Recent changes in Foreign Investment Policy & FEMA with selected International Tax aspects / implications

CA. Shabbir Motorwala

NIRC – ICAI FEMA ConferenceNew Delhi 19 December 2015

1

Contents

Broad Coverage

Recent Foreign Investment and FEMA - Trends and observations

Foreign Investment – primarily PN 12 of 2015 dated 24 November 2015

• Manufacture

• LLPs

• NRIs

• Construction-Development

• Other Changes

FEMA

• Issue of Shares

• Bonds

• External Commercial Borrowings

Selected Tax and International Tax aspects

2

Recent changes in Foreign Investment Policy & FEMATrends and observations

• Issue of quite a few Notifications / Amendments

• RBI draft’s ECB framework was placed in public domain though final guidelines quite different

• FDI – RBI Notification not immediate after Press Note (PN 12 of 2015 still awaited?)

• No highlighting of changes or guidance on issues dealt with or arising fresh

• No suitable transition timeframe or provisions

• No FAQs issued with or shortly post issue of amendments

• No clarification of what other changes are under consideration for future

• Liberalization as well as reducing of Administrative burden

• DIPP put most sectors under Automatic Route

• RBI delegated most powers to AD-Banks

• No robust window to seek redressal and seek clarifications which can be made available in public domain

• Representations by CAs / Lawyers - not a warm welcome anymore

Recent changes in Foreign Investment Policy

4

Recent changes in Foreign Investment PolicyPN 12 of 2015 – Make in India fortified

• Definition of ‘Manufacture’ inserted which is same as under Section 2(29BA) of the Income-tax Act:

Manufacture with its grammatical variations means a change in a non-living physical object or article or things – (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.

• Key issues

• Does the above definition clarify the position adequately?

• Is there a benefitted class or any class loosing out?

• Whether reliance can be placed on judicial precedents under the Income tax Act to determine the eligibility for FDI under the FDI policy?

• Manufacturer permitted to sell its products through whole sale and/or retail, including e-commerce

• This aspect first mention by the Finance Minister’s Union Budget 2015 speech

• This was always the position adopted in the past !

• Any industrial undertaking manufacturing items reserved for Micro and Small Enterprises would not require Govt. approval even when the foreign investment in such undertaking exceeds 24%.

5

Recent changes in Foreign Investment PolicyPN 12 of 2015 – LLP• 100% FDI in LLP put under Automatic Route as against Approval Route earlier

• Sectors /activities to be those falling under Automatic Route and no FDI-linked performance conditions (as earlier)

• Any Indian Company with FDI can make downstream investments in LLP (earlier the Investor Indian Company had to be engaged in 100% Automatic Route sectors)

• Earlier policy w.r.t. Resident Designated Partner created challenge for 100% foreign ownership - No such requirement under the new policy

• Downstream investment by LLPs in Indian Company / LLP under Automatic Route

• Sectors /activities to be those falling under automatic route and there are no FDI-linked performance conditions

• Definition of Control introduced – right to appoint majority of Designated Partners where such designated partners, with specific exclusion to others, have control over all the policies of the LLP

• Definition of Ownership introduced – percentage of the investments in LLPs

• Key issues

• No specific Approval Route otherwise envisage for FDI in LLPs?

• Whether LLP can be capitalized on non-cash basis in the same way as an Indian Company?

• With control and ownership criteria fortified, whether basis exists to deny FDI to LLP in all sectors?

6

Recent changes in Foreign Investment PolicyPN 12 of 2015 – NRI related amendments• NRI candy earlier in PN 7 of 2015

• NRI definition which includes PIOs amended to include Overseas Citizens of India (OCI) whose ambit is wider than PIOs.

• NRI Investments under FEMA 20 / Schedule 4 (Non-Repatriation basis) deemed to be domestic investment on par with residents

• Benefits conferred to NRIs by PN 12 of 2015

• A Company, Trust and Partnership Firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy

• Sectors relevant : Schedule Air Transport (NRI 100%/ FDI 49%); Construction-Development

• Similar Benefits to investments under Schedule 4 of FEMA 20 – Non Repatriation Basis

• RBI Notification on this would be critical / interesting

• Key Issues

• Is this the return of the erstwhile OCBs scheme in a new Avatar?

