SALIENT FEATURES OF THE INCOME TAX PROPOSALS IN INDIA’S BUDGET FOR 2015-16

India’s Union Budget (“Budget”) was announced on February 28, 2015, and the Finance Bill, 2015 (the “Finance Bill”) was tabled in Parliament. Most of the income tax proposals in the Finance Bill will be effective from the financial year commencing on April 1, 2015, unless specified otherwise.

Announced in the backdrop of high expectations, the Budget boldly resorts to a higher fiscal deficit of 3.9% to enable increased outlays on various rural initiatives, socio economic schemes and infrastructure needs. The Budget provides a roadmap for the implementation of the Goods and Service Tax (“GST”) on April 1, 2016, and attempts to deal with unaccounted money in a realistic manner. Deferral of the general anti-avoidance rules by two (2) years, reduction of withholding tax rates for royalty and technical services to 10%, non- applicability of minimum alternate tax to Foreign Institutional Investors, and clarity of taxation for promoters in real estate/infrastructure investment trusts are other welcome changes. A proposal to lower corporate tax rates and remove exemptions over the next four (4) years has been made.

After causing great concern to the international business community in the 2012-13 budget through the introduction of a retrospective amendment to tax indirect global transfers having underlying assets in India, the government has now accepted the Expert Committee report, which will provide greater clarity for non-residents in cross-border transactions. Unfortunately, contrary to expectations, the Budget does not contain any proposal to provide relief to taxpayers already in litigation on this matter.

The Finance Bill will be discussed in Parliament before its enactment, and therefore, it is likely that the Finance Bill may be amended to an extent as a result of these discussions.

We have summarized below some of the key income tax proposals.

Corporate tax rates

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 will be reduced from 30% to 25% over the next four (4) years, coupled with rationalization and removal of various exemptions and rebates. The surcharge, on the other hand, has been increased: (a) to 7% if the net income of a domestic company is between INR 10 million and INR 100 million; and (b) to 12% if the net income of a domestic company exceeds INR 100 million; thereby increasing the maximum effective rate of tax to 34.608%.

Individual tax rates

The base income tax slab rates for the financial year 2015-16 have not been changed for individuals, Hindu Undivided Families, associations of persons and bodies of individuals; however, limits on various rebates applicable to individuals have been increased, particularly, those relating to promoting social security.

High-net worth individuals having income in excess of INR 10 million (about US$ 154,000) will be subject to an additional surcharge of 2%, thereby increasing the effective maximum rate to 34.608%. The additional 2% surcharge is in lieu of abolition of wealth tax.

Table

Category of taxpayer Effective tax rate
Individuals earning more than INR 10 million 34.608%
Corporate tax – domestic company
Income less than INR 10 million 30.90%
Income from INR 10 million to INR 100 million 33.063%
Income more than INR 100 million 34.608%
Minimum Alternate Tax – domestic company
Income less than INR 10 million 19.06%
Income from INR 10 million to INR 100 million 20.39%
Income more than INR 100 million 21.34%
Dividend Distribution Tax – domestic company 17.304%
Corporate tax – foreign company
Income less than INR 10 million 41.20%
Income from INR 10 million to INR 100 million 42.024%
Income more than INR 100 million 43.26%
Firm/Limited Liability Partnerships
Income less than INR 10 million 30.90%
Income more than INR 10 million 34.608%

Deferral of the General Anti Avoidance Rules (“GAAR”)

The existing GAAR, introduced by the Finance Act, 2013, was scheduled to come into effect from April 1, 2015.

Owing to ambiguities in their scope and application, lack of safeguards, and the possibility of misuse of these provisions, GAAR had been widely criticized. With a view to address the concerns raised by stakeholders, the Government had appointed an Expert Committee (“EC”). Some of the recommendations of the EC had been accepted and the GAAR provisions were amended in the 2013 Budget. However, the 2013 Budget deferred the implementation of GAAR and made it applicable from April 1, 2015.

