kpmg dtc impact financial

8/6/2019 KPMG DTC Impact Financial

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2010 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, aSwiss cooperative. All rights reserved.

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Direct Taxes Code Bill 2010Direct Taxes Code Bill 2010

Financial ServicesFinancial Services -- Sectoral Analysis / ImpactSectoral Analysis / Impact

September 2010September 2010

TAXTAX


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Contents

1. Background

4. Mutual Fund

6. Bank / Non-banking financial company

5. Insurance

3. Venture Capital Fund / Venture Capital Company

7. Key provisions for offshore funds

2. Key tax rates under DTC

8. Foreign Institutional Investors


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Background

DTC 2009 unveiled in August 2009

The Government received over 1,600 representations on DTC 2009

Revised Discussion Paper released in June 2010 on 11 specific issues

DTC 2010 tabled in the Lok Sabha on 30 August 2010

After clearance from the Parliamentary Standing Committee, the Bill may be passed in

the Winter Session

The DTC 2010 to be effective from FY commencing 1 April 2012

Impact / Issues

DTC effective from April 1, 2012

Room to make representations on key issues prior to enactment


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NilNilDividends on which DDT hasbeen paid

15 percent15 percentDDT

20 percent18 percentMAT

Normal rate - 30 percent

Branch profit tax - 15 percent

Interest income * 20 percent

Fees for technical services /Royalties * 20 percent

Normal rate - 40 percentIncome tax - ForeignCompany

30 percent30 percentIncome Tax - Indian Company

DTC 2010Current Income-tax headlinerates

Category

Key Tax Rates ... Corporate tax

* In case the non-resident does not have a PE in India


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Key tax rates ... Capital gains tax

15%

Exempt

Currentheadline rate

Deduction allowed for 100% of gains

(Effectively exempt)

LTCG (more than 1 year)

Deduction allowed for 50% of gains Balance taxable at normal rates (30%)

STCG (1 year or less)

DTC 2010Gain on transfer of Equity Shares / Units ofEquity Oriented Fund on which STT is paid

20% (10% incertain cases, ifindexation notavailed)

Currentheadline rate

Taxable at normal rates (30%) - Indexationavailable

If held for more than 1 year from end of financial yearin which asset is acquired

DTC 2010Gain on transfer of other InvestmentAssets

Impact / Issues Statement of objects and reasons provides that in respect of equity share and equity-oriented mutual fund unit,

higher deduction of 100% is allowed if such securities are transferred after 1 year from end of the financial yearin which it is acquired. There is an apparent anomaly with the language of the provision.

Whether indexation available for transfer of equity shares on which STT has not been paid? As per the Discussion Paper prior to this, As there will be a shift from nil rate of tax on listed equity shares and

units equity oriented funds held for more than one year, an appropriate transition regime will be provided,if required.- Possibility of deduction from capital gains being phased out over a period?


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Venture Capital Funds / Companies

Income of VCF / VCC from investment in unlisted VCU engaged in certain specified businesses

exempt from tax.

Income received by investor from the above stated VCF / VCC taxable as if it were income received

by the investor had he made investments directly in the VCU.

Above VCF / VCC are not subject to distribution tax on distribution of income to investors.

Income of VCF from investment in companies not engaged in specified businesses to be governed by

normal trust taxation provisions.

The trust taxation provisions have been substantially simplified to provide for one-level taxation.

Concept of determinate / indeterminate / maximum marginal rate taxation removed.

Income of VCC from investment in companies not engaged in specified businesses to be governed by

normal corporate tax provisions.


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Venture Capital Funds / Companies

Specified businesses defined to mean (a) nano-technology; (b) information technology relating to hardware

and software development; (c) seed research and development; (d) bio-technology; (e) research and

development of new chemical entities in the pharmaceutical sector; (f) production of bio-fuels; (g) dairy and

poultry; (h) building and operating composite hotel cum convention centre with seating capacity of morethan three thousand; (i) development of infrastructural facility; or (j) any other business as may be

prescribed;

Infrastructure facility means the following facilities, (a) a road including toll road, a bridge or a rail system;

(b) a highway project including housing or other activities being an integral part of the highway project; (c) a

water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid

waste management system; and (d) a port, airport, inland waterway or inland port;

Impact / Issues

Provisions under DTC largely similar to the current Income-tax Act. Simplification of trust taxation

provisions would come as a relief for domestic funds. Certain current issues continue e.g. no exemption available for income from VCU which is listed

subsequently, investment in preferential allotments of listed company, interest from deposits;

applicability of MAT to VCC; no exemption from TDS on interest to exempt VCF / VCC; etc.


