Monday, 31 October, 2016

Vistra India Update 314

October 16th -31st, 2016

Income Tax

Amendment to the DTAA between the Government of The Republic of India and the Government of Japan notified

The Government of India has amended the DTAA between Government of the Republic of India and the Government of Japan effective from 1st October 2016.

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Special provisions relating to tax on distributed income of domestic company for buy-back of shares

The CBDT has amended the Income Tax Rules 1962, to notify the methodology to compute the amount received by a company in respect of the share issued by it, being the subject matter of buy-back in the following circumstances.

  1. Where the share has been issued by a company to any person by way of subscription.
  2. Where the company had at any time, prior to the buy-back of the share, returned any sum out of the amount received in respect of such share.
  3. Where the share has been issued by a company under any plan or scheme under which an employees’ stock option has been granted or as part of sweat equity shares.
  4. Where the share has been issued by a company being an amalgamated company, under a scheme of amalgamation, in lieu of the share or shares of an amalgamating company.
  5. The amount received by a company, being a resulting company in respect of shares issued by it under a scheme of demerger.
  6. The amount received by the demerged company in respect of the original shares in the demerged company.
  7. Where the share has been issued or allotted by the company as part of consideration for acquisition of any asset or settlement of any liability.
  8. Where the shares have been issued or allotted by a company on succession or conversion, as the case may be, of a firm into the company or succession of sole proprietary concern by the company.

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External Commercial Borrowings (ECB) by Start-ups

Reserve Bank of India has decided to permit AD Category-I banks to allow Startups to raise ECB under the following framework:

  • a) Eligibility: An entity recognized as a Startup by the Central Government as on date of raising ECB.
  • b) Maturity: Minimum average maturity period will be 3 years.
  • c) Recognized lender: Lender / investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and shall not be from a country identified in the public statement of the FATF.
  • d) Forms: The borrowing can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares. The funds should come from a country which fulfills the conditions at (c) above.
  • e) Currency: The borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof.
  • f) Amount: The borrowing per Startup will be limited to USD 3 million or equivalent per financial year.
  • g) All-in-cost: Shall be mutually agreed between the borrower and the lender.
  • h) End-uses: For any expenditure in connection with the business of the borrower.
  • i) Conversion into equity: Conversion into equity is freely permitted, subject to Regulations applicable for foreign investment in Startups.
  • j) Security: The choice of security to be provided to the lender is left to the borrowing entity. Security can be in the nature of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc., and shall comply with foreign direct investment / foreign portfolio investment / or any other norms applicable for foreign lenders / entities holding such securities.
  • k) Corporate and personal guarantee: Issuance of corporate or personal guarantee is allowed. Guarantee issued by non-resident(s) is allowed only if such parties qualify as lender under paragraph(c) above. Exclusion: Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted.
  • l) Hedging: The overseas lender, in case of INR denominated ECB, will be eligible to hedge its INR exposure through permitted derivative products with AD Category – I banks in India. The lender can also access the domestic market through branches/ subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back to back basis.
  • m) Conversion rate: In case of borrowing in INR, the foreign currency - INR conversion will be at the market rate as on the date of agreement.

Other provisions like parking of ECB proceeds, reporting arrangements, powers delegated to AD banks, borrowing by entities under investigation, conversion of ECB into equity will be as included in the ECB framework announced vide A.P. (DIR Series) Circular No. 32 dated November 30, 2015. However, provisions on leverage ratio and ECB liability: Equity ratio will not be applicable.

Click to view the relevant circular


External Commercial Borrowings (ECB) – Extension and Conversion

Under the existing rules Authorised Dealers is empowered by RBI to grant approvals for extension and conversion of ECBs that are not matured. Under the new rules announced, RBI now empowers Authorised Dealers to approve extension and conversion of ECBS that are matured and unpaid – provided there is no additional costs, consent of lender obtained and reporting requirements are fulfilled.

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Foreign Direct investment (FDI) in other financial services

At present FDI regulations permit foreign investment upto 100% under the automatic route in Non-Banking Finance Companies (NBFCs) engaged in 18 activities listed therein subject to minimum capitalization norms. It has now been decided to allow foreign investment upto 100% under the automatic route in ‘Other Financial Services’ which includes activities which are governed by financial sector regulators like RBI, SEBI, IRDA, PFRDA, NHB or any other financial sector regulator notified by Government of India. Such foreign investment shall be subject to conditionalities, including minimum capitalization norms, as specified by the concerned Regulator/ Government Agency.

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Foreign Exchange Management (manner of receipt and payment) Regulations, 2016

New regulations have been notified with respect to receipt from and payment to person resident outside India. This will have an impact in the way receipts and payments are effected in the course of export and imports.

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Investment by a Foreign Venture Capital Investor (FCVI) Registered under SEBI (FVCI) Regulations, 2000

Investment in India by Foreign Venture Capital Investors (FVCI), registered with SEBI, is governed by the provisions of Schedule 6 of the Principal Regulations. In order to further liberalize and rationalize the investment regime for FVCIs and to give a fillip to foreign investment in the startups, the extant regulatory provisions have been reviewed and accordingly amendments have been carried out in Schedule 6 of Foreign Exchange Management (Transfer or Issue of security by a person resident outside India)Regulations, 2000, through Foreign Exchange Management  (Transfer or Issue of Security by a Person Resident outside India) (Third Amendment) Regulations, 2016.

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Review of Sectoral Caps and Simplification of Foreign Direct Investment (FDI) policy

The Central Government had reviewed the current FDI Policy on various sectors and has made amendments in the Consolidated FDI Policy. Some of the important features of these amendments are as follows:

  1. In all sectors where there is a limit/cap on foreign investment, such limit/cap shall be reckoned in a composite manner. In other words, "sectoral cap", i.e., the maximum amount which can be invested by foreign investors in an entity will include all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under Schedules 1, 2, 2(A), 3, 6, 8, 9 and 10 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000. Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts (DRs) having underlying of instruments which can be issued under Schedule 5, being in the nature of debt, shall not be treated as foreign investment under such composite limit/cap. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment under the composite limit/cap.
  2. Total foreign investment" in an Indian company will be the sum total of direct and indirect foreign investments.
  3. Portfolio investment up to aggregate foreign investment level of 49% or sectoral/statutory cap, whichever is lower, will not be subject to either Government approval or compliance with the sectoral conditions, as the case may be, provided such investment does not result in change in ownership leading to control of Indian entities.
  4. Theonusofcompliancewiththe  sectoral/statutory caps on foreign investment and attendant conditions, if any, shall be on the company receiving foreign investment.
  5. A company shall be considered as owned by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens. A Limited Liability Partnership (LLP) will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/ or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share.
  6. Foreign investment in LLP is permitted under the automatic route if the LLP is engaged in sector where 100% FDI is allowed and there are no attendant FDI linked performance conditionalities to the sector.
  7. "Real estate business" shall mean dealing in land and immovable property with a view to earning profit therefrom and does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent income on lease of the property, not amounting to transfer, will not amount to “real estate business”.
  8. Manufacturing has been given a precise definition and foreign investment up to 100% under the automatic route is permitted in manufacturing subject to the conditions of the FDI policy and the provisions of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. A manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce without Government approval.
  9. An entity engaged in single brand retail trading operating through brick and mortar stores, is permitted to undertake retail trading through e-commerce.

Click to view the relevant circular



Publishing of Rate of Exchange for conversion of the foreign currency

The Central Board of Excise and Customs (CBEC) vide Notification No. 127/2016 - 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 21st of October 2016.

Click to view the relevant circular