• How does one determine ownership and control in Trust and Partnership?

• Whether Overseas LLPs covered within ambit of Partnership?

• Downstream investments – Calculation of split Downstream FDI?

• Is conversion of NRI investment from Repatriable to Non-Repatriable basis possible?

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March 2005

September 2010

October 2014

December2014

March 2015

Issued clarifications on terms like “original investment”, “lock-in period”, etc. through Press Release

The Central Government allowed Foreign Direct Investment in Construction-Development Sector for the first time

Press Note 2 of 2005 released

Proposed amendments in the Foreign Direct Investment policy for the Construction Development Sector issued for public comments

Press Release providing clarifications on Press Note 10 of 2014 such as exit route, completion of trunk infrastructure, commencement of project, unusable/idle parcels of land, etc.

Press Note 10 of 2014 released

Liberalization and rationalization of the FDI policy on Construction Development Sector

November2015

Press Note 12 of 2015 released

Liberalization and rationalization of the FDI policy on Construction Development Sector and other sectors as well

Recent changes in Foreign Investment PolicyReal Estate Sector: Journey so far

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Recent changes in Foreign Investment PolicyReal Estate Sector – Recent changes prior to PN 12 of 2015

• The medicines that did not work enough - Press Note 10 of 2014

• For Development of Serviced Housing Plots – Minimum land area of 10 hectares done away with

• For Construction Development projects – Minimum built up area reduced to 20,000 sq.mts

• USD 5 Mn – to be brought within 6 months from date of commencement of project – Subsequenttranches may follow upto 10 years or upto date of completion

• Investor permitted to exit on completion of trunk infrastructure i.e. roads, water supply, street lightingdrainage, sewerage

• Exit / Transfer of stake from one NR to another before completion of project / trunk infrastructureconsidered under approval route

• Clarification on 15 September 2015 - Facility sharing arrangement between Group companies

• Facility sharing arrangements between group companies through leasing / sub-leasing arrangements forlarger interest of business will not be treated as real estate business

• Provided the arrangements are at arm’s length price and the annual lease rent earned by the lessorcompany does not exceed 5% of its total revenue

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Recent changes in Foreign Investment PolicyPN 12 of 2015 – Booster Dose for Real Estate Sector

• Each phase of the construction development project to be considered as aseparate project subject to the conditions

• Minimum area to be developed and minimum capitalization conditions deleted

• Exits simplified

• Foreign investor can exit before the completion of project under automaticroute subject to a lock-in-period of three years (calculated with reference toeach tranche of foreign investment)

• Transfer of stake from non-resident investor to another non-resident investornot involving repatriation neither subject to lock-in period nor Governmentapproval

• Prohibited Real estate business ambit relaxed to exclude earning of rent /incomeon lease of the property not amounting to transfer and the term transfer includes:

• Sale, exchange or relinquishment

• Extinguishment of any rights or compulsory acquisition under law

• Allowing possession under Section 53A of Transfer or Property Act

• Any arrangement including transfer of shares which has effect of transferring orenabling enjoyment of immovable property

Note: What types of arrangements qualify under above provisions?

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Recent changes in Foreign Investment PolicyPN 12 of 2015 – SBRT

• SBRT and wholesale/cash & carry trading permitted in the same entity subject tomaintenance of separate books of accounts and duly audited by StatutoryAuditor

• SBRT can now be undertaken through e-Commerce

• No change in sectoral cap and sourcing obligations for FDI beyond 51%

• Indian Brands defined as owned and controlled by Indian Citizens / Entitiesspecifically made eligible under Policy to receive SBRT

• Indian Manufacturer which is owner of Indian Brand and which manufacturesin India 70% of products in-house and sources at most 30% from IndianManufacturer

