Capital gains tax evasion under CBI scanner

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The Central Bureau of Investigation (CBI) is probing if any government officials were involved in misusing stock exchange platforms to benefit from the long-term capital gains tax (LTCG) exemption.

According to sources, CBI officials visited the headquarters of the Securities and Exchange Board of India (SEBI) in Mumbai to get relevant files pertaining to LTCG cases probed by the markets regulator.

This comes at a time the income tax (I-T) department is probing the entities which had allegedly misused capital gains provisions to evade taxes worth Rs 34,000 crore.

Gains made from the sale of shares held for more than a year are exempt from taxes.

According to sources, the CBI is trying to gather information if any government official made any undue gains by being the end-beneficiaries. “We have collected some relevant documents along with transaction trails with regard to the companies that appeared to have misused the trading platforms to evade taxes. We suspect that there are high chances of government officials being involved, especially as end-beneficiaries,” a CBI source said. “The undue advantage could be hidden and may have been done in a multi-layered arrangement, which needs to be identified.”

Sources said the central agency was in the process of vetting the documents and would accordingly take a call on registering a case against the suspected beneficiaries.

The issue is critical as a few instances of abuse have been reported despite several measures taken by the regulator and the bourses. The intensity of the matter has raised the probability of revocation of capital gains benefits.

So far, investigations by the SEBI revealed that 11,000 entities have bought shares of more than Rs 5 lakh each in the past three years in listed firms that might not have any business operations. The SEBI has identified these entities using data analytics and trading and surveillance data.

The probe suggests that such deals were aimed at evading capital gains tax by showing the source of income as legitimate from stock markets. The so-called losses, actually bogus losses, are showed in the books to offset the same against capital gains.

The modus operandi is thus: Operators advise beneficiaries to invest in the listed companies, which allot shares on preferential basis at a nominal rate. These shares are under a lock-in period for a year.

Subsequently, these operators manipulate the scrip. They also rope in entities to provide the “last traded price” to book LTCG and also to buy shares at a higher price. The beneficiary pays cash to the operator through a multi-layered structure from the gains made by evading taxes.

The markets regulator had reservations that the cases were about tax evasion, which do not fall under its purview. However, if share prices were manipulated, it could proceed under section 11B of the SEBI Act, which allows it to impound the sale proceeds.

It also pointed out that the evidence provided by the tax department was not sufficient to establish connections between promoters of companies, beneficiaries and the “last traded price” and “exit” providers.

Source: http://www.business-standard.com/article/markets/capital-gains-tax-evasion-under-cbi-scanner-117062100019_1.html

SEBI set to block P-Note route for NRIs to prevent laundering of black money

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The regulator wants to tighten the rules amid concerns that various variants of P-Notes have been floated since the implementation of GAAR on April 1.

The regulator plans to put in place a clear bar on non-resident Indians (NRIs) and entities owned by them and resident Indians subscribing to participatory notes, a move aimed at preventing possible round-tripping or laundering of black money.

The Securities and Exchange Board of India (SEBI) is set to tweak its regulations to this effect at its upcoming board meeting on April 26 after the finance ministry recently wrote to the regulator. Such a restriction is already implied through the answer to a frequently asked question (FAQ) but the regulator feels this lacks legal sanctity.

“Most of Sebi’s FAQs themselves clearly state that they should not be regarded as interpretation of law, and that they should not be treated as a binding opinion or guidance from SEBI,” said Moin Ladha, associate partner, Khaitan & Co. “Therefore, in case of any contradictions between the regulations and FAQs, the regulations would prevail. While FAQs do indicate the position SEBI is taking, they cannot be said to override or expand the scope of the regulations.”

P-notes are a derivative instruments issued offshore to those who want to bet on the country’s stocks and bonds without registering themselves with SEBI. The regulator wants to tighten the rules amid concerns that various variants of P-notes have been floated since the implementation of General Anti Avoidance Rules (GAAR) on April 1.

