India: India Budget Insights (2015-16)


The Indian Finance Minister, Arun Jaitley announced the 2015 Union Budget today. The Modi-led Government has taken policy measures that are bold, decisive and pragmatic- clearly, a major step in the right direction for achieving a projected 8.5% growth rate in 2015-16 and leaping towards the hallowed two digit growth rate in the near future.

A slew of regulatory and fiscal measures proposed in the Budget seek to improve India's investment and business environment. Major reliefs include phased reduction in corporate tax rates, deferral of General Anti Avoidance Rules (GAAR) and grandfathering of existing structures, pass-through status for alternate investment funds, extension of lower withholding tax rate for interest on non-convertible debentures (NCDs), and relief against minimum alternative tax (MAT) for foreign portfolio investors (FPIs) and more clarity on taxation of overseas indirect transfers. The proposal to mitigate permanent establishment (PE) risk for offshore funds (primarily hedge funds) is laudable, though the fine print leaves ambiguity on whether such relief can be claimed in reality by private equity funds, including those sponsored by India based fund managers. The Government has laid the groundwork for implementation of a pan India goods and services tax (GST) by 2016, which will truly be a game changer and will reduce the overall burden of consumption taxes including excise, service tax and value added tax.

India's corporate tax rate of 30% (excluding surcharge and education cess) is one of the highest in the Asia-Pacific region. The Finance Minister has proposed to reduce the tax rate to 25% from 2016 over a period of four years in a move to enhance competitiveness and encourage global investors to 'Make in India'. This has been coupled with the move to reduce the rates of withholding taxes for royalties and fees technical services provided by non-residents to 10% which would incentivize foreign companies to set up manufacturing bases in India.

A major change has been proposed to the definition of corporate residency for tax purposes. Today, a company incorporated in India or a foreign company which is 'wholly' controlled and managed from India is considered a resident and taxed on global income. The Budget proposes to change the definition of resident of India to cover any company if it has its place of effective management in India. Thus, the definition moves away from an objective test to a subjective test. This is likely to result in an enormous amount of litigation, especially in cases where Indian companies have subsidiaries abroad or are globalizing their businesses, as also in cases of private client and carry structures of fund managers structured through offshore companies.

The GAAR provisions which were set to trigger next month will now be deferred to April 1, 2017. Further, all investments prior to April 1, 2017 would be grandfathered, thereby providing significant relief to private equity and strategic investors using popular investment structures including Mauritius and Singapore based structures. The ambiguities replete in the GAAR provisions have always stuck out as a sore thumb and it is expected that additional clarity will be provided before GAAR is finally implemented.

The retroactive tax on overseas M&A with underlying Indian assets introduced back in 2012 adversely impacted many cross border deals. This tax has been severely criticised by the global investor community because of the uncertainty in its application. The Budget proposes to rationalise the provisions by limiting the tax incidence to transactions where the underlying assets in India constitute at least 50% of the global enterprise value. Further, sellers that do not control the overseas target and hold less than 5% in the company will not be subject to this tax. Of course, it would have been more prudent to have removed these provisions in entirety considering that it goes against global tax practices, which the Finance Minister assured, will be followed in India as a policy measure.

A long-standing demand of the fund industry has been addressed with the Budget proposing pass-through status for Category I and Category II alternative investment funds which inter alia include onshore venture capital, infrastructure, private equity and debt funds. Investment income earned by the fund would be taxable at level of the investor or unit holder instead of the fund while business income will be taxed at the maximum marginal rate at the fund level. With pass-through status, there is more flexibility in structuring the fund - for instance as a company. However the imposition of withholding tax of 10% in respect of distributions of non-business income by the fund to its investors will act as a dampener since they apply even to exempt income such as dividends / capital gains on listed shares. Overseas investors may also mitigate tax incidence by taking advantage of tax treaty relief as in the case of investments from Mauritius, Singapore and Netherlands.

The presence of fund managers or investment advisors in India may, in certain scenarios, be viewed as a Permanent Establishment (PE) of the offshore fund, thereby exposing the fund to additional tax liability. The Budget proposes to mitigate this risk by clarifying that an India based fund manager or investment advisor shall not be treated as a PE as long as the offshore fund is broad-based with over 95% investors being non resident, each investor's holding in the fund is capped at 10%, specific limits on the quantum of investment in any entity and other criteria is satisfied. While this proposal can definitely boost India's fund management industry, it appears that the relief can effectively only be availed by FPIs or hedge funds and may end up excluding private equity or venture capital funds. It is important to extend this relief to private equity funds as well considering the investment of around USD 100 billion made by private equity funds into India over the last decade. Another criterion for the relief is that the fund manager cannot be employed by an entity connected with the f und, which is not optimal since funds sponsored by India based fund managers may not be protected against PE risks.

The Budget offers limited relief to FPIs by proposing that MAT should not apply in relation to capital gains from securities transactions. In light of various judicial decisions, it would be helpful if the MAT exemption is widened to cover all overseas investors including private equity investors claiming capital gains tax exemption under a treaty (e.g.: those based in Mauritius or Singapore) as long as there is no PE in India. Further, the specific provision of a MAT exemption to just FPIs would, as a reverse corollary, open the doors for the tax department to impose MAT on other foreign entities earning exempt income (either under domestic law or due to treaty benefits).

In a significant boost to debt markets, the lower 5% withholding tax rate (reduced from 20%) on interest coupon on NCDs issued to FPIs will extend till June 2017. This will facilitate substantial debt investment into the country.

The framework for Real Estate Investment Trusts and Infrastructure Investment Trusts has been an area which has seen significant changes. Since their introduction, there has been a lack of interest due to absence of clarity around the tax incidence on setting up of such vehicles. While pass through status to REIT investors in relation to interest income earned by the REIT from the SPV was earlier provided, it is now proposed to be extended to rental income earned in respect of property directly held by the REIT. Sponsors of REITs who acquired units through swap of SPV shares can now benefit from capital gains tax relief applicable upon sale of listed units on the stock exchange, though no MAT relief has been provided.

A number of measures have been introduced to counter tax evasion and black money including stringent reporting of offshore assets and prosecution for failure to comply. Taking a cue from countries like Singapore, the Government proposes to make tax evasion a predicate offence for money laundering which will give more teeth to regulatory authorities.

