The 2019-20 budget has ushered in several changes on the tax front with an intention to increase foreign investment into India and to provide for the rationalization of existing taxes.
Some of the key changes introduced by budget are:
In place of the existing flat 15% surcharge on income tax payable by specified taxpayers (including foreign portfolio investors set up as trusts) earning more than ₹10 million (US$ 139,765), the budget proposes to introduce progressive surcharge rates calculated at: 1) 15% for taxpayers earning more than ₹10 million but less than ₹20 million, 2) 25% for taxpayers earning between ₹20 million and ₹50 million, and 3) 37% for taxpayers in earning more than ₹50 million. This would increase the tax rates up to 42.7% for the highest slab of taxpayers.
Gifts to non-residents to be taxable
By virtue of section 56(2)(x) of the Income Tax Act, 1961 (ITA), the recipient of undervalued property is taxed on the difference between the fair market value (FMV) and the amount paid for the property as “income from other sources”. Noting that there have been instances where gifts made by residents to non-residents have been claimed to be non-taxable in India on the basis that income does not accrue or arise in India, the budget has proposed to introduce a deeming fiction in the nexus rules under section 9 of the ITA to ensure that such gifts (subject to exceptions for gifts to close relatives) are subject to tax under section 56(2)(x).
Relief from deemed capital gains tax
Section 50CA of the ITA provides that in case of the transfer of unlisted shares of a company at less than the FMV, it would be deemed to be the full value of consideration for computing capital gains. The budget seeks to provide relief from the applicability of section 50CA in cases where consideration for the transfer of shares is approved by certain authorities and the transferor has no control over such determination. This budget proposes to empower the Central Board of Direct Taxes to notify transactions to which the provision would not apply, although no indicative list of transactions has yet been notified.
Extension of angel tax exemption
Section 56(2)(viib) of the ITA levies a tax (angel tax) on share premium received by private companies for the issue of shares at a price higher than the FMV of the shares, as computed for tax purposes. However, this provision does not apply to consideration for issuance of shares received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by the government in this behalf. The definition of venture capital fund only includes category I alternative investment funds (AIFs). Recognizing that most AIFs in India are structured as category II AIFs, the budget proposes to amend section 56(2)(viib) to exempt venture capital undertakings from its applicability in respect of investments received by category II AIFs as well.
Tax pass-through to AIFs. The budget proposes to extend the tax pass-through framework for category I and category II AIFs by allowing losses incurred by such AIFs (not being business losses) to be set-off and carried forwarded by the individual investors in their own hands. Further, accumulated or unabsorbed losses (not in the nature of business losses) of such AIFs as on 31 March 2019 would be passed through to its investors to be set-off and carried forward against their income, provided that the investor was a holder of units of the AIF as on 31 March 2019.
The budget has proposed several incentives for international financial services centres (IFSCs). These include, 1) a proposed expansion exemption from capital gains tax on transfer of specified securities to be notified by the central government. Currently, the exemption is only available in respect of capital gains arising from transfer of global depository receipts, rupee denominated bonds, and derivatives on a stock exchange in an IFSC. The budget also proposes to extend the expanded exemption to category III AIFs located in an IFSC and deriving income solely in convertible foreign exchange and having only non-resident unit holders; and 2) a proposal to exempt from tax interest income earned by a non-resident from any monies borrowed by a unit in an IFSC on or after 1 September 2019, from a non-resident.
Withholding tax parity to non-residents
Section 201 of the ITA deems any person who fails to withhold tax on payments made to a resident in accordance the provisions of the ITA to be an “assessee in default” for the tax. However, a carve out from the applicability of this provision is provided for cases where the resident payee files its return of income, discloses the payment in its return, and pays applicable taxes. The budget proposes to extend flexibility to similar situations involving payments to non-resident payees.
The business law digest is compiled by Nishith Desai Associates, a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. The firm specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.