Reduction in corporate income tax for certain companies
The Government of India promulgated the Taxation Laws (Amendment) Ordinance 2019, announcing key changes to corporate tax rates in the income-tax law. While existing domestic companies have been provided with an option to pay tax at a concessional rate of 22%, new domestic companies set up on or after 1 October 2019, and commencing manufacturing before 31 March 2023, would have the option to pay tax at 15%. However, the reduced tax rates come with consequential surrender of specified deductions/ incentives. No minimum alternate tax (MAT) would be applicable in either of these options. Companies that do not opt for the concessional tax rates will continue to enjoy the benefit of such specified deductions/ incentives, and where applicable, be subject to MAT at 15%.
Deemed accrual on income in case of money or property received by non-resident for inadequate consideration
Currently, income of non-residents arising from money or property received from Indian residents without or for inadequate consideration are claimed to be not taxable in India as such income does not accrue or arise in India.
The Finance Act 2019, is amended to include income of the nature referred to above (viz. money or property situated in India) received by a non-resident on or after 5 July 2019 from a resident without or for inadequate consideration to be treated as income deemed to accrue or arise in India. However, the existing provisions provides exemption from tax in specific cases, which will continue to apply. Further, this will be subject to the provisions of the relevant tax treaty.
The above amendment will be effect from 1 April 2020 and will accordingly apply from assessment year 2020-21 onwards.
Tax on buyback of shares in case of listed companies
Buyback of unlisted shares attracts additional tax at 20% (plus surcharge and cess) in the hands of the company distributing the income on such buyback. Such income arising in the hands of shareholders is exempt. However, such provision was not applicable on buyback of listed shares.
Now, the law has been amended to include such tax on buyback of listed shares. Corresponding amendment is introduced to exempt income received by the shareholders on buyback of listed shares. However, the Taxation Laws (Amendment) Act 2019, has provided that such tax shall not be applicable to buy-back of listed shares in respect of which the public announcement was made on or before 5 July 2019 in accordance with the regulations laid down by the Securities and Exchange Board of India.
The amendment is effective from 5 July 2019.
Relaxation of provisions in respect of payments made to non-resident
Currently, there are provisions under the law for consequences on failure to withhold or pay taxes. However, a taxpayer who fails to withhold taxes while making payments is not treated as a “taxpayer in default”, in case recipient of income has duly filed its return of income disclosing such sum and has furnished an accountant’s certificate to this effect.
However, till now, such exception was only provided in the case of payments to residents and not to non-residents. From 1 September 2019 such relief shall be extended to a taxpayer in respect of failure to withhold taxes while making payments to non-residents.
To align the ITPR with the OECD Guidelines and international practices, provisions have been introduced in the ITPR for a secondary adjustment. The secondary adjustment is an adjustment in the books of account of the taxpayer and its associated enterprise to reflect that the actual allocation of profits between the Indian taxpayer and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment. This is intended to remove the imbalance between the cash account and actual profit of the Indian taxpayer.
The secondary adjustment is required only where a primary adjustment to the transfer price occurs in one of the following circumstances:
- Where adjustment has been made on one’s own by the taxpayer in one’s income tax return.
- Adjustment made by the Tax Officer has been accepted by the taxpayer.
- Arising due to the APA signed.
- Application of Safe Harbour Rules.
- Settlement arrived at under the MAP route.
However, an exception has been made according to which such secondary adjustments shall not be carried out by the taxpayer if the amount of the primary adjustment made in the case of a taxpayer does not exceed INR 10 million.
According to this provision, excess money arising from primary transfer pricing adjustments not repatriated into India within the prescribed time limit will be deemed as an advance made by the Indian taxpayer to its associated enterprise. Time limits have been prescribed having regard to the circumstance leading to the primary transfer pricing adjustment. The effect of the advance is given by way of an imputation of interest on such advance. The imputed per annum interest on such advance will be computed at the one year marginal cost of fund lending rate of State Bank of India as on 1 April of the relevant previous year plus a spread of 325 basis points in cases where the international transaction is denominated in INR. In cases where the international transaction is denominated in foreign currency, the interest will be computed at six month London Interbank Offered Rate (LIBOR) as on 30 September of the relevant previous year plus a spread of 300 basis points. This interest will be imputed till such time the excess money arising due to primary transfer pricing adjustments is repatriated into India.
The provisions relating to secondary transfer pricing adjustment are generally applicable for primary transfer pricing adjustments made from tax year 2016/17 onwards.
Further, it has been clarified that this interest will be computed on excess money or part thereof. Further, the excess money may be repatriated from any of the associated enterprises of the taxpayer which is not a resident of India. These amendments have been effective retrospectively from 1 April 2018 (i.e., for tax year 2017/18 onwards).
Also, it has been clarified that the provisions of this section are applicable to Advanced Pricing Agreements signed on or after 1 April 2017. Further, no refund of taxes paid till date under the pre-amended section would be allowed.
Moreover, to simplify the implementation of these provisions, an option has been introduced to taxpayers to either pay tax on the imputed interest every year until the excess money arising due to primary transfer pricing adjustments is repatriated into India or pay a one-time tax on the excess money or the part thereof @ 18% plus surcharge of 12% and cess of 4%. Interest will have to be paid till the date of payment of the additional tax. Further, no credit will be given for this additional tax paid, neither will a deduction be allowed under any provision of the Act, in respect of such amount on which the tax has been paid. This amendment will be effective from 1 September 2019 onwards. This amendment is in line with the internationally accepted best practices.
Sabka Vishwas (Legacy Dispute Resolution) Scheme 2019
Recently, similar to state amnesty scheme Central Government with effect from 1 September 2019 has notified one-time amnesty scheme for liquidation of past disputes of Central Excise and Service tax (erstwhile indirect tax laws). The brief about the scheme is produced below.
- All person except following can avail benefit of the scheme –
- Whose reply/appeal has been finally heard as on 30 June 2019.
- Who have been convicted for any offence.
- Who have been issued a show cause notice for refund.
- Who have been subject to audit/enquiry/investigation, but the duty has not been quantified as on 30 June 2019.
- Making voluntary disclosure in certain circumstances.
- Who intend to file declaration in respect of tobacco and related products, petroleum, etc.
- The benefits of the scheme are produced below.
- Relief for tax dues from 40% to 70% in specified scenarios.
- Complete waiver of interest and penalty.
- Waiver from prosecution.
- Conclusion of proceedings covered under the scheme for the relevant period.
- All proceedings pending below the level of High Court are deemed to be withdrawn.
This onetime dispute resolution scheme is a welcome step towards addressing long-pending litigations. With complete waiver of interest, penalty and prosecution, and part waiver of tax dues, this would be an opportune moment for taxpayers to review their old tax disputes for early closure.