Budget brings clarity on taxes, more power to NBFCs, composite foreign investment cap

The Union Budget 2015 addressed several issues being faced by the financial services sector and corporates at large, most particularly on taxation among others.

The Finance Minister not just granted tax pass-through status to the PE industry but also deferred taxation under General Anti Avoidance Rule (GAAR), clarified on the taxation norms for indirect transfers of assets by MNCs in India, talked about killing the distinction between a foreign portfolio investor and foreign direct investor, giving more powers to NBFCs and more.

In particular, NBFCs that are registered with banking regulator RBI and having an asset size of Rs 500 crore and above will be considered for notifications as 'financial institution' in terms of SARFAESI Act, 2002. This will help such NBFCs attach the property of wilful or intended defaulters and avert losses.

“The extension of SARFAESI to NBFCs will place them on par with banks, in line with the RBI's recent regulatory efforts in that direction. The same logic suggests that SARFAESI should have been extended to housing finance companies,” said Anil Kothuri, president, Edelweiss Housing Finance Limited.

The Budget also introduced Micro Units Development Refinance Agency (MUDRA) Bank to refinance micro finance institutions and with lending priority given to SC/ST enterprises.

To promote investment in the country, a proposal to set up a Public Debt Management Agency (PDMA) which will bring both India’s external borrowings and domestic debt under one roof has been announced. The Budget speech mentioned merger of the Forwards Markets Commission with stock market regulator SEBI to strengthen regulation of commodity forward markets and reduce wild speculation.

The government has announced the introduction of a comprehensive Bankruptcy code realising the futility of Board for Industrial & Financial Reconstruction or Sick Industrial Companies Act.

“Introduction of the new bankruptcy law is very critical for resolution of stressed assets and now there would be clear laws for banks to be able to enforce liquidation of companies under default. The legislation would enable professional liquidators to gain control over companies on behalf of creditors and work towards a systematic winding down of companies,” says Abizer Diwanji, partner and national leader – financial services at consulting firm EY(formerly Ernst & Young).

In order to curb the attraction for foreign gold, the government has announced the introduction of a Gold Monetisation Scheme, which will replace the present gold deposit and gold metal loan schemes. The new scheme will allow the depositors of gold to earn interest in their metal accounts and jewellers to obtain loans in their metal accounts.

Banks/other dealers would also be able to monetise this gold. A sovereign gold bond has been proposed as an alternative to purchasing metal gold.

George Alexander Muthoot, MD, Muthoot Finance, said: “We welcome the announcement of Finance Minister on gold monetisation. Gold loan NBFCs are already doing this gold monetisation through gold loans they disburse based on gold collaterals.”

In some of the other measures, Budget talked about simplifying the procedures for Indian companies to attract foreign investments and to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps.

Black money

The Budget also talked big on curbing black money and the FM said he proposes to introduce a Bill in the current session of the parliament which would make concealment of income and assets and evasion of tax in relation to foreign assets prosecutable with punishment of rigorous imprisonment up to 10 years. Further, the offenders will not be permitted to approach the Settlement Commission and penalty for such concealment of income and assets at the rate of 300 per cent of tax shall be levied.

He said non filing of return or filing of return with inadequate disclosure of foreign assets will be liable for prosecution with punishment of rigorous imprisonment up to seven years. Beneficial owner or beneficiary of foreign assets will be mandatorily required to file return, even if there is no taxable income.

Moreover, abettors of the above offences, whether individuals, entities, banks or financial institutions, will be liable for prosecution and penalty.

The Foreign Exchange Management Act, 1999 (FEMA) is also amended to the effect that if any foreign exchange, foreign security or any immovable property situated outside India is held in contravention of the provisions of this Act, then action may be taken for seizure and eventual confiscation of assets of equivalent value situated in India. These contraventions are also being made liable for levy of penalty and prosecution with punishment of imprisonment up to five years.

As regards curbing domestic black money, a new and more comprehensive Benami Transactions (Prohibition) Bill will be introduced in the current session of the parliament.

MAT and other taxation issues

Among other moves, the FM talked about rationalising the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT.

It is also proposed to levy a surcharge at the rate of 12 per cent against current rate of 10 per cent on additional income-tax payable by companies on distribution of dividends and buy-back of shares, or by mutual funds and securitisation trusts on distribution of income.

The FM also proposed to amend the provisions of section 194LD of the Income-tax Act to extend the period of applicability of reduced rate of tax at 5 per cent in respect of income of foreign investors (FIIs and QFIs) from corporate bonds and government securities, from May 31, 2015 to June 30, 2017.

It is also proposed to amend the provisions of section 92BA of the Income-tax Act to increase the threshold limit for applicability of transfer pricing regulations to specified domestic transactions from Rs 5 crore to Rs 20 crore.

Tax clarity

The FM also clarified the government's stance on the vexatious issue of retrospective taxation of MNCs on their India-related asset transfers.

He proposed to amend the provisions of the Income-tax Act to provide that the share or interest shall be deemed to derive its value substantially from the assets located in India, if on the specified date, the value of such assets represents at least 50 per cent of the fair market value of all the assets owned by the company or entity.

However, the indirect transfer provisions would not apply if the value of Indian assets does not exceed Rs 10 crore. Further, the principle of proportionality will apply to the taxation of gains arising from indirect transfer of Indian assets.

He said the Indian entity shall be obligated to furnish information relating to the offshore transactions having the effect of directly or indirectly modifying the ownership structure or control of the Indian company or entity. In case of non-compliance, a penalty is also proposed.

Jaitley also said the indirect transfer provisions shall not apply in a case where the transferor of share or interest in a foreign entity, along with his associated enterprises, neither holds the right of control or management nor holds voting power or share capital or interest exceeding 5 per cent of the total voting power or total share capital in the foreign company or entity, directly or indirectly, holding the Indian assets.

Moreover, the capital gains shall be exempt in respect of transfer of share of a foreign company deriving its value, directly or indirectly, substantially from the shares of an Indian company, under a scheme of amalgamation or demerger.

(Edited by Joby Puthuparampil Johnson)

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