Inspite of the earlier changes made, GAAR still gives the Indian tax authorities with considerable discretion to tax certain arrangements made with a view to avoid tax. The Budget has proposed to defer GAAR by two (2) more years, and hence, GAAR will now be effective prospectively from April 1, 2017. The Finance Minister decided to defer the implementation of GAAR to accelerate the investment momentum gathered in the recent past in India.

The deferral of GAAR is definitely a welcome move as investors have been apprehensive about the broad scope of the GAAR provisions as also the wide powers granted to the tax department for its implementation.

Amendments to the indirect transfer provisions between non-residents

 The Budget has tried to address the concerns of foreign investors by making significant changes to the provisions dealing with offshore transfers having underlying assets in India. Such indirect transfer provisions were introduced in the Finance Act, 2012 by way of Explanation 5 to Section 9(1)(i) of the Income-tax Act, 1961 (the “IT Act”), clarifying that an offshore capital asset would be considered to be situated in India if it substantially derived its value (directly or indirectly) from assets located in India.

On the basis of the recommendations provided by the EC, the Finance Bill now proposes to make various amendments to the indirect transfer provisions, specifying that such indirect transfer provisions will be applicable only if the value of the assets located in India exceeds INR 100 million, and the assets in India represent at least fifty per cent (50%) of the value of all the assets owned by the offshore transferor company. However, the value of the assets is required to be computed without any reduction in liabilities. The Finance Bill also clarifies that only those assets in India will be charged to tax in India in case of an offshore transfer.

The Finance Bill also provides for situations when the indirect transfer provisions shall not apply. These are:

  • Where the transferor of shares of or interest in a foreign entity, along with its related parties, does not hold the: (i) right of control or management; or (ii) voting power or share capital or interest exceeding 5% of the total voting power or total share capital in the foreign company 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 the: (i) right of management or control in relation to such company or the entity; or (ii) any rights in such company which would entitle the transferor to either exercise control or management of the Holding Co or entitle the transferor to voting power exceeding 5% in the Holding Co.

The Finance Bill imposes a reporting obligation on the Indian entity through which the Indian assets are held by the foreign entity, and requires the Indian entity to furnish information relating to the offshore transaction which will have the effect of, directly or indirectly, modifying the ownership structure or control of the Indian entity. Any failure to furnish such information will attract a penalty ranging from INR 500,000 to 2% of the value of the transaction.

While the indirect transfer provisions provide some relief and clarity to investors, we notice that some of the recommendations of the EC have not been considered by the government. These include exempting from tax the transfer of listed securities and participatory notes, and making available treaty benefits on such indirect transfers. In our view, it will be very onerous for the Indian entity to furnish information of listed companies in case of an indirect change in ownership. Further, the retrospective applicability of these provisions has not been clarified, although in last year’s budget, the Finance Minister had stated that assessing officers will not issue retrospective notices on offshore transfer transactions. In fact, one of the major recommendations of the EC was that no person should be treated as an assessee in default under Section 201 of the IT Act or a representative assessee of a non-resident due to a retrospective amendment. This recommendation was made on the basis that such treatment would amount to the imposition of a burden of impossibility of performance. However, this recommendation has not been given effect to in the Budget. Further, there is no clarity in relation to a situation where there is a double taxation avoidance agreement (“DTAA”) with the country of residence of the non-resident or foreign company.

The Finance Bill indicates that a clarificatory circular may be issued in due course to give effect to some of the recommendations made by the EC, and it needs to be seen whether this circular, when issued, contains any guidance in relation to taxation of past transactions or applicability of DTAAs.

These amendments will take effect from April 1, 2015 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Fund managers in India not to constitute a business connection of offshore funds

The existing provisions of section 9 of the IT Act deal with different circumstances where incomes are deemed to accrue or arise in India for non-residents. One of the conditions is the existence of a business connection in India, which if established, would render the income of the non-resident attributable to tax in India. Similarly, under the DTAAs, the source country assumes taxation rights on certain incomes if the non-resident has a Permanent Establishment (“PE”) in that country. Further, section 6 of the IT Act provides for conditions under which a person is said to be resident in India. In the case of a person other than an individual, the test is dependent on the location of its “control and management.” In the case of offshore funds, under the existing provisions, the presence of a fund manager in India may create sufficient nexus of the offshore fund with India and may constitute a business connection in India even though the fund manager may be an independent person.

