union budget 2016: announcements in financial services sector
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Union Budget 2016: Announcements in Financial Services sector
Overview
The FM was expected to make the Financial Services (‘FS’) sector a focus area in Budget 2016. The FM has not disappointed on this front, and has announced a slew of policy and tax reforms that should go a long way in boosting growth of the FS sector.
The Government has prioritized expenditure in the infrastructure sector and provided for recapitalization of banks. Some of the key factors for achieving the targets set-down by the Government are enactment of a comprehensive law to deal with resolution of financial firms; undertaking important banking sector reforms; public listing of general insurance companies; and revamping the foreign direct investment (‘FDI’) policy of the Government.
The key policy and tax announcements relevant of the FS sector have been summarized in the ensuing paragraphs.
Key announcements
Policy announcements
Foreign investment norms
General
• FDI to be allowed in insurance and pension sectors, under automatic route, upto 49percent, subject to the extant guidelines on Indian management and control that will beverified by the regulators. Presently, FDI in insurance and pension sectors is allowedupto 49 percent; however, for foreign investment to increase beyond 26 percent, priorGovernment approval is required.
• To enhance global competitiveness of Indian stock exchanges and accelerate adoption ofbest-in-class technology and global market practices, the individual investment limit forforeign entities in Indian stock exchanges is proposed to be enhanced from 5 percent to15 percent, bringing the limit on par with domestic institutions.
• The basket of eligible FDI instruments is proposed to be expanded to include hybridinstruments, subject to certain conditions.
• FDI to be allowed beyond the 18 specified activities for non-banking finance companies(‘NBFCs’), under the automatic route, in other activities which are regulated by financial
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General amendments
GAAR
International Tax Amendments
Transfer pricing
Customs and excise
Service tax
Central sales tax
GST
Russell Gaitonde +912261357045 [email protected]
Malini Mallikarjun +912261357025 [email protected]
Sudeep Sirkar +912261357089 [email protected]
sector regulators. • FDI upto 100 percent in Asset Reconstruction Companies (‘ARCs’) to be allowed under
the automatic route, instead of the Government approval route. FII investments • Foreign Institutional Investors (‘FIIs’) to be allowed to invest upto 100 percent (instead of
74 percent) of each tranche in security receipts (‘SR’) issued by ARCs, subject to sectoral caps.
• To allow FIIs to invest in unlisted debt securities and pass-through securities issued by
securitization special purpose vehicles (‘SPVs’). • The existing limit of 24 percent for investment by FIIs in Central Public Sector
Enterprises, other than banks, listed on stock exchanges, to be increased to 49 percent to obviate the need for prior Government approval for increasing FII investments.
FS sector reforms
Stressed assets • Recognizing that a systemic vacuum exists with regard to bankruptcy situations in
financial firms, a comprehensive Code on Resolution of Financial Firms (in the form of a law) is proposed to be introduced in Parliament during Financial Year (‘FY’) 2016-17. The Code will seek to provide specialized resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities. The Code along with the Insolvency and Bankruptcy Bill, 2015 (which has already been tabled in the Parliament) are expected to provide a comprehensive resolution for financial firms.
• To tackle the problem of stressed assets in the banking sector, the Government proposes
to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) to (i) enable sponsors of ARCs to hold up to 100 percent stake in the ARC, and (ii) to allow non-institutional investors to invest in SRs.
• With a special focus on the banking sector, the FM has announced the following steps for
revamping public sector undertaking (‘PSU’) banks:
− PSU banks are faced with the problem of stressed assets. The Government does not propose to interfere in the lending of PSU banks. Instead, the Government has tried to address structural issues in various sectors such as Power, Coal, Highways, Sugar and Steel to which PSU banks have large credit exposure. PSU banks have also put in special efforts to effect recoveries, with a focus on reviving stalled projects.
− To support credit growth of PSU banks, a sum of INR 25,000 crores (~US$ 3.67
billion) has been allocated towards recapitalization of PSU banks. If additional capital is required by the banks, the Government has indicated that it remains committed to finding the resources for doing so.
− The Bank Board Bureau is proposed to be operationalized during FY 2016-17 and a
Deni Shah +912261357138 [email protected] Madhav Kanhere +912261357028 [email protected]
roadmap for consolidation of PSU banks is proposed to be spelt out. The Bank Board Bureau was announced during Budget 2015 for improving governance of PSU banks. The Government has already started the transformation of IDBI Bank and is also considering the option of reducing its participation in IDBI Bank to below 50 percent.