• Changes to sourcing norms

• 30% local sourcing requirement to be met annually from the date of openingthe first store as against first tranche of FDI earlier - Average of five yearstotal value condition done away with

• Government to relax norms for 'state-of-art' and 'cutting-edge' technologywhere local sourcing not possible

• Sourcing Requirement would only be qua the Indian Company receiving FDI

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Recent changes in Foreign Investment PolicyPN 12 of 2015 – Miscellaneous changes

• FDI in Defunct Indian Company – no operations or downstream investments

• Prior FIPB approval condition done away with and such cases now placed under Automatic Routeexcept where proposal is to undertake activities under Government Route

• Swap of Shares

• Prior FIPB approval condition done away and such cases now placed under Automatic Route exceptwhere proposal is to undertake activities falling under the Government Route

• Valuation in such cases by Merchant Banker – SEBI Registered in India or Host Country Regulated

• Change in Ownership / Control

• Guidelines for establishment of Indian Companies or transfer of ownership or control of Indian Companies from Resident Indian Citizens to non-resident Entities

• Approval Route only for Sectors under Approval Route, earlier applied also to sectors with FDI caps

• Recommendation limits

• FM to consider FIPB proposals upto Rs. 5,000 Crores (earlier limit was Rs. 2,000 Crore and was raised to Rs. 3,000 Crore by PN 6 of 2015 in June 2015)

• CCEA to consider FIPB proposals exceeding Rs. 5,000 Crores

• CCEA to also consider proposals referred by FIPB / PM

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Recent changes in Foreign Investment PolicyPN 12 of 2015 – Illustrative sector specific changes• Plantation

• Apart from Tea Plantation, Coffee, Rubber, Cardamom, Palm Oil Tree and Olive Oil Tree plantations added and placed under Automatic Route

• Defence

• 49% FDI now under Automatic Route from Approval Route (excess continues under Approval Route)

• Foreign Investment is subject to Security Clearance and Guidelines of M/o Defence

• 100% FDI under Automatic Route from earlier Approval Route

• Up-linking of Non-news & Current Affairs TV Channels and Downlinking of TV Channels

• 100% FDI under Automatic Route from earlier upto 49% under Automatic Route and thereafter upto74% under Approval Route

• Non-news and Current Affairs TV Channels & Downlinking of TV Channels

• Aviation - Non-Scheduled Air Transport Service, Ground Handling, Maintenance & Repairs, etc

• Sectors which wen 100% under Automatic Route where earlier under Caps / Approval Route

• Credit Information Companies and Duty Free Shops – subject to conditions

• White Label ATMs – PN 11 of 2015

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Recent changes in Foreign Investment PolicyPN 1 of 2015 -- Mapping of NIC Code 2008

• NIC Codes relevant for reporting of issue of shares / convertible instruments / capital to RBI in Form FC-GPR by Indian Company / LLP in terms of sectors and activities undertaken.

• Objective is to improve the ease of doing business in India and harmonize categorization

• Key issue – few NIC Codes are not matching with activities permitted or prohibited

• E.g. For Real Estate sector, the NIC code mentioned is 68200 whose activity description as given below:

NIC Code 68200 - This class includes the provision of real estate activities on a fee or contract basis including real estate related services such as, activities of real estate agents and brokers, intermediation in buying, selling and renting of real estate on a fee or contract basis, management of real estate on a fee or contract basis, appraisal services for real estate, real estate escrow agents.

Under the FDI Policy and FEMA 20, Real Estate Business:

“Dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. “

• Other mismatches are (i) Trading in TDRs, where NIC specified is 66110 which relates to “Administration of Financial Markets”; and (ii) For B2B E-commerce, the NIC code is 47912 which relates to Retail Trading via E-commerce.

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Recent changes in Foreign Investment PolicyPN 8 of 2015 – Composite Caps

• Effective from 12 May 2015

• Foreign Investments to include all types of foreign investments – direct and indirect regardless of the Schedules under FEMA 20 being under

• FDI – Schedule 1

• FII – Schedule 2 / FPI – Schedule 2A

• NRI – Schedule 3 (Repatriation basis)

• FVCI – Schedule 6

• QFI – Schedule 8

• LLP – Schedule 9

• DRs – Schedule 10

Note: FCCBs and DR not regarded as equity investments till conversion of the debt instruments.