Regulatory changes introduced by the Budget, including shifting of power to regulate most capital account transactions to the Central Government clearly show the Government's intention to simply cross-border transactions. Also, bold initiatives have been introduced to bolster the BFSI sector. Extending the much needed SARFAESI benefits to large NBFCs and introduction of a comprehensive bankruptcy code are measures that will have a significant impact. The Government has also announced various initiatives to facilitate simpler regulatory approval processes.

While proposing sweeping reforms in the 2015 Budget, the Modi-led Government seems to be committed towards reducing overall tax compliance costs, removing uncertainty, ensuring a stable and non-adversarial environment, boosting investor confidence and fostering a favourable business and investment regime. While it is a great way to bring India back on the global investment radar, some of the fine print in the Budget may act as an irritant. There have of course been missed opportunities such as bringing clarity on tax treaty entitlement, exemption from MAT to SEZ units and on deductions for CSR spends, which, it is hoped, will be addressed in the future.

We have provided below a more comprehensive analysis of the Budget proposals. Hope you enjoy reading it.

  • Clarity On Indirect Transfer Tax: Ambiguity Still Prevails!
  • General Anti-Avoidance Rules: Temporarily Avoided!
  • Government 'Passes Through' Rules For AIFs
  • Permanent Establishment Exemption For Fund Managers In India – Much Ado About Little!
  • MAT Relief Or Burden For Foreign Investors?
  • Tax Additions On REITS: Pass-Through Remains Partial!
  • Expanded Net To Tax Offshore Structures
  • Tax On Interest Paid By Branch Office Of Banks To Head Office: Muddying Troubled Waters!
  • Tax Rules For GDRs: Could Have Done With Some Sweetening!
  • Tax Rates: Stability And Rationalization Measures
  • Indirect Tax: Moving Towards GST
  • Regulatory Measures: Simplifying Regulations!
  • Missed Opportunities


The Finance Minister, during his Budget speech, spoke about moving towards a tax regime which would be in consonance with global policy. In doing so, he has tried to address the concerns of investors by making significant changes to the indirect transfer tax provisions in the Income Tax Act (ITA). In the international context, capital gains tax is typically based on residence and not source and very few countries have provisions taxing indirect transfer of shares by offshore companies. However, by virtue of Section 9, the ITA taxes capital gains based on the source of the gains. Further, the indirect transfer tax provisions, as have been provided under the ITA, expand the existing source rules for capital gains. The indirect transfer tax provisions were introduced in the Finance Act, 2012 by way of Explanation 5 to Section 9(1)(i) of the ITA, "clarifying" that an offshore capital asset would be considered to have a situs in India if it substantially de rived its value (directly or indirectly) from assets situated in India.

On the basis of the recommendations provided by the Shome Committee appointed by the then Prime Minister, the Finance Bill (Bill) proposes to make various amendments to these provisions which are summarized below:

  • Threshold test on substantiality and valuation:The Bill provides that the share or interest of a foreign company or entity shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of Indian assets (i) exceeds the amount of INR 10 crores (INR 100 million); and (ii) represents at least fifty per cent of the value of all the assets owned by the company or entity. The value of the assets shall be the Fair Market Value (FMV) of such asset, without reduction of liabilities, if any, in respect of the asset. The manner of determination of the FMV of the assets has not been prescribed in the Bill and is to be provided for in the rules.
  • Date for determining valuation: Typically, the end of the accounting period preceding the date of transfer shall be the specified date of valuation. However, in a situation when the book value of the assets on the date of transfer exceeds by at least 15%. The book value of the assets as on the last balance sheet date preceding the date of transfer, then the specified date shall be the date of transfer. This results in ambiguity especially in cases where intangibles are being transferred.
  • Taxation of gains:The gains arising on transfer of a share or interest deriving, directly or indirectly, its value substantially from assets located in India will be taxed on a proportional basis based on the assets located in India vis -ŕ-vis global assets. While the Bill does not provide for determination of proportionality, it is proposed to be provided in the rules. It would be necessary to ensure that only the value of the Indian assets is taxed in India. It is important to address the cost adjustment, if at a later point in time, the Indian assets are transferred. For example, if an offshore company derives substantial value from Indian company shares held by it, and tax is paid on transfer of the offshore company on account of the value derived from India, will there be a step up in cost basis if the shares of the Indian company are subsequently transferred?
  • Exemptions: The Bill also provides for situations when this provision shall not be applicable. These are:

    • Where the transferor of shares of or interest in a foreign entity, along with its related parties does not hold (i) the right of control or management; and (ii) the voting power or share capital or interest exceeding 5% of the total voting power or total share capital in the foreign company or entity directly holding the Indian assets (Holding Co).
    • In case the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly, then the exemption shall be available to the transferor if it along with related parties does not hold (i) the right of management or control in relation to such company or the entity; and (ii) any rights in such company which would entitle it to either exercise control or management of the Holding Co or entitle it to voting power exceeding 5% in the Holding Co.

      Therefore, no clear exemption has been provided to portfolio investors as even the holding of more than 5% interest could trigger these provisions. This is a far cry from the 26% holding limit which was recommended by the Committee. Further, no exemption has been provided for listed companies, as was envisaged by the Committee
    • In case of business reorganization in the form of demergers and amalgamation, exemptions have been provided. The conditions for availing these exemptions are similar to the exemptions that are provided under the ITA to transactions of a similar nature.
  • Reporting Requirement:The Bill provides for a reporting obligation on the Indian entity through or in which the Indian assets are held by the foreign entity. The Indian entity has been obligated to furnish information relating to the off-shore transaction which will have the effect of directly or indirectly modifying the ownership structure or control of the Indian entity. In case of any failure on the part of Indian entity to furnish such information, a penalty has been proposed to be levied. The proposed penalty ranges from INR 500,000 to 2% of the value of the transaction.

    In this context, it should be pointed out that it may be difficult for the Indian entity to furnish information in case of an indirect change in ownership, especially in cases of listed companies. Further, there is minimum threshold beyond which the reporting requirement kicks in. This means that even in a case where one share is transferred, the Indian entity will need to report such change.

All in all, while these provisions will provide some relief to investors, a number of recommendations as provided by the Committee have not been considered by the Government. Some of these recommendations related to exemption to listed securities, P-Notes and availability of treaty benefits. Further, there are no provisions for grand fathering of existing investment made in the past and questions arise as to the tax treatment on transactions undertaken between 2012 and 2015 although in last year's budget, the Finance Minister had clarified that assessing officers will not issue retrospective notices in relation to these provisions. Yet another issue that has not been considered is the potential double taxation that can happen, especially in multi-layered structures. Further, no changes have been proposed to the wide definition of 'transfer' which could potentially cover unintended activities like pledge/mortgage of property of the foreign company having assets located in India.

