India: Private Client Wrap: Quarter 2, 2014 In Review

  • Change in government: leads to market upswing – substantial tax reforms anticipated in the budget to be announced on 10 July 2014
  • Higher cap on outward remittance and investment: Indian resident individuals can now remit up to USD125,000 annually outside India – real estate investments continue to be restricted; outward investment by Indian entities restored to 400% of net worth
  • FATCA compliance: Indian banking regulator instructs financial institutions to be registered with US authorities and obtain the Global Intermediary Identification Number (GIIN) by 31 December 2014
  • CSR: Statutory heads of permissible CSR activities to be liberally interpreted but expenditure for one-off activities not eligible to be considered CSR expenditure
  • Trusts: Supreme Court holds that income of a discretionary trust cannot be taxed in the hands of a beneficiary unless distributed to the beneficiary
  • Family settlements: Allahabad Tribunal holds that transfer of shares of a closely-held company from family members to such company under a family arrangement is a transfer subject to capital gains tax.

Our Q1 wrap ended on an expectant note in anticipation of the elections to be conducted in May. Now, a new Indian government comprising of the BJP-NDA coalition has been voted into place. Their win by an overwhelming majority makes this government more stable than any that India has had since its liberalisation in the 1990s. This means that there would now be sufficient political will for key legislative and developmental action points which were stalled over the last few years. The party's pro-business manifesto and a prime minister with a reputation for decisive CEO style of functioning, have also led to much optimism about the Indian economy in the recent past.

There is no denying the challenges, of course. The first important test will be the release of the annual budget on 10 July 2014, which will need to boost a sluggish economy and improve investor perception as well as bring down the current account deficit and inflation. We will be examining budget proposals separately in a detailed analysis on 15 July 2014.

While we wait, here's a brief round-up of key events in Q2:


Despite the liberalisation of the Indian economy, exchange control norms continue to regulate the inflow and outflow of money from the country. One such measure, the Liberalised Remittance Scheme (LRS) restricts the purposes for and extent to which resident individuals can remit money outside India. Since the introduction of the LRS in 2004, the ceiling for remittances by an individual has been progressively increased and had remained steady from the year 2007 to 2013 with an upper limit of USD 200,000 per individual per year. However, in August 2013, reflecting the poor economic position of the rupee, capital controls were introduced and this ceiling was reduced to USD 75,000 with further restrictions being added to the use of outward remittances for acquisition of immoveable property outside India (directly or indirectly).

In view of the recent stability that the rupee has seen in the foreign exchange market, the Reserve Bank of India (RBI) has on 3 June 2014, enhanced this ceiling to USD 125,000 per individual per year. This minor revision provides very little relief as it was widely expected that the upper limit of USD 200,000 would be restored and that the added restrictions (including restrictions relating to the acquisition of foreign immovable property) would be removed after the stabilization of the economy.

Along with increasing the cap for offshore remittances by individuals, the RBI has also restored the cap for overseas direct investment by Indian corporates to pre-2013 limits. Indian corporates can invest offshore upto 400% of the net worth as per the last audited balance sheet. However, any investment greater than USD 1 billion in a financial year (even if within the 400% cap) will require prior RBI approval. Please click here for further details on this measure. One can only hope that these changes are a part of a progressive revision with the aim to ultimately disband capital controls. Indian exchange controls are a determinative factor in private wealth structuring and opening up of capital controls will provide much more flexibility in terms of global wealth planning for modern day HNIs who are likely to have multi-jurisdictional wealth.


The Foreign Account Tax Compliance Act ("FATCA") is an anti-tax evasion law in the US, which came into effect from 1 July, 2014. FATCA empowers US tax authorities to seek information from foreign financial and non-financial institutions in relation to individuals and entities who are liable for tax in the US (including US citizens residing outside the US and US-owned foreign entities). Institutions that do not comply with FATCA could face 30% withholding tax on payments received from US sources.

While India has not signed a formal intergovernmental agreement or IGA with the US, an 'in-substance' agreement was signed between the countries on and with effect from 11 April, 2014. Due to this, financial institutions in India are now required to make FATCA disclosures (through the Central Board for Direct Taxes) to the US Internal Revenue Service – this would primarily relate to investments by account holders liable to tax in the US.

India's market regulator, the Securities and Exchange Board of India ("SEBI") plans to issue guidelines to help financial institutions in India to identify accounts of persons liable to tax in the US, for the purpose of compliance with FATCA. Indian financial institutions receiving funds from offshore sources might have to undertake thorough searches of high-value individual accounts to identify the nationality or residence of the account holders involved. According to news reports, SEBI plans to put in place a quantum-based system categorization — balances up to $50,000; between $50,000 and $1 million; and those exceeding $1 million – with the lower category likely to be exempt (along with products related to retirement) and the degree of scrutiny being the highest for the last category. SEBI might require financial institutions to complete identification of high-value investors before December 2014 and thereafter, report to SEBI on an annual basis. The review of relatively lower-value accounts could be extended to next year.

