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CA STUDY NOTES
SUPPLEMENTARY STUDY PAPER – 2022
Elective Paper 6C: INTERNATIONAL TAXATION
[Amendments made by the Finance Act, 2022 and other developments, including significant Notifications/Circulars issued between 1st October, 2021 and 31st October, 2022]
(Relevant for students appearing in May, 2023 Examination)
BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of the Institute of Chartered Accountants of India with a view to assist the students in their education. While due care has been taken in preparing this Supplementary Study Paper, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not responsible in any way for the correctness or otherwise of the amendments published herein.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher.
Website : www.icai.org
Department/Committee: Board of Studies E-mail : bosnoida@icai.in
Published by : The Publication & CDS Directorate on behalf of The Institute of
Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi- 110002, India
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(1) |
(2) |
(3) |
|
Chapter & Topics |
Page No. |
Study Material Page No. |
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Chapter 1: Transfer Pricing |
||
|
Power to the Central Government to issue direction for giving effect to the Faceless Scheme [Section 92CA(9)/(10)] |
1 |
1.73 |
|
Dispute Resolution Mechanism |
2 |
1.78-1.79 |
|
Chapter 2: Non-resident Taxation |
||
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Presence of Eligible Fund Manager in India not to constitute business connection in India of such Eligible Investment Fund on behalf of which he undertakes Fund Management Activity [Section 9A] |
3 |
2.45-2.49 |
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Income of a specified fund on transfer of certain asset [Section 10(4D)] |
8 |
2.50-2.53 |
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Income of a non-resident as a result of transfer of non-deliverable forward contracts entered into with an offshore banking unit of an IFSC [Section 10(4E)] |
14 |
2.53 |
|
Income of a non-resident by way of royalty or interest, on account of lease of an aircraft or a ship in a previous year, paid by a unit of an IFSC [Section 10(4F)] |
15 |
2.53 |
|
Income received by a non-resident in an account maintained with an Offshore Banking unit in any IFSC [Section 10(4G)] |
15 |
– |
|
Withdrawal of exemption under section 10(8), 10(8A), 10(8B) and 10(9) |
16 |
2.63-2.64 |
|
Clarification relating to eligibility of exemption under section 10(23FE) in respect of specified funds having “Indirect” Loans and Borrowings [CBDT Circular No.19/2021 dated 26.10.2021] |
16 |
2.59 |
|
(1) |
(2) |
(3) |
|
Chapter & Topics |
Page No. |
Study Material Page No. |
|
Capital gains arising to a Non-resident or specified fund [Section 10(23FF)] |
17 |
2.65-2.66 |
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Transfer of specified securities by a non-resident on a recognized stock exchange located in any IFSC [Section 47(viiab) r.w. Notification No. 89/2022 dated 3.8.2022] |
18 |
2.87 |
|
Transfer in a relocation, of a share/ unit/ interest in Original Fund [Section 47(viiad) r.w. Notification No. 80/2022 dated 8.7.2022] |
18 |
2.88 |
|
Notification of Cost Inflation Index for Financial Year 2022-23 [Notification No. 62/2022, dated 14.6.2022] |
19 |
2.90-2.91 |
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Surcharge |
20 |
2.100-2.101 |
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Refund for denying liability to deduct tax under section 195 [Section 239A] |
23 |
– |
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Special provisions for computing tax on income of Specified Fund or Foreign Institutional Investors from securities or capital gains arising from their transfer [Section 115AD(1A) and (1B)] |
23 |
2.120-2.121 |
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Chapter 4: Advance Rulings |
4.1-4.17 |
|
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Boards for Advance Rulings – An Introduction |
27 |
– |
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Constitution of Board for Advance Rulings [Section 245-OB] |
27 |
– |
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Definitions |
28 |
– |
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Vacancies, etc., not to invalidate proceedings [Section 245P] |
30 |
– |
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Application for advance ruling [Section 245Q] |
30 |
– |
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Procedure on receipt of application [Section 245R] |
31 |
– |
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Advance Ruling to be void in certain circumstances [Section 245T] |
32 |
– |
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(1) |
(2) |
(3) |
|
Chapter & Topics |
Page No. |
Study Material Page No. |
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Powers of the Board for Advance Rulings [Section 245U] |
32 |
– |
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Appeal [Section 245W] |
33 |
– |
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Chapter 7: Tax Treaties: Overview, Features, Application & Interpretation |
||
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Clarification regarding the Most-Favoured-Nation (MFN) clause in the Protocol to India’s DTAAs with certain countries [Circular No.3/2022 dated 3.2.2022] |
34 |
7.33 |
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Chapter 8: Anti Avoidance Measures |
||
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OECD – BEPS 2.0 – Consensus based solution for tax challenges arising out of digitalization |
37 |
8.7-8.8 |
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ANNEXURE – 5 : Rule 128 Foreign Tax Credit |
44 |
A.13 – A.14 |
Note – This Supplementary Study Paper 2022 has to be read along with the October 2021 edition of the Study Material. Accordingly, the page numbers of the relevant provision in the said edition of the Study Material indicated in column (3) of the above table would facilitate easy co-relation with the Study Material. The content relating to advance rulings have been given in entirety in this Supplementary Study Paper owing to non-applicability of provisions relating to Authority for Advance Rulings for May, 2023 Examination. Hence, students have to read the content relating to advance rulings given in the Supplementary Study Paper in the place of the content in the Study Material. Students are advised to read “BEFORE WE BEGIN…” in pages vi & vii, carefully before proceeding to read this Supplementary Study Paper to understand the manner in which amendments have been presented herein.
