to park their incomes without tax has been plugged. See our note on our website at http://www.rashminsanghvi.com/downloads/taxation/international-taxation/place_of_effective_management(poem).htm.

3.7.1 The Government had issued draft guidelines for public comments.

3.7.2 The guidelines have been recently finalised. These are almost on the same lines as the draft guidelines. One will have to establish substance that management of the foreign company is outside India.

3.7.3 While the provision in S. 6(3) is quite wide, the Guidelines & Press note published in January, 2017 have given a substantial relief. As per the Press note and Circular 8/2017 all foreign companies having annual turnover of less than Rs. 50 crore will not be covered under S. 6(3).

This is a beneficial announcement.

3.7.4

i) This limit of Rs. 50 cr. is stated in the press release. It was not stated in the circular issuing guidelines. However, CBDT has clarified vide Circular 8/2017 that POEM guidelines will not apply to companies having turnover of less than 50 cr. This is even more liberal than the old definition of residence (wholly controlled from India).

ii) One can debate that the guidelines themselves are just that – only a guide. Do they have statutory force? Section 6(3) provides that foreign company with POEM in India will be considered as Indian resident company. The section nowhere gives powers to the Government to specify any guidelines. Section 6(3) is complete in itself.

Hence even the guidelines legally are doubtful of statutory force.

However the intention of the Government is clear that they would like to give relief to foreign companies which have a turnover of Rs. 50 cr. or less.

3.8 GAAR – GAAR has been made effective from FY 2017-18. It applies to domestic and International transactions. The department has the power to consider whether a transaction or a group of transactions is designed to avoid tax. CBDT has issued guidelines for GAAR (Circular No. 7/2017 dated 27th January 2017).

3.8.1 To have some safeguards, it has been provided that if the effect of the transaction is less than Rs. 3 cr., then GAAR will not apply.

3.8.2 ITA and DTA have Specific Anti-Avoidance Rules (SAARs). E.g. in case of sale of immovable property, the minimum sale value to be considered will be the stamp duty value. It is to take care of sale of property at undervaluation. If there is a SAAR, can GAAR apply? The guidelines state that SAAR may not cover every tax planning. Hence even if SAAR is there, GAAR can apply.

3.8.3 Rule 10U(1)(d) states that GAAR will not apply to income from transfer of capital asset if the assets have been acquired before 1.4.2017. Such relief is also available in Mauritius, Singapore and Cyprus DTAs. This has important implications.

3.8.3.1 The relief is only for capital gain and not for income from the asset. For example, if a non-resident has invested through Mauritius in Indian shares before 1.4.2017, capital gain on sale of the same is still exempt from tax. However income on the same, say dividend, will not get any relief. The relief on capital gain is referred to as “grandfathering”.

3.8.3.2 Further, grandfathering will not apply to arrangements. It means investment structures through Mauritius will be covered under GAAR. If there is any further investment made through the Mu. Company, it will not get relief. Only the original investment will get relief – for capital gain.

3.8.3.3 There were questions as to what happens to investment made in convertible debentures before 1.4.2017 which get converted into shares after 31.3.2017. Will these shares get the DTA relief? The department has clarified that relief will be available to such shares. Relief has also been provided for bonus shares received after 31.3.2017 and shares acquired on account of amalgamation and demerger.

3.9 Amending DTAs with Mauritius, Singapore and Cyprus to remove the relief of Capital Gain tax and bringing in provisions for limitation of treaty benefits only to bonafide cases.

4. Steps recommended by G20 and OECD:

4.1 Internationally, G20 / OECD have proposed measures to avoid Base Erosion and Profit Shifting (BEPS) (In simple words, ‘Tax Planning’). There are 15 BEPS Action reports running into 2,000 pages. Based on these reports, the countries have signed Multilateral Convention by which all the Double Tax Avoidance Agreements will be amended with one document. These measures will target tax avoidance. (See Part B for more details.)

4.2 There are several steps in these reports. India has already started taking these steps. Some of these are:

i) Country by Country Reporting: The MNCs who have group turnover of Euros 750 mn. or more, will have to report their key financials with respect to each country. These will help in identifying the areas where there could be tax avoidance due to Transfer Pricing. Refer to our budget note 2016 below:
http://www.rashminsanghvi.com/downloads/taxation/international-taxation/Budget_2016_Direct%20_Tax%20_Provisions.htm

ii) Automatic Exchange of Information between various countries. If any country comes across information pertaining to a covered transaction of a resident of another country, it will be obliged to share the same with the respective country. Exchange has started with quite a few countries. These will start in a full-fledged manner by 2018.

iii) Amending the DTAs to strengthen Permanent Establishment Rules, avoid double non-taxation, place restriction on interest expenditure paid to related parties abroad and similar other measures to prevent tax avoidance.

iv) Controlled Foreign Corporation Rules have been recommended. This will prevent passive incomes like dividend, interest, etc. to be parked in a group company in a tax haven. There is no official mention for CFC

v) Signing Tax Information Exchange Agreements.

vi) Introducing Limitation of Benefits clause in the DTAs.

4.3 All these will result in capturing the income in the country where it arises. Parking incomes in tax havens will become extremely difficult.

4.4 Already the business of tax havens has gone down. It will go down further.

5. Challenges ahead:

5.1 Having said this, one should note that there is no resolution on differences in tax systems, or rules of different countries. For example, if an Indian company purchases goods from its subsidiary in UK. The Indian Transfer Pricing Officer (TPO) can allege that purchase is at a high cost. Hence he will reduce the purchase expenditure and increase the income. Will the UK revenue reduce the income of the subsidiary? (This is called Compensatory Adjustment.) If UK does not agree to reduce the income, then there will clearly be double / excess taxation.

The classic example is of tax on Apple – manufacture of iPhones and iMacs. It has a subsidiary in Ireland through which it sells its products to customers outside USA. Sale also happens within the European Union. The European Commission (EC) has alleged that Ireland has given excessive tax relief to Apple. It has asked Ireland to raise a tax demand of Euros 13 bn. The US Government, Irish Government and Apple have said the European Commission’s demand is incorrect and that Irish Government has followed the rules.

The irony is that Ireland, which is a part of EU, is not willing to raise the demand. Ireland is a small country and it has got its desired revenue from Apple. It does not need more. This has become a “Tax War” between US and EU. Both – Irish Government and Apple have filed appeals against EC order. Let us wait and see what happens.

5.2 There are umpteen such issues which one will have to deal with.

5.3 The rules based on BEPS reports are extremely complicated. The tax departments, tax professionals and businessmen will have to spend efforts to understand these.