The RBI, India's banking regulator, also issued a notification (on 27 June, followed by SEBI's circular of 30 June on similar lines) requiring financial institutions in India to be registered with US authorities and obtain the Global Intermediary Identification Number (GIIN) by 31 December 2014. However, the notification also refers to requirements applying only once a formal IGA has been signed, on which more details are expected from the regulators soon. The notification and circular also contain rules for Indian institutions with overseas branches in jurisdictions which have IGAs with the US or do not.

Individuals impacted: In the Indian context, these compliances are likely to be problematic for non-resident Indians ("NRI") or Indians with investments in the US. A common issue faced by NRIs relates to the concept of a Hindu Undivided Family under Hindu succession laws. Under this concept, the eldest son of a family comes into the possession of a pool of ancestral property upon the demise of his father – however, his right is more akin to that of a trustee than an owner, which can create issues from a US characterisation perspective. An alternative scenario is where the HUF is managed by an Indian manager (also known as "Karta"), but has US citizens as substantial beneficiaries. In the latter case, the Indian Karta may often not even be aware that US compliances are required for the Indian HUF.1


We had previously discussed the changes brought about in India's mandatory regime for corporate social responsibility (CSR) by the notification of the Companies (Corporate Social Responsibility Policy) Rules, 2014 ("CSR Rules").

On 18 June, the Ministry of Corporate Affairs issued certain clarifications in response to feedback received from stakeholders. The Ministry has clarified that:

  • CSR activities must be relatable to the permissible activities listed in Schedule VII of the Companies Act, 2013 and must be interpreted liberally so as to capture the essence of the subjected listed. The clarification provides certain illustrations. For instance, the activity of 'promoting education' on a liberal interpretation would encompass projects for promoting consumer education and awareness, renovation of school buildings but would not cover training of personnel for enforcement of road safety as that is an established Government function.
  • Eligible CSR expenditure includes: (i) expenditure on activities carried out in the form of a 'project/programme'; (ii) salaries paid to CSR staff of the company and volunteers in proportion to the company's time spent on CSR; and (iii) contribution to the corpus of a trust, society, or a not-for-profit company provided (a) such recipient entity is created exclusively for undertaking CSR activities or; (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII; (iii) expenditure incurred by a foreign holding company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, such expenditures are routed through the Indian subsidiary and if the latter is required to do so as per Section 135 of the Companies Act, 2013.
  • Expenditure which is not eligible to be counted as CSR expenditure are those incurred on: (i) one-off activities such as marathons, charitable contributions, TV programme sponsorships; and (ii) fulfilling statutory obligations, e.g., those under the labour laws.
  • Trusts registered under the Income Tax Act are eligible to carry out CSR activities in case they are located in States where registration of a trust is not mandatory.

The CSR provisions are estimate to result in CSR expenditure of around INR 20,000 crore in 2014-2015 alone2 (around USD4 billion). The ripple effects of such investment are expected to change the dynamics of philanthropy in India. This is an opportune time for the Government to understand philanthropy as an initiative wider than just charity and relook tax and regulatory provisions that have stifled the growth of philanthropy in India.


Indian trust jurisprudence is dated and does not contemplate modern trust structures involving institutional trustees, protectors and the like. Therefore, the decision of the Supreme Court in Commissioner of Wealth Tax, Rajkot v Estate of Late HMM Vikramsinhji of Gondal,3 is significant as being one of the few recent cases dealing with trust issues. The Supreme Court held that income of a discretionary trust cannot be taxed in the hands of a beneficiary unless distributed to the beneficiary. The Supreme Court has thus reiterated the primary basis for difference in taxation of discretionary trusts versus determinate (or specific) trusts in respect of an offshore trust.

The dispute centred on determining the nature of two UK trusts on the basis of the terms of the trust deeds. The Revenue had argued that the trusts were specific trusts because under the clause (in dispute) the trusts' income were payable in specific shares to identified beneficiaries and that as per the trust deeds, this clause had been triggered when additional trustees were not appointed to exercise their discretion as to distributions. The Supreme Court did not accept this argument of the Revenue. It considered the wording of the clauses and the working of the trustees in practice and held that where trustees have clearly retained the income of the trust and brought it forward year to year without disbursing it to the beneficiaries, the trust is discretionary.

This judgment highlights that beneficiaries of a discretionary trust should not include any part of the trust's income in their individual returns unless it is actually received by them. One key issue that has not been addressed is the treatment of distributed income in the hands of the beneficiaries, particularly when the distribution is in the nature of capital. Under the erstwhile regime, capital distributions were not considered taxable – however, with the introduction of S. 56 of the Income Tax Act, 1961, there is ambiguity as to whether such a tax should apply and whether there should be a difference between offshore trusts (which may not be taxable in India) and onshore trusts (which are likely to be).


