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We are happy to present the latest issue of Tax Trends, SKP’s Direct Tax Newsletter. This issue
covers the period from April 2016 to June 2016.
The most striking development for this quarter was the amendment in the India Mauritius Tax
Treaty. The Mauritius Tax Treaty was subject to intense scrutiny in recent years for the double
non-taxation of capital gains earned by a Mauritian Tax Resident in India. The ’Mauritius Route’
became the entry point in India, often with merely a titular presence in Mauritius. The challenge
to the Mauritius Treaty was however struck down by the Courts and required a renegotiation with
Mauritius. The Prime Minister, Narendra Modi, in a recent television interview highlighted the
Mauritius Treaty renegotiation as one of the significant steps taken by his government to curb
Black Money. The India Singapore and India Cyprus Tax Treaty may also see similar revisions.
Spotlight discusses the finer aspects of the amendment to the Mauritius Treaty.
The Finance Bill, 2016 was passed in this quarter with certain modifications to the original draft.
The Equalisation Levy, which is a tax on the Digital Economy, became effective from 1 June 2016
and marks one of the first measures implemented by India under the BEPS Action Plan 1.
Similarly, the requirement of Tax Collection at Source (TCS) at the rate of 1% on cash sales also
became effective from 1 June 2016.
To ease doing business, the government has proposed to defer the applicability of Income
Computation and Disclosure Standards (ICDS) by one year. ICDS will now apply from 1 April 2016
and not 1 April 2015 as was originally proposed. The government is in the process of issuing
certain clarifications on the ICDS provisions and making modifications to the format of Tax Audit
Report for FY 2016-17. There are indications that small taxpayers may be kept outside the
purview of ICDS provisions.
Certain clarifications are also expected on the Place of Effective Management (POEM) regulations.
While the government is taking a fairly long time to issue the final guidelines on how POEM rules
will apply, there are possibilities that control exercised over overseas subsidiaries in the capacity
of a shareholder (Stewardship activities) may be kept outside the purview of POEM. If that
happens, it would be a great relief to most of the Indian Holding companies.
As per the existing law, the General Anti-Avoidance Rules (GAAR) would become effective from 1
April 2017. The law, as it was originally drafted, provided for grandfathering of investments made
up to 30 August 2010. The government has now amended the regulations to provide for
grandfathering of investments made before 1 April 2017 so that it is in line with the effective date
of GAAR. While certain additional clarifications on GAAR provisions would be necessary, it appears
that GAAR provisions would apply from 1 April 2017 and there may not be any further extension
of the effective date.
The government has been actively pursuing the Income Declaration Scheme (IDS) which provides
immunity from prosecution for taxpayers having undisclosed income if the income is voluntarily
disclosed and effective tax at the rate of 45% has been paid.
We hope you find this newsletter useful and we look forward to your feedback. You can write to
us at [email protected].
Warm regards,
The SKP Direct Tax Team
In this issue
Spotlight 2
Legal Updates 4
Tax Talk 6
Compliance Calendar 7
Corporate Tax Myth 7
Contact Us 8
TAX TRENDS
Volume 2 Issue 1 | Apr–Jun 2016
2
India-Mauritius Tax Treaty Amended - Advantage India
Over the last 15 years, Mauritius has
contributed to about 35% of the
Foreign Direct Investments (FDI) in
India on account of a favourable Tax
Treaty with India.
One of the main highlights of the tax
treaty is the treatment of capital
gains earned in India by a Mauritian
Tax Resident. The Tax Treaty
provides rights only to Mauritius to
capital gains arising from the sale of
shares of Indian companies. This is a
departure from most of the other tax
treaties entered into by India (barring
a few exceptions).
Due the favourable tax laws of
Mauritius, the Mauritius route was
resulting in double non-taxation of
income (i.e. in India and Mauritius)
instead of eliminating it.
