India, Mauritius to amend tax treaty

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India will levy capital gains tax on investments routed through Mauritius from April 1 next year, bringing down the curtains on a contentious three decade-old rule that allowed companies to bring in billions of dollars by paying negligible taxes.

The taxes on capital gains will apply to investments made from April 1, 2017 and will be imposed at 50% or half of the domestic rate until March 31, 2019, and at the full rate thereafter.

How do people use tax havens to avoid paying taxes?

Through “round tripping” or “treaty shopping”.

How does round tripping work?

Round tripping refers to routing of investments by a resident of one country through another country back to his own country.

You get money out of India and transmit it to a tax haven with whom India has a bilateral tax avoidance treaty such as the double-taxation avoidance agreement (DTAA). In the tax haven, this money is treated as capital of a registered corporate entity. You now invest this money back in an Indian company as foreign direct investment (FDI) by buying stakes or invest it in Indian equity markets.

How does this help in avoiding taxes?

The entire purpose of this exercise is to window-dress as foreign capital your original money that you had taken out from India.

In the entire process, you end up paying zero or negligible taxes. In India, you can claim tax exemption citing the DTAA arguing that you have paid taxes in the source country. In the source country, taxes are negligible since it is a tax haven.

What is DTAA?

These are bilateral treaties signed between governments to prevent companies from being taxed twice over.

So, what was the problem with Mauritius?

Mauritius, and other tax havens, has almost negligible taxes. This was encouraging companies to route their investments in India through “shell” companies (those that exist only on paper) in Mauritius and avoid paying taxes.

How big was the problem?

At $94 billion, Mauritius has been the largest FDI source for India, accounting for 34% of total FDI in India between 2000 and 2015.

What are the changes that will plug this gap?

The changed DTAA will make it mandatory to pay capital gains tax on sale of shares in India by companies registered in Mauritius

When will the new rules kick-in?

Share sales in Indian companies by Mauritius-registered firms will be taxed at half of the applicable rate between April 1, 2017 and March 31, 2019.

If the capital gains tax in India is 10% currently, Mauritius-registered companies will be taxed at 5% during the first two years beginning April 2017. Full capital gains tax will apply from April 1, 2019.

What about previous investments?

The new rules will not apply only to investments made before April 1, 2017, meaning share sale of investments made before this date will be exempt from capital gains tax.

Which companies will benefit from the reduced tax rates during the first two years?

The benefit of 50% reduction in tax rate during the transition period from April 1, 2017 to March 31, 2019 shall be subject to a limitation of benefit (LOB) Article.

A Mauritius-registered company (including a shell or conduit company) will not be entitled to lower tax rate, if it doesn’t spend at least Rs 27 lakh in Mauritius in the previous 12 months. This is called ‘purpose and bonafide business test’.

How will impact investors?

Many foreign investors will have to redraw their strategies. The incentive to route investments through Mauritius will cease to exist once the new rule kicks-in. This could raise their tax outgo.

What about markets?

It could hurt short-term foreign investor inflows into India, particularly from companies whose investment strategies are guided by minimising taxes. This could pull down markets initially.

Are these rules related to the general anti-avoidance rules (GAAR)?

GAAR are aimed at curbing tax avoidance and aim to give tax authorities the right to scrutinise transactions that they feel have been done to avoid taxes.

Under GAAR corporations may be forced to restructure salaries of employees if taxmen conclude that these were structured only to avoid taxes. Similarly, if a foreign investment transaction from Mauritius has taken place with an intent to exploit DTAA, it will come under GAAR.

Implementation of GAAR will take place from April, 2017.

Source: http://www.hindustantimes.com/business/india-mauritius-tax-treaty-all-you-need-to-know/story-QSOlvKyt6rrN7E00S7wp9K.html

If you bought property but have not deposited TDS, you may get a tax notice

by | posted in: Corporate Updates, Income Tax,e-Filing- Individuals, Firms, Companies | 0
While the rule has been in effect since June 1, 2013, many buyers are unaware or often confused about how to calculate the tax.If you bought property worth more than Rs 50 lakh and did not deduct tax at source (TDS) or failed to deposit the amount with the income tax department on time, you may have to pay a penalty of up to Rs 1 lakh.