• Debt Recovery Tribunals to be strengthened with focus on improving the existing
infrastructure, including computerized processing of court cases, to ensure reduction in the number of hearings and faster disposal of cases.
Debt markets • To improve greater retail participation in Government securities, Reserve Bank of India
(‘RBI’) is expected to facilitate retail participation in the primary and secondary markets through stock exchanges and access to NDS-OM trading platform.
• To facilitate deepening of the Indian corporate bond markets, the following measures are
proposed:
− The Life Insurance Corporation of India will set-up a dedicated fund aimed at facilitating credit enhancement to infrastructure projects. The fund will help in raising the credit rating of bonds issued by infrastructure companies, and facilitate investment from long-term investors;
− RBI will issue guidelines to encourage large borrowers to access a certain portion of
their financing needs through market mechanism instead of banks; − An e-auction platform for primary debt offers will be introduced by the Securities and
Exchange Board of India (‘SEBI’) which will help develop an enabling eco-system for private placement of corporate bonds;
− RBI and SEBI will jointly develop a complete information repository for corporate
bonds, covering primary and secondary market segments; and − RBI will develop a framework to facilitate an e-platform for a repo market in corporate
bonds. Others • The RBI Act, 1934 is proposed to be amended to provide statutory basis for a Monetary
Policy Framework and a Monetary Policy Committee through the Finance Bill, 2016. A committee-based approach is expected to be introduced, so as to add value and transparency to monetary policy decisions.
• A Financial Data Management Centre, under the aegis of the Financial Stability
Development Council, is proposed to be set-up to facilitate integrated data aggregation and analysis in the FS sector.
• New derivative products are proposed to be developed by SEBI in Commodity
Derivatives market.
• With the rising instances of ‘Ponzi’ schemes in India and given the impact these schemes have on the poor, a comprehensive legislation is proposed to be introduced to deal with the menace of these schemes.
• SEBI Act, 1992 is proposed to be amended to provide for more members and benches of
the Securities Appellate Tribunal. • Recognizing that public shareholding in Government-owned companies is a means of
ensuring higher levels of transparency and accountability, it is proposed to list Government-owned general insurance companies.
Direct tax proposals Applicability of Minimum Alternate Tax (‘MAT’) to foreign companies
• The Government of India has kept its commitment to clarify that MAT provisions were not
applicable to foreign companies (including FIIs) which did not have a Permanent Establishment (‘PE’) or a place of business in India, for the period prior to April 1, 2015. Budget 2016 contains the following retroactive proposal that MAT shall not apply to a foreign company, if:
− It is a tax resident of a country that has executed a tax treaty with India, and it does
not have a PE in India under the applicable tax treaty; or − It is a resident of a country which does not have a tax treaty with India and where such
foreign company is not required to seek registration under any law for the time being in force relating to companies.
India-based Fund Managers
• In order to rationalize the regime to encourage offshore funds to appoint India-based
Fund Managers, and to address some of the concerns that have been expressed by certain foreign portfolio investors [such as Luxembourg SICAVs and Foreign Pension Funds (‘FPF’)], Budget 2016 proposes to bring about the following two changes to the conditions that are currently prescribed:
− Firstly, offshore funds that are established or incorporated or registered in a country or
a specified territory that is notified by the Central Government for the purposes of this section will also now qualify for the concessional taxing framework. Previously, only offshore funds that were tax residents of countries or specified territories with which the Indian Government had entered into a Double Taxation Avoidance Agreement or a Tax Information Exchange Agreement, qualified.
− Secondly, the condition that the offshore fund shall not control and manage any
business in India or from India is now being restricted only in the context of activities in India.
• The current taxing framework that is provided for offshore funds that wish to appoint
India-based Fund Managers still suffers from various challenges that need to be addressed by the Indian Government on a priority basis. The success of the India-based
Fund Manager regime depends largely on this, and the Indian Government has to do a lot more than what it has sought to do in Budget 2016.
Mutual Funds
• SEBI has issued guidelines for consolidation of plans within a mutual fund
scheme. Budget 2016 proposes to extend a tax exemption in this respect, applicable to the merger or consolidation of various plans within a single mutual fund scheme. Accordingly, any transfer by a unit holder of a capital asset, being a unit or units, held by him in a consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in a consolidated plan of that scheme of the mutual fund, will not be regarded as a taxable transfer effective from April 1, 2016; hence, it will be exempt from capital gains tax.
