Tax motivated transaction IPSO Facto may not be regarded as Sham

In today’s economy, a business entity cannot undermine the impact of taxation on its growth and development trajectory, which is why tax planning is considered to be the most pivotal part of financial planning. While the line between tax planning and tax evasion is very thin, the Supreme Court, on various occasions, has differentiated between the two concepts and has repeatedly held that minimisation of tax liability through legitimate tax planning is not illegal.[1]

Continue Reading Tax motivated transaction ipso facto may not be regarded as sham

The conundrum created by AAR regarding GST on damages

With the ongoing pandemic, the odds of invocation of clauses such as liquidated damages, price variation clause, compensation clause or forfeiture of deposits for the delay in adhering to contractual timelines, etc. have become very high. Such additional payments could also bring out an exposure on account of taxability under Goods and Services Tax (“GST”) legislations.

Continue Reading The conundrum created by AAR regarding GST on damages

International Financial Services Centre

Inauguration of India’s first International Financial Services Centre (“IFSC”) at the Gujarat International Finance Tec-City (“Gift City”) in Gujarat is a positive development to invigorate our financial sector. If everything that is being attempted to achieve is accomplished, it will mark our entry on the global stage. When IFSC was being set up, our then Finance Minister, Late Mr. Arun Jaitley, had envisioned an IFSC at par with other global financial hubs like London, Singapore, Hong Kong, Dubai, etc. An IFSC encourages all major global players to operate in such facility, which in turn would facilitate a two way flow of finance, financial products, financial services, etc.. It would also attract the best talent pool because of access to multiple career opportunities as well as ability to work with the market leaders and world class products. For India, despite being one of the fastest-growing economies in the world, having one of the best talent pools that has created a name for itself in the global scene, having a significantly young population and emerging as one of the most sought after jurisdictions for start-ups, to not have an IFSC of its own and to not offer financial services to businesses across the world, would have been a great travesty.

Continue Reading International Financial Services Centre, an idea whose time has come – Part I: Banking Sector

Applicability of new TDS provisions on sale of securities

Generally, transactions involving sale of shares by non-resident shareholders are subject to withholding tax at applicable rates under the Income-tax Act, 1961 (“IT Act”), provided the gains arising from such sales are taxable in India. However, there was no requirement to withhold/ deduct any tax on gains arising to resident sellers from sale of shares/ securities. Continue Reading Decoding the applicability of new TDS provisions on sale of securities

Taxing Times Ahead for Slump Sale Transactions

Slump sale transactions are a preferred method of transferring a business as a going concern. They are often used for internal restructuring purposes and for sale of a whole or part of a business undertaking to a third party. Several global transactions also comprise of a slump sale element to execute the transfer of the Indian business to the buyer’s affiliate in India. In a slump sale, a business undertaking is transferred by one party to another as a going concern for a lumpsum consideration, without attributing specific values to assets and liabilities. Continue Reading Taxing Times Ahead for Slump Sale Transactions

CBDT notifies thresholds to determine ‘significance’ of significant economic presence

Non-resident taxpayers may now have to watch out for a new nexus norm that will require enterprises with no physical presence in India to pay taxes in India on their business profits attributable to transactions or activities that constitute a ‘significant economic presence’ (“SEP”) of the non-resident in India. Continue Reading CBDT notifies thresholds to determine ‘significance’ of significant economic presence

BUMPY ROAD AHEAD FOR M&A TRANSACTION - BUDGET 2021

The Finance Minister (“FM”) introduced her promised ‘never like before Budget’, with the objective of stimulating economic growth through higher spending on healthcare and infrastructure, against the backdrop of the economic slowdown caused by the Covid-19 pandemic. The FM has also proposed a slew of reforms under the Finance Bill, 2021 (“Bill”), to rationalize the extant provisions of the Income-tax Act, 1961 (“IT Act”). Certain proposals introduced in the Bill could significantly impact M&A deals and change the traditional modus operandi of M&A transactions in India. The ensuing paragraphs will focus on a few such significant amendments proposed in the Bill, which may require close consideration by stakeholders before entering an M&A transaction, be it amalgamation, share acquisition or an acquisition of business as a going concern. Continue Reading Bumpy Road Ahead for M&A Transaction: Budget 2021