Several taxpayers recently received notices from the department for no t doing so. Anyone buying real estate worth more than Rs 50 lakh has to deduct 1% of the price of the property before paying the seller. That 1% TDS has to be deposited with the tax department using Form 26 QB.

“The income tax department recently matched the TDS data with the data they received from the property registrar for property transactions over `50 lakh. Wherever there was a discrepancy, either the buyers failed to deduct or deposit the TDS, a notice has been sent,” said Vaibhav Sankla, director, H&R Block.

While the rule has been in effect since June 1, 2013, many buyers are unaware or often confused about how to calculate the tax. TDS has to be calculated on the total sale price  and not the amount exceeding Rs 50 lakh.

“Sometimes total sale price, which exceeds `50 lakh in aggregate, may be payable in instalments. The TDS in that case must be deducted from each instalment no matter how small the instalment is. Most people fail to do that,” said Archit Gupta, founder, ClearTax.in.

In case the payment is made in instalments, then TDS needs to be deducted at the time of making each payment. This TDS, deducted each time while paying the instalment, is to be deposited with the department by way of return cum challan (Form 26QB) within seven days of the following month of making the payment. Failing to do so can, apart from the dues and late filing interest, attract a penalty under Section 271H of up to Rs 1 lakh.

For those who have received a notice, the immediate corrective step to avoid paying a penalty is to pay the TDS along with the applicable interest and late filing fee.

The interest payable under Section 201 is 1% per month if tax wasn’t deducted and 1.5% in case this was done but not paid.

“This interest is calculated on the TDS amount from the date of payment, whether paid in lump sum or in instalments,” said Sankla. Take the example of a property purchased in January 2015 worth Rs 60 lakh where the first Rs 20 lakh was paid that month and the rest in June that year. For the first instalment of Rs 20 lakh, the interest will be applicable from January onwards, while that on the second payment will be from June 2015. There is also a late filing fee under Section 234E for delaying the interest payment of `200 per day, subject to the maximum of taxes due. There may be some leniency if the seller has already paid capital gains tax or claimed capital gains exemption (on the sale of property).

“The intent of the department is that there is no tax evasion. So, if the seller has already paid the taxes, the buyer can submit Form 26A certificate from a chartered accountant and request that penalty under Section 234E should not be levied,” said Gupta. Though this will save you from the late filing fee, the interest under Section 201 will still apply.

Buyers should also remember to issue Form 16B. “It is generated via TRACES and the seller may not be able to take tax credit for TDS deducted in case of non-filing or latefiling of Form 26QB,” said Gupta. Penalties remain the same for failing to do so.

Source:http://economictimes.indiatimes.com/articleshow/51901867.cms

 

Govt to further simplify ITR forms, sets up committee

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The government is looking to further simplify income tax return forms to help taxpayers fill them without seeking help from experts and the revenue department has set up a committee in this regard.

The committee, according to sources, will be headed by a joint secretary level officer and would include chartered accountants and tax experts.

“The tax department is trying to further simplify the return form so that no outside help is needed by those who want to file returns on their own,” a source said.

The effort would be to come out with a simple formula for indexation to help assessees compute capital gains on sale of assets, the source added.

“The Committee would also look into the possibility of reducing the number of pages in the return form,” the source said.

The Income Tax department had in June come out with a simplified tax return form for salaried class. Filers now have to disclose the total number of savings and the current bank accounts held by them at any time during the previous year (excluding dormant accounts).

The form also has space to fill up the IFSC code of the bank and in an additional feature, tax filers have been given an option to indicate their bank accounts in which they would want their refund credited. The ITR also has sought the Aadhaar number of filers.

The tax department had come out with simplified ITR after experts raised objections to the 14 page form which was notified earlier in the year.

The earlier form sought details of bank accounts and foreign visits and following controversy, the Revenue Department announced putting them on hold.

Source: http://www.business-standard.com/article/pti-stories/govt-to-further-simplify-itr-forms-sets-up-committee-115112200147_1.html