Similarly, if the fund manager located in India undertakes fund management activity in respect of investments outside India for an offshore fund, the profits made by the fund from such investments may be liable to tax in India due to the location of the fund manager in India and attribution of such profits to the activity of the fund manager. Therefore, apart from taxation of income received by the fund manager as fees for fund management services, income of the offshore fund from investments made in countries outside India may also get taxed in India due to such fund management activity undertaken in, and from, India by virtue of a business connection.

Further, the presence of the fund manager in India under certain circumstances may lead to the offshore fund being held to be resident in India on the basis of its control and management being in India. There are many fund managers of Indian origin, who manage the investments of offshore funds in various countries. These persons are not locating in India due to the foregoing tax consequences. In order to facilitate the location of fund managers of offshore funds in India, a specific tax regime has been proposed in the IT Act in line with international best practices, with the objective that, subject to fulfillment of certain conditions by the fund and the fund manager:

  • the tax liability in respect of income arising to the fund from investments in India will be neutral to the fact as to whether the investment is made directly by the fund or through engagement of the fund manager located in India; and
  • the income of the fund from investments outside India will not be taxable in India solely on the basis that the fund management activities in respect of such investments have been undertaken through a fund manager located in India.

The proposed tax regime provides that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute a business connection in India of the eligible investment fund.

Further, it is proposed that an eligible investment fund shall not be said to be resident in India merely because the eligible fund manager undertaking fund management activities on its behalf is located in India. This specific exception from the general rules for determination of business connection and resident status of offshore funds and fund management activity is subject to certain conditions:

The offshore fund will be required to fulfill the following conditions during the relevant year for being constituted as an eligible investment fund:

  • the fund is not a person resident in India;
  • the fund is a resident of a country or a specified territory with which an agreement has been entered into by the Indian government;
  • the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed five percent (5%) of the corpus of the fund;
  • the fund and its activities are subject to applicable investor protection regulations in the country or specified territory where it is established or incorporated or is a resident;
  • the fund has a minimum of twenty-five (25) members who are, directly or indirectly, not connected persons;
  • any member of the fund along with connected persons shall not have any participation interest, directly or indirectly, in the fund exceeding ten percent (10%);
  • the aggregate participation interest, directly or indirectly, of ten or less members along with their connected persons in the fund, shall be less than fifty percent (50%);
  • the investment by the fund in an entity shall not exceed twenty percent (20%) of the corpus of the fund;
  • no investment shall be made by the fund in its associate entity;
  • the monthly average of the corpus of the fund shall not be less than INR 1 billion and if the fund has been established or incorporated in the previous year, the corpus of fund shall not be less than INR 1 billion at the end of such previous year;
  • the fund shall not carry on or control and manage, directly or indirectly, any business in India or from India;
  • the fund is neither engaged in any activity which constitutes a business connection in India nor has any person acting on its behalf whose activities constitute a business connection in India other than the activities undertaken by the eligible fund manager on its behalf; and
  • the remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken on its behalf is not less than the arm’s length price of such activity.

There are also additional conditions to be satisfied by the fund manager for being construed as an eligible fund manager, which are as under:

  • the person is not an employee of the eligible investment fund
  • the person is registered as a fund manager or investment advisor in accordance with the specified regulations;
  • the person is acting in the ordinary course of his business as a fund manager; and
  • the person along with his connected persons shall not be entitled, directly or indirectly, to more than twenty percent (20%) of the profits accruing or arising to the eligible investment fund from the transactions carried out by the fund through such fund manager.

This tax regime will not have any impact on the taxability of any income of the eligible investment fund which would have been chargeable to tax irrespective of whether the activity of the eligible fund manager constitutes a business connection in India of such fund or not.

While it appears that the Budget has proposed amendments to encourage fund management activities in India, the Budget sets out a number of rigid and irrelevant conditions that will be impossible for most funds to satisfy. Separately, the proposed regime requires all eligible funds to furnish, within ninety (90) days from the end of the respective financial year, a statement of compliance to the prescribed authority in the prescribed form. Penal consequences are proposed for failure to file the statement.

