Budget 2020 highlights: New income tax slabs, DDT gone..

In the union budget 2020, the following section 115BAC shall be inserted in the Income Tax Act, with effect from the 1st day of April, 2021, with  new income tax slabs and lower rates. These income tax rates are optional and are available to those who are willing to forego some exemptions and some deductions.

Direct Taxes
1. Tax rate reduced for new companies to 22% and for manufacturing companies 15%
2. New simplified personal tax regime for Individual tax payers. The revised slab can be availed if they do not claim deductions and certain exemptions.
For income :
Upto 5,00,000 nil
Rs 5,00,000 -7,50,000: 10%
Rs 7,50,000 – 10,00,000 : 15%
Rs10,00,000 – Rs 12,50,000 20%
Rs 12,50,000- Rs 15,00,000 : 25%
More than Rs 15,00,000 : 30%
3. Companies not required to deduct dividend distribution tax and will be taxed only in the hands of the recipient. Parent company to be allowed deduction of dividend received subsidiary
4. Concessional tax rate of 15% extended to power generation companies
5. Investment made in Infrastructure and other specified sectors
6. Tax rate of 194LC at 5% for interest payment to non resident in respect of money borrowed or bond issued upto June 30,2023 and for 194LD at 5% for interest on borrowing from foreign institutional or qualified investor and municipal bonds
7. Interest payment on bonds listed on exchange by ILFS – 4%
8. Option to Cooperative societies to pay tax at 22% with no exemption or deduction. Exempt from alternative minimum tax
9. Affordable housing tax breaks extended by one year. Additional 1.5 lakhs tax benefit on interest paid on affordable housing loans to March 2021
10. Turnover threshold for tax audit raised to Rs 5 crore from Rs 1 crore
11. 100% tax concession to sovereign wealth funds on investment in infra projects
12. Income from Charitable institutions fully exempt from taxation. Donation to such institution allowed as deduction.
13. Registration of charity institutions to be made completely electronic, donations made to be pre-filled in IT return form to claim exemptions for donations easily.
14. Faceless appeals against tax orders on lines of faceless assessments
15. For tax payers who have appeals pending only disputed tax is to be paid by tax payer and no interest or penalty if the same is paid within March 31,2020. Post March 31,2020 certain amount levied uptill June 30,2020
16. Startup ESOP taxes deferred by 5 years
Other Areas
1. New scheme to provide subordinate debt to MSME
2. Decriminalise some norm violations in Companies Act
3. Increase the bank deposit insurance from Rs 1 lakh to Rs 5 lakh
4. New system for instant allotment of PAN
5. A new scheme NIRVIK to be launched this year itself for exporters
6. A debt ETF consisting of government securities will be launched.
7. For NBFCs and HFCs, liqduity constraints will be addressed.
8. FPI Limit in corporate bonds will be raised to 15% from 9%.
9. LIC to be listed at stock exchanges

Two important changes in Income tax (TDS/TCS)
— TCS to be collected by seller whose turnover exceeds Rs. 10 cr. In previous year from each buyer on amount exceeding 50 lacs @0.1% for sale of goods.

-TDS rate u/s 194J for technical payment changed from 10% to 2% to avoid litigations in respect of 194J Vs 194C

Tax avoidance rules: POEM norms to take effect from April, 2017

Confirming that India’s so-called POEM regulations — which are meant to ascertain the residential status of companies and use it to curb tax avoidance — will take effect from April 1, the Central Board of Direct Taxes (CBDT) on Tuesday issued the final guidelines in this regard. While the draft Place of Effective Management rules issued in December 2015 had caused a stir in the industry for being out of sync with transnational business realities (under pressure from businesses, Budget FY17 deferred POEM activation by one year), the new draft narrowed the scope of the tool and sought to allay most concerns of the investor community about its potential improper use/misuse.