Investments via P-notes had declined to a 43-month low of Rs 1.57 lakh crore in December but rebounded in January to Rs 1.75 lakh crore before dropping again to Rs 1.70 lakh crore in February. There could be a resurgence in P-note issuance as these are exempted from capital gains tax under the amended tax treaties with Singapore and Mauritius that took effect on April 1.

Legal experts said the concept of NRI itself is a grey area and defining it would be crucial for regulators. They said the prohibition should be strictly enforced to prevent round-tripping of Indian money. “The concern of round-tripping of Indian money, particularly when leading industrialists may have a foreign passport, was always a concern,” said Sandeep Parekh, founder, Finsec Law Advisors. SEBI relies on the income tax definition on what constitutes an NRI.

“The concept of who is an NRI itself is a grey zone ranging from income tax definition which is based on residency to citizenship laws which are typically drafted very broadly to include any person of Indian origin and their kith and kin who are born abroad,” Parekh said. “Defining an NRI within this spectrum would be crucial to allow legitimate money in from immigrants who have left India several generations ago and are doing exceedingly well.”

In recent discussions with a leading custodian, the latter gathered the impression that the regulator was not comfortable with NRIs as a group holding a majority interest in a Category II foreign portfolio investors (FPIs) even though regulations do not restrict this. Rules require Category II FPIs to be broad-based — the minimum number of investors should be 20 and no single investor can hold more than 49%. However, NRIs as a group cannot hold more than 49% in Category III FPIs.

Source :  http://timesofindia.indiatimes.com/business/india-business/sebi-set-to-block-p-note-route-for-nris-to-prevent-laundering-of-black-money/articleshow/58215743.cms

New ITR forms for Assessment Year 2017-18 notified by CBDT

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The CBDT has notified new income-tax return forms (ITR forms) for the assessment year 2017-18. It has prescribed simplified version of ITR-1 with fewer columns. A new column has been inserted in ITR Forms to report cash deposits in banks above 2 lakhs during the demonetisation period, i.e., from November 9, 2016 to December 30, 2016.

CBDT had prescribed new ‘Form ITR 4 Sugam’ for taxpayers opting for presumptive taxation scheme. A new column has been prescribed to mention digital receipts as the rate of presumptive income is 6% for such receipts.

The new ITR forms prescribed are listed below:-

ITR_1 For Individuals having Income from Salaries, one house property, other sources (Interest etc.) and having total income upto Rs.50 lakh

ITR_2 For Individuals and HUFs not carrying out business or profession under any proprietorship

ITR_3 For individuals and HUFs having income from a proprietary business or profession

ITR_4 For Presumptive Income from Business & Profession

ITR_5 For persons other than – (i) individual, (ii) HUF, (iii) company and (iv) person filing Form ITR-7

ITR_6 For Companies other than companies claiming exemption under section 11

ITR_7 For persons including companies required to furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) or 139(4E) or 139(4F)

Changes in new ITR forms are as follows.

1) Simplified one page ITR Form for Salaried class taxpayers

[ITR 1 Sahaj] Now the Govt. has notified simplified one page form ‘ITR-1 Sahaj’ for individuals earning income from salary, pension, one house property and income from other sources. It has removed columns which are not frequently used by the taxpayers.

New ‘ITR-1 Sahaj’ has retained those deductions which are most frequently used by the taxpayers, viz, under Section 80C, 80D, 80G and 80TTA.

If any taxpayer wants to claim deduction under any other provision of chapter VI-A he can specify the relevant Section in column titled as ‘Any other’. Schedules of TDS and TCS have been merged into one in order to make ITR 1 shorter and simpler.

However, new columns have been inserted to report dividend income and long-term capital gains exempt under Section 10(34) and Section 10(38) respectively.

2) Disclosure of cash deposits during demonetization

[ITR 1, 2, 3, 4, 5, 6, 7]  A new column has been introduced in all ITR Forms to report on cash deposited by taxpayers in their bank accounts during the demonetization period, i.e., from November 9, 2016 to December 30, 2016. However, taxpayers are required to fill up this column only if they have deposited Rs 2 lakh or more during the demonetization period.