On this basis, in our view, it is likely that fund managers may still not relocate to India until the conditions are toned down further.

These amendments will take effect from April 1, 2015 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Reporting of payments made to non-residents

Under the existing provisions of section 195(1) of the IT Act, any person who is responsible for paying to a non-resident any sum chargeable to tax under the IT Act, has to withhold income tax at the rates in force. Further, section 195(6) of the IT Act provides that such person will have to furnish the information relating to payment to the non-resident in the form and manner as may be prescribed by the Central Board of Direct Taxes (“CBDT”).

Technically, the effects of these provisions are that all payments to non-residents which are chargeable to tax are to be reported, and forms no. 15CA and 15CB have to be furnished in case of every remittance out of India chargeable to tax. The Finance Bill, 2015 has proposed that the person responsible for paying to a non-resident any sum, whether or not chargeable under the provisions of the IT Act, will be required to furnish the information relating to payment of such sum to the concerned tax authorities, in such form and manner, as may be prescribed. It is also proposed that if this information is not furnished or if inaccurate information is furnished, a penalty of INR 0.1 million can be levied. This amendment will be effective from June 1, 2015.

In our view, furnishing information to the tax authorities in relation to payments that are not chargeable to tax in India is potentially burdensome and can lead to extensive litigation with the tax authorities about whether the payment was actually chargeable to tax or not. This will also lead to disallowance of business expenditure in the books of the Indian entity, and to other onerous interest and penalty provisions. This is clearly contradictory to the intentions of the government which promised a non- adversarial tax regime. Press reports suggest that the CBDT has sought to allay such concerns and have stated that not all cases have to be reported, and that the CBDT will come out with clarity shortly.

Pass through status to Category I and Category II Alternative Investment Funds

The existing provisions of section 10(23FB) of the IT Act provide that any income of a Venture Capital Company (“VCC”) or a Venture Capital Fund (“VCF”) from investment in a Venture Capital Undertaking (“VCU”) shall be tax exempt.

Section 115U of the IT Act provides that income accruing or arising or received by a person out of investment made in a VCC or VCF shall be taxable in the same manner as if the person had made a direct investment in the VCU. These sections provide a tax pass through (i.e., income is taxable in the hands of investors instead of VCF/VCC) only to funds set up as a company or a trust, which are registered: (i) before May 21, 2012 as a VCF under the Securities Exchange Board of India (“SEBI”) Venture Capital Funds Regulations, 1996, or (ii) as a VCF Category-I Alternative Investment Fund (“AIF”) regulated by the SEBI (AIF) Regulations, 2012, with effect from May 21, 2012.

Under the AIF regulations, AIFs have been classified under three separate categories as Category I, II and III AIFs.

  • Category I includes AIFs which invest in start-ups early stage ventures, social ventures, or SMEs in infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable.
  • Category II AIFs are funds including private equity funds or debt funds which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements.
  • Category III AIFs are funds which employ diverse or complex trading strategies and may employ leverage including through investments in listed or unlisted derivatives. The funds can be set up as a trust, company, limited liability partnership or any other body corporate.

In order to rationalize the taxation of Category-I and Category-II AIFs, it has now been proposed to provide a special tax regime which will be applicable irrespective of whether they are set up as a trust, company, or limited liability partnership.

The salient features of the special tax regime are:

  • The income of a person, being a unit holder of an AIF, out of investments made by the AIF 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 directly by such unit holder. In other words, the income of a unit holder in an AIF will take the character of the income that accrues or arises to, or is received by, the AIF.
  • Any income of the AIF (other than income from profits and gains of business) will be taxable in the hands of the unit holders and not in the hands of the AIF.
  • Income by way of business profits taxable in the hands of the AIF will be tax exempt in the hands of the unit holder.
  • Where any income, other than income which is not taxable in the hands of the AIF is payable to a unit holder, the AIF is required to withhold income tax at the rate of ten percent (10%).
  • If in any year, there is a loss in the hands of the AIF (either a current loss or a loss which remained to be set off), the loss shall not be allowed in the hands of the unit holder; but it can be carried forward by the AIF to be set off against income of the AIF for the next year and subsequent years in accordance with the provisions of the IT Act.
  • The provisions relating to dividend distribution tax or tax on distribution income shall not apply to the income paid by an AIF to its unit holders.
  • It shall be mandatory for the AIF to file its return of income.