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Mutual Funds

Income received by the mutual fund is exempt from tax

No withholding tax is applicable on payments to mutual fund

Distribution Tax

In case of equity oriented mutual fund* 5%

In case of non-equity oriented mutual fund - Nil

Withholding tax

In case of equity oriented mutual fund Nil

In case of non-equity oriented mutual fund withholding tax applicable

o 10% where deductee is a resident individual / HUF; and

o 20% for other deductees (including non-residents)

o Exemption from withholding tax paid to resident unit-holders provided the deductee is not a company

and the aggregate amount of payment to unit-holder does not exceed INR 10,000.

* Equity-oriented mutual fund defined to mean a fund where more than 65% of total proceeds are investedby way of equity shares in domestic companies.

Taximplications

for MutualFunds

ImplicationsParticulars


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Mutual Funds

Income received from Mutual Fund

In case of equity oriented mutual funds exempt

In case of non-equity oriented mutual funds taxable at applicable rates

STT applicable on transactions in units of equity oriented mutual funds

Capital Gains No special tax rates provided, taxation at normal rates

In case of transactions in units of equity oriented mutual funds where STT is paid

o In case of units held for more than one year 100% deduction allowed

oIn case of units held for one year or less 50% deduction allowed

In case of non equity oriented mutual funds

o Indexation available in case of units held for more than one year from the end of the financial year inwhich it was acquired

Taximplications

for Investorsin MutualFunds


Impact / Issues

Proposed provisions dilute the current tax arbitrage available to investors in non-equity oriented

mutual funds vis--vis fixed income instruments directly.

5% DDT on equity oriented mutual funds an additional cost.

Current definition of equity oriented mutual fund continues .. Not widened to include FoFs, investment

in derivatives / non-domestic companies, etc.

Compliance obligation for mutual funds to increase.


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Insurance

Insurance premium (including re-insurance premium) accrued from or payable by anyresident or non-resident deemed to accrue in India if in respect of insurance covering anyrisk in India

Re-insurance

No withholding tax in case payments eligible for deduction (as mentioned in next slide)

In case of other payments, Life insurance company required to withhold taxes on

payments to resident policyholders at specified rates except where Policyholder is not a company; and

Aggregate amount of payments during the financial year does not exceed Rs. 10,000

Withholding taxobligation for

life insurance

Life Insurance company liable to pay distribution tax @ 5% on income computed inprescribed manner

No tax deduction available to life insurance company for taxes paid

Approved equity oriented life insurance scheme defined as life insurance policies where more than65% of premium are invested in equity and such scheme are approved by Board

Introduction ofapprovedequity orientedlife insurancescheme

Life Insurance Tax regime changed.. Only profits determined in Shareholders A/ctaxable, subject to certain adjustments

Concessional tax rate of 12.5%* removed Taxable at corporate tax rate of 30%

Other than Life Insurance -

Profits of other life insurance business to be profits as disclosed in annual accounts furnished underthe Insurance Act, subject to certain adjustments

Tax rate reduced marginally on account of surcharge and education cess

Taxation ofInsurance

business



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Insurance

Deduction / exemption available in case income arising from following policies:

Where sum is received on completion of original period of contract and premium paid / payable for anyof years does not exceed 5% of actual capital sum assured

Where sums are received under an approved equity oriented life insurance scheme and distributiontax is paid by the life insurer; and

Where sums are received on death of insured person

In case other than above, premiums paid eligible for deduction to the extent not claimedearlier and included in income

Taxability ofsums received

underinsurancepolicy

Separate deduction upto an aggregate limit of INR. 50,000 (including contribution forchildren education) proposed for life insurance policy where premium paid during the termof the policy does not exceed 5% of actual capital sum assured and health insurancepolicies

Contribution to pension funds may be permitted as a deduction in the aggregate limit ofINR 100,000 if the annuity plan is approved by the CBDT

Deduction forpremium paidin hands ofpolicy-holders


Impact / Issues There is no grandfathering provision for existing policies.