• There is no specific prescription that the cost basis and period of holding of the units in
the consolidating plan will be available as the cost basis and the period of holding of the units in the consolidated plan. Budget 2016 needed to clarify these aspects.
Alternative Investment Funds (‘AIFs’)
• The withholding tax provisions applicable to Category I and Category II AIFs have been
proposed to be rationalized in Budget 2016 to distinguish between resident investors and non-resident investors. While resident investors will continue to suffer a 10 percent withholding tax on gross distributions made by such AIFs, with effect from June 1, 2016, withholding from distributions made to non-resident investors shall be made at the rates in force (including rates applicable on account of a tax treaty).
• Moreover, both resident and non-resident investors will be eligible to obtain NIL / reduced
tax withholding certificates from the Indian Revenue, subject to the satisfaction of certain conditions. This will ensure that the overall tax position of such investors is taken into account (eg, available of losses for set off) while applying the withholding tax provisions.
• Strangely, in the context of resident investors, the anomaly of withholding tax applying
even to distribution of dividend income / exempt capital gains received by the AIF has not been addressed, even though such dividend income is for the recipients, when the distributing Indian company has paid Dividend Distribution Tax (‘DDT’) and the capital gains are exempt if prescribed conditions are satisfied.
• Budget 2016 neither deals with any of the recommendations made by the Alternative
Investment Policy Advisory Committee: such as (a) the extension of pass through status to all categories of AIFs, (b) clarity on characterization of income of AIFs by deeming the same to be capital gains, and (c) ability of investors in AIFs to utilize losses incurred at the AIF level.
Securitisation Trusts (‘STs’)
• Budget 2016 proposes to replace the current scheme of taxation of STs, on lines similar
to the framework currently applicable to Category I and Category II AIFs. Accordingly, STs which are currently required to pay a distribution tax on amounts distributed to investors, will now be considered to be pass through (with effect from June 1,
2016). Income of the STs will be liable to tax in the hands of its investors in the like manner and to the same extent as if such investors had implemented the underlying investments themselves. If the ST does not implement any distributions during a FY, income of the ST as at the last day of the relevant FY shall be included for the investors; such income will not be taxed again in the year in which it is actually distributed.
• The STs will be obliged to withhold tax at source:
− At the rate of 25 percent from distributions made to resident individuals and Hindu Undivided Families;
− At the rate of 30 percent from distributions to other resident investors; and − At the rates in force from distributions made to non-resident investors.
Investors may approach the Indian Revenue for a certificate for NIL / lower deduction of tax at source.
• The definition of STs is proposed to be harmonized to include STs created by securitization / reconstruction companies as defined under the SARFAESI Act. Presently, STs are defined to mean vehicles created in accordance with relevant SEBI and RBI regulations.
• STs will have the obligation to provide a breakup of the nature and proportion of its
income to its investors as well as to the Indian Revenue. Real Estate Investment Trusts (‘REITs’)
• One of the key asks from the real estate sector was to tweak the tax rules in relation to
REITs to make REITs more attractive to investors.
• To make REITs more attractive to investors, it is proposed to eliminate Dividend Distribution Tax (‘DDT’) on dividend distribution by project SPVs to the REIT and by further exempting such dividends for the unit holders from tax, thereby providing a complete pass through of income in respect of dividend distributions by the SPV.
• Proposed DDT exemption will apply only on dividends to be distributed by asset owning companies to REIT from income accruing to such companies after the specified date (the date on which such company was acquired by REIT). Also, DDT exemption will not be available where shares of the asset owning companies are not wholly owned by REIT.
• Other changes requested by the industry in the form of reduction of period of holding of units of a Business Trust to qualify as a long term asset from 36 months to 12 months, clarity on deduction of expenses at the REIT level, etc have, however, not been accepted.