A fundamental question that ought to have been addressed is whether such tax policy is in consonance with global tax policies and the Finance Minister should have actually taken the bold step of scrapping the provisions from the ITA in entirety. In the current form, we can expect further litigation on various issues relating to the indirect transfer provisions for the foreseeable future.


The GAAR provisions were introduced in the ITA in 2012 and were slated for implementation from April 1, 2013. Owing to ambiguities in its scope and application, lack of safeguards and possibility of misuse by tax authorities, GAAR had been widely criticized. With a view to address the issues raised, the Government had appointed a Committee for consultation with stakeholders and the review of the GAAR provisions. Some of the recommendations of the Committee had been accepted and the GAAR provisions were amended in the 2013 Budget. The 2013 Budget deferred the implementation of GAAR for 2 years and made it applicable from April 1, 2015. However, in spite of significant changes to the provisions, GAAR still empowers the Revenue with considerable discretion in taxing 'impermissible avoidance arrangements'.

This year's Budget has reviewed the GAAR provisions and has deferred GAAR further by 2 years i.e. GAAR will now be applicable from April 1, 2017. Further, it has also been proposed to grandfather investments made upto March 31, 2017 and make GAAR applicable prospectively, i.e. to investments made only after April 1, 2017. The Finance Minister has stated that considering that investor sentiment has turned positive and with a view to accelerate this momentum, it would be prudent to defer the implementation of GAAR. Further, the memorandum to the Finance Bill states that keeping in mind that the Base Erosion and Profit Shifting (BEPS) project under Organization of Economic Cooperation and Development is continuing and India is an active participant in the project, it would be proper that GAAR provisions are implemented as part of a comprehensive regime to deal with BEPS and aggressive tax avoidance.

The deferral of the GAAR provisions is definitely a huge positive. Investors have been worried about the scope of the GAAR provisions and concerns have been raised on how they would be implemented. A re-look at the scope of the provisions will definitely be welcomed by the investment community and it is hoped that when revised provisions are introduced, they will be in line with global practices.


This year's Budget came with a number of reforms that were announced for alternative investment funds (AIFs). The Finance Minister, in his budget speech, announced that foreign investment will be allowed in AIFs going forward. Although this is a positive development, one has to wait and watch as to how this measure will be implemented.

Globally, funds have been accorded pass through status to ensure fiscal neutrality whereby funds do not discharge tax at an 'entity-level'. Instead, tax liability should fall on the investors in a fund depending on their respective tax statuses. True pass-through tax treatment is accordingly an integral aspect for the fund economics to work.

In response to a long-standing demand of the investment funds industry in India, the Finance Minister sought to extend pass through status to AIFs that are registered with the Securities and Exchange Board of India (SEBI) as Category I AIFs or Category II AIFs under the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations).

Prior to the Finance Minister's announcement, pass-through status was only available to Category I AIFs under the venture capital fund sub-category and venture capital funds that were registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations).The Bill includes a proviso to section 10(23FB) of the ITA pursuant to which Category I and Category II AIFs that are registered under the AIF Regulations will be taxed according to the new rules set forth in the newly introduced Chapter XII-FB of the ITA. Consequently, venture capital funds registered under the erstwhile VCF Regulations will continue to be eligible to claim the exemption under section 10(23FB) in respect of income from investments in venture capital undertakings.

The Bill defines an "investment fund" to mean a fund that has been granted a certificate of registration as a Category I or a Category II AIF and provides that any income accruing or arising to, or received by, a unit-holder of an investment fund out of investments made in the investment fund shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to, or received by such person had the investments made by the investment fund been made directly by the unit-holder. In other words, the income of a unit-holder in an investment fund will take the character of the income that accrues or arises to, or is received by the investment fund.

However, the Bill contemplates that income chargeable under the head 'Profits and gains of business and profession' will be taxed at the investment fund level and the tax obligation will not pass through to the unit-holders. In order to achieve this, the Bill proposes to introduce two provisions:

  • Section 10(23FBA) which exempts income of an investment fund other than income chargeable under the head 'Profits and gains of business or profession'; and
  • Section 10(23FBB) which exempts the proportion of income accruing or arising to, or received by, a unit-holder of an investment fund which is of the same nature as income chargeable under the head 'Profits and gains of business or profession'.

Where the total income of an investment fund in a given previous year (before making adjustments under section 10(23FBA) of the ITA) is a loss under any head of income and such loss cannot be, or is not wholly, s et-off against income under any o ther head of income, the Bill allows such loss to be carried forward and set-off in accordance with the provisions of Chapter VI (Aggregation of Income and Set Off or Carry Forward of Loss). Further, the Bill provides that the loss will not pass through to the unit holders of an investment fund and accordingly, the unit holders will be precluded from off-setting their proportionate loss from the investment fund against other profits and gains that they may have accrued. This is unlike under the current rules for taxation, where a trust is regarded as being a determinate trust or where an investor's contribution to the trust is regarded as a revocable transfer, in which case the investor retains the ability to off-set its proportionate losses against its other profits and gains.

If the income of an investment fund in a given previous year is not paid or credited to the account of its unit-holders at the end of the previous year, such income will be deemed to have been credited to the account of its unit-holders on the last day of the previous year in the same proportion in which the unit-holders would have been entitled to receive the income had it been paid in the previous year.

An important feature of the pass-through framework is the requirement to deduct tax at 10% on the income that is payable to the payee as outlined in the newly proposed section 194LBB of the ITA. In view of the rule mandating the deemed credit of income to the accounts of unit-holders, the Bill extends the requirement to deduct tax to scenarios where income is not actually paid or credited but only deemed to be credited.

A welcome move provided for in the Memorandum to the Bill is that income received by investment funds would be exempted from TDS by portfolio companies. While a separate notification would be issued in this respect, when implemented, this should be helpful in case of interest / coupon payouts by portfolio companies to such funds. Previously, it was administratively difficult for investors to take credit of the TDS withheld by portfolio companies.

