INDIAN MERCHANTS CHAMBER
AMENDMENTS PROPOSED IN
FINANCE BILL 2013
PANEL DISCUSSION
21 March 2013
Bela Sheth Mao
Country Tax Lead
Shell India Markets Pvt LTd
CONTENTS
1. GDP and tax collections
2. Tax residency certificate (TRC)
3. Pass through status – Alternate Investment Fund (AIF)
4. Special Audit
5. Defective return
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GDP AND TAX COLLECTIONS
Financial year
GDP
Direct tax collections
(INR lac crores)
Direct tax collections
(USD billion)
2009-10
8%
3.6
65
2010-11
8.6%
4.4
80
2011-12 (budgeted)
7.5%
5.1
92
2011-12 (registered)
5%
4.98
90
2012-13 (budgeted)
7%
5.7
103
2012-13 (revised)
5%
5.65
103
6.1 – 6.7%
6.7
122
2013-14 (budgeted)
 Economists caution that buoyancy in revenue collection will depend on maintaining
the GDP growth rate in the range of 9 – 10%. The tax GDP ratio during fiscal
2010-11 was 10.8%.
 Given the budgeted estimates of GDP, there will be pressure on the tax
administration to meet revenue targets through aggressive assessments
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TAX RESIDENCY CERTIFICATE (TRC)
Scenario up to the Budget
 Section 90(3) inserted in the Income Tax Act, 1961 (‘Act’) with effect from 1 April
2013 requiring non-residents claiming treaty relief to obtain a TRC in a prescribed
format
 Several judgments affirming Mauritius treaty benefits (in context of capital gains
relief) based on TRC, following Azadi Bachao Andolan which affirmed Circular
789
 The CBDT issued a Notification dated 17 September 2012 specifying the format of
the TRC which required certain particulars on the non-resident to be verified by the
overseas Government
 Some jurisdictions are issuing TRCs in the required format (Singapore; Mauritius),
some are flat refusing (USA; UK), some are issuing partial TRCs (Luxembourg)
 There is no clarity on what happens when the TRC is not obtained in the required
format
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TAX RESIDENCY CERTIFICATE (TRC)
Budget, 2013
 In the Budget announced on 28 February 2013, a new Section 90(5) is proposed to
be introduced in the Finance Bill, 2013
 Its language seems to suggest that the TRC is essential but not sufficient to avail
treaty benefits. Further, the amendment would be effective 1 April 2012
 No indication on what happens if the TRC is not obtained in the specified format
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TAX RESIDENCY CERTIFICATE (TRC)
Post Budget clarifications
 The TRC will be accepted as evidence of residency
 The language of the proposed Section will be taken up for consideration in the
Budget session of the Parliament
 Circular 789 dated 13 April 2000 in reference to Mauritius remains in force
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TAX RESIDENCY CERTIFICATE (TRC)
Implications

Capital gains derived by Mauritius residents protected, in particular short term
capital gains derived by FIIs

Circular 789 and Azadi Bachao Andolan still hold good in law

However, additional information may still be called for to satisfy the ‘beneficial
ownership’ test to avail treaty benefits even if the new Section is not enacted

Scrutiny likely under anti-avoidance rules even if TRCs are obtained once GAAR
takes effect in April 2016 (no amendments to GAAR provisions in the Budget –
treaty override still exists)

TRC assumes importance because there is a significant impact when treaty benefits
are not available
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TAX RESIDENCY CERTIFICATE (TRC)
Implications (contd.)
 Tax rate on royalty / FTS has been changed to 25% from 10%
 No change in the impact of Section 206AA of the Act
 Example - implications under the India – Singapore treaty
Pre - Budget
Situation where payee holds
Royalty
LTCG on unlisted shares
TRC and PAN
10%
NIL
PAN but not TRC
10%1
20%3
TRC but not PAN
20%2
20%2
Post - Budget
Situation where payee holds
Royalty
LTCG on unlisted shares
TRC and PAN
10%
NIL
PAN but not TRC
25%1
20%3
TRC but not PAN
25%2
20%2
1.
2.
3.
4.
Under Section 115A of the Act
Under Section 206AA of the Act
Under Section 112 of the Act
The table does not factor surcharge and education cess
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TAX RESIDENCY CERTIFICATE (TRC)
Business impact
 The logistics of obtaining TRCs
• They are usually issued based on calendar year where as
assessments are done on a financial year – timing mismatch
• Payments to non-residents are recurring, real time and often there
is not enough time to obtain a timely TRC – post payment event
 If jurisdictions are not issuing TRCs as required by the Indian tax
authorities, the WHT impact on royalty / FTS payments with changes
in Section 115A will be significant
 If it is a net of tax contract, the tax impact will be 33.33% - this is a
significant cost of doing business in India
 Most overseas group entities to whom payments are made are
‘pooling entities’ – it may be difficult to establish ‘beneficial ownership’
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PASS THRU STATUS – ALTERNATIVE INVESTMENT FUNDS
Scenario up to the Budget
 On 21 May 2012 SEBI introduced guidelines for Alternative Investments Funds
(AIFs) which are funds incorporated or established in India for the purpose of
pooling of capital from Indian or foreign investors
 These guidelines have replaced the SEBI Venture Capital Fund guidelines
 AIFs regulated under these guidelines should not be covered under the SEBI Mutual
Fund or Collective Investment Scheme regulations
 AIFs can take the form of a trust or a company or a LLP and can operate broadly
under 3 categories, and it is mandatory for them to get registered with SEBI
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PASS THRU STATUS – ALTERNATIVE INVESTMENT FUNDS
Scenario up to the Budget (contd.)
 Activities of AIFs
Category of AIF
Activity
Category I
Social Venture Fund, Infrastructure Fund, VC
Fund, SME Fund
Category II
PE Funds, Debt Funds, Funds of Funds
Category III
Hedge Fund, Open-ended Funds, Funds
trading for short term returns
 Under Section 10 (23F) of the Act, venture capital companies are exempt from tax
on dividends and capital gains earned where certain specified conditions are met
 Accordingly, they enjoy pass through status to the extent that tax is payable on
distributions to investors
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PASS THRU STATUS – ALTERNATIVE INVESTMENT FUNDS
Budget, 2013
 In the Budget announced on 28 February 2013, a new Section 10(23FD) is
proposed to be introduced in the Finance Bill, 2013 where the venture capital
exemption is proposed to be extended to Category I AIFs registered with SEBI
 This applicable where:
• The AIF is not listed
• 2/3rds of its funds are invested in unlisted securities, and
• Directors or related parties do not hold more than 10% equity in in invested
companies
 ‘Angel investor pools’ will also be covered by this exemption if they are recognised
by the SEBI as Category I AIFs
 Exemption not extended to Category II and III AIFs (possibly because of nature of
activities)
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PASS THRU STATUS – ALTERNATIVE INVESTMENT FUNDS
Implications