3) Quoting of Aadhar Number

[ITR 1, 2, 3, 4] The Finance Bill, 2017 as passed by Lok Sabha has introduced a new Section 139AA requiring every person to quote Aadhar number in the return of income. If any person does not possess the Aadhaar Number but he had applied for the Aadhaar card then he can quote Enrolment ID of Aadhaar application Form in the ITR.

It may be noted that firms are also required to Quote Aadhaar number of their Partner/members in new ITR 5. Further, in case of trust Aadhaar number of Author(s) / Trustee(s) / Manager(s), etc., are required to be specified in new ITR 7.

4) Income taxable at special rates

Unexplained income     [ITR 2, 3, 5, 6, 7]

As per Section 115BBE any unexplained credit or investment attracts tax at 60% (plus surcharge and cess, as applicable), irrespective of the slab of income.

Now new columns have been inserted in ITR Forms under ‘Schedule OS’ to report such unexplained income under ‘Schedule SI’.

It may be noted that any taxpayer having unexplained income cannot opt for ITR-1 Sahaj.

Dividend above Rs 10 lakhs

As per Section 115BBDA the dividend received from domestic company is taxable at rate of 10% if aggregate amount of such dividend exceeds Rs. 10 lakh. New column has been inserted in ITR Forms to declare such dividend income in ‘Schedule OS’.

It may be noted that any taxpayer having dividend income above Rs 10 lakhs and covered under Section 115BBDA cannot opt for ‘ITR-1 Sahaj’.

Patent income

A new column has been inserted in ITR Forms to declare royalty income from patent developed and registered in India and chargeable to tax at 10% under section 115BBF.

5) Deduction under section 80EE

[ITR 2, 3, 4] Section 80EE allows deduction on home loan interest for first time home buyers. This deduction is over and above the Rs 2 lakhs limit covered under Section 24(b).

A new field has been provided in new ITR Forms under Schedule VI-A deductions to claim home loan interest under Section 80EE.

6) Declaration of value of assets and liabilities by Individuals/HUF earning above Rs 50 lakhs

[ITR 2, 3, 4] During 2016, the Govt. had introduced new Schedule requiring individuals/HUFs to declare the value of assets and liabilities if their total income exceeds Rs. 50 lakhs. Taxpayers were required to mention cost of immovable property, jewellery, bullion, vehicles, shares, bank and cash balance, etc.

Now tax payers are also required to disclose address of immovable property and description of movable assets in new ITR Forms. Further, new fields have been introduced in ITR Forms for disclosure of ‘Interest held in the assets of a firm or AOP as a partner or member’. Such members/partners are also required to disclose name, address, PAN of the firm or AOP.

7) Registration number of Chartered Accountant Firm

[ITR 3, 5, 6] Now taxpayers are required to mention registration number of firm of Chartered Accountant which has done audit in ITR Forms.

8) Bifurcation of receipt/expenses from business and profession in no account case.

[ITR 3, 5] In old ITR Forms there was no option to bifurcate income and expense of business and profession separately. All receipts were to be clubbed together and shown in ITR.

Now in new ITR forms, there is an option to show receipts from business and profession separately.

9) Deduction of additional depreciation in case of asset put to use for less than 180 days in preceding year

[ITR 3, 5, 6] In case of purchase of an asset which is put to use for less than 180 days, additional depreciation shall be restricted to 50% for that year and remaining would be allowable in the succeeding year.

In old ITR Forms, no column was there under ‘Schedule DPM’ to claim unutilized 50% additional depreciation in succeeding year. Now in new ITR Forms such column has been inserted to claim unutilized 50% depreciation.

10) Segregation of digital receipts and other receipts under presumptive taxation scheme

[ITR 4] As per the presumptive taxation scheme under Section 44AD, 8% of gross receipts or turnover will be deemed as income of the taxpayer. However, in 2017 Union Budget such limit has been proposed to be reduced to 6% for digital receipts of taxpayer.

In new ITR form, new columns have been inserted to show turnover received through digital mode. Consequently, columns have been inserted to show presumptive income at 6% and 8%.