• For downstream Investments, FII / FPI / QFI holding as on 31 March

• Transfer of shares from R to NR in Sectors with conditionalities subject to compliance with such obligations

• Portfolio investments upto 49% or upto sectoral cap not subject to government approval or sectoralconditionalities if ownership and control continues with Indian Citizens / Entities.

Recent changes in FEMA

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Recent FEMA Changes Issue of Partly Paid-up Shares & Warrants

• RBI Circular No. 3 dated 14 July 2014

• Sectoral conditions to be complied – Issue under Approval Route to be post FIPB approval

• Partly- paid up equity shares

• Pricing to be decided upfront and not lower than fair value at time of issuance.

• 25% of the total consideration including share premium to be received upfront

• Balance consideration to be received within 12 months except where issue size exceeds Rs. 500Cr and SEBI-ICDR Regulations apply

• Unlisted Company also eligible as above subject to appointing a monitoring agency in line withListed Companies.

• Partly paid-up Warrants

• Most conditions as above.

• Balance consideration allowed to be received within 18 months.

• Issue and forfeiture of amount paid to be as per Companies Act 2013 & Income-tax Act 1961.

• FDI PN on above release is PN 9 of 2015 dated 15 September 015 - more than a year later?

• Key Issue – whether Compulsory Convertible Preference Shares / Debentures covered?

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Recent FEMA Changes Other changes - Issue of shares

• RBI Circular 31 dated 17 September 2014 - Issue of equity shares against any amount payables

• Scheme over and above the issue of shares / convertible debentures to NR against lump sumptechnical know-how fee, royalty, ECBs as stipulated and Import payables of capital goods, etc.

• Issue of Equity shares against any other funds payable by the Investee Company remittance of whichdoes not require prior permission of the Government of India or RBI

• The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps,pricing guidelines, applicable tax laws etc.

• Key issues

• Issue of convertible preference shares / debentures covered?

• Whether overdue payments covered?

• RBI Circular No. 4 dated 16 July 2015 – Sweat Equity Shares to NRs

• Along with ESOP, Sweat Equity shares can be issued to Employees / Directors of Holding Companyor JV or WOS abroad

• Scheme to be drawn as per SEBI or Companies Act 2013 (Share & Debenture Rules 2014) andcompliance with sectoral cap and with prior approval of Government wherever required

• Reporting to RBI within 30 days in Form ESOP for ESOP as well as Sweat Equity Shares

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Recent FEMA Changes Foreign Investments - REITs, AIFs and InvITs

RBI notification no . FEMA. 355/2015-RB dated 16 November 2015

• Foreign investors including RFPIs and NRIs allowed to invest, hold and transfer units of Investment Vehicles - AIFs, REITs, and InvITs

• General permission for investment subject to conditions prescribed (inward remittance, etc).

• General permission also extends to sell, transfer or redemption of units

• Ownership / control of investment vehicle determined qua the sponsor/manager / investment manager

• If sponsor/manager / investment manager is not Indian owned or controlled = foreign investment.

• If these entities are other than companies than SEBI to determine the foreign ownership / control

• Explanation 1 - AIF cannot be managed by LLPs as their ownership / control cannot be determined under FDI Policy

• Subsequent to this notification PN 12 of 2015 has laid down criteria for O & C of LLPs

• Whether this rigor applies only to LLPs with FDI? Whether REIT and InvITs also covered?

• Downstream investment where Investment vehicle which is reckoned as foreign investment to be compliant with sectoral caps and conditions including in LLPs

• AIF Category III allowed to make only portfolio investments as eligible to RFPI

• Reporting to be as per formats prescribed by the RBI / SEBI

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Recent FEMA changes Foreign Investment by FPI in Corporate Bonds

• Registered FPIs Investment in Debt Market - RBI Circular No. 71 dated 03 February, 2015

− All future investments of Registered FPI in the debt market in India will be required to be madewith a minimum residual maturity of three years.