The Mauritius Tax Treaty therefore
has been subject to a lot of
controversy in India. The Tax
Authorities and certain sections of
Civil Society have argued that the
Treaty was being abused by round-
tripping funds and by tax avoidance
in India. However, the Supreme
Court of India has categorically held
that unless the Treaty is amended,
the Mauritian resident would be able
to take advantage of the same.
On 10 May 2016, India and Mauritius
signed a protocol amending the tax
treaty to plug the Treaty abuse. The
major amendments to the tax treaty
and its impact on investments in
India are discussed in this article.
Major amendments
Source-based taxation in India of
capital gains arising on the sale of
shares of an Indian Company
With effect from 1 April 2017, India
gets the right to tax capital gains
arising to a Mauritian Tax Resident
from the sale of shares of an Indian
company acquired on or after 1 April
2017.
As a result, shares acquired by
Mauritian residents in India up to 31
March 2017 have been protected
from taxation and no capital gains tax
will be payable in India even if such
investments are sold on or after 1
April 2017. This is a major relief for
existing Mauritian residents which
has resulted in a desirable
prospective on taxation of investors.
However, clarity is required on
whether gains from shares obtained
on or after 1 April 2017 on the
conversion of debentures/preference
shares obtained before 31 March
2017 or as bonus or right shares or
from corporate restructuring of
existing shares as on 31 March 2017
would be eligible for protection from
taxation in India. The government
has set up a committee to look into
the issues arising from the
amendment in the protocol.
Interestingly, to probably soften the
immediate impact of taxation of
capital gains in the short-term, the
protocol provides that gains realised
during the period of 1 April 2017 to
31 March 2019 from the sale of
shares of an Indian company
acquired on or after 1 April 2017, will
be subject to tax at only 50% of the
domestic tax rate of India. This
benefit of reduced tax rate is
however, subject to the satisfaction
of the newly inserted limitation of
benefits clause (LOB). The LOB clause
provides that the benefit of reduced
tax rate for two years will not be
available to a shell or conduit
company (the affairs of which are
primarily arranged only to obtain
benefits of the tax treaty). A company
shall be deemed to be a shell/conduit
company if its total expenditure on
operations in Mauritius is less than
INR 2.7 million (approximately USD
40,000) in the immediately preceding
12 months. It however, appears that
inspite of incurring requisite
expenditure, the company still needs
to satisfy the substance of its
existence and that it is not a conduit
or shell company.
From 1 April 2019 onwards, the
capital gains from the sale of shares
of an Indian company will be taxed at
the full tax rate set in the Indian tax
law.
SPOTLIGHT
3
Source-based taxation of interest
income of Mauritian Banks
As per the original Tax Treaty,
interest earned by Mauritius resident
banks from Indian taxpayers was
exempt from tax in India. As per the
amended Treaty, the interest earned
by Mauritian resident banks from
debt-claims or loans made on or after
1 April 2017 will be liable to
withholding tax at the rate of 7.5% in
India. Interest income arising from
debt-claims existing on or before 31
March 2017 shall continue to be
exempt from tax in India.
Interestingly, while the original tax
treaty did not provide any
withholding tax rate (taxation
followed the Indian tax law), the
withholding tax rate of 7.5% has now
been introduced for all interest
income earned by Mauritius
residents from India (banks and
others).
Source-based taxation of service
income from India
The original tax treaty did not provide
for source-based taxation of service
income of Mauritian residents from
India. However, as per the protocol,
service income in nature of Fees for
Technical Services (FTS) will be liable
for 10% withholding tax in India on
gross basis (if not attributable to a
Permanent Establishment (PE)) in
India. Service income attributable to
a Service PE in India (on account of
presence of 90 days in India in any 12
-month period), will be taxable at
40% (plus applicable surcharge and
cess) on net-income basis.
Impact of amendments on India-
Singapore tax treaty
After Mauritius, Singapore is the
second most preferred jurisdiction
for investments into India. Over the
last 15 years, Singapore has
contributed to about 15% of the FDI
in India. The India-Singapore Tax
Treaty provides rights only to
Singapore for the taxation of capital
gains arising from the sale of shares
of Indian companies till a similar
benefit is available under the India-
Mauritius tax treaty.