While the proposed pass-through regime is a welcome development, it is not without its set of difficulties. For example, the withholding provision in its current form would apply to exempt income such as dividends and long-term capital gains on listed equity shares. Further, no clarity has been provided on whether the withholding obligation would also apply in respect of non-resident investors who are eligible to treaty benefits. While section 195(1) of the ITA casts a withholding obligation only on sums that are chargeable to tax under the provisions of the ITA, it would have been preferable if the Bill clarified that section 194LBB would not be applicable in connection with the credit of income to an investor that is eligible for treaty benefits.


Under current Indian treaties and domestic law, the presence of a fund manager in India increases the risk of the offshore fund constituting a PE / tax presence in India. Consequently, it exposes the risk of the profits of the offshore fund being subject to tax in India, to the extent attributable to the PE. Today, India focused offshore funds deal with this risk by engaging managers outside the country, or engaging Indian residents on an advisory basis. The ITA has proposed amendments to encourage fund management activities in India – by providing that having an eligible manager in India should not create a tax presence (business connection) for the fund in India or result in the fund being considered a resident in India under the domestic 'place of effective management' rule.

However, while section 9A may be well intentioned, it employs a number of rigid criteria that would be impossible for PE funds and difficult for FPIs to satisfy:

  1. No ability to "control and manage": To qualify, the fund shall not carry on or control and manage, directly and indirectly, any business in India. It is unclear whether shareholders rights such as affirmative rights can be considered "control and management". Further, this exemption will not be available to buy-out/growth funds, since such funds typically take a controlling stake and management rights in the portfolio companies.
  2. Broad basing requirement: The fund is required to have a minimum of 25 members who are directly/ indirectly unconnected persons. This seems similar to the broad-basing criteria applied to Category II FPIs and isn't quite appropriate for private equity/venture capital funds which may often have fewer investors. Further, there is no clarity on whether the test will be applied on a look through basis (which could impact master-feeder structures).
  3. Restriction on investor commitment: It is required that any member of the fund, along with connected persons1 should not have a participation interest exceeding 10%. It has also been stated that the aggregate participation of ten or less people should be less than 50%. This would restrict the ability of the fund sponsor/ anchor investor to have a greater participation. It would also have an impact on master feeder structures or structures where separate sub-funds are set up for ring fencing purposes.
  4. Fund manager cannot be an employee: The exemption does not extend to fund managers who are employees or connected persons of the fund. Further, it is not customary in industry to engage managers on a consultancy/ independent basis, for reasons of risk and confidentiality, particularly in a private equity/venture capital fund context. Therefore, this requirement is likely to be very rarely met.

The proposed amendments do not leave funds worse off – however, they are unlikely to provide benefit to private equity/venture capital funds or FPIs. Firstly, a fund manager exemption is more relevant in a private equity/venture capital context, where on ground management is more of a necessity. For the reasons discussed above, private equity/venture capital funds are unlikely to be able to take advantage of section 9A. If the intent was to provide PE exclusion benefits to FPIs investing in listed securities, it would have been more appropriate to clarify the risk on account of co-location servers in India on which automated trading platforms are installed. Secondly, FPI income is characterized as capital gains, and hence, the permanent establishment exclusion may only be relevant to a limited extent.


Minimum Alternate Tax ("MAT") is a tax levied based on the book profits of the company, where the overall tax paid by the company is less than 18.5% of the book profits. In case of non-residents, where there is no permanent establishment in India, Courts have traditionally held that no MAT is applicable since they do not maintain their books under the Indian Companies Act. However, there have been certain decisions by the Authority for Advance Rulings2 levying MAT on Foreign Portfolio Investors ("FPIs") even where their long term capital gains tax are not taxable in India.

The Finance Bill has proposed to specifically exempt long term capital gains arising to FPIs from the ambit of the MAT provisions.

This exemption on MAT however, has only been extended to a limited category of foreign investors in respect of exempt capital gains income.

A broader fundamental issue that also arises is that private equity players and foreign companies not falling within the purview of FPIs will now be at the risk of scrutiny by the Revenue in respect of MAT liability. This is especially relevant since recently many offshore funds have received tax notices on MAT. It is surprising that as a policy decision, the Finance Minister has completely ignored non-resident investors who invest in India with a long term view, who can now be adversely affected due to this amendment. This also leaves open this issue for Courts to decide on the applicability of MAT provisions to non-resident investors and we can expect significant litigation to arise in respect of this issue in the near future.


With a view to incentivizing the Indian real estate and infrastructure markets, a framework for Real Estate Investment Trusts and Infrastructure Investment Trusts (collectively referred to as "Business Trusts" in this piece) was put in place by the SEBI through the SEBI (Real Estate Investment Trust) Regulations, 2014 and the SEBI (Infrastructure Investment Trust) Regulations, 2014. The Business Trust framework would allow for an asset backed investment mechanism where an Indian trust is set up for the holding of real estate or infrastructure assets as investments, either directly or through an Indian company set up as a Special Purpose Vehicle (SPV). Please click here for our article providing further detail s on the Business Trust taxation framework in light of last year's budget.

Further, the Government sought to provide clarity on the tax treatment of Business Trusts through the introduction of a specialized regime in the Finance Act, 2014, enacted into the ITA following last year's budget. However, these measures did not offer much encouragement either to the sponsor (the developer who sets up the Business Trust by transfer of property or shares of SPV) or the unit holders (investors in units of the Business Trust). The Bill proposes to make amendments to the ITA to rationalize the tax provisions governing Business Trusts as below:

1. Sponsor taxation:

Under the existing provisions of the ITA, capital gains tax exemption is provided to the sponsor on transfer of shares of an SPV to the Business Trust. However, the sponsor is liable to capital gains tax on the difference between the sale price of the Business Trust units and acquisition cost of the SPV shares at the time of divestment of the Business Trust Units. Further, even though the initial transfer of shares of the SPV is not subject to capital gains tax, there is a levy of MAT that applies on the total book profits in the year of transfer, in addition to deferred capital gains tax later at an appreciated value on sale of Business Trust units. The extant regime also provides for no exemption from capital gains tax or stamp duty for the sponsor transferring real property directly into the Business Trust.

The Bill proposes to modify the extant regime by making capital gains completely exempt in the hands of the sponsor in ordinary cases. For this purpose, the Bill has introduced an amendment allowing for the long term capital gain exemption and beneficial 15% rate on short term capital gains on the sale of Business Trust units by the sponsor as part of an offer for sale at the time of initial listing or by way of subsequent sale on the stock exchanges.