− The above lock-in applies to all future investments against limit vacated due to exit of currentinvestments.

− FPI not allowed to make investment in liquid and money market mutual fund schemes

− No lock-in period and free to sell the securities if sale is to domestic investors

• RBI Circular No. 73 dated 06 February, 2015 provides clarifications on above circular

• In view of three years lock-in, no investment permitted in CPs by Registered FPIs

• Registered FPIs not allowed to make further investment in a debt instrument having initial / residual maturity of three years with optionality clause exercisable within three years

• RBI Circular No.31 dated 26 November 2015

− FPIs permitted to acquire NCDs/bonds, which are under default, either fully or partly, in the repayment of principal on maturity or principal installment in the case of amortizing bond.

− The revised maturity period, restructured based on negotiations with the issuing Indian company, would need to be three years or more.

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BondsIncome Tax aspects

• Section 194LC of the Act – Interest income of foreign company / business trust

• A lower WHT at 5% on gross basis on Interest on Fx borrowings by an Indian Company as under:

– Loan agreements – 1 July 2012 till 30 June 2017

– Infrastructure Bonds – 1 July 2012 till 30 June 2014

– Any long term bond including infrastructure bonds – 1 July 2014 till 30 June 2017

• CBDT Circulars 7 of 2012 & 15 of 2014 – RBI ECB Guidelines and Interest Rate akin to Government approval for availing the lower withholding tax rate.

• Section 194LD of the Act - Interest on certain bonds / government securities

• Applies to Interest payable from 1 July 2013 to 30 June 2017 to FII / QFI I respect of their investment in INR denominated bond of an Indian corporation or Government Security

• A lower WHT at 5% on gross basis applies

• Issue whether Bonds includes Debentures?

• Companies Act 2013 – states Debentures includes Bonds?

• Intention seems to cover Debentures as well and there is no rationale for their exclusion

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Recent FEMA Changes Masala Bonds

• Rupee bonds issued by Indian entities in overseas markets are popularly known as Masala Bonds

• Scheme operationalized in general by RBI vide Circular No. 17 dated 29 September 2015:

- Eligible borrowers: Any corporate or body corporate as well as REITs and InvITs.

- Type of Instruments – Plain Vanilla Bonds in FATF compliant centres

- Recognized investors: Any investor from a Financial Action Task Force compliant jurisdiction either placed privately or listed on exchanges as per host country regulations

- Maturity: Minimum maturity period of 5 years.

- All-in-cost: All in cost should be commensurate with prevailing market conditions.

- Amount: Upto USD 750 mn per annum.

- End-uses: No end-use restrictions except for a negative list (Real Estate / Capital markets or domestic equity investments / Activities prohibited by FDI policy / On-lending for prohibited objectives / Land.

• The CBDT issued a press release dated 29 October 2015 proposing taxation of income from off-shore rupee denominated bonds as follows:

- Withholding tax rate on interest income of such bonds to be reduced to 5 percent from 20 percent.

- Capital gains, arising in case of appreciation of rupee would be exempted from capital gains tax.

(Legislative amendment in this regard expected to be proposed through the Finance Bill, 2016)

External Commercial Borrowings

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New ECB framework An Overview

• Draft framework issued in September 2015 to replace the existing ECB framework - To have more rational and liberal framework

• The Reserve Bank has issued a A.P. (DIR series) Circular no. 32 dated 30 November 2015 outlining the new framework for ECB

• Significant difference between draft framework issued in September 2015 and Final Guidelines – Planning goes haywire!!