Rationalization of tax regime for Infrastructure Investment Trust (‘InVIT’) and unitholders
• To exempt the dividend distributed by SPV to InVIT from the levy of DDT subject to certain conditions:
− InVIT either holds 100 percent of the share capital of the SPV or holds all of the share
capital other than that which is required to be held by any other entity as per the regulations; and
− Exemption is available only for dividends distributed out of current income earned
after the InVIT acquires the requisite shareholding. • To exempt dividend received by InVIT from SPV:
− Income in the nature of dividend received from SPV and distributed by InVIT, is
proposed to be exempt from tax for the unitholders. − The proposal to tax dividend received by individuals, HUFs and Firms from domestic
companies, in excess of INR 1 mn, is not proposed to be applied to distributed income received by unitholders from InVIT.
• The proposal to exempt dividend distributed by SPV to an InVIT from the levy of DDT and
exemption of such dividend for the InVIT and the unitholder, is expected to increase the efficiency of ‘InVIT’ as an investment vehicle.
NBFCs
• Budget 2016 has addressed a longstanding request of the NBFC sector, by allowing NBFCs to claim a tax deduction for any provision created for bad and doubtful debts (‘NPAs’) to the extent of 5 percent of the NBFC’s total taxable income (i.e. before making any deduction in respect of such provision, and giving effect to the various tax deductions that are permitted under Chapter VI-A of the Act). Going forward, at the time of write-off of a bad debt, NBFCs will be allowed to claim a tax deduction for such bad debt to the extent that such bad debt exceeds the credit balance that lies in their provision for NPA account (which the NBFCs will maintain for income-tax purposes). Hitherto, NBFCs were only allowed to claim a tax deduction for bad debts on an actual write-off basis; this created unnecessary tax implications for NBFCs, especially, where they created book provisions in accordance with the RBI’s guidelines for NPA provisioning; but, did not actually write-off the bad debt in their books of accounts.
• On the other hand, banks (both domestic and foreign) and Public Financial Institutions
(‘PFIs’), were allowed to claim a tax deduction for (i) the provisions that they maintained for NPAs in their books of accounts, up to specified limits, and (ii) bad debts that were actually written-off in their books of accounts to the extent that such bad debts exceeded the credit balance that lay in their provision for NPA account (which they maintained for income tax purposes). Historically, the Government was hesitant to confer a similar tax treatment to NBFCs, as the Government believed that banks and PFIs deserved to enjoy this tax treatment, because a sizeable part of the lending that they undertook comprised of Priority Sector Lending, which benefited larger sections of the Indian economy and which more often than not generated NPAs. With NBFCs now also playing a pivotal role in providing financial support to key focus sectors of the Indian economy, including undertaking activities such as micro-finance etc., there was a need for the Government to extend NBFCs with a similar tax treatment for provisions for NPAs. Hence, this legislative amendment, which will come into effect from April 1, 2016, is a welcome move on the part of the FM.
• It would have been ideal if the FM would have also permitted NBFCs to offer to tax the
interest income that they earn on NPAs on a cash basis (instead of on an accrual basis), in accordance with the guidelines that are issued by the RBI in relation to debt, as the Government currently allows banks and PFIs to do. This issue also creates unnecessary tax implications for NBFCs. Hopefully, the FM will also accede to this request of the NBFC sector, when he finalizes the Finance Bill, 2016.
Companies operating in an International Financial Services Centre (‘IFSC’)
• In Budget 2015, the FM had announced the proposal to establish India’s first IFSC in Gujarat under the name Gujarat International Finance Tec-City (‘GIFT’), on the lines of similar regulatory frameworks that exist in other global financial centres that are located in Dubai, London, New York, and Singapore. Development of the GIFT is presently underway with some commercial space ready for occupation. The RBI put forth enabling regulations in the form of the Foreign Exchange Management (IFSC) Regulations, 2015 and an amendment was also made to the Special Economic Zones Act, 2005.
• Budget 2016 confers various fiscal benefits to financial services companies that operate
from the IFSC as well as investors that invest in securities that are available for investments in the IFSC. We have discussed these provisions below:
− Long term capital gains realized on transfer of equity shares and units of equity
oriented mutual fund schemes that are available for investments within the IFSC shall be exempt from capital gains tax.
− Transactions in equity shares and units of equity oriented mutual fund schemes that
are available for investments within the IFSC shall not be liable to Securities Transaction Tax (‘STT’), where the consideration is payable in foreign currency. Similarly, where the consideration is payable in foreign currency, commodities transactions entered into on a recognized association located within the IFSC shall not be liable to Commodities Transaction Tax (‘CTT’).