The CBDT has made it clear that POEM’s intent is  not to target Indian multinationals, which have legitimate business activities outside India, but to pin down shell companies  and firms created for retaining income outside India although the real control is exercised from India.

In what would reduce the chances of an assessing officer invoking the POEM provision without proper evaluation, the new rules state that she will need approval of a three-member collegium of her senior officers for triggering the test. Also, it has now been clarified that POEM guidelines won’t apply to companies having turnover or gross receipts of Rs 50 crore or less in a financial year. The regulations, the CBDT said, would apply for assessment year 2017-18 (FY17) and further.

“The guiding principles issued by the CBDT seeks to address some of the practical issues which could arise in application of the POEM test. The guideline strikes the right balance between providing certainty to taxpayers as well as ensuring that offshore companies with no substance or activities, which are controlled from India, are subject to Indian tax jurisdiction,” Rajendra Nayak, tax partner, EY India, said.

The POEM principle — which has found traction with tax authorities in capital-exporting countries and the OECD — was included in India’s I-T Act via the Finance Act, 2015 with the express purpose of discouraging the creation of shell companies with Indian shareholders in foreign jurisdictions to avoid tax residency in India. If a company is treated as resident in India, its worldwide income is taxable here, while only the India-sourced income of foreign companies is taxed. Although the tax rate on foreign companies is higher (40% versus the marginal rate of 30% for domestic firms), subjecting worldwide income to taxation could potentially increase the tax liability of many MNCs with Indian stakeholders. In fact, the real reason behind POEM is the tax department’s intent to curb corporate structures allowing passive foreign income — royalty, dividend, capital gains, interest income and the like — of firms incorporated in foreign countries with Indian ownership, escaping the tax net here. Tuesday’s draft, analysts said, gives further guidance on “active business outside India” test especially with respect to determination of passive income, total asset base, number of employees and payroll expenses in India and outside.

The new norms provide that if board of directors delegates authority to make key management decision/commercial decision to the promoter or strategic/legal/ financial advisors, the place of effective management will be the place where such persons makes those decisions.

Rakesh Bhargava, director, Taxmann, said: “In the final guidelines the CBDT has provided adequate safeguards to ensure that POEM guidelines does not become an oppressive tool in the hands of revenue to harass genuine assessees. Now, assessing officer can ascertain the residential status of foreign company on the basis of POEM guidelines only after taking two-stage approval; first approval is required before initiating any proceedings and second approval is needed before giving any final finding on residential status of foreign company.”

Giving additional clarifications, the CBDT said the decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company’s POEM. However, the circular added, the shareholder’s involvement can, in certain situations, turn into that of effective management. “Therefore, whether the shareholder involvement is crossing the line into that of effective management is one of fact and has to be determined on case-to-case basis only,” the circular said.

Furthermore, the guidelines stressed that day-to-day decisions taken by junior or middle management of a company wouldn’t be taken into account for determining POEM. However, in certain situations where the person responsible for operational decision is also the one responsible for the key management and commercial decisions, it will be necessary to distinguish the two type of decisions and assess the location where the key management and commercial decisions are taken.

Source: http://www.financialexpress.com/economy/tax-avoidance-rules-poem-norms-to-take-effect-from-april-2017/521170/

CBDT tightens screws on shell companies

The Central Board of Direct Taxes (CBDT) on Tuesday issued the much-awaited “guiding principles” for determination of a Place of Effective Management (PoEM) of a company, scotching speculation that the Budget may see its removal from the statute book.

Put simply, PoEM means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

The CBDT guidelines come barely two months before the end of fiscal year 2016-17, in which PoEM had become legislatively effective, giving little time for Indian multinationals to prepare for the new regime.

The main objective of introducing PoEM was to ensure that companies incorporated outside India but controlled from India do not escape taxation here. It also brings in the concept of residency of corporates with internationally accepted principles, say tax experts.