The Finance Act 2016, had introduced the presumptive taxation scheme for professionals as well. Now new ITR 4 Form shows an option to avail such presumptive taxation scheme for professionals under Section 44ADA.

11) Details of receipts as mentioned in Form 26AS under TDS schedule

[ITR 4] ITR 4 which is now applicable for taxpayer opting for presumptive taxation scheme has a new column under the ‘Schedule TDS2’ to show the receipts as mentioned in Form 26AS.

12) Disallowance for non-deducting or non-payment of Equalisation levy

[ITR 3, 5, 6] The Finance Act, 2016 has introduced new provision to deduct 1% Equalization Levy on payment made for certain advertisement services paid to non-residents.

Any default in deduction or payment of Equalization levy would attract disallowance of Section 40(a)(ib). In new ITR Forms a new column has been inserted under ‘Part A-OI’ to mention such disallowance under section 40(a)(ib).

13) Disallowance of any amount payable for use of railway assets

[ITR 3, 5, 6] Any sum payable by the assessee to the Indian Railways for the use of railway assets shall be allowed as deduction on actual payment basis as per section 43B.

A new column has been inserted under ‘Part A-OI’ for disallowance under section 43B in case of non-payment of such amount on or before due date of furnishing return of income.

14) New schedule to report ‘receipt and payment’ account of a company under liquidation

[ITR 6] A new schedule ‘Part A-OL’ has been inserted in ITR 6 to furnish details of ‘receipt and payment’ account of company under liquidation.

15) Changes related to ITR 7 in respect of Charitable Trusts

[ITR 7] Various changes have been introduced in the new ITR 7 form. Now trust is required to furnish following additional details in new ITR 7 –

  1. a) Registration number and date of registration for business trusts registered with the SEBI.
  1. ) ‘Schedule AI’ to report aggregate of income referred to in section 11 and 12 excluding voluntary contribution.
  1. c) ‘Schedule ER’ to report amount applied to charitable or religious purposes (revenue account).
  1. d) ‘Schedule EC’ to report amount applied to charitable or religious purposes (capital account).
  1. e) ‘Schedule 115TD’ to report accreted income of trust under section 115TD

CAs, Merchant Bankers face fine if assessees file wrong tax information

by | posted in: Accounting Standards, Audit, Due Diligence, Corporate Updates, Economy, Business Updates, Corporate Affairs | 0
CBDT chairman Sushil Chandra addressing a CII interactive session on Union Budget 2017-18 in New Delhi on Monday.

From April 1, chartered accountants (CAs), merchant bankers and valuers can’t escape responsibility for filing of incorrect information in certificates or reports attached with income tax returns of assessees.

 

They will be fined Rs 10,000 for each such certificates or reports, according to a provision in the Budget for 2017-18.

 

For this purpose, the Budget has proposed to insert a new section, 271J, in the Income Tax Act.

 

“Under Section 271J… we have entrusted responsibility with chartered accountants, valuers and merchant bankers who files audit, valuation reports and other things…,” CBDT Chairman Sushil Chandra said at a post-Budget interaction with PHD Chamber of Commerce and Industry here. “So, if they file any incorrect information in the returns, they are also liable for a token penalty of Rs 10,000.”

 

The whole system is based on “a lot of faith on CAs and assessees and they have to be more responsible”, he said.

 

While there are many provisions to penalise the defaulting assessees, there was none to penalise CAs, merchant bankers and valuers.

 

A memorandum to the Finance Bill said: “In order to ensure that the person furnishing reports or certificates undertakes due diligence before making such certification, it is proposed to insert a new section (271J in the Act) so as to provide that if an accountant or a merchant banker or a registered valuer furnishes incorrect information in a report or certificate, the assessing officer or the commissioner (appeals) may direct him to pay a sum of Rs 10,000 for each such report or certificate by way of penalty.”

 

Chandra said the objective of the Budget was to improve tax compliance along with increasing tax base and improving ease of doing business.

 

Non-compliance level was high despite low tax, he said, adding that Indians named in various black money reports, including Panama Papers, were among the highest.