Accordingly, with the amendment to
the India-Mauritius tax treaty, the
exemption from capital gains tax in
India for Singaporean tax residents
will no longer be available. However,
it is unclear whether this change
occours automatically or whether
there will be a formal negotiation
between India and Singapore in this
regard. It is also expected that the
government would clarify the
position for existing investments of
Singapore residents in India and the
applicability of a lower tax rate for
two years for Singaporean residents
(similar to Mauritius).
Sector impact analysis
Once the protocol is notified, the
amended tax treaty is expected to
impact the following sectors
operating in India through Mauritius
(and Singapore from a capital gains
perspective in India):
1. Private Equity investors/Venture
Capital Investors investing in
unlisted shares of Indian
companies through the FDI route:
Gains from investment in debt
instruments should still be exempt
from tax in India as the protocol
applies only to shares of an Indian
company.
2. Foreign portfolio investors (FPIs)
investing in shares (listed and
unlisted) of Indian companies:
Gains from derivatives and bonds
should continue to be exempt from
tax in India as the protocol applies
only to shares of an Indian
company.
3. Mauritian banks providing loans to
Indian residents after 1 April 2017
4. Mauritius service companies
rendering services in India with or
without PE in India.
The amendment to the India
Mauritius Treaty underlines the focus
of the Indian government in
implementing the BEPS project to
deal with prevention of double non-
taxation and treaty abuse.
There is now an urgent need for
investors to re-look at their existing
structures to maintain the tax
efficiency obtained in India.
The withholding tax rate of 7.5% is
probably one of the lowest agreed by
India under other popular tax
treaties (Netherlands, Singapore, etc.)
and coupled with the low corporate
tax rate in Mauritius, could result in
Mauritius becoming a preferred
jurisdiction for routing debt
investments into India.
4
LEGAL UPDATES
Rates provided in section
206AA of the Income Tax Act,
1961 (ITA) do not override Tax
Treaty rate
DCIT versus M/s Pricol Ltd (ITA No.
880 & 1141/Mds./2014)
The taxpayer, an Indian company
made certain payments to non-
residents and had withheld taxes at
the rate of 10% as per the relevant
tax treaty. The penal rate of
withholding tax at the rate of 20% for
cases where the receiver does not
have a PAN, was not applied by the
taxpayer.
The Tax Authorities contended that
the penal rate of withholding tax
(section 206AA) overrides all other
provisions of the law and taxes were
required to be withheld at the rate of
20% since the receiver did not have a
PAN in India.
The Tax Tribunal held that the
withholding tax provisions deal with
the collection and recovery of taxes.
These provisions are procedural and
cannot override the charging
provisions. Hence, the penal rate of
withholding tax at the rate of 20%
cannot be applied where the Tax
Treaty provided for a lower rate of
tax.
If the Individual was resident
of USA, under the tie-breaker
rule of the India-USA tax
treaty, salary earned by him
for rendering services in USA
would be exempt from tax in
India.
Raman Chopra versus DCIT, Circle
48(1) (ITANo. 6619/Delhi/2015)
Taxpayer (an individual) derived
income from salary and income from
other sources. During the first three
months of the fiscal year, the
taxpayer was working in USA and he
was a tax resident of USA as per local
laws of USA.
The taxpayer was in India for more
than 183 days during the fiscal year.
Based on his stay details, he was
considered as a resident and ordinary
resident in India for the concerned
fiscal year under the Indian tax laws.
Taxpayer claimed that the salary
earned in USA while he was a tax
resident of USA cannot be taxed in
India under the India-USA Tax Treaty
as those services were rendered
outside India.
The Tax Authorities contended that
since the taxpayer was resident and
ordinary resident in India for the
fiscal year, his global income is
taxable in India and hence, salary
earned in USA is taxable in India as
per the ITA.