Girish Vanvari, National Head of Tax, KPMG in India, said that the guidelines stress on substance over form. “They attempt to differentiate between shareholder control, management control and routine decisions. Whilst the guidelines are comprehensive, they are subjective on substance and can be challenged for interpretation in many places,” he said.

Narrower application

Rohinton Sidhwa, Partner, Deloitte, Haskins & Sells LLP, said that what has been released has a narrower application than what was originally proposed. They are also supplemented with examples on isolated facts that will not lead to a PoEM as also illustrative interpretations. The legislative amendment was effective from April 1, 2016, whereas the guidelines are being released only today, Sidhwa pointed out.

Hitesh Sawhney, Partner — Direct Tax, PwC, said thatCBDT has clarified that the intent of PoEM provisions is to target shell companies/companies that are created to retain income outside India and not Indian MNCs engaged in business overseas.

Stress on substance

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said that the finalised guidance relies on substance over form and that routine operational decisions shall not be relevant for PoEM determination.

“Also a panel of three commissioners is to affirm the proposed decision of the assessing officer on the PoEM of a foreign company. Hopefully, this will not impinge upon the right to appeal by the foreign company before a judicial forum,” he added.

Now that the final guidelines are out, will the government go ahead with a Controlled Finance Corporation (CFC) structure or not? Says Daksha Baxi, Executive Director, Khaitan & Co: “My personal view is that CFC is a better anti-avoidance provision, less prone to subjectivity and therefore less litigative.” It seems that at least for the current year, where PoEM is applicable, the government wants to ensure that the provision can be properly implemented, she said.

Rahul K Mitra, Head of Transfer Pricing & BEPS, KPMG in India, said: “With guidelines for PoEM out, it looks like they may not be introducing CFC.”

Jiger Saiya, Partner – Direct Tax, BDO India, echoed his thoughts, saying the “government seems inclined towards implementing the PoEM framework rather than introducing an alternative measure.”

Source: http://www.thehindubusinessline.com/economy/cbdt-tightens-screws-on-shell-companies/article9499358.ece

Government extends tax residency rule – Place of Effective Management

A deadline for comments on the draft guidelines to determine the tax residency of a foreign company has been extended to January 9.

The government felt the need to determine a company’s place of effective management due to lack of detail in the Income Tax Act leading to the possibility of tax avoidance.

“Representations requesting for extension of the last day for submitting comments and suggestions, have been received and considered,” according to a government statement announcing the extension of the deadline for comments on the issue, earlier slated for January 2.

The Place of Effective Management (POEM) of a company, as the concept was called, was introduced in the Finance Act, 2015 to determine the tax residency of a foreign company.

The draft guidelines for what defines a company’s place of effective management, released on December 23, defines the POEM as “a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.”

“Section 6(3) of the Income-tax Act, 1961, prior to its amendment by the Finance Act, 2015, provided that a company is said to be resident in India in any previous year, if it is an Indian company or if during that year, the control and management of its affairs is situated wholly in India. This allowed tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and management outside India,” according to draft guidelines issued by the Central Board of Direct Taxes.

“As per the amendment brought in by the Finance Act, 2015 a foreign company will be regarded as a tax resident of India, if its POEM in that year is in India,” according to a report by Deloitte and CII.

According to the Deloitte report, there is ambiguity around some of the provisions in the guidelines, such as the duration for which a company has India as a place of effective management. “A question may still arise that for a foreign company to be resident in India, is it necessary that the POEM should be situated in India throughout the financial year under consideration or mainly in India.

Similarly, the term “key management and commercial decisions” in the definition of POEM seems to be causing some confusion.

“Unlike, for instance, the UK, India does not define the term ‘key management and commercial decisions’ and therefore these are undefined and subjective.

In the UK, judicial precedents and tax rules lay emphasis on whether directors/officers taking major decisions are independent, are empowered to take these or whether such directors/officers are acting under the influence or direction of shareholders,” Mr.Alex Postma, Leader–Global and EMEIA International Tax Services, EY had said in a note.