 

He pointed to high level of evasion of tax and tendency to export black money to foreign shores in spite of having global practices and standards, emphasising that this has to come down. “The department has done its bit, now it’s time for the taxpayers to show their respect to the law of land,” he said.

 

On long-term capital gains tax, he said the Budget has tried to plug gaps.

 

In the past few years, the tax department has detected Rs 80,000-crore sale consideration through the penny stock mechanism, the CBDT chief said, adding that this was used for conversion of black money into white.

 

However, “neither have we changed capital tax regime nor have we changed any law. So, whosoever was getting the benefit of long-term capital gains through ESOP, IPO and FPO is not going to change”.

 

Nothing is going to change except misuse, he clarified.

Transfer pricing treaty for investors from cyprus

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The government on Monday afternoon clarified that according to the amended Cyprus treaty, investors need to pay only 10% tax with retrospective effect from November 1, 2013, instead of the 30% tax they have already paid. While bringing in clarity on this matter, a lacunae as far as transfer pricing still remains.

The genesis of the problem lies in 2013. The government had, on November 1, 2013, blacklisted Cyprus as an investment destination through a notification. So, investments made through Cyprus attracted 30% tax (TDS) instead of 10% tax under the original India-Cyprus treaty.

The government had blacklisted Cyprus after the island country had refused to share some data related to investors with India.

The government also said that transfer pricing could also apply on returns given to Cyprus investors by Indian companies.

However, the government later amended the treaty (through a notification on December 14, 2016) after Cyprus agreed to co-operate on sharing investor data. Under the amended treaty, the higher taxation part was rescinded. But the transfer pricing portion still remains unclear.

What led to a cause of worry was the fact that many private equity investors had paid 30% tax between 2013 and 2016 on returns from Indian investments. The government clarification on Monday came as many foreign investors were worried that the 10% tax would not be applicable for the three years between 2013 and 2016. However, following Monday’s clarification, they can now claim refunds from the tax department.

Most of the investors used Cyprus as a pooling vehicle to invest in Indian real estate. Most of the investments were in debt vehicles. In some cases, while the equity investment were made either in listed or unlisted companies through Mauritius or Singapore, debt investments were made through Cyprus.

Transfer pricing conundrum
Transfer pricing is normally only applied in cases where two companies— one an Indian and another multinational— do a merger or acquisition. People close to the development said that some of the transfer pricing adjustments could be made in the coming months. In cases where the tax officers have already gone ahead with the transfer pricing procedures, it may not be possible to undo it, say experts.

Treat for genuine investors, though need for clarity in Tax Rules
This reworked Tax Treaty comes very much after India demonstrated flexibility and lifted the so called sanctions after Cyprus agreed to share information on tax evaders. The reworked tax treaty between India and Cyprus for effective information sharing is also a step towards global cooperation on tax transparency. It will provide relief to genuine investors in Cyprus. But investors loathe uncertainty. The need is for stability and certainty in the tax system, and therefore tax rules must be clear.

Source: http://economictimes.indiatimes.com/articleshow/56073396.cms

Alternative Investment Funds coming to India

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Markets regulator SEBI is learnt to be in process of creating a new category of Alternative Investment Funds(AIFs) to encourage long-term funds to use the AIF route to invest in the listed space.

 

Sources privy to the development said the Securities and Exchange Board of India (SEBI) will reclassify the existing category III into two groups – one comprising long-term funds like pension funds and the other consisting of hedge funds and other arbitrage funds who look to invest on a short-term basis.

 

Further, SEBI is also expected to consult the government in providing a ‘pass through’ status to the new category of AIF on par with Category I and Category II AIFs. According to legal experts, this categorisation would help the long-term overseas funds to receive a favourable tax treatment in the AIF space as currently they are taxed on par with arbitrage funds.

 

As per the current tax regulations, any investments made in listed companies which are held for more than 12 months are termed long-term investments, while others are called short-term investments. Capital gains tax is applicable only for short-term investments and investors needn’t pay any capital gains tax in case of long-term holding.