There is no specific exemption provided for commuted portion of pension received from

approved pension funds [10(23AAB) funds].

Compliance obligations for insurance companies to increase.


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Banks / NBFCs

Interest on bad or doubtful debts of any financial institution (including NBFC)shall be included in total income of the financial year in which interest iscredited to profit and loss account of, or is actually received, whichever isearlier

Interest on bad anddoubtful debts

Deduction towards provision for bad debts subject to following conditions:

amount should be in accordance with prudential guidelines of RBI

amount should be debited to profit & loss account

Deduction capped at 1% of aggregate average advances

Debit balance, if any, on last day of financial year in the provision for doubtfuldebts allowed as a deduction provided the balance has been transferred toprofit & loss account

Deduction of provisionfor doubtful debt/ bad

debts for financialinstitutions (includingbanks and NBFC)


Impact / Issues

NBFC and Housing finance public company eligible for deduction Definition of aggregate average advances not available

No clarity on the allowability of the claim with respect to the provision for bad and doubtful debts

made beyond the limits prescribed by RBI


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Banks / NBFCs

In respect of a financial lease (as defined), a business capital asset is deemedto be owned by a lessee

Lessee to be allowed the depreciation on the assets procured on finance lease

and payment of lease rent to be treated as payment of principal and interest

Financial lease

New provision inserted on broken-period income

As per the provisions, income accruing from a debt instrument, transferred at

any time during a financial year, should not be less than amount of broken-period income from the instrument

Broken-period income is defined as income for the period commencing fromdate of acquisition of debt instrument or beginning of the financial year,whichever is later, and ending on the date of sale of security

Broken-period income to be calculated as if the income from such securitieshad accrued from day to day and been apportioned accordingly for brokenperiod

Broken-period income


Impact / Issues

No corresponding provision for purchaser to claim broken-period interest as an expense.

Certainty on allowability of depreciation to lessee in case of financial lease.

Finance lease defined to provide clarity on the lease arrangement.


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Banks / NBFCs

DDT at 15% on amount of dividend declared, distributed or paid by a domesticcompany

In computing DDT, amount of dividend declared by a company to be reducedby dividend received from another company if:

Dividend is received from a subsidiary; and

Subsidiary has paid DDT on such dividend

Dividend DistributionTax

Branches of foreign banks and other permanent establishments required topay additional branch profits tax of 15%

Branch profits calculated as income attributable, directly or indirectly, to thepermanent establishment included in the total income of the foreign companyas reduced by amount of income-tax payable on such attributable income

Liability to be discharged by payment of pre-paid taxes.

Branch Profits Tax


Impact / Issues

Branch Profits Tax

Tax levied on profits of branch level irrespective of remittance to head office

Tax Treaty not to have preferential status in respect of levy of branch profits tax

DDT

Significant relaxation for intermediate holding companies as existing provision requirement that recipient

company should not be a subsidiary of any other company done away with

No clarity on the availability of Multi-level DDT credit


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Banks / NBFCs

Lower of following allowed as a deduction:

Expenses attributable to business in India

0.5% of total sales / receipts of business in India

Nature of expenses covered is similar to provision of section 44C of theIncome-tax Act, 1961

Head officeexpenditure incurred

by a non-resident


Impact / Issues

Current requirement of restricting deduction to a percentage of adjusted total income withdrawn Even loss making banks can claim deduction

As deduction is linked to percentage of sale / receipt vis--vis earlier deduction based on adjusted

total income - may adversely affect where India is significant income contributor


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Company regarded as resident if place of effective management at anytime in the year is in India

Place of effective management means

Place where Board of directors / executive directors make their decisions; or If Board routinely approves commercial and strategic decisions of executive

directors / officers, place where such executive directors / officers performtheir functions

Residency ofForeign Cos.

