Tuesday, 15 November, 2016

Vistra India Update 315

November 1st -15th, 2016

Income Tax

Chapter VIA deduction on enhanced profits 

Chapter VI A of the Income Tax Act 1961, provides for deductions in respect of certain incomes.  In computing the profits and gains of a business activity, the Assessing officer may make certain disallowances, such as disallowances pertaining to section 32, 40(a)(ia), 40A(3), 43B etc., of the Act.  At times disallowance out of specific expenditure claimed may also be made.  The effect of such disallowances is an increase in the profits.  Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.

In view of the judgements of the High courts of Bombay, Gujarat and Allahabad, the Central Government has notified that the disallowances made under section 32, 40(a)(ia), 40A(3), 43B etc of the Act and other specific allowances, related to business activity against which the Chapter VI A deduction has been claimed, result in enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance. 

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Depreciation restricted to 40% for companies opting lower income tax rate prescribed u/s 115BA

Section 115BA of the Income Tax Act 1961, subject certain conditions, provides an option to companies engaged manufacture or production of any article or thing to pay income tax at a lower rate of 25% with effect from FY 16-17. The Central Government has now notified that, with effect from 1st April 2016, depreciation rates would be restricted to 40% for all block of assets in case of companies which opt for the lower income tax rates prescribed under section 115BA. 

The notification also mentions that in the New Appendix I, in the Table, in the second column, for the depreciation rates “‘50’, ‘60’, ‘80’, ‘100’ ”, wherever they occur, the figure “40” shall be substituted with effect from the 1st day of April, 2017.  This amendment appears to indicate that maximum depreciation rate for all block of assets is restricted to 40% for all companies with effect from April 2017.  Clarification is awaited from the government on this. 

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Transactions in relation to which permanent account number is to be quoted

Subsequent to demonetization of INR 500 and INR 1,000 currency notes with effect from 9th November 2016, the Central government has made it mandatory to quote PAN for all cash deposits with banks or post office, aggregating to more than INR 250,000/- during the period 9th November 2016 to 30th December 2016. 

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Company Law

Amendment of Companies (Registration offices and Fees) Rules 2014

Ministry of Corporate Affairs has amended Companies (Registration offices and Fees) Rules 2016 to provide that Form AOC-4 (Form for filing financial statement and other documents with registrar) can also be pre-certified by Company Secretary, Cost Accountant in whole time practice along with the practicing Chartered Accountant.

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RBI announces draft guidelines for Centralized Hedging for Indian Subsidiaries of Non-Resident Companies

The Reserve Bank of India released draft operational guidelines to allow the overseas parent or its central treasury to hedge the currency risk arising out of genuine current account exposures of the Indian subsidiary in order to better manage the latter’s currency risk. Comments on the draft guidelines are invited from banks, market participants and other interested parties by November 11, 2016. Key operational guidelines released are:

  1. Products allowed for hedging are: all Foreign Currency -INR  derivatives,  OTC  as  well  exchange  traded  that  the  Indian  subsidiary  is  eligible  to  undertake
  2. The non-resident entity may approach directly or through its banker, an AD Cat-I bank which handles the foreign exchange transactions of its subsidiary for hedging the currency risk of and on the latter’s behalf.
  3. The transactions under this facility will be covered under a multiple party agreement involving the Indian subsidiary, the non-resident entity and the Indian AD Cat – I bank.
  4. The profit/ loss of the hedge transactions shall be reflected in the books of accounts of the Indian subsidiary. This requirement shall be included in the multiple party agreement.
  5. Any rupee account if required for undertaking the hedging transactions be permitted to be opened by the AD Bank in the name of the related non-resident entity.
  6. Transactions booked on the exchanges may be reported to the concerned AD Bank for monitoring underlying exposure.

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External Commercial Borrowings (ECB) – Clarifications on hedging

Reserve Bank of India has issued certain clarifications with regard to hedging requirement to be complied with during the currency of ECB. This requirement of 100% hedging was first announced in its RBI/2015-16/349 A.P. (DIR Series) Circular No.56 dated March 30, 2016.  With a view to provide clarity on the aforesaid directions and bring uniformity in hedging practices in the market so as to effectively address currency risk at a systemic level, the following clarifications are issued:

  1. Wherever hedging has been mandated by the RBI, the ECB borrower will be required to cover principal as well as coupon through financial hedges. The financial hedge for all exposures on account of ECB should start from the time of each such exposure (i.e. the day liability is created in the books of the borrower).
  2. A minimum tenor of one year of financial hedge would be required with periodic rollover duly ensuring that the exposure on account of ECB is not unhedged at any point during the currency of ECB.
  3. Natural hedge, in lieu of financial hedge, will be considered only to the extent of offsetting projected cash flows / revenues in matching currency, net of all other projected outflows. For this purpose, an ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year. Any other arrangements/ structures, where revenues are indexed to foreign currency will not be considered as natural hedge.