While the proposed pass-through regime is a welcome move, there is no clarity on whether the withholding obligation will also apply in respect of non-resident investors who are eligible to treaty benefits. In our view, the treaty benefits should apply as long as the non-resident investors are able to demonstrate substance/tax residency certificate requirements as prescribed under the IT Act.

Tax Regime for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (IITs)

The Finance (No.2) Act, 2014 had amended the IT Act to put in place a special taxation regime in respect of business trusts. The business trust as defined in section 2(13A) of the IT Act includes a REIT or an IIT which is registered under regulations framed by the SEBI in this regard.

In the case of a business trust, being a REIT, the rental income arising from the assets held directly by the REIT was taxable at the REIT level and did not get a pass through benefit.

In order to provide a pass through tax benefit to the rental income arising to a REIT from real estate property directly held by it, it has now been proposed to provide that: (i) any income of a business trust, being a REIT, by way of renting, leasing or letting out any real estate asset owned directly by such business trust, shall be tax exempt in the hands of the REIT; (ii) the distributed income or any part thereof, received by a unit holder from the REIT, which is in the nature of income by way of renting, leasing or letting out any real estate asset owned directly by such REIT, shall be deemed to be income of such unit holder and shall be charged to tax; (iii) the REIT is required to withhold tax on rental income attributable to the resident unit holder at the rate of ten percent (10%), and in case of distribution to a non-resident unit holder, the tax is required to be deducted at the rate in force as applicable on payments made to non-residents; and (iv) the Finance Bill also provides that no withholding tax shall be deducted by the payer under section 194-I of the IT Act on the amount of rental income to the REIT.

The Finance Act, 2014, had specified that no capital gains tax would arise on the exchange by the sponsor of its shares in an SPV for units in a REIT and further it was specified that capital gains tax would be chargeable in the hands of the sponsor at the time of sale of such units of the REIT. The Finance Bill now proposes to exempt from tax the sale of such units of the REIT held by the sponsor consequent to an IPO.

In our view, the tax incentives will give much needed relief to the real estate sector, which has been facing a huge slowdown in demand in the last few years, resulting in a liquidity crunch and delay in completion of existing projects.

These amendments will take effect from April 1, 2015 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Reduction in rate of tax on royalty income and fees for technical services in case of non-residents

The existing provisions of section 115A of the IT Act provide that where the total income of a non-resident includes any income by way of royalty and fees for technical services received by such non-resident, inter alia, from an Indian concern, the tax levied shall be at the rate of 25% on the gross amount of such income. This rate of 25% was provided in the Finance Act, 2013. In order to reduce the hardship faced by non-residents due to the higher rate of tax of 25%, it has been proposed to amend the IT Act to reduce the rate of tax under section 115A on royalty and fees for technical services payments made to non-residents to 10%.

In our view, the reduction is a welcome move and will rationalize the withholding tax rate with many DTAA rates. In turn, this will increase technology inflow in India by non-residents, who may also establish manufacturing bases in India.

This amendment will take effect from April 1, 2015 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Raising the threshold for application of domestic transfer pricing rules

The existing provisions of section 92BA of the IT Act define “specified domestic transaction” in the case of a taxpayer to mean any of the specified transactions, not being an international transaction, where the aggregate of such transactions entered into by a taxpayer exceeds a sum of INR 50 million. In order to address the issue of compliance costs for small businesses, it has been proposed to increase the aggregate of specified domestic transactions entered into by a taxpayer in the previous year to INR 200 million.

Therefore, transfer pricing provisions in respect of a domestic transaction within India will be attracted only if the aggregate of such transactions per person in a particular financial year exceeds INR 200 million and not otherwise.