Key tax provisions for Offshore Funds

Impact / Issues

Residency for non-corporate entities continues to be based on control and management test

Expression at any time very wide Meaning of the expressions routinely / commercial and strategic decisions impact on Indian groups

having overseas subsidiaries to be considered


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Transfer of capital asset situated in India

Income deemed to accrue in India, if it accrues, directly or indirectly, through orfrom inter alia transfer of the capital asset situated in India (same as current law)

Income of a non-resident not deemed to accrue in India from transfer outside

India, of share / interest in a foreign company unless at any time in 12 monthspreceding thee transfer, the fair value of the assets in India, represent at least50% of the fair market value of all assets owned by the company

If income is deemed to accrue / arise in India as above, proportionate gainstaxable in India

Offshore Leverage

Interest income deemed to accrue in India if it is accrued from / payable by anon-resident and used for inter alia earning income from any source in India

Such interest will not be deemed to accrue or arise in India if such interest hasnot been claimed by the non-resident as a deduction from his tax baseschargeable in India

Extra-territorial

operation


Impact / Issues No consideration to the quantum of interest in the offshore company (whether even 1% stake transfer in offshore company

leads to an indirect transfer?)

Meaning of the expressions interest in a foreign company / owned directly and indirectly by the Company

Guidelines awaited on FMV methodology, which are critical in determining applicability of this provision

Provision can be overridden by a favorable tax treaty


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Tax Treaties entered into under the Act deemed to have been enteredunder the Code

Code or DTC, whichever is beneficial to apply, except in the following

cases Where GAAR is invoked

Where Branch Profit tax is levied

Where CFC rules are triggered

Tax Treaty v/s

DTC


Impact / Issues

Ambiguity in the initial DTC draft removed by clearly specifying that past Treaties continue .. However, effectiveness to be

considered in light of anti-abuse provisions.


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Powers given to Commissioner for invoking GAAR

Onus on the tax payer to prove that obtaining tax benefit was not the mainpurpose

GAAR can be invoked with respect to an impermissible avoidancearrangement guidelines and conditions for invoking GAAR to beprescribed

Impermissible avoidance arrangement means an arrangement whosemain purpose is to obtain tax benefit and satisfying any of the below:

Creates rights / obligations not at arms length;

Leads to misuse or abuse of beneficial provisions; or Lack commercial substance;

Lacks bonafide intent;

GAAR to override provisions of Tax Treaty

GAAR


Impact / Issues GAAR to override tax treaties: Sustainability of tax treaty protection with Mauritius, Cyprus, etc. in absence of appropriate

substance / commercial rationale, etc.?

To watch out for CBDT guidelines on GAARs

Effectiveness of DRP route for resolving GAARs related disputes

Availability of AAR mechanism?


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GAARs invoked -Is main purpose

Arrangement of taxbenefit?

(impermissibleavoidance

arrangement)Deemed connectedperson as same,

etc

Treat the arrangementas void

Disregardaccommodating

parties/ Treat partiesas one and the same

Re-allocateincome, expenses,

relief, etc

Disregard/ combine/ re-characterize

the arrangement

Re-characterizeEquity -Debt,

Income, expenses,relief, etc

Rights / Obligationsnot at arms-length

Misuse /Abuse of DTC

Lacks commercial/

economic

substance

Is not for bonafidepurposes



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PE defined : Relevant for Business Connection and Branch Profit tax

PE includes :

Fixed place PE,

Service PE (no time threshold specified), Construction / Installation / Assembly / Supervisory PE (no time threshold

specified),

Substantial Equipment PE (no time threshold specified) and

Agency PE (excludes independent agents)

PE


Impact / Issues

Non-specification of time thresholds : Impact thereof

No exclusions for preparatory and auxiliary activities

No definition for Independent Agent

Provision of Services in India resulting in Service PE : Taxability on a gross basis vs. net basis

PE definition in Treaties to over-ride Business Connection test

Branch Profit Tax not subject to treaty protection; hence, treaty definition of PE not relevant for Branch Profit Tax


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CFC provisions introduced

Total income of a resident to include income attributable (on a net income basis) to a CFC

CFC means a foreign company

that is a resident of a territory with lower rate of taxation (where taxes paid are less than 50

percent of taxes on such profits as computed under the DTC) whose shares are not listed on recognized stock of that country

that is individually or collectively controlled by persons resident in India

that is not engaged in any active trade or business (Active trade or business not to includeincome from sale of goods or supply of services to any associated enterprise); and

that has specified income exceeding INR 2.5 million

CFC provisions to override provisions of Tax Treaty.