The Tax Tribunal observed that during
first three months of the fiscal year,
the taxpayer was a resident of both
India and the USA. Therefore, as per
Article 4(2) of India-USA tax treaty,
the tie-breaker rule should be applied
for this period. According to the tie-
breaker rule, the taxpayer becomes
resident of USA. Therefore, it was
held that as per Article 16(1) of India-
USA tax treaty, services rendered in
USA would not be taxable in India.
Services forming part of the
supply of goods cannot be
treated as fees for technical
services. Engineering services
provided to review
predetermined design and
construction cannot be
treated as royalty or fees for
included services
Gujarat Pipavav Port Ltd versus
ITO (International Taxation) (ITA
No. 7878/MUM/2010)
The taxpayer was an Indian company
engaged in the business of
developing, constructing, operating
and maintaining a port. Taxpayer
entered into two contracts with Z Co,
a company incorporated in China –
one for the purchase of cranes and
another for rendering installation and
commissioning services for the
cranes. Furthermore, the taxpayer
also engaged L Co, a company
incorporated in USA for providing
engineering services in connection
with the review of pre-determined
design and construction audit of the
cranes purchased from Z Co.
5
The taxpayer withheld taxes on pay-
ments made for installation and com-
missioning services. However, the
taxpayer did not withhold any tax on
the payment made to Z Co for the
purchase of crane and payments
made to L Co.
The tax authorities contended that the
sale of cranes involved certain ser-
vices like fabrication, etc. which was
the responsibility of the seller. Accord-
ingly, some portion of the sale consid-
eration involved services in the nature
of managerial, technical or consultan-
cy services and hence are taxable in
India. Accordingly, taxes on the same
had to be withheld.
Furthermore, in respect of services
provided by L Co, the tax authorities
contended that it had developed and
transferred a technical plan and tech-
nical design and therefore services
were taxable as per Article 12(4)(b) of
India-USA tax treaty. The tax authori-
ties also contended that L Co provided
report with respect to the review of
design of cranes and therefore would
be taxable as royalty under Article 12
(3)(a). Accordingly, taxes on such pay-
ments had to be withheld.
The Tax Tribunal observed that there
were different contracts for the pur-
chase of cranes and installation and
commissioning such cranes. Services
mentioned in the purchase contract
are inextricably linked to the sale of
goods and it is a settled principle that
same cannot be treated as fees for
technical services. Accordingly, it was
held that such business income would
not be taxable in India in the absence
of a Permanent Establishment (PE) in
India.
In connection with payments made to
L Co, the Tax Tribunal observed that L
Co has only reviewed the design and
not provided any know-how to the
taxpayer. Furthermore, it was also
observed that reviewing the design
would not result in the transfer of any
skill or knowledge; also the payment
was not for use or right to use any
industrial, commercial or scientific
experience. L Co had provided the
commercial services pertaining to the
review of pre-determined designs
while it was manufactured and hence,
there was no transfer of any technical
plan or design. Furthermore, such
commercial services of reviewing de-
signs does not make available any
technical knowledge, experience, skill,
etc. to the taxpayer. Accordingly, it
was held that there was no require-
ment of withholding of taxes.
Interest payment by PE to its
head office is a payment
made by foreign company’s
Indian PE to foreign company
itself and not an income in
the hands of foreign company.
BNP Paribas SA versus ADIT (ITA No.
3422 (MUM) 2009)
The taxpayer is a company incorpo-
rated in France. It carries on the busi-
ness of banking in India through its
branch offices (PE). During the year,
the Indian PE had paid interest to the
taxpayer.
The tax authorities contended that the
interest paid by the PE to taxpayer
was tax deductible in India. For the
purpose of the tax assessment, the
taxpayer and the Indian PE must be
considered as one unit, however, for
the purpose of computation of income
they are two separate entities. There-
fore, since this interest payment is tax
deductible for the PE in India, the
interest received by the taxpayer
would be taxable under Article 12 of
Indo-French tax treaty.