• Intent is to liberalise and encourage long term ECBs denominated in foreign currency and INR

• ECB can be credit enhanced / guaranteed / insured by overseas party / parties only if they fulfill criteria of recognized lenders

• ECB’s are classified under three ‘Tracks’:

• Track I: Fx ECB upto USD 50 mn with minimum average maturity (‘MAM’) of 3 years and beyond USD 50 mn with MAM of 5 years

• Track II: Fx ECB with MAM of 10 years irrespective of the amount

• Track III: Rupee denominated ECB with MAM of 3/5 years

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New ECB framework Forms & MAM

• Forms of ECB:

- Bank loans

- Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares / debentures)

- Buyers’ credit and Suppliers’ credit

- Foreign Currency Convertible Bonds (FCCBs)

- Finance lease; and

- Foreign Currency Exchangeable Bonds (FCEBs) [only under the approval route]

• Minimum Average Maturity Period (MAM)

- Track I = 3 years or more for ECB upto USD 50 million or its equivalent; and 5 years or more for ECB beyond USD 50 million or its equivalent

- Track II = 10 years or more irrespective of the amount

- Track III = Same as Track I

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New ECB Framework Eligible Borrowers

Track I Track II Track III• Companies in :

- Manufacturing sector

- Software development sector

• Shipping and airline companies.

• Units in SEZs

• Small Industries and Development Bank of India

• Exim bank (only under the approval route)

• Entities eligible under Track I

• Companies in infrastructure sector (definition aligned with Harmonised Master List of Government of India)

• Holding Companies

• Core Investment companies

• REITs and INVITs registered with SEBI (new)

• Entities listed under Track II

• All NBFCs

• Entities engaged in micro finance activities, subject to conditions

• Companies in Miscellaneous services i.e.

- R & D

- Training (excluding educational institutes)

- Companies supporting infrastructure

- Logistic services (new)

• SEZ / NMIZs developers

• Getting Tracks right very relevant

• Some of the sectors significantly impacted or favored – see next slides

26

New ECB framework Harmonised Master List of Government of India

The Government of India on 27 March 2012 identified a harmonized master list (‘HML’) of infrastructure sub-sectors to be / and updated from time to time. The updated Harmonised Master List of infrastructure sub-sectors includes following categories:

1. Transport – Roads and bridges, ports, inland waterways, airports etc.

2. Energy – Electricity generation / transmission / distribution, Oil / gas pipelines etc.

3. Water and Sanitation – Solid waste management, water treatment plants, irrigation etc.

4. Communication – Telecommunication (Fixed network), telecommunication towers etc.

5. Social and Commercial Infrastructure

• Education institutions (capital stocks),

• Hospitals – widely defined to include dispensaries etc. (capital stock),

• Three star or higher category classified hotels located outside cities with population of more than 1 million,

• Common infrastructure for industrial parks, SEZs, tourism facilities and agriculture markets, cold chain,

• Hotels with project cost of more than Rs.200 crores each in any place in India and of any star rating etc.

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New ECB Framework Eligible Borrowers - Selected Issues

• LLPs are still not included in the list of Eligible Borrowers

• Earlier coverage was for Software sector and now coverage is of software development

• Whether current category is more restrictive?

• Infrastructure companies to now mandatorily comply with MAM of 10 years

• Hospital earlier part of specified service sector now part of Infrastructure under HML List as stipulated

• Hotels earlier part of specified services sector and infrastructure sector per size now infrastructure through HML as stipulated

• SEZ / NMIZ developers were previously under the Approval Route and now under Automatic Route but can only borrow in INR

• NBFCs / Microfinance as stipulated – Now can only borrow in INR

• Miscellaneous Service Sector

• Logistic Sector included

• Now can only borrow in INR whereas earlier could borrow in Fx

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New ECB Framework Recognized Lenders / Investors

Track I Track II Track III • International banks

• International Capital markets

• Multilateral / regional . Government –owned financials institutions

• Export credit agencies

• Suppliers of equipment

• Foreign equity holders

• Overseas long-term investors such as:- Prudentially regulated financials entities- Pension funds- Insurance companies- Sovereign wealth funds- Financial institutions in International

Financial services centres in India• Overseas branch and subsidiaries of Indian banks

• Entities listed under Track I except for overseas branches / subsidiaries of Indian banks