This amendment will take effect from April 1, 2015 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

On the source rule in respect of interest received by non-resident in certain cases

Under the provisions of the IT Act, any interest paid by an Indian resident entity to a non-resident entity is subject to a withholding tax in India (subject to allowing a beneficial rate for such withholding tax under a DTAA). On this basis, the Calcutta High Court in the matter of ABN Amro Bank had 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 required to be deducted on such payment. Subsequently, in the case of Sumitomo Mitsui Banking Corporation, the Mumbai Income Tax Appellate 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. 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, and they make tax-free interest payments to their head offices, thereby, reducing taxable profits in India.

The Finance Bill proposes to add an Explanation to Section 9(1)(v) of the IT Act that any interest payable by a person engaged in the banking business in India to its head office will be chargeable to withholding tax in India. While the Finance Minister had promised tax incentives for foreign entities to set up a base in India, the newly added provision acts contrary to this intention as it imposes a withholding tax obligation on interest payments to a bank’s head office.

These amendments will be effective from April 1, 2015 and will, accordingly, apply to the assessment year 2016-17 and subsequent assessment years.

Rationalizing the provisions relating to Minimum Alternate Tax (MAT) for FIIs

The existing provisions contained in section 115JB of the IT Act provide that, in the case of a company, if the tax payable on the total income as computed under the IT Act is less than eighteen and one-half percent (18.5%) of its book profit, such book profit shall be deemed to be the total income of the taxpayer and the tax payable shall be eighteen and one-half percent (18.5%) of its book profit. This tax is termed as MAT.

The Finance Act (No.2), 2014, provided that any securities held by a Foreign Institutional Investor (“FII”) in which it has invested in accordance with the regulations made under the SEBI Act, 1992, will be construed as a capital asset. Consequently, it was clarified that the income arising to a FII from transactions in securities would always be in the nature of capital gains. It is, therefore, proposed to amend the provisions of section 115JB to provide that income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable) arising to an FII, shall be excluded from the chargeability of MAT.

In case of non-residents, where there is no PE in India, Indian courts have traditionally held that no MAT is applicable as they do not maintain their books under India’s Companies Act. But, there have been certain decisions by the Authority for Advance Rulings levying MAT on Foreign Portfolio Investors (“FPIs”) even when long term capital gains tax is not taxable in India. The exemption on MAT under the Finance Bill has been given only to FIIs in a limited manner in respect of exempt capital gains income. Private equity funds and foreign companies continue to be at the risk of scrutiny by the tax authorities in respect of MAT liability. This is especially relevant because many offshore funds have received tax notices on MAT. It is surprising that as a policy decision, the Finance Minister did not extend the MAT exemption to all categories of investors.

These amendments will take effect from April 1, 2015 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Amendment to the conditions for determining residency status in respect of Companies

Until date, foreign companies were treated as “non-resident” in India unless wholly controlled and managed from India.

The Finance Bill proposes a more subjective test of place of effective management, and considers a foreign company resident in India if its place of effective management is in India at any time in the relevant financial year. The place of effective management 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, if a foreign company is held by an Indian company or Indian resident shareholders, with a majority of the directors of such foreign entity based in India and say one director situated outside India, and if the key management and commercial decisions are taken from India, then the worldwide profits of the foreign entity will be taxable in India.

This amendment will impact Indian companies who have established subsidiaries abroad if the foreign subsidiaries are managed and run from India. We understand from press reports that the CBDT has clarified that these amendments have been drafted only to focus on companies in India who hold meetings abroad to circumvent the tax residency rules, and that appropriate guidelines in this regard will be framed soon.

These amendments will take effect from April 1, 2015 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

Service tax

The service tax rate has been increased from 12% to 14%. The “Education Cess” at 2% and the “Secondary and Higher Education Cess” at 1% will be subsumed in the revised rate of service tax. The new service tax rate shall come into effect from a date to be notified by the Central Government after the enactment of the Finance Bill, 2015.

Further, an enabling provision is specified in the Finance Bill to empower the Central Government to impose a Swachh Bharat cess on all or any of the taxable services at a rate of 2% of the value of such taxable services with the objective of financing and promoting Swachh Bharat (i.e., clean and green India) initiatives. This cess shall be levied from a date to be notified by the Central Government in this regard and will not have immediate effect.