The Tax Tribunal observed that the
hypothetical independence of a PE
and Foreign Head Office is only for the
computation of profits attributable to
the PE and is not applicable for com-
puting the income of the Head Office.
According to Article 12(5) of the Indo-
French tax treaty, where the head
office has PE in India and debt claim
in respect of which the interest paid is
effectively connected with the PE, it
would be taxable as business profits
and not as interest income.
In the present case, the Indian PE has
already paid taxes for income attribut-
able to it in India. Accordingly, it was
held that the interest paid by the PE to
the taxpayer is a payment made by
the taxpayer to itself and therefore it
would not be considered as income in
the hands of taxpayer.
Note: Since 1 April 2015, the law
has been amended and the interest
income would now be taxable in India.
6
Special Investigation Team
recommends ban on cash
transactions and cash
holdings above certain limits
[Excerpts from The Times of India, 14
July 2016]
The Times of India has reported that
the Special Investigation Team (SIT)
on Black Money has submitted its
fifth Report to the Supreme Court of
India. The SIT has recommended that
cash transactions in excess of INR
300,000 and cash holding with
individuals in excess of INR 1,500,000
should be banned. It has also
recommended framing a law to make
such cases punishable by law.
TDS (Withholding tax) is the
main source of revenue, says
top Tax Official
[Information published by Business
Standard on 12 July 2016]
The Press Trust of India has reported
that the Chief Commissioner of
Income Tax – TDS, Delhi region stated
that, “Everyone knows from top to
bottom that TDS is our main source
of collection. It is main source of our
revenue not only in direct taxes, but
in the overall collection of the
government." The report also
mentions that the TDS collection for
FY 2016-17 for Delhi region alone is
expected to be INR 467 billion, which
is nearly 40% of the overall income-
tax collection of the Delhi region.
India pursuing tax evaders
named in Panama Papers,
writes to a dozen foreign
countries for information
[Excerpts from The DNA, 10 July
2016 ]
The DNA has reported that the
Indian Tax Authorities have written
to tax officials of about a dozen
countries, including Switzerland,
British Virgin Islands and the UK,
asking for information about
persons named in the Panama
Papers. This action comes in the
backdrop of resistance from the
persons named, to provide
information to the Tax Authorities.
Government forms
committee to examine
adopting calendar year as
financial year
[Excerpts from The Economic Times,
7 July 2016]
The Government of India has
constituted a committee to examine
the possibility of adopting the
calendar year as the financial year as
against the existing financial year of
April to March. The Committee will
submit its report by 31 December
2016.
India slips to 75th place on list
of money held by its citizens
in Swiss Banks
[Information published by The
Economic Times on 3 July 2016]
The Press Trust of India has reported
that in terms of money held by its
citizens in Swiss Banks, India has
slipped from 61st place to 75th place
in one year and is the lowest ranked
country amongst the BRICS nations.
TAX TALK
7
Corporate Tax Myth It is not possible to reorganise an existing business into a Limited Liability Partnership if the turnover of the business
exceeds INR 6 million (INR 6,000,000)
To understand the implications of this myth, please write to [email protected].
Compliance Calendar (July to September 2016)
Month Due Date Compliances
July 7 TDS payment for TDS deducted in June 2016
July 15 Filing of TCS statements for the quarter of April to June 2016
July 31 Filing of TDS statements for the quarter of April to June 2016
July 31
Filing of tax return by all taxpayers other than
companies,
taxpayers whose accounts are required to be audited,
working partner of a firm whose accounts are required to be audited,
August 7 TDS payment for TDS deducted in July 2016
August 15 Issuance of TDS certificates for the quarter of April to June 2016
September 7 TDS payment for TDS deducted in August 2016
September 15 Payment of second instalment of advance tax for all taxpayers for assessment year 2017-18 (45%
of estimated tax liability to be deposited on cumulative basis)
September 30 Furnishing Tax Audit Report
September 30 Due date for filing tax return by taxpayers subject to tax audit and to whom Indian transfer
pricing regulations do not apply
8
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