Qualifying income of Category I AIFs (including angel investor pools) will be
exempt from tax

Depending on the nature of the fund vehicle, the distribution of income to members
could be tax free, specially if the members are residents of Mauritius or Singapore
which have favourable tax treaties with India

AIFs if set up as companies would not be subject to rigours of Section 56(2)(viib)

Most angel investors may not qualify for Category I AIF because the minimum
contribution by members is Rs 1 crore, and most angel investors are individuals
who often invest less than that

Angel investors provide small amounts of capital at the start-up stage while venture
capitalists enter later in the cycle. By raising minimum investment threholds and
offering preferential treatment to pools, the Budget may induce angels to behave
like venture capitalists and reduce access to capital for very small start-ups
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SPECIAL AUDIT – SECTION 142(2A)
 The Section provides that having regard to the ‘nature and complexity’
of the accounts of an assessee and the interests of the revenue, the
Assessing Officer (AO) may with the permission of the Chief
Commissioner or Commissioner, direct the assessee to have the
accounts audited
 The expression ‘nature and complexity’ of accounts and thereby the
power of the AO to direct the audit has been the subject of different
interpretation by various Courts
 The Supreme Court in Sahara India (Firm) v. CIT 169 Taxman 328
held that
•
•
•
•
•
The word complexity is not defined in the Act
It is a nebulous word
It relied on its dictionary meaning
All that is difficult to understand cannot be regarded as complex.
Objectivity has to be applied.
There has to be a genuine and honest attempt by the AO to understand
the accounts and AO cannot use the provision to shift the responsibility to
the auditor
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SPECIAL AUDIT – SECTION 142(2A)
 In Delhi Development Authority v. Union of India (25 Taxman 234) the Delhi
High Court held that accounts do not become complex merely because there
are a large number of entries.
 In V. Vishnudas Kini v. DCIT (109 Taxman 15) the Kerala High Court justified
the special audit as gross receipt were more than Rs 2 crores, volume of
vouchers were large, and correctness of expenses could not be verified without
significant effort.
 In ATS Infrastructure Ltd v ACIT (30 Taxman 361) the Allahabad High Court
confirmed the special audit as the assessee had opted for a dubious method of
accounting.
 In view of the divergent views, possibly to reduce litigation and bring clarity,
the powers of the AO to direct the special audit have been widened.
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SPECIAL AUDIT – SECTION 142(2A)
 The AO can now order a special audit not only due to the reason of
nature and complexity of accounts, but also in the following additional
circumstances:
• The Volume of accounts
• Doubts over correctness of accounts
• Multiplicity of transactions in the accounts
• Specialised nature of business activity of the assessee
 It is evident that some of the amendments have been inserted to
counter some of the judgements that have been passed in favour of
assessees
 The amendments significantly broaden the power of the AO without
defining the scope within which the powers can be exercised. This
may not reduce the probable purpose of reducing litigation.
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SPECIAL AUDIT – SECTION 142(2A)
 A corresponding amendment is also proposed in Section 153 in
respect of period of the special audit to be excluded from the period of
limitation for completion of assessment and re-assessments
 The amendment provides that the period to be excluded shall be:
• The period commencing from the date on which the AO directs
the assessee to get his accounts audited under Section 142(2A);
and
• ending with the last date on which the assessee is required to
furnish a report of such an audit under that Section; or
• Where such direction is challenged before a Court, ending with
the date on which the order setting aside such direction is
received by the Commissioner
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DEFECTIVE RETURN – SECTION 139(9)
 The Explanation to Section 139(9) provides nine conditions which are
required to be fulfilled for an AO not to regard a return of income as
defective
 The Finance Bill, 2013 proposes to insert a new clause with effect from
1 June 2013 stating that the return will be regarded as defective if self
assessment tax (along with interest) has not been paid on or before the
due date of furnishing of the return
 The memorandum explaining the proposed amendment states that this
amendment has been proposed because it has been noticed that a
large number of assessees are filing their income tax returns without
payment of self assessment tax
 The amendment seems to be aimed at individual assessees
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DEFECTIVE RETURN – SECTION 139(9)
 In the context of non-resident corporate assessees, this situation is
likely to arise when:
• There may be uncertainty on the taxability on Indian source of
their income (usually whether activities constitute a PE or not)
• adequate WHT has not been withheld and deposited from Indian
source taxable income, and the due date for last instalment of
advance tax has passed
• the due date of filing the income tax return is near
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