The Union Budget for the financial year 2015-16 reflects a number of priorities set out by the new Government in its election manifesto. It will not be out of place to highlight some of them here because it shows the sincerity of the new administration to keep their promises in letter and spirit.
Promising a stable tax regime, expediting implementation of Goods and Service Tax, or GST as planned and implementing provisions for transfer of indirect taxes will help bring back the confidence of overseas investors that was eroded due to the Vodafone case.
In the post-Vodafone Saga, under the Finance Act of 2012, the Union Government amended Section 9 of the Income Tax Act so 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 indirectly, its value substantially from the assets located in India.
(a) neither holds the right of control or management,
b) nor holds voting power or share capital or interest exceeding five percent.
Exemption shall be available in respect of any transfer, subject to certain conditions, in a scheme of amalgamation or de-merger, of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company on proportional basis. The amendment shall be applicable from April 1 this year.
Another major tax relief is provided to fund managers in India that will ensure that under certain conditions they will not be considered a business connection of offshore funds.
In order to facilitate location of fund managers of off-shore funds in India a specific regime has been proposed in the Finance Act in line with international best practices. Subject to fulfillment of certain conditions by the fund and the fund manager, the tax liability in respect of income accruing 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.
This change was warranted because under the existing provisions, in the case of offshore funds, the presence of a fund manager in India may create sufficient nexus of the off-shore fund with India and may constitute a business connection in India even though the fund manager may be an independent person.
Similarly, if the fund manager located in India undertakes fund management 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 offshore fund.
POEM INTRODUCED
Concept of Place of Effective Management, or POEM has been introduced. This is to amend the conditions for determining residency status in respect of companies.
The existing provisions of Section 6 of the Income Tax Act provide that a company is an Indian resident if in any previous year it is an Indian company; or during that year, the control and management of its affairs is situated wholly in India.
The latest budget has introduced the concept of POEM for determining the residential status of the company under section 6 of the Act. POEM of the foreign company in India even for a part of the year could result in residence based taxation on its global income and application of all the provisions of the Act including the Minimum Alternate Tax. However, this may not be welcomed by the foreign companies which have branches in India and foreign subsidiaries having parent company in India among others.
The Finance Bill proposes to amend the Income Tax Act to provide that, in the case of non-resident banking entities, any interest payable by the their Permanent Establishment or PEs in India to the head office or any other PEs of the bank outside India shall be deemed to accrue or arise in India. This interest payment shall be chargeable to tax in respect of such interest income in addition to any other income attributable to the PE in India.
