India: The Finance Bill, 2015 - Direct Tax Highlights

Last Updated: 15 October 2015
Article by DSK Legal

CORPORATE TAX RATES

  • Corporate tax rates will remain same as applicable to Financial Year 2014-15
  • For domestic companies

    • increase in surcharge from 5% to 7% on taxable income above rupees one crore up to rupees ten crores, and
    • increase in surcharge from 10% to 12% on taxable income above ten crores
    • Proposed to reduce the tax rates from 30% to 25% over the next four years
Particulars Taxable Income above Rs. 1 crore
but less than Rs. 10 crores
Taxable Income above Rs. 10 crores
Tax Rate 30% 30%
Surcharge 7% 12%
Tax Rate + Surcharge 32.10% 33.60%
Education Cess thereon 3% 3%
Effective Tax Rate 33.06% 34.61%
  • For Foreign Companies:

    • No change in surcharge rates
Particulars Taxable Income above Rs. 1 crore
but less than Rs. 10 crores
Taxable Income above Rs. 10 crores
Corporate Tax Rate 40% 40%
Surcharge 2% 5%
Tax Rate + Surcharge 41.80% 42%
Education Cess thereon 3% 3%
Effective Tax Rate 42.02% 43.26%

PERSONAL TAX RATES

Basic income-tax rates/slab will remain same as applicable to Financial Year 2014-15:

Individuals (residents as well as non-residents):

Total Income Rate
Not exceeding Rs. 250,000 Nil
Over Rs. 250,000 but not exceeding Rs. 500,000 10%
Over Rs. 500,000 but not exceeding Rs. 1,000,000 20%
Over Rs. 1,000,000 30%

Residents above the age of sixty years but less than eighty years:

Total Income Rate
Not exceeding Rs. 300,000 Nil
Over Rs. 300,000 but not exceeding Rs. 500,000 10%
Over Rs. 500,000 but not exceeding Rs. 1,000,000 20%
Over Rs. 1,000,000 30%

Residents above the age of eighty years:

Total Income Rate
Not exceeding Rs. 500,000 Nil
Over Rs. 500,000 but not exceeding Rs. 1,000,000 20%
Over Rs. 1,000,000 30%
  1. There will be an increase in surcharge from 10% to 12% on taxable income above rupees one crore for individuals/HUFs resulting in effective tax rate being increased from 33.99% to 34.6%.
  2. Wealth-tax proposed to be abolished

CORPORATE TAX PROPOSALS

Wooing Foreign Investment

Pass through status given to Category-I and Category-II Alternative Investment Funds (AIF)

Presently, pass through status has been given to Venture Capital Company (VCC) and Venture Capital Fund (VCF), whereby income received by VCC and VCF from Venture Capital Undertaking (VCU) is exempt from taxation in the hands of the VCC and VCF and is instead taxable in the hands of the Beneficiaries of VCC and VCF, as if the income was received directly by the Beneficiaries from the VCU. This ensured applicability of exemption provided by favourable tax treaties resulting in such income not being taxed in India.

However, VCC and VCF are only a type of Category-I AIF. It is proposed to extend the benefit of pass through status to all types of pooled investment vehicles (other than hedge funds) set up under Category-I and Category-II AIF, with respect to income other than business income. This benefit would be available irrespective of whether such funds are set up as a Trust, Company or a LLP etc. It was also clarified that the provisions of Dividend Distribution Tax (DDT) and tax on distributed income (buy-back tax) would not apply to payment made to unit holders of such funds.

Further, it is proposed that the income received by the investment fund would not be subject to TDS.

It would also be mandatory for the fund to file its return of income regardless of whether it has any taxable income or not.

Fund Manager located in India not to constitute a Permanent Establishment of offshore funds

At present activities of a fund manager present in India with respect to the off shore fund could be treated as a business connection or a permanent establishment (PE) of the offshore fund in India resulting in profits of the offshore fund being taxed in India. Also, the offshore fund could be treated to be resident in India by virtue of its control and management being situated in India.

It is proposed to amend the current provisions to provide that a fund manager of offshore fund would not be treated as the business connection or PE of the offshore fund. The proposed amendment is to apply to offshore funds and fund managers that meet the conditions stipulated.

Reduced withholding tax rate on interest extended for FIIs and QFIs

Withholding tax at the reduced rate of 5% was provided for interest earned between 1st June, 2013 and 1st June, 2015 by FIIs and QFIs, on investments in Government Securities and rupee denominated corporate bonds. The reduced withholding tax period has been proposed to be extended to interest earned up to 30th June, 2017.

Reduction on tax-rate for Royalty and Fees for technical services for non-residents

Finance Act, 2013 under the regime of Congress lead government had increased the rate of tax on Royalty income and Fees for technical services, earned by non-residents, from 10% to 25%. The present government has reverted to the pre-2013 rates; reducing the tax rate to 10% on royalty and fees for technical services earned by non-residents.

REITs and INVITs

Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust (Invit) were introduced by Finance Act (No.2), 2014 to incentivise investment in real estate and infrastructure and were collectively referred to as 'business trusts'.

Swapping of shares by sponsors

The existing provisions defer the capital gain in the hands of the sponsor when the sponsor exchanges the shares of the SPV, which holds the assets, with the units of the Business Trust. The tax is deferred and payable at the time of transfer of the units of the Business Trust. However, the benefit of exemption long term capital gain and reduced rate of 15% where the gain is short term is not available to the sponsors on sale of such swapped units.

In order to do away with the disadvantageous position faced by sponsors on exchange of shares of the SPV, it is proposed to exempt the gain made on swapped units transferred under an IPO or subsequent sale on stock exchange.

However, there is no corresponding proposed amendment with respect Minimum Alternate Tax (MAT) payable.

Pass through status for rental income received by REITs

REITs predominantly earned income by way of rentals through property either held directly by the REIT or through an SPV. In order to provide pass through status to the rental income received by the REIT, it is proposed to exempt such income in the hands of the REIT and tax it as rental income in the hands of the unit holder. However, it is also proposed that such rental income distributed by REITs to its unit holder shall be subject to TDS at the rate of 10% where the unit holder is a resident and the applicable rate of tax in case of non-resident unit holder.

Furthermore, in order to ensure that the income is not taxed in the hands of the REIT, it is proposed that no tax shall be deducted at source on payment of rental income to the REIT.

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