Karnataka HC affirms discount on issue of ESOPs is a tax-deductible business expenditure

Rewarding employees through share-based benefit schemes has been an effective tool for the companies to not just recognise their contribution to the company, but also retain them by imbibing a sense of belonging and ownership. One such scheme, popular among the companies for almost last two decades, has been grant of Employee Stock Option Plans (“ESOPs”). In simple terms, an ESOP is an option and not an obligation, provided by a company to its employees, to purchase its shares at a future date at a pre-determined price, which is ordinarily less than the market price, on satisfaction of certain prescribed conditions. While the issuance of ESOPs entail various tax implications for both the employer and the employees, the scope of this blog is limited to ascertaining the validity of an employer’s right to claim the perceived discount granted on the issue of shares as a tax deductible business expenditure. Recently, the Karnataka High Court (“HC”) affirmed the ruling of the special bench of the Bangalore Income Tax Appellate Tribunal (“ITAT SB”) in the case of Biocon Ltd.[1], wherein it was held that discount on issuance of ESOPs is an allowable business expenditure under Section 37(1) of the Income-tax Act, 1961 (“IT Act”) for the employer. Continue Reading Karnataka HC affirms discount on issue of ESOPs is a tax-deductible business expenditure

Foreign Pension Funds’ tax treatment to match Sovereign Funds for certain investments 

Background

With a view to boost infrastructure investments in India and make Indian investment more attractive, the Finance Act, 2020 (FA, 2020) introduced section 10(23FE) in the Income-tax Act, 1961 (IT Act). This section provides an exemption from tax in India in respect of income of certain specified investors who have investments in the infrastructure sector. Specified investors for this purpose include a wholly owned subsidiary of Abu Dhabi Investment Authority, ‘pension funds’ (PF) and ‘sovereign wealth funds’ (SWF). The exempt income would include interest, dividend or long-term capital gains arising to the specified investors, from their investments made in (a) company or entity engaged in developing, maintaining or operating an ‘infrastructure facility’ (Infra Companies); (b) Category-I and Category-II Alternate Investment Funds which have in turn made all their investments in Infra Companies; and (c) business trusts (i.e. Real Estate Investment Trusts and Infrastructure Investment Trusts). These exemptions are available if the Specified Investors meet certain conditions, including the requirement that they should be notified by the Indian Central Government in this regard. In pursuance to this, the Central Board of Direct Taxes (CBDT) has specified the procedure for the inclusion of PFs in the tax exemption notification. Continue Reading Foreign Pension Funds’ tax treatment to match Sovereign Funds for certain investments

By Hook or By Crook - When IT dept. sought to tax rights issue as unexplained cash credit but Tribunal refused

Background

In general, tax can only be levied on an amount, which falls within the meaning of the term ‘income’ or ‘deemed income’. Capital receipts are not taxable except where they are characterised as ‘income’ through specific provisions in the Income-tax Act, 1961 (“IT Act”). Thus, amounts received by way of share capital, whether the amount representing face value or premium, being capital receipt are not characterised as ‘income’ of a company, and therefore not taxed. However, it has been seen that this exemption under the law can be misused. A time-tested strategy aimed at laundering an individual’s unaccounted funds involves incorporation of sham entities with huge capital at premium, which in turn invests these funds in the individual’s legitimate businesses by way of subscription to shares at a premium. Section 68 (‘Cash Credits’) of the IT Act attempts to deter such practices by bringing to tax any sum found credited in the books of an assessee if the assessee offers no or unsatisfactory explanations on the nature and source of the credit. Continue Reading By Hook or By Crook: When IT dept. sought to tax rights issue as unexplained cash credit but Tribunal refused