− MAT will apply at a reduced rate of 9 percent (increased by surcharge and education
cess) to companies that operate within the IFSC, provided that such companies derive income solely in the form of convertible foreign exchange.
− DDT will not be applicable to distributions made by companies that operate within the
IFSC. Such dividend distributions will also be exempt from tax for the recipient shareholders.
• The above amendments will come into effect from April 1, 2016, with the exception of the
STT and CTT amendments which will come into effect from June 1, 2016. Rupee denominated bonds
• The RBI has recently permitted Indian corporates to issue Rupee denominated bonds
outside India, as a measure to enable Indian corporates to raise funds from overseas. • With a view to provide relief to non-resident investors who bear the risk of currency
fluctuation, Budget 2016 proposes to exempt foreign investors from having to pay capital gains tax in India on account of appreciation of the Rupee between the date of issue of
the bond and the date of redemption of the bond, against the foreign currency in which the investment was made. This amendment is proposed to come into effect from April 1, 2016.
• More importantly, the Central Board of Direct Taxes had issued a press release on
October 29, 2015 indicating that interest on such Rupee denominated bonds would be entitled to the concessional tax rate of 5 percent available in respect of interest received until June 30, 2017. Unfortunately, the FM has not amended the related provisions to make unequivocally clear under which provision would the interest on such bonds qualify for the concessional tax rate of 5 percent; hopefully, the FM will address this ambiguity when he finalises the Finance Bill, 2016. Separately, the FM has also not provided any clarity on whether he will extend the concessional tax rate window beyond June 30, 2017.
Small Savings
Sovereign Gold Bond Scheme, 2015 • The Government of India had introduced the Sovereign Gold Bond (‘SGB’) Scheme, 2015
with the aim of reducing the demand for physical gold, so as to reduce the outflow of foreign exchange on account of import of gold. The SGB is a mode for substitution of physical gold and also provides security to the individual investor who invests in gold for meeting his social obligations. SGBs are bonds denominated in grams of gold. The SGB scheme is administered by the RBI.
• With a view to providing parity in tax treatment between physical gold and SGBs, Budget
2016 contains the following two proposals, which shall come into effect from April 1, 2016:
− It provides that any redemption of SGBs held by an individual shall not be considered
a taxable transfer, and therefore shall be exempt from capital gains tax; and − Investors in SGBs that hold the bonds as long-term capital assets will be eligible to
claim indexation benefits on transfer on such bonds.
Gold Monetization Scheme, 2015 • The Government of India had introduced the Gold Monetization Scheme, 2015 (‘GMS
2015’), wherein it allowed designated banks to accept deposits in the form of gold.
With a view to providing the same tax benefits to this scheme as were available to the erstwhile Gold Deposit Scheme of 1999, Budget 2016 contains the following two proposals, which shall come into effect retrospectively from April 1, 2015:
− It excludes deposit certificates that are issued under the GMS 2015 from the definition
of ‘capital asset’, thereby exempting gains arising from their transfer from the levy of capital gains tax; and
− It provides that interest arising on such deposit certificates will be exempt from
income-tax.
• The aforesaid measures are welcome moves on the part of the FM, as they help to
address the anomalies that existed with the above two Gold Schemes that were launched by the Indian Government in 2015. Hopefully, this should help attract additional investments into these schemes.
Tax incentives for investment in start-ups
• It is proposed to exempt capital gains arising from transfer of a long-term capital asset
(‘Original Asset’), if the following conditions are satisfied:
− The taxpayer invests whole or part of such capital gains, within six months from transfer of the Original Asset, in unit(s) of funds issued before April 1, 2019, to be notified by the Central Government (‘long-term specified asset’);
− If the long-term capital gains arising from sale of Original Asset is more than the cost
of long-term specified asset, the exemption shall be restricted to the proportion that the cost of long-term specified asset bears to the capital gains arising from the transfer of Original Asset;
− Investment made in long-term specified asset on or after April 1, 2016 does not
exceed INR 5 mn; − Total investment made in long-term specified asset during the year of transfer of
Original Asset(s) and in the subsequent year does not exceed INR 5 million; − The long-term specified asset is not transferred within 3 years from date of acquisition
– in case such a transfer takes place, the amount of capital gains originally exempt, shall be subject to capital gains tax in the year of transfer of the long term specified asset;
− Loan / advance taken against long-term specified asset shall be deemed to result in
‘transfer of long-term specified asset’ as on the date of taking loan / advance. • The proposed amendment is in line with the exemption proposed under the Start-
up India Action Plan (‘the Start-up Plan’) and seeks to promote investment in the ‘Fund of funds’ proposed to be set-up as part of the Startup Plan.