• Entities listed under Track II

• For NBFCs-MFIs,other eligible MFIs, not for profit companies and NGOs - Overseas organizations and individuals satisfying prescribed conditions

• Overseas lending organization to furnish to AD Bank a certificate from overseas regulated bank of Host Country FATC / AML / CFT compliance plus certificate of due diligence including two years of banking relationship. Similar requirement for individual lenders

29

New ECB Framework All-in-Cost (AIC)

Track I Track II Track III • For Average maturity of 3-5

years - 300 bps per annum over the 6-month LIBOR or applicable bench mark

• For Average maturity of above 5 years - 450 bps per annum over the 6-month LIBOR or applicable bench mark

• Penal interest: Maximum 2% over and above contracted interest rate

• Maximum spread over the benchmark is 500 bps per annum

• Remaining conditions as given under Track I

• In line with the market conditions

• AIC includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in FCY or INR but will not include commitment fees, pre-payment fees / charges withholding tax payable in INR.

• 50 bps reduction for ECBs under Track I as compared to existing policy.

• Guarantee fees now forms part of the AIC – ability to pay lesser interest to the lender? In case of Related party generally arm’s length Guarantee fees range from 0.5% to 1.5%

• AIC of Track III in line with market conditions – Arm’s length principle of TP whether sufficient?

30

New ECB Framework Permitted end uses

Track I Track II Track III • Capital expenditure for:

- Import of capital goods including specified items / Local sourcing of capital goods / New projects / Modernisation / expansion of existing units

- Investment in overseas JV / WOS /

- Acquisition of shares of PSUs under the disinvestment programme

- Refinancing of Trade Credit / ECB;

- Payment of capital goods already shipped/ imported but unpaid;

• SIDBI for on-lending to the MSME sector.

• Units of SEZs for its own requirements.

• Shipping and airlines companies for import of vessels and aircrafts

• General Corporate Purpose (including working capital) - provided raised from direct/ indirect equity holder / group company with MAM of 5 years

No end-use restrictions except:

- Real estate activities

- Investing in capital market

- Using proceeds for equity investment domestically

- On-lending to other entities with any of the above objectives

- Purchase of land

Holding Cos can also provide loans to their infrastructure SPVs

• NBFCs - On-lending to infrastructure sector

- Hypothecated loans to domestic entities for acquisition of capital goods/equipment

- Providing capital goods/equipment to domestic entities by way of lease / hire-purchase

• SEZs/ NMIZs Developers - for providing infra-structure facilities within SEZ/ NMIZ.

• NBFCs MFI and other eligible MFI / NGOs - for on-lending to self-help groups or for micro-credit or for bona fide micro-finance activity including capacity building.

• For other entities, end-use restriction as in Track II

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New ECB FrameworkOther key conditions

• Individual limits under automatic route

- Infrastructure and Manufacturing sector: upto USD 750 mn

- Software development sector: upto USD 200 mn

- Micro-finance activities: upto USD 100 mn

- Others: upto USD 500 mn

- Above mentioned limits are separate from the limits allowed for rupee denominated bonds overseas

• Currency of Borrowing

- Can be raised in any freely convertible currency as well as INR

- Change of currency from one convertible FCY to another convertible FCY/INR is freely permitted

- Change of currency from INR to FCY is not permitted

• Hedging requirements – entities raising ECB under the provisions of Tracks I and II are required to follow guidelines issued, if any.

• Security for raising ECB - Creation of charge on Immovable property, Movable assets, Financial securities and Issue of corporate / personal guarantees permissible subject to conditions.

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New ECB FrameworkPermitted end uses / transitional provisions

• ECBs under the Approval Route

- For Track I

- Import of second-hand goods as per DGFT guidelines

- On-lending by Exim Bank

- ECB proposals beyond the Individual limits under automatic route

- ECB from foreign equity holder where the ECB liability – Equity ratio exceeds 4:1 upto 7:1 (for ECBs exceeding USD 5 Mn). CCDs continue to be outside Equity under this Ratio.