Enterprises have become increasingly mobile and technology and connectivity are as important as never before in their global competence. This poses risks that a travelling executive may create significant unforeseen tax burdens in India,” Mr. Postma added in his note.

Source: http://www.thehindu.com/business/Economy/government-extends-tax-residency-rule-deadline/article8055070.ece

Relaxed tax residency rules to help MNCs

While Indian-incorporated firms (Indian companies) are taxed at 30% plus dividend distribution tax (DDT), non-resident (foreign) companies are taxed at 40% on Indian income without DDT.

Foreign companies with Indian shareholders won’t have to pay taxes here for their worldwide income unless they are managed from India on an everyday basis. If these foreign companies are managed from outside India, whether or not they are promoted by resident Indians, they will have to pay taxes in India only for the income they earn in the country.

This major relaxation is being built into the place of effective management (POEM) rules being finalised by the finance ministry, government sources told FE. The POEM concept that was included in the I-T Act early this fiscal had raised fears among many multinational companies with Indian promoters or major shareholders that New Delhi would lay claim to taxes on their incomes attributable to other geographies.

While Indian-incorporated firms (Indian companies) are taxed at 30% plus dividend distribution tax (DDT), non-resident (foreign) companies are taxed at 40% on Indian income without DDT. Although the tax rates on foreign companies are higher, the prospect of subjecting the worldwide income to taxation here could have potentially hit many MNCs with Indian stakeholders.

The proposed lenient POEM rule, analysts said, would give the likes of UK’s Jaguar Land Rover (which has the Indian parent Tata Motors) a chance to convince the Indian tax authorities that the UK firm’s commercial decisions are taken by the local management there and avoid paying taxes for the income in the UK and elsewhere in India.

Similarly, foreign subsidiaries of state-owned oil companies such as ONGC Videsh’s Imperial Energy incorporated in Cyprus and ONGC Nile Ganga doing oil exploration in Sudan, Syria and Venezuela can potentially show that their managerial and commercial decisions are ‘in substance’ made at the local level although OVL, the Indian holding company, is under the direct administrative control of the government of India. The same is true for HPCL’s Singapore subsidiary Prize Petroleum International.

“Putting a management in place is a shareholder decision, not a management decision. Promoters getting into any other role would amount to overstepping shareholder rights, going by the strict interpretation of law. The POEM as a principle must cover only management decisions,” said Rahul Garg, leader, direct tax, PwC India.

According to experts, seeking permission from an Indian parent on a decision taken by an overseas subsidiary to see if it is in line with the global policy of the parent may not ordinarily amount to the parent exercising management control, unlike the parent passing on a centrally taken decision to the foreign associate. However, where the senior management of foreign associates of Indian firms are based in India or have common board members based in India, the overseas entity may find it hard to prove that management decisions are taken from outside India. Also, foreign associates of Indian companies lacking skilled managerial personnel or do not assume business risks on its own, could have a tough time convincing the taxman in India that they are not Indian residents.

Prior to the Finance Act, 2015, a company was considered an Indian resident if its control and management were wholly in India throughout the financial year. Since some Indian companies sought to avoid resident status and taxes on their worldwide income by holding one or two board meetings outside India, the government changed the residence definition saying that any company, the ‘place of effective management’ of which is in India, would also be a resident company. Tax residence is a place from where key management and commercial decisions necessary for running the company are, in substance, made. According to experts, this OECD definition of tax residence relies on the substance of the organisation’s structure than its legal form. The government is bringing out clarifications as there is not much global guidance on the concept.

Points to note:

* Mere shareholder rights with Indians won’t result in resident status
* Only managerial decisions taken here will make foreign firms Indian residents and liable to pay tax for entire global income here
* Foreign firm has to prove management independence to avoid tax residence if board members are common with that of Indian ones.

Source: http://www.financialexpress.com/article/economy/relaxed-tax-residency-rules-to-help-mncs/156692/