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International Tax Update- India Budget POEM 2015

Income Tax - Direct Tax Code - DTC - By: - CA Rohit Gupta - Dated:- 4-3-2015 Last Replied Date:- 30-12-1899 - International Tax Update: Budget 2015 India Budget 2015 introduced in India on 28.02.2015 has made significant changes as far as International Taxation is concerned. Major ones include:- Reduction in rate of tax on non-residents for royalties/fees for technical services from 25% to 10%, Offshore funds not to be taxable in India in respect of fund manager located in India. Cl .....

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ive Management and brought within the ambit of Indian taxation the companies whose control and management is not wholly situated in India. The detailed amendments are as under: a) Reduction in rate of tax on Income by way of Royalty and Fees for technical services in case of non-residents The rate of tax on royalty and fees for technical services reduced from 25% to 10% under section 115A of Income Tax Act. A few tax treaties, such as those with Netherlands and Singapore already provided for a t .....

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t. b) Clarity relating to Indirect transfer provisions The Finance Act, 2012 inserted certain clarificatory amendments in the provisions of section 9. The amendments, inter alia, included insertion of Explanation 5 in section 9(1)(i) w.r.e.f. 1.04.1962 . The Explanation 5 clarified that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirec .....

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the Indian assets (direct holding company). in case the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly then the exemption shall be available to the transferor if he along with its associated enterprises,-a) neither holds the right of management or control in relation to such company or the entity, b) nor holds any rights in such company which would entitle it to either exercise control or management of the direct holding company or enti .....

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ctly, its value substantially from assets located in India will be on proportional basis. Note: The amendment shall be applicable prospectively w.e.f. 1.4.2015 and subsequent years. The amendment has the effect of partially nullifying the retrospective amendment made by finance act 2012. The amendment shall definitely repose confidence of foreign investors in Indian growth story and also provide certainity in taxation and promises made by present government. However, this can be used as a great .....

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nt activity in respect of investments outside India for an off-shore fund, the profits made by the fund from such investments may be liable to tax in India due to the location of fund manager in India and attribution of such profits to the activity of the fund manager undertaken on behalf of the off-shore fund. Therefore, apart from taxation of income received by the fund manager as fees for fund management activity, income of off-shore fund from investments made in countries outside India may a .....

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ve that, subject to fulfillment of certain conditions by the fund and the fund manager,- the tax liability in respect of income arising to the Fund from investment in India would be neutral to the fact as to whether the investment is made directly by the fund or through engagement of Fund manager located in India; and that income of the fund from the investments outside India would not be taxable in India solely on the basis that the Fund management activity in respect of such investment .....

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s behalf is located in India. d) Amendment to the conditions for determining residency status in respect of Companies- Concept of Place of Effective Management (POEM) Introduced The existing provisions of section 6 of the Act. provides for the conditions under which a person can be said to be resident in India for a previous year. In respect of a person being a company the conditions are contained in clause (3) of section 6 of the Act. Under the said clause, a company is said to be resident in I .....

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orporated outside but controlled from India. 'Place of effective management' (POEM) is an internationally recognized concept for determination of residence of a company incorporated in a foreign jurisdiction. It is proposed to amend the provisions of section 6 to provide that a person being a company shall be said to be resident in India in any previous year, if- it is an Indian company; or its place of effective management, at any time in that year, is in India . Further, it i .....

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international standards. It would also be a measure to deal with cases of creation of shell companies outside India but being controlled and managed from India. These amendments will take effect from 1st April, 2015 Note: The amendment has reversed the position of taxability of companies operating in India. Earlier, the requirement was entire control and management was to be located in india for taxing the company as Indian Resident. However, after the amendment, even at any time of the year, th .....

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t applicable in respect of income from capital gains The existing provisions contained in section 115JB of the Act provide that in the case of a company, if the tax payable on the total income as computed under the Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half percent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the rel .....

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in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act,1992,if any such amount is credited to the profit and loss account, shall be reduced from the book profit for the purposes of calculation of income-tax payable under the section. Further by inserting a new clause (fb) in Explanation 1, it is proposed that the book profit shall be increased by the amount or amounts of expenditure relatable to the above income. Note: This is a welcome r .....

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the rate of interest does not exceed the rate notified by the Central Government in this regard. The limitation date of the eligibility period for benefit of reduced rate of tax available under section 194LC in respect of external commercial borrowings (ECB) has been extended from 30th June, 2015 to 30th June, 2017 by Finance (No.2) Act, 2014. Accordingly, it is proposed to amend section 194LD to provide that the concessional rate of 5% withholding tax on interest payment under the section will .....

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rgeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery would apply . Accordingly, the PE in India shall be obligated to deduct tax at source on any interest payable to either t .....

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king company as set by various judicial precedents including Sumitomo Mitsui Banking Corpn. v. Dy. DIT 2012 (4) TMI 80 - ITAT MUMBAI wherein it was held to be non-taxable on the ground of being payment to self/on principles of mutuality. However, there is still no clarity on the taxation of receipt of interest from head office to Indian banking branch. The amendment is applicable only to banking company. h) TDS return for Foreign Remittance to include all payments whether chargeable to tax or no .....

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. It is proposed to amend the provisions of section 195 of the Act to provide that the person responsible for paying any sum, whether chargeable to tax or not, to a non-resident, not being a company, or to a foreign company, shall be required to furnish the information of the prescribed sum in such form and manner as may be prescribed. For ensuring submission of accurate information in respect of remittance to non-resident, it is further proposed to insert a new provision in the Act to provide t .....

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uent years by amendment of the Act. Further, investments made up to 31.03.2017 are proposed to be protected from the applicability of GAAR by amendment in the relevant rules in this regard. SERVICE TAX j) Change in Service Tax rate: The Service Tax rate is being increased from 12% plus Education Cesses to 14%. The Education Cess and Secondary and Higher Education Cess shall be subsumed in the revised rate of Service Tax. Thus, effective increase in Service Tax rate will be from existing rate of .....

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