Contributions to recognized provident funds / pension schemes
• The FM has proposed to provide a uniform tax treatment to contributions made by an
employee to a Recognized Provident Fund (‘RPF’), the National Pension System (‘NPS’) and a Superannuation Fund (‘SF’).
• Under the existing provisions of the Act, the terminal benefits on exit, in form of lump sum
withdrawals, from NPS, are taxable for the employee in the year of receipt including any amount received by an employee on account of closure or his opting out of the pension scheme. It is proposed to provide that any withdrawals from NPS by an employee on account of closure or his opting out of the pension scheme, will now be exempt for the recipient up to 40 percent of the total amount payable to him at the time of closure or his
opting out of the scheme. However, the whole amount received by a nominee, on the death of the employee, shall be exempt from tax.
• Under the existing provisions of the Act, the terminal benefits on exit, in form of lump sum
withdrawals, from RPF are exempt. Also, any payment from an approved SF made to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement, is also exempt from tax. In order to bring parity in tax treatment of different types of pension plans, Budget 2016 proposes to provide that contributions made on or after April 1, 2016, by an employee participating in a recognized provident fund and superannuation fund, up to 40 percent of the accumulated balance attributable to such contributions on withdrawal, shall be exempt from tax. Likewise, any payment in commutation of an annuity purchased out of contributions made on or after the April 1, 2016, which exceeds 40 percent of the annuity, shall be chargeable to tax.
• In order to bring parity in the monetary limit for contribution to RPF by the employer and
employee, it is proposed to limit employer's contribution to the RPF to INR 150,000 annually, without attracting tax. Further, the monetary limit for contribution to SF by the employer has been increased to INR 150,000 from INR 100,000, without it being taxed as a perquisite in the hands of the employee.
• Further to bring all the pension plans under one umbrella, it is proposed to provide
exemption (a) to one-time portability from a RPF to NPS; and (b) any payment from an approved SF by way of transfer to the account of the employee under notified NPS.
• The above amendments are applicable from FY 2016-17. Other amendments
Expenditure in relation to exempt income • In his speech, the FM acknowledged that disallowances of expenditure relatable to
exempt income have been the subject matter of protracted litigation. He indicated that the provisions of Rule 8D which governs the quantification of disallowance will be rationalized. Currently, Rule 8D provides a disallowance of the aggregate of the following:
(a) Directly relatable expenditure; (b) Pro rata interest expenditure which is not directly attributable to the exempt income;
and (c) 0.5 percent of the average value of investments yielding exempt income
• The FM mentioned that the disallowance will be limited to 1 percent of the average
monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed. No fine print is available in the Finance Bill, 2016, so one will have to wait and watch how this rationalization will be introduced. Immediately, it is not clear how the cap of actual expenditure claimed will apply in cases where the taxpayer asserts that it has not incurred any such expenditure, but the Indian Revenue disagrees with such
claim.
Capital gains arising on transfer of unlisted shares
• The ambiguity on the applicability of the concessional tax rate of 10 percent (instead of 20 percent) to capital gains arising to non-residents from the transfer of unlisted securities issued by private limited companies has been sought to be put to rest. The controversy had arisen due to the manner in which the term ‘securities’ is understood in the context of the Securities Contracts (Regulation) Act, 1956. However, the clarification is proposed to be inserted prospectively (i.e. from April 1, 2016), which could imply that the concessional tax rate of 10 percent was not available in respect of such securities in previous financial years. The Indian Government should consider making this clarification retroactive instead.
• The period of holding for unlisted shares to qualify as a long term capital asset is
proposed to be reduced from three years to two years. While the FM mentioned this aspect in his speech, the actual amendment is not a part of the Finance Bill, 2016.