However, no exemption has been provided in respect of MAT liability on the sponsor entity. As per the Bill, the sponsor has been given capital gains exemptions both on transfer of SPV shares to the Business Trust and on later sale of Business Trust units, although both events would substantially increase the book profits of the sponsor. Therefore, MAT would most likely be applicable on the total book profits in both financial years despite the exemptions.

While tax implications on sale of Business Trust units by the sponsor is justified owing to realization of gains, imposing MAT at the point of transfer of SPV shares results in unjust tax burden for the sponsors since it is only a notional profit. Therefore, an exemption from / deferral of MAT liability at the point of transfer of SPV shares to the Business Trust would have been desirable and the lack of the same makes the Business Trust structure less desirable for a developer.

Further, a larger issue raised by the developer community was that the present regime does not provide a capital gains or stamp duty exemption for the sponsor where property is directly transferred into the Business Trust. The Bill has not made any revisions to this position and this position remains unchanged.

2. Taxation of Business Trust income

Under the existing regime, a pass-through has been provided only for income up-streamed by way of interest on debt infused into an SPV by the Business Trust. No pass-through was allowed for income up-streamed by way of dividends distributed by the SPV or for rental income of the Business Trust, from real property directly held by it, being up-streamed to the investors.

The Bill proposes to add to this by allowing a pass-through for rental income earned by the Business Trust from real property directly held by it as well. Further, tenants paying the rental income to the Business Trust are not required to withholding any tax on the rental payments, thereby increasing the cash available for payout by the Business Trust. To this extent, the Bill proposes that in case of distributions of rental income by the Business Trust to the domestic investors, there is no tax in the hands of the Business Trust and the domestic investors have to pay tax on such income. In respect of distribution of rental income by the Business Trust to non-resident investors, there is a withholding tax which will be applied on such income at the rates in force, which can go up to 40%. Such withholding tax paid in India under this provision should be creditable in the jurisdiction of residence of the investors. From a foreign investor point of view, a direct holding of assets by the Business Trust may not be tax efficient.

Most importantly, in the absence of capital gains and stamp duty exemptions being accorded to the sponsor for direct transfer of property, the pass-through that has been given for rental income would remain largely ineffectual since developers would be unwilling to transfer property into the Business Trust after incurring such significant costs. Further, since no pass-through in respect of dividend distribution by the SPV, the pass-through accorded to Business Trusts remains partial and not in line with investor expectations.

Although developers and investors alike have largely been expectant of a mass iron-out of the tax framework for Business Trusts, the proposals made in the Bill in respect of taxation of Business Trusts still leave un-addressed tax issues. All in all, the proposals fall short of expectations and further revisions would be required for the Indian Business Trust structure to become a success story.


In a vibrant economy with Indian companies and families looking to explore different opportunities globally, Indian residents often look to set up offshore holding companies either for: (i) strategic and operational reasons (easier global expansion of business), (ii) personal finance reasons (as in the case of fund managers who may receive carried interest from offshore funds and wish to diversify their personal portfolio); or (iii) personal wealth planning reasons (For example, in order to buy property abroad it is often required to pool funds in an offshore entity on account of the upper limits under the liberalized remittance scheme, or for protection against exchange rate fluctuations etc).

The Budget proposes two key sets of provisions which could impact offshore assets and structures. Firstly, the residency rule for offshore entities has been changed to bring in the place of effective management (POEM) rule, which could subject several offshore entities to tax in India. Secondly, strict penal consequences have been introduced for failure to disclose offshore assets (including shares). Both these measures are expected to have a significant impact on outbound investments by Indian residents.

1. Place of Effective Management

Till date, offshore companies have been treated as "non-resident" in India unless wholly controlled and managed from India. The consequence of this is that the income of such offshore company is not taxable in India unless distributed to an Indian resident shareholder. Further, even in situations where the offshore company is 100% owned by Indian residents and has majority Indian directors, it has been held that there should be no residence in India if board meetings are held outside India. The Bill proposes moving to a more subjective test of place of effective management (POEM), and considers a foreign company resident in India if its POEM is in India at any time in the relevant financial year. POEM has been defined to mean "a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made".

Therefore, for example, in the situation described above, where an offshore company has 100% Indian resident shareholders, majority of Indian directors and one director offshore, the company could now be considered Indian resident under the POEM test. In that case, the worldwide profits of the offshore company would be taxable in India. Even if the shareholding is less than 100%, with some portion held by non-Indian investors, Indian promoters may still want ownership and management control, which could create exposure. This could impact a range of structures, including outbound investment structures by Indian business families and personal wealth/carried interest structures such as personal holding companies.

While the change has been introduced based on international standards (particularly OECD), the deviation is that the Indian threshold is triggered even if POEM exists for a certain period during the financial year, whereas the OECD standard looks for the predominant POEM during a given year. This makes it possible that an offshore company could be considered "resident" and taxable on a global basis in 2 or more countries at a given time (India, where a part of the POEM exists, the OECD country with substantial POEM and the country of incorporation if it does not recognize the country of management). Further, there is still not enough clarity on what would constitute the place where "key management decisions are in substance made" i.e. whether the residence of directors will be looked at, location of board meetings or other criteria such as expansive veto rights by Indian resident shareholders.

2. Disclosure and tax on offshore assets

Offshore holding structures will also be impacted by the stringent disclosure requirements and penal consequences introduced by this budget, which are discussed below.

In 2012, it was made compulsory for Indian residents to disclose all offshore assets (including bank accounts, beneficial interest in trusts, etc.) in their tax returns, irrespective of whether any income has accrued to the resident in the relevant financial year. As part of the Modi Government's commitment to identify and stem the generation of 'black money', the Finance Minister has proposed to introduce a Bill in the ongoing Parliamentary session to deal solely with offshore black money, with the following key features:

  • Income and asset concealment and tax evasion in relation to foreign assets will be a non-compoundable offence punishable with a penalty of 300% of tax due; 10 years' rigorous imprisonment and no recourse to the Settlement Commission;
  • Not filing returns or filing returns with inadequate disclosure of foreign assets will also be an offence punishable with upto 7 years' rigorous imprisonment. The prosecution and penalty provisions will equally apply to individuals or entities that abet such offences;
  • Undisclosed income from foreign assets or income from undisclosed foreign assets will be taxable at the maximum marginal rate (30%) and will not be eligible for any statutory exemptions or deductions;
  • Beneficial owners of foreign assets or beneficiaries of foreign assets will be mandatorily required to file returns even if there is no taxable income;
  • The taxpayer is mandatorily required to specify the date of opening of the foreign account in the return of income.

