The Finance Bill, 2017 which was presented by the Finance Minister in the Indian Parliament on 1 February 2017 (Original Bill) has been amended by the Lok Sabha (Amended Bill). This Ergo provides a snapshot of some of the key amendments sought to be made on the income-tax front.

Relief to non-residents investing in Foreign Portfolio Investors (FPIs) from tax on indirect transfer of Indian assets

Currently, an offshore transfer of shares or interest in a foreign company or entity triggers capital gains tax in India (subject to certain exemptions) in the hands of the non-resident transferor, where such share or interest derives “substantial value” from assets situated in India.

The Original Bill had exempted direct or indirect investments held by non-resident taxpayers in FPIs [that are registered as Category-I or Category-II with the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (SEBI Regulations)] from the scope of indirect transfer tax provisions. The Amended Bill has bifurcated this exemption as under:

  • For Financial Years (FY) 2011-12 to FY 2013-14: exemption from capital gains tax arising due to indirect transfer of Indian assets would be available to Foreign Institutional Investors (FII) as referred to in clause (a) of the Explanation to Section 115AD of the Income-tax Act, 1961 (IT Act);
  • For FY 2014-15 and onwards: exemption from capital gains tax arising due to indirect transfer of Indian assets would be available for Category-I and Category-II FPIs under the SEBI Regulations.

Thin capitalisation provision expanded

For limiting the deduction in respect of interest paid to non-resident associated enterprises, the Original Bill had proposed to introduce thin capitalisation norms by inserting Section 94B in the IT Act if the interest “paid” by an Indian company or a permanent establishment of a foreign company in India exceeded INR 10 million. The Amended Bill has expanded the scope of this proposal to provide that such disallowance shall be applicable even if such interest expenditure is accrued but not paid.

Relief provided to private family trusts from Section 56(2) taxation

Section 56(2) of the IT Act is currently specifically applicable to individuals, HUFs, closely held companies and firms (collectively, Specified Taxpayers). Currently, if the Specified Taxpayers (subject to certain exceptions) receives certain specified property without consideration or for inadequate consideration, then, the difference between the fair market value, to be computed as per prescribed formula, and the actual price paid (Difference) is taxable in the hands of the recipient provided the Difference exceeds INR 50,000.

The Original Bill had proposed to amend the Section 56(2) by widening the scope of type of taxpayers to be covered under this section to all “persons” for receipt of specified property, on or after 1 April 2017 unless they are specifically covered in the exempted category.

This had raised some concerns as to whether this would trigger taxation in case of settlement/contribution of assets into private family trusts as it was not covered within the exempted category.

In what is being seen as a sigh of relief, the government has specifically provided in the Amended Bill that receipt of property by a trust from an individual shall not attract liability under Section 56(2) provided such trust has been created or established solely for the benefit of relatives of the individual. The term “relative” is already exhaustively defined in IT Act.

Cash transactions above INR 2 lakhs to attract 100% penalty!

The Original Bill had proposed a penalty on any person who received INR 300,000 or more (a) in aggregate from a person in a day; (b) in respect of a single transaction; or (c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee, cheque an account payee bank draft or use of an electronic clearing system through a bank account. The quantum of penalty proposed is equivalent to the amount received.

In furtherance of its objective to curb black money, boost digital payments, and move to a cashless economy, the Amended Bill has reduced the aforesaid monetary limit for cash transactions from INR 3,00,000 to INR 2,00,000. Consequential changes have also been proposed to TCS (tax collection at source) provisions within the IT Act.

Khaitan comment

The final print of the law would be effective only once it is passed by both the Houses of the Indian Parliament and receives Presidential assent. Meanwhile, one would hope that the Government notifies soon the list of share acquisitions which would be exempted from the rigors of the amendment which seeks to tax on-market sale of listed shares (even if such shares are held for more than 12 months) if securities transaction tax is not paid at the time of acquisition of shares. Lastly, the Amended Bill also provides some changes with respect to book profits computation under minimum alternate tax regime for Ind-AS compliant companies, mandates the quoting of Aadhaar number in the PAN application form and the income-tax returns, proposes amendments to various other acts [such as Companies Act, 2013, Securities Contracts (Regulation) Act, 1956 among others], provides for dissolution of certain tribunals (such as the Competition Appellate Tribunal among others) and ramifications surrounding the same would need to be seen.