Withholding tax provisions • The Government of India has accepted some of the recommendations made by the
Income-tax Simplification Committee headed by Justice R V Easwar in the context of withholding tax provisions. The following changes are slated to come into effect from June 1, 2016:
S No
Section Nature of Payment
Present Threshold
(INR)
Proposed Threshold
(INR)
Present rate of TDS
Proposed rate of TDS
1 194D Insurance commission
20,000 15,000 10 percent
5 percent
2 194DA Payment in respect of Life Insurance Policy
100,000 100,000 2 percent
1 percent
3 194EE Payments in respect of NSS Deposits
2,500 2,500 20 percent
10 percent
4 194H Commission or brokerage
5,000 15,000 10 percent
5 percent
5 194K Income in respect of units
Proposed to be omitted with effect from June 1, 2016
STT
• Presently, STT on sale of an option in securities where the option is not exercised is payable at 0.017 percent of the option premium. Budget 2016 proposes to increase the STT rate from 0.017 percent to 0.05 percent. The amendment will be applicable from June 1, 2016.
Indirect tax proposals Services provided by mutual fund agent or distributor
• To withdraw the obligation to deposit service tax (under reverse charge mechanism) by a mutual fund or asset management company on services provided by mutual fund agent or distributor.
• Going forward, the service provider i.e. the mutual fund agent or distributor would be
liable to deposit applicable service tax. • The above amendment is effective from April 1, 2016. Services provided by chit fund foreman
• To re-introduce the abatement of 70 percent, on the services provided by foreman to a chit fund under the Chit Funds Act, 1982.
• This abatement is subject to the condition that CENVAT credit on inputs, input services
and capital goods has not been availed. • The abatement of 70 percent was withdrawn during Budget 2015.
• The above amendment is effective from April 1, 2016.
Services provided by insurers carrying on life insurance business
• To introduce an option to apply composite service tax rate of 1.4 percent on the total premium charged on single premium annuity policies.
• The above amendment is effective from April 1, 2016.
Exemptions
• To exempt the following services from levy of service tax:
− Services of general insurance business provided under ‘Nirmaya’ Health Insurance
Scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability in collaboration with private/ public insurance companies.
− Services of life insurance business provided by way of annuity under the National
Pension System (NPS) regulated by Pension Fund Regulatory and Development Authority (PFRDA) of India.
− Services provided by Employees’ Provident Fund Organisation (EPFO) to persons
governed under the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952.
− Services provided by Insurance Regulatory and Development Authority (IRDA) of
India to insurers. − Services provided by the SEBI by way of protecting the interest of investors in
securities and to promote the development of, and to regulate, the securities market. • The above exemptions are effective from April 1, 2016 Reversal of CENVAT credit
• To provide the following options to a banking company and financial institutions including
NBFCs engaged in providing services by way of extending deposits, loans or advances: − Reverse / pay 50 percent CENVAT Credit availed on inputs and input services in the
month; or − Reverse CENVAT Credit basis the computation prescribed under Rule 6(1), (2) and
(3) of the CENVAT Credit Rules, 2004. • Currently, a banking company and financial institutions including NBFCs are subject to an
adhoc (mandatory) reversal of 50 percent of CENVAT Credit availed on inputs and input services in the month, irrespective of the proportion of taxable and exempt output services.
• The above amendment is effective from April 1, 2016. Conclusion The FS sector has clearly been a focus area for the Government in Budget 2016. Through the Budget, the FM has sought to bring about stability and transparency in the FS sector. The FM has also announced several measures to address the bad loans situation that is plaguing the Indian banking sector; at the same time, the FM has also announced various initiatives to help strengthen the Indian corporate bond market. On the tax front, the Government has tried to walk-the-talk, and has made an earnest effort to try and win investor confidence by acting upon numerous recommendations that it had received from several industry associations, such as (i) amending the MAT provisions retrospectively to end the debate on applicability of MAT to foreign companies, where such
companies neither have a place of business nor a PE in India; (ii) permitting NBFCs to claim a tax deduction for NPA provisions; (iii) providing clarity on taxation of long-term capital gains arising on unlisted securities of Indian private companies; (iv) enabling foreign investors in Category I and Category II AIFs to claim tax treaty benefits especially for withholding tax purposes; (v) revamping the taxing regime of STs and their investors etc. However, there were some key tax issues that remained unaddressed, such as (i) addressing the main concerns of FIIs, Sovereign Wealth Funds and FPFs with the current India-based Fund Manager regime, (ii) providing much needed clarity on the taxation of Depository Receipts on lines of the recommendations of the Sahoo Committee etc. On balance, the FM seems to have done a good job as far as his policy and tax initiatives for the FS sector; however, this only goes to demonstrate that a lot still needs to be done.
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