• Transitional provisions

• ECB can be raised under existing framework upto 31 March 2016 where loan agreement is signed before the commencement of the revised framework except following cases which have time to sign loan agreement till 31 March 2016

- ECB for Working capital by airline companies

- ECB for consistent foreign exchange earners under USD 10 bn scheme

- ECB for low cost affordable housing projects

Selected International Tax Aspects

34

REITs & InvIT - Taxation Regime

Nature of Income Taxation of REIT / InvIT Taxation for unit holders

Interest from SPV Exempt Taxable as Interest Income / Withholding tax to be deducted by REIT ondistribution (Non-resident – 5%, Others – 10%)Tax Treaty protection Relevant

Dividend Exempt Exempt

Rental income on property held by REIT directly

Exempt Taxable in the hands of unit holdersREIT to withhold tax @10 % if distributed to residentWithhold at applicable rates in force if distributed to non-resident

Capital Gains earned byREIT on sale of share of SPV

Applicable rates of capital gains depending on period of holding

Exempt

Capital Gains earned by unit holders on sale of REIT / InvIT units (listed on stock exchange)

Not Applicable For unit holders- Long term exempt (if units are held for more

than 36 months)- Short term 15% / Treaty Protection Relevant

Other Income Tax at 30% Exempt

* Above rates are exclusive of surcharge and cess

35

AIF I and II - Taxation Regime

Nature of Income Taxation of AIF I & II Taxation for Investors

Any income except business income

Exempt Taxable to be of the same nature and in same proportion as for AIF

AIF to deduct 10 per cent on all income

Loss at the AIF level would not be passed to the investors but would be allowed to be carried forward at fund level to set-off against income of the next year

Tax Treaty protection Relevant

Business Income Taxable at MMR Exempt

* Above rates are exclusive of surcharge and cess

36

Recent Income Tax Changes Procedural Relaxations

• ITCC requirement done away with on closure of LO / BO/ PO of Foreign Company

• The Master Circular issued by RBI on 1 July 2015 has done away with the requirement of submission of the Income-tax clearance certificate (‘ITCC’) at the time of closure of the LO / BO/ PO in India

• A certificate from a Chartered Accountant / Statutory auditor stating that all taxes have been paid in India insisted by the AD- Bank (including Form No. 15 CA / 15 CB).

• Recent amendments to Rule 37BB and relaxations in Form 15CA / 15CB

• Specified list of payments not requiring certificates expanded to included:

• (i) Advance payment against imports; (ii) settlement of import invoice; (iii) imports by diplomatic missions and (iv) import below Rs. 5,00,000 ; and (v) Intermediary Trade.

• New Form 15CA

• Part A - Reporting requirements for foreign remittances upto Rs. 5 Lakhs during the financial year

• Part B – Relates to certificates u/s 197 and 195(2) / (3)

• Part C – Similar to earlier Part B

• Part D - Remittances not chargeable to tax under the Act

• Revised Form 15CA seeks residential status of Remitter

• No major change in Form 15CB

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Finally Corporate India needs to plan for BEPS

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OECD BEPS Action Plan

Coherence 2. Hybrid Mismatch Arrangements3. Controlled Foreign Company Rules4. Interest Deductions and other financial payments5. Harmful Tax Practices

Substance

Transparency

6. Preventing Treaty Abuse7. Artificial Avoidance of PE Status8. Transfer Pricing of intangibles9. Transfer Pricing – Risk and Capital10. Transfer Pricing – High Risk Transactions

11. Methodology and Data Analysis12. Disclosure Rules13. Transfer Pricing Documentation14. Dispute resolution

15. Multilateral Instrument (Execution)

1. Digital Economy

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Thank youThe views in this presentation are personal views of the Presenter. Further, the informationcontained is of a general nature and is not intended to address the circumstances of anyparticular individual or entity. Although, the endeavor is to provide accurate and timelyinformation, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such / thisinformation without appropriate professional advice which is possible only after a thoroughexamination of facts / particular situation.