Income attributable to a CFC to be computed as per Specified Formula.

Resident assessee to furnish details of investments and interest in entities outside India.

Wealth tax to be levied on resident assessee

CFC


Impact / Issues

Applicability of CFC regime to Indian financial services groups having offshore AMCs and entities controlled by such AMCs?

Applicability of CFC regime to downstream investment subsidiaries of overseas operating companies?

Applicability of CFC regime to non-corporate overseas entities?

Computation of profits of the CFC for measuring lower rate of taxation could pose complexities

Credit / deduction in India for Foreign Taxes paid by CFC?

Gains on sale of CFCs shares to be taxed without offsetting prior years taxes paid due to application of CFC

Set-off between profits and losses of different CFCs?

Double taxation on account of applicability of TP and CFC provisions?


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Foreign Institutional Investors

No Specific Code prescribed for FIIs Governed by normal tax provisions applicable to foreign

companies

Income of FIIs from transfer of securities is capital gains and not business income

The term securities includes derivatives No withholding tax applicable on capital gains .. Withholding tax applicable on other income

Capital loss allowed to be indefinitely carried forward for set-off

STT continues

Other provisions relevant to offshore funds apply

Impact / Issues

Treatment as capital gains to impact FIIs based out of jurisdictions where Treaty does not provide

for a capital gains tax exemption.

Re-instatement of concessions on capital gains tax on listed equity shares is a relief


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Venture Capital UndertakingVCU

Venture Capital FundVCF

Venture Capital CompanyVCC

Transfer PricingTP

Securities Transaction TaxSTT

Short-term Capital GainSTCG

Permanent EstablishmentPE

Non-Banking Finance CompanyNBFC

Minimum Alternate TaxMAT

Long-term Capital GainLTCG

Foreign Institutional InvestorsFII

Financial YearFY

Direct Taxes Code Bill 2010DTC

Dispute Resolution PanelDRP

Central Board of Direct TaxesCBDT

Dividend Distribution TaxDDT

AAR Authority for Advance Rulings

CFC Controlled Foreign Companies

GAAR General Anti Avoidance Rules

Glossary


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Mumbai

Lodha Excelus, 1st Floor,

Apollo Mills Compound,N.M. Joshi Marg, Mahalakshmi,

Mumbai 400 011

Tel +9122 39896000

Fax +91 22 39836000

New Delhi

Building No.10, Tower B,

8th

Floor, DLF Cyber City,Phase II

Gurgaon 122002 Haryana

Tel +91 124 3074000

Fax +91 124 2549101

Bangalore

Maruthi InfoTech Centre

11/1 and 12/1, East Wing, II Floor,

Koramangala,

Inner Ring Road

Bangalore 560 071

Tel +91 80 3980 6000

Fax +91 80 3980 6999

Hyderabad

8-2-618/2

Reliance Humsafar, 4th Floor

Road No. 11, Banjara Hills

Hyderabad 500 034

Tel +91 40 6630 5000

Fax +91 40 6630 5299

Chennai

No. 10 Mahatma Gandhi Road,

Nungambakam,

Chennai 600 034

Tel +91 40 3914 5000

Fax +91 40 3914 5999

Kolkata

Infinity Benchmark,

Plot No.G-1, 10th floor,

Block - EP & GP,

Sector - V, Salt Lake City

Kolkata 700091

Tel: +91 33 44034066

Fax: +91 33 4403 4199

Pune

703, Godrej Castlemaine,

Bund Garden,

Pune 411 001

Tel +91 20 305 85764/65

Fax +91 20 305 85775

Kochi

4/F, Palal Towers,

M. G. Road,

Ravipuram, Kochi 682016

Tel +91 (484) 302 7000

Fax +91 (484) 302 7001

Chandigarh

SCO 22-23

Ist Floor, Sector 8 C

Madhya Marg

Chandigarh 160019

Tel +91 72 3935 781

Fax +91 72 3935 780

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on

such information without appropriate professional advice after a thorough examination of the particular situation.

2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

www.kpmg.com/in

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