The Finance Minister also announced corresponding changes to related legislations of the Prevention of Money Laundering Act, 2002 (PMLA) and the FEMA indicating the Government's intention to have a comprehensive regime in place to tackle offshore black money. The Finance Minister has proposed to include 'concealment of income or evasion of tax in relation to a foreign asset' as a predicate offence under the PMLA, thus enabling the confiscation of foreign assets unaccounted for and prosecution of persons involved.

Provisions of the PMLA and FEMA are also proposed to be widened to enable attachment and confiscation of equivalent assets in India where contraventions have occurred and the foreign asset cannot be forfeited. In addition, such contraventions are punishable with up to 5 years' imprisonment and penalty.

The measures have a laudatory aim and may also prove to have a deterrent effect. That said, there were no details provided on the safeguards to ensure legitimate accounts are not sealed and honest taxpayers harassed, as there are legally permissible circumstances when assets obtained abroad can be retained abroad.

There is also need for more clarity on how beneficiaries of foreign discretionary trusts will be treated. In many instances, individuals are not aware they have been named beneficiaries especially in the case of testamentary trusts. Imposing a mandatory filing requirement in such cases will end up causing hardship.


Under the ITA, any interest paid by an Indian resident entity to a non-resident entity would be subject to a withholding tax in India (subject to treaty relief allowing a beneficial rate). However, in case of apportionment of profits between an Indian PE and its foreign head office, the Supreme Court of India4 has settled that only the PE is to be considered the taxable assessee under the ITA. On this basis, the Calcutta High Court in ABN Amro Bank5 held that any interest paid by a PE to its head office would not be separately chargeable to tax in the hands of the head office and no Indian withholding tax would be applicable on the same. Subsequently in the case of Sumitomo6, the tribunal further applied the doctrine of mutuality to state that the transaction between the branch office and head office in respect of interest payment cannot be brought to tax in India. Further, in these cases, the interest expenditure was also allowed as a deduction from the taxable profits of the PE. At present, this position is largely being followed by global banks having a presence in India so as to make tax-free interest payments to the head office, thereby reducing taxable profits in India.

The Bill, however, proposes to add an Explanation to Section 9(1)(v) to provide that any interest payable by a PE to its head office or any other foreign PE or constituent of such head office would be chargeable to tax in India under the ITA, thereby introducing a withholding tax on such payments as well. For the purposes of this provision, PE is defined to include a fixed place of business through which the business of the foreign entity is wholly or partly conducted. Further, since such interest income has been made taxable in India under domestic law, the Explanation also elaborates that the Indian PE would be deemed to be a 'separate and independent' person on whom the provisions of the ITA shall apply.

While the finance minister had promised tax incentives for foreign players to set up shop in India, the newly added provision would act as an additional tax burden for a foreign financial institution at the time of payment of interest from its Indian branch to its head office (or any other foreign branch) since such interest payments have till date been free of tax in India. In Sumitomo, the tribunal has held that interest payments by a PE to its head office should not be taxable in India under the extant framework of the ITA. However, the tribunal also held that even if such payments were taxable under the ITA, a specific provision would be required to be added in Article 11 of tax treaties (dealing with interest payments) allowing for such payments to be taxable in India.7 Such a specific provision would be required since there would be no differentiation between a PE and its head office from the perspective of a tax treaty for the purposes of Article 11.

Therefore, unless India's tax treaties are modified to include a specific provision allowing India to tax interest payments from an Indian PE to its head office (like for instance, Article 14(3) of the India-US tax treaty), such interest should not be taxable in India, making the proposed provision largely redundant. However, what this provision will effectively result in is increased litigation on this issue in India which could have otherwise been avoided.


Under the extant provisions of the ITA, Global Depository Receipts (GDRs) issued against ordinary shares or foreign currency convertible bonds (FCCBs) of the issuing companies were allowed certain tax benefits. These included a concessional tax rate of 10% on long term capital gains on the transfer of GDRs to residents and exemption from capital gains tax on transfer of GDRs from one non-resident to another.

Based on the recommendations of the Sahoo Committee, the Depository Receipts Scheme, 2014 (New Scheme) allowed issuance of GDRs against a wider range of permissible underlying securities (including debt and mutual fund units), by listed and unlisted Indian companies alike.

The Sahoo Committee also recommended that tendering of shares of a listed company for issue of DRs be on par with sale of shares on a stock exchange for capital gains tax purposes. It was also recommended that conversion of DRs into underlying securities be tax neutral on the basis that DRs and their underlying securities should be treated as the same asset. These recommendations have been examined in further detail in our hotline here.

With the implementation of the New Scheme underway, it was expected that the current budget would extend tax benefits available under the ITA to all kinds of depository receipts irrespective of the underlying security. However, the amendments proposed by the budget to the ITA narrow down the scope of the exclusion, by not allowing GDRs issued against ordinary shares of unlisted companies. The intention may be to avoid having allowing an arbitrage to foreign investors (since sale of unlisted securities are taxable in India). Nevertheless, in light of the Sahoo committee recommendations, extending ITA benefits to certain permissible instruments such as listed NCDs would have served as a good impetus to the markets. One open issue that has not been clarified is whether companies having listed NCDs will now be considered as listed companies to be eligible for the GDR exemption even if their shares are not listed.


There has been no change in the corporate tax rate of 30% for domestic companies. However, the Finance Minister has stated that the corporate tax rate would be reduced from 30% to 25% (excluding surcharge and cess) over the next four years, coupled with rationalization and removal of various exemptions and rebates. Surcharge on the other hand, has been increased by 2% for domestic companies, thereby increasing maximum effective rates to 34.61%.

The base income-tax brackets for the financial year 2015-16 have not been changed for individuals, Hindu Undivided Families, association of persons and body of individuals, but, limits on various rebates applicable to individuals have been increased, particularly, those related to promoting social security. High-net worth individuals having income in excess of INR 1 crore (about USD 0.17 million) will be subject to an additional surcharge of 2%, thereby increasing the effective maximum rate to 34.61%. The additional 2% surcharge is in lieu of the Wealth Tax which has been abolished by this Budget since Wealth Tax was proving to be a low yield high cost revenue measure.