The designated AD Category-I bank will have the responsibility of verifying that 100 per cent hedging requirement is complied with. Relevant paragraph of the Master Direction No. 5 dated January 01, 2016 is being updated to reflect the changes. 

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Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Sixteenth Amendment) Regulations, 2016

Prior to the announcement of above Amendment Regulations, foreign direct investment in Pension Funds is allowed upto 49% under automatic route.  With the new amendment announced to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, (Notification No. FEMA 20/2000-RB dated 3rd May 2000), existing entry F.10 in Annex B of Schedule 1 is substituted with a new entry F.10.1 specifying that:

  1. Foreign investment in the Pension Funds is allowed as per the Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013.
  2. Foreign investment in Pension Funds will be subject to the condition that entities bringing in foreign investments as equity shares or preference shares or convertible debentures or warrants as per Section 24 of the PFRDA Act, 2013 shall obtain necessary registration from the PFRDA and comply with other requirements as per the PFRDA Act, 2013 and Rules and Regulations framed under it for so participating in Pension Fund Management activities in India.
  3. An Indian pension fund shall ensure that its ownership and control remains at all times in the hands of resident Indian entities as determined by the Government of India / PFRDA as per the rules/regulation issued by them from time to time. The meaning of ownership and control would be as defined in Regulation 14 of the Principal Regulations. 

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Withdrawal of Legal Tender Character of existing ₹ 500/- and ₹ 1,000/- Bank Notes

Following the  Gazette Notification No 2652 dated November 08, 2016 issued by Government of India, ₹ 500 and ₹ 1,000 denominations of Bank Notes of the existing series issued by Reserve Bank of India (hereinafter referred to as Specified Bank Notes) shall cease to be legal tender with effect from 9th November, 2016, to the extent specified in the said Gazette Notification.   Bank   branches   will   be   the primary agencies through which the members of public and other entities will be exchanging the Specified Bank Notes for Bank Notes in other valid denominations or depositing the Specified Bank Notes for crediting to their accounts, upto and including the December 30, 2016. Therefore, banks have to accord highest priority to this work. 

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Issue of Pre-Paid Instruments to foreign tourists

Following the withdrawal of the legal tender character of the existing and any older series banknotes in the denominations of ₹ 500 and ₹ 1,000, Authorized Persons are allowed to issue Pre-paid instruments to foreign tourists in exchange of foreign exchanged tendered by them. Passport may be treated as a valid document for issuance of said prepaid instruments. 

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Service Tax 

Withdrawal of exemption from service tax on cross border B2C OIDAR services provided online/electronically from a nontaxable territory to consumers in taxable territory in India

At present services received in taxable territory in India from outside the taxable territory by Government, a local authority , a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession are exempted (B2C transactions). Whereas, services received by persons in taxable territory from nontaxable territory for business to business (B2B) are taxable under reverse charge. Further, per the Place of Provision of Service Rules, 2012 rule 9(b), with respect to online information and database access or retrieval services [OIDAR], the place of supply is location of service provider and thus the above mentioned services provided by a person in nontaxable territory and received by a person in taxable territory were outside the levy of service tax.

With reference to the above, vide Notification Nos. 46/2016ST, 47/2016ST, 48/2016ST and 49/2016ST all dated 9th November, 2016 the Department of Revenue has notified that online information and database access or retrieval [OIDAR] services provided by any person located in nontaxable territory and received by Government, local authority, governmental authority, or an individual in relation to any purpose other than commerce, industry or any other business or profession (B2C transactions) would be chargeable to service tax under reverse charge. These notifications shall come into force with effect from 1st December 2016.  

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Combined Annual Return for Central Excise and Service Tax for the period 2015-16 dispensed with

The assessee was required to file a Combined Annual Return under Central Excise and Service Tax by 30th November 2016 (for FY 15-16) in a format to be notified by CBEC.  However, now the Central Government has notified that in view of impending implementation of Goods & Service Tax (GST) the aforesaid Annual Return shall not be required to be filed for the year 2015-16 which is due to be filed by 30th November 2016. After implementation of GST, Annual Return for non-GST goods only may be required. Decision on the same will be taken after due consultation with the trade. 

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Publishing of rate of exchange for conversion of the foreign currency

The Central Board of Excise and Customs (CBEC) vide Notification No. 136/2016 - Customs (N.T.) notified the rate of exchange for conversion of the foreign currency into Indian currency or vice versa for Export and Import of goods, with effect from 4th of November 2016. 

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