 

However, if a fund invests in the listed space through the AIF route, irrespective of the nature of holding, the investor would be taxed at uniform slab applicable for category III AIFs.

 

“Current SEBI AIF regulations are like one size fits all. Category III AIFs comprise several types of short-term and long-term funds and the purpose of each of them is different. However, the tax they are paying is the same. Long-term funds would rather take the direct route or would invest via P-notes instead of AIFs,” said a lawyer.

 

These measures are a part of efforts made by SEBI and union government to promote AIFs. During the union budget 2015, the government had provided pass-through status for Category I and Category II AIFs. Last November, the government had allowed foreign funds to invest in AIFs through the direct route.

 

In the last two years, inflows into AIFs have witnessed a significant increase. According to a SEBI data, cumulative funds raised via the AIFs as on March 31, 2016 was `22,691.18 crore — a fourfold increase compared to `5,847.5 in Q2FY15.

 

According to Jay Gandhi, Partner at Shardul Amarchand Mangaldas, the SEBI AIF regulations have found great traction in the market in a relatively short period of time. “The AIF regulations have permitted investment managers great flexibility in structuring various kind of fund structures targeted at specific segments of the investor community,” Gandhi said.

Source: http://www.financialexpress.com/markets/alternative-investment-funds-coming-india-heres-need-know/314881/

Intangible MNC assets may be taxed in case of a global merger and acquisition

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A recent clarification by the government has created a stir among some multinationals which are concerned that their Indian entities might be taxed even in case of a global merger and acquisition with another global company.

More so, the worry is in case of multinationals that hold intangible assets in India, either through research and development centres, or are engaged in businesses where it is tough to value assets.

This is mainly because tax component, if at all, would be decided on valuation of the Indian entity, and whether valuation (Indian entity) accounts for more than half the holding entity outside India. This comes in the wake of the Central Board of Direct Taxes (CBDT) announcing rules for determining fair market value in case of indirect transfer of shares of an Indian entity. Rules specify a method for determination of “fair market value” of foreign target company shares and Indian company shares. In case of an indirect transfer of shares or transaction, if the value of Indian assets is more than 50% of the foreign target company, this could lead to taxation in India.

So if an US-headquartered company invests in India through a Mauritius company and at any point in time there’s a change in ownership, the tax could be applied. The tax would be triggered in India if the ownership of the Mauritius company is changed, and if more than 50% of the total assets of this company (Mauritius company) are in India.

“If a multinational has a presence in India through an intermediate holding vehicle in a third country, and if there is an M&A deal at the intermediate holding entity level, the Indian entity can attract taxation in India,” said Amit Singhania, Partner at Shardul Amarchand Mangaldas.

“While the 50% rule applies, valuing the Indian assets, particularly the right of management or control in an unlisted Indian company would be challenging,”  Singhania said.

Many multinationals are now rushing to their Indian tax consultants to find out which transactions could attract tax here. “Many multinationals that have a presence in India through Mauritius could face some tax in India even if there is an offshore M&A deal, especially where the seller is based in a country whose treaty does not exempt capital gains tax in India,” said Rajesh H Gandhi, partner, tax, Deloitte Haskins and Sells.

“However, more importantly, it could be challenging to identify and value some of the assets and determine the place where they are situated. This would be more relevant for assets like human resources, contractual rights and intangibles such as mobile applications, results of R&D or patents developed in India but registered elsewhere,” said Gandhi.

Industry trackers say that in case of an M&A at an international level, the shares of holding companies are transferred or merged, which is where the problem lies. Many experts also point out that information and documentation required to ascertain the valuation of Indian as well as an intermediary is not just complicated but tough to come by in many cases.

“If so, income tax would assume the Indian entity’s valuation is more than 50% of the holding entity,” said a consultant currently advising such a client. Experts point out that patents held by the Indian company, and some other assets too have to be valued. Not only valuing these intangible assets could have different views, in some cases, these patents or other intangible assets are developed in India but sit on the balance sheet of other group companies outside India.

Source: http://economictimes.indiatimes.com/articleshow/52474147.cms