Withholding rates applicable in case of royalty and fees for technical services to offshore entities are proposed to be reduced from 25% to 10% (on a gross basis). While most Indian tax treaties cap withholding on royalty and fees for technical services between 10-15% and the payee would be able to claim foreign tax credit in its country of residence, this reduction would be relevant in case of pass-through entities (partnerships, LLCs, etc.) where there is uncertainty over their eligibility to treaty relief, or in case of payments made to entities set out in non-treaty countries. This would be important for technology transfer, knowledge sharing and collaboration agreements across sectors and will boost domestic manufacturing / service industry.

The existing regime of allowing a lower withholding rate applicable on interest paid on non-convertible debentures to FPIs of 5% is proposed to be extended for payments up to June 2017 (currently applicable only up to May 2015).


One of the major announcements on the indirect tax front was the proposal to implement a unified Goods and Services Tax ("GST") regime from April 1, 2016. The GST is a long pending demand that has been coming from the industry and the commitment to introduce the same from next year is welcomed by investors.

Other major changes included the increase in the rate of Service tax and the standard ad valorem rate of central excise duty from 12.36% (inclusive of cesses) to 14% and 12.5% respectively.

An important change having a wide ranging impact is the applicability of service tax on "aggregators". With effect from March 1, 2015, services provided under the "aggregator model" and under the brand name or trade name of the aggregator will result in a service tax liability on the aggregators or their representatives in India. In the absence of any Indian presence, including by way of a representative, the aggregator will be required to appoint an agent for payment of service tax. This change will impact a number of portfolio companies especially in the taxi aggregation business.

Further, with effect from April 1, 2015, services of mutual funds agents and mutual fund distributors will no longer be exempt from service tax. Under the reverse charge mechanism, service tax on such services shall be payable by the assets management company or the mutual fund receiving such services.

Additionally changes have also been introduced to remove certain exemptions such as admission to entertainment event or amusement parks, or services provided by Government or local authority to a business entity. Importantly, the Bill also clarifies that reimbursable expenditure will also be included in the value of taxable service.

With a view to encourage digitization of indirect tax processes, the Finance Minister in his budget speech announced that electronic records and digitally signed invoices will be accepted for central excise and service tax purposes. Online central excise and service tax registration is proposed to be completed within two working days.


I. Amendments to exchange control regime

1. Foreign equity investment to be regulated by Central Government

Thus far, Section 6 of the Foreign Exchange Management Act, 1999 ('FEMA') granted powers to the Reserve Bank of India (RBI) to regulate, restrict or prohibit capital account transactions, in consultation with the Central Government. The RBI had in furtherance of the above powers formulated various regulations to regulate capital account transactions, including the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (TISPRO Regulations).

The Bill now seeks to shift the power to regulate non debt capital account transactions from the fold of RBI to the Central Government, limiting the powers of RBI to only capital account transactions involving debt instruments. It would be pertinent to note that the definition of debt instruments shall be as defined by the Central Government.

It appears that this change has been introduced as capital account controls is a policy issue and not a regulatory matter. Practically too, so far the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India made policy pronouncements on FDI through Press Notes/Press Releases which were notified by the RBI as amendments to the TISPRO Regulations. Further, these notifications took effect from the date of issue of Press Notes/ Press Releases, unless specified otherwise therein. However, in case of any conflict, the relevant FEMA notification prevailed.

To that extent, this change is a positive move as it removes multiple regulators for the same matter, and obviates the need for an amendment to TISPRO Regulations by RBI for a foreign investment related policy decision. Having said this, it remains to be seen as to whether other capital account transaction regulations relating to other kind of foreign investments (like foreign portfolio investment, foreign venture capital investments, etc.), outbound investments, immovable property regulations, etc. which have been formulated by the RBI will continue to subsist or will the Central Government replace them. Also, it is not clear at this stage as to which entity will be the nodal entity for any regulatory approvals pertaining to capital account transaction.

2. Composite caps

Under the FDI Policy, while foreign investment in most sectors is permitted up to 100% under the automatic route, there are certain sectors in which there are sectoral caps. Further, in some such sectors, there are separate caps for FDI and FPI route investments. For instance, in the power exchange sector, there is a composite cap of 49%, but sub-caps of 26% for FDI and 23% for FPI investments. The Finance Minister has, in his Budget Speech proposed to replace these sub-caps with composite caps for both FDI and FPI.

This is a welcome move, as it provides greater flexibility for stakeholders to structure foreign investment and it may create further investment headroom for specific category of investors. For example, in the defence sector, investment by FPIs is currently not permitted. Once the Bill has been notified, FPIs would be able to utilize the 26% foreign investment limit currently reserved only for FDI investors.

II. Securities Law Regulations

Forward Markets Commission merged With Securities and Exchange Board of India

After the National Spot Exchange Limited (NSEL) crisis, there has been considerable debate in the Indian financial circles on the fate of the Forward Markets Commission, (FMC) which regulates the commodities market. The Central Government had the option to either strengthen the FMC by amending the Forward Contracts (Regulation) Act, 1952 (FCRA) or merging the FMC with the capital markets regulator, the SEBI as recommended by the FSLRC.

Post the NSEL crisis, the Government had transferred the administrative control of FMC from the Ministry of Consumer Affairs to the Ministry of Finance. In consonance with the recommendation of the FSLRC, the Budget merges the FMC with SEBI. As per proposed amendments to the FCRA and Securities Contract (Regulation) Act, 1956 (SCRA), all registered association such as commodity exchanges will now be deemed stock exchanges and have been given a period of one year, unless extended by SEBI, to comply with the regulation applicable to stock exchanges i.e. SCRA and rules framed thereunder. The convergence of the regulatory framework for securities and commodities trading should strengthen the regulatory framework for the financial markets and provide the much needed confidence to all the stakeholders.

III. Banking, Financial Services and Insurance

1. Extending SARFAESI protection to Non-Banking Financial Institutions

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) provides certain measures for recovery of non-performing assets to 'financial institutions' as defined under Section 2(1)(m) of SARFAESI Act. The definition includes (a) a public financial institution (as defined in the Companies Act, 1956), (b) any financial institution or non-banking financial company (NBFC), as may be specified by the Central Government. However, despite the recommendations by the Usha Thorat Committee to include NBFCs as 'financial institutions' for the purposes of SARFAESI, the Central Government had not made any such inclusions.

The Finance Minister has in his Budget Speech announced that NBFCs that (a) are registered with the RBI and (b) have an asset size of INR 500,00,00,000 (Rupees Five Hundred Crores) (INR 5 billion) shall be considered as 'financial institution' for the purposes of the SARFAESI Act.