In ACIT vs. Bilakhia Holdings P. Ltd4, the Allahabad Bench of the Income Tax Appellate Tribunal ("Tribunal") has held that if a closely-held company receives shares from shareholders who belong to the family pursuant to a family arrangement among such shareholders, the receipt will not be considered a gift, but will be considered a transfer.

This characterisation is crucial because: a) gifts between specified relatives are not taxable in India; and b) Indian capital gains apply differential rates for assets held for a short term (up to 40% tax) and long term period (up to 20% tax). Gifted assets are allowed the benefit of the predecessor's holding period in determining the applicable right while transferred assets are not.

In Bilakhia, family members entered into a family arrangement in furtherance of which, shares held by other members of the family and other companies were transferred without any monetary consideration to the holding company. The issue before the Tribunal was whether the transfer was to be considered a gift. For a gift, two considerations had to be satisfied as per the Transfer of Property Act: (a) the transfer must be without monetary consideration; and (b) the transfer must be voluntary.

The Tribunal, relying on an earlier decision of the Supreme Court of India held that a family arrangement cannot be considered as being "without consideration", as that would render it unenforceable under Indian contract law. It clearly was the intention of the family to enter into a binding, enforceable agreement. The taxpayer company argued that the transfer of shares was voluntary since it was made pursuant to an agreement that was voluntarily entered into. To this, the Tribunal held that since the transfer was made for monetary consideration, i.e. for equalization of wealth and to avoid family disputes, it could not be stated that the transfer was voluntary or capable of being characterised as a gift.

This decision assumes importance when entering into family arrangements by the members of a family, including a Hindu Undivided Family as capital gains tax may now be imposed (as well as stamp duty of about 1-2%) on the family settlement arrangement. Contrast Bilakhia with the decision in CIT v Nagaraja Rao5 in which the Karnataka High Court had held that a family arrangement is not a transfer but a crystallisation of respective interests in family property. On that basis, the High Court held that the transfer of shares in a private company and of partnership interests from one family member to another pursuant to a settlement directed by the arbitrator of the family dispute is not a 'transfer' for the purposes of imposing capital gains tax on such transaction.


In the run-up to Budget 2014, there have been quite a few wishlists and predictions being reported in the news. Although the Government is keeping its cards close to its chest, it is expected that the Government will tackle retrospective taxation and set a target to implement the Direct Taxes Code (DTC) and the Goods and Services Tax which have been repeatedly put on the backburner due to a lack of political consensus.

On the personal wealth front, it is being increasingly acknowledged that the Government will move towards increasing the tax exemption limit to boost household savings (as also suggested in the DTC). The Government has not given clear indications on its policy towards taxation of HNIs6 but the state of the country's finances suggest that the 10% surcharge imposed on HNIs with income exceeding 10 million may be here to stay7 and that an additional income tax bracket may be implemented to tax the super-rich.8

On the tax planning front, the Government is also likely to defer implementation of the GAAR provisions by a further one year to April 2017 and proposes to set up a Directorate of Risk Assessment to enhance effective scrutiny. This directorate would go through tax returns9 to identify those where the revenue risk and chances of recovery are high. This step has been suggested after the low success rate of the Government before the Income Tax Tribunals and the higher judiciary.

That's all for Q2, folks. Watch this space for further updates in the next action packed quarter.


1 The characterization of the HUF for purposes of foreign law has been an issue. For instance, see the decision of the England & Wales High Court (Chancery Division) in Bal Mohinder Singh v. Jasminder Singh and Herinder Singh ([2014] EWHC 1060 (Ch) where the court looked at whether property, if held as an HUF was then held, as a matter of English law, subject to a constructive trust. Although HUFs are not trusts under Indian law, it is easier to understand them if the national law recognizes trusts. HUFs present more interpretational issues in non-common law jurisdictions which do not recognize the concept of trust.


3 Civil Appeal No. 2312 of 2007.

4 I.T.A Nos. 981-985 & 1034-1038/Ahd/2009

5 TS-222-HC-2012 (KAR)

6 The previous Government was showing an indication of leaning towards DTC-like measures.The DTC Bill which was again released to the public for comments in April has remained unchanged on its earlier proposal of a 35% tax bracket for income exceeding INR100 million and a 10% tax on recipients whose dividend income exceeds INR 100 million.



9 Changes to the tax returns were also announced in June: closely- held domestic companies must specifically report all shares that were bought back from its shareholders in a financial year; Individuals and HUFs who have income from a proprietary business or profession are now required to separately disclose in their tax returns specific sums paid to non-residents e.g. commission, royalty; all transactions with persons located in Cyprus (or other countries notified as non-cooperative jurisdictions) need to be disclosed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Sriram Govind
Shreya Rao
In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.