This is a welcome move for the NBFC industry in India for the following key reasons. Firstly, eligible NBFCs would now be able to enforce security interest without court intervention thereby considerably expediting the security enforcement mechanism. Secondly, assets of eligible NBFCs can now be sold to asset reconstruction or securitization companies. Additionally, eligible NBFC would now also be considered a qualified institutional buyer and would be able to acquire security receipts issued by an asset reconstruction company or a securitization company.

2. New Bankruptcy Code

Considering the failure of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and Board for Industrial and Financial Reconstruction (BIFR) as suitable mechanism for regulating bankrupt companies in India, the Finance Minister has announced the Government's intention to introduce a 'comprehensive Bankruptcy Code' for dealing with bankrupt companies in India. Steps in this regard were taken in August 2014 when a committee was set up under the chairmanship of Mr. T.K. Vishwanathan to study the 'corporate bankruptcy legal framework in India' and suggest measures to reform the system. The interim report was submitted by the committee in February 2015, which suggested elaborate reforms.3 The committee is ex pected to submit the second part of its report, an Insolvency Code, which is likely to be the Bankruptcy Code for India. This is a welcome and much needed move to bring Indian insolvency regulations and processed in line with well-established international practices. The lack of efficacious and efficient remedies in cases of insolvency and restructuring, which functioned with the intent to protect the companies, makes the newly suggested Bankruptcy Code more important.

3. Common grievance redressal body for financial service providers

In the interest of enhancing consumer protection, the Finance Minister has announced the creation of a task force for the formation of a Financial Redressal Agency (FRA), which shall address grievances against all financial service providers. While currently no clarity has been provided as regards the jurisdiction and scope of the FRA, it would be interesting how the FRA would function in sync with existing dispute resolution mechanisms in India, especially the various redressal mechanisms provided by various regulators under their respective statutory frameworks.

4. Boost for Insurance sector

The Budget has proposed that employees of specified income brackets would now have the choice between contribution to Employee State Insurance or to any other private health insurance offered by an insurer recognised by Insurance Regulatory Development Authority of India. The budget has also increased the income tax deduction limits on account of contributions made towards life insurance pension plans.

These proposals along with the recently raised foreign investment cap in the Insurance sector should attract more private players and investments in this high potential space.

5. Infrastructure Financing

Infrastructure was named as one of the key focus areas of the Government for the coming financial year. Two of the key developments that have been proposed are:

  1. creation of a National Investment and Infrastructure Fund (NIIF) with an annual flow of INR 20,000 Crore into it, which would be raised through debt. The fund would invest in equity of infrastructure finance companies; and
  2. introduction of Public Contracts (Resolution of Disputes) Bill to streamline resolution disputes arising from public contracts.

Both these measures should increase much needed investor confidence in the infrastructure sector. In fact, the introduction of a specific dispute resolution mechanism will add predictability and expedite conflict resolution, which in the past has been a major concern for investors, private participants and financing of such projects.


While the budget announcements have set out the right direction from a broad policy perspective, there are opportunities that have not been addressed and missed. A few of them are set out below:

Clarity on entitlement to tax treaty benefits

Tax authorities have increasing been challenging the entitlement of non-residents to treaty benefits alleging tax avoidance, etc., ignoring commercial considerations - such as need for holding company to ring-fencing investments, ease of fund-raising, etc. Some clarity and certainty on acceptance of established principles would have been welcomed.

Applicability of MAT to SEZs and foreign strategic investors

When SEZs were introduced in 2005, they were specifically exempted from MAT. But, in 2011, the exemption was withdrawn. As SEZs are entitled to a 10-year tax holiday (complete relief in the first 5 years and 50% relief in the next 5 years), SEZs set up before April 2011 were left disappointed. In line with the government's policy of "make in India", it was hoped that a fillip to the SEZ Units by way exempting them from MAT would have allowed for increased investor interest in setting up of units in SEZ.

The Budget has specifically clarified that MAT is not applicable in case of FPIs. However, ambiguity still surrounds applicability in case of other residents availing treaty benefit, particularly, on capital gains earned on exit by strategic investors in Indian companies. In fact, by specifically only referring to FPIs, the budget announcements seemed to indicate that non-residents other than those specifically exempted are sought to be covered.

Taxation on share premium paid by angel investors

In 2012, amendments were introduced to tax share premium received by domestic companies in excess of their fair market value, except where the investment was made by SEBI-registered venture capital funds. As this amendment was introduced as an anti-avoidance measure to curb money-transfers disguised as share premium, some clarity was expected to restrict its applicability to specific circumstances, considering the quantum of litigation this is spawning at various levels. Another issue is that while pas-through treatment has been provided for AIFs, the exemptions on share premium received from venture capital funds have however, not been extended to all AIFs which ought to have been done.

DDT and buyback taxation

At the time of dividend distribution and buyback, corporate profits so distributed are subject to additional tax in the hands of the company, contrary to the practice followed globally of taxing the shareholder for such distributions (though withheld by the company). This creates various difficulties, particularly for claiming tax treaty relief in India, claiming credit in the shareholder's country of residence, claiming interest deduction on borrowings, etc. A move back to withholding tax regime would have eased the cost of doing business in India.

Deduction for CSR spends

Currently, there is no deduction available for expenditure incurred by domestic companies towards fulfilling their Corporate Social Responsibility obligations under the new Companies Act, 2013. Introduction of such relief was a major expectation for large-scale companies with net worth or turnover or net worth exceeding prescribed thresholds.


1. 'Connected person' has been defined under section 102 of the ITA

2. In Re:Castleton Investment Ltd., [2012 ]348 ITR 537 (AAR).

3. Interim Report of the Bankruptcy Law Reform Committee, submitted in February 2015 available online at

4. CIT v. Hyundai Heavy Industries Co. Ltd., 291 ITR 482 (SC); DIT (International Taxation) v. Morgan Stanley & Co. Inc., 292 ITR 416 (SC).

5. [2012] 343 ITR 81 (Calcutta); followed by the Calcutta High Court in The Bank of Tokyo- Mitsubishi UFJ Ltd v. DIT, [2015] 228 Taxman 337 (Calcutta)(MAG.).

6. [2012] 16 ITR(T) 116 (Mumbai) (SB); referred to by the Government in the Memorandum explaining the provisions of the Finance Bill, 2015.

7. Based on Para 41 of the OECD Model Commentary on Article 7.

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.

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