BEFORE WE BEGIN …
International Taxation is one of the six elective papers of the CA Final Course. This paper includes the provisions of income-tax law relevant in the context of international taxation, namely, provisions relating to non-resident taxation, transfer pricing, advance ruling and double taxation relief. It also includes provisions of other direct tax laws relevant in the context of international taxation, namely, provisions relating to equalization levy and black money law. The direct tax laws of the country undergo significant changes every year with the passing of the annual Finance Act. Apart from these major amendments which take place every year, notifications and circulars are issued by the CBDT from time to time to implement the provisions of the Act and clarify issues regarding the meaning and scope of certain provisions. Further, decisions are pronounced by various courts interpreting the provisions of direct tax laws.
As far as the applicability of Finance Act is concerned, the amendments made by the Finance Act of a particular year would be applicable for May and November examinations of the next year. For May, 2023 examination, the direct tax laws, as amended by the Finance Act, 2022 and circulars and notifications issued upto 31.10.2022 would be applicable. The relevant assessment year for May, 2023 examination is A.Y.2023-24. Accordingly, this Supplementary Study Paper 2022 contains the amendments made by the Finance Act, 2022 and notifications and circulars issued between 1.10.2021 and 31.10.2022, relevant for May 2023 examination. The amendments have been presented chapter-wise to facilitate easy co-relation with the October 2021 edition of the Study Material on Final Paper 6C International Taxation. The Supplementary Study Paper 2022 has to be read along with the October 2021 edition of the Study Material. For this purpose, the corresponding pages of the Study Material have been given in the Content page for easy reference.
The manner in which amendments have been presented in the Supplementary Study Paper can be grouped into three categories – First, where the entire content of a chapter, namely, Advance Rulings, has been given in this Supplementary Study Paper, owing to non-applicability of the provisions relating to Authority for Advance Rulings for May, 2023 Examination. Second, where the relevant provision (Section/Clause) has been given in entirety, with the amendments therein indicated in italics/bold italics. This has been done in respect of newly inserted provisions [namely, section 10(4G) and section 239A] as well as existing provisions where a major part thereof has undergone a change or where there are two or more different changes in the same provision [namely, sections 9A, 10(4D), 10(4E), 10(4F) and 10(23FF)]. Third, where the relevant provision has not been given in entirety in this Supplementary Study Paper, but only the respective notification/circular or the sub-section/clause/proviso/Explanation which has undergone change has been explained in this Supplementary Study Paper. Here also, the relevant amendment has been indicated in italics/bold italics along with a note requiring the students to read the amendment along with the related provisions in the Study Material. Thus, students may note that whereas in the First and
Second categories, the content given in this Supplementary Study Paper will substitute the related content given in the Study Material, in the third category, the amendment given in this Supplementary Study Paper has to be read along with the related provision in the Study Material.
Students are advised to read this Supplementary Study Paper thoroughly and understand the amendments and their effect. For May, 2023 examination, this Supplementary Study Paper 2022 on Final Paper 6C has to be read along with the October, 2021 edition of the Study Material on Final Paper 6C International Taxation. Since the knowledge of direct tax laws is a pre-requisite for attempting case studies in this paper, students are expected to have read and understood the contents of the October, 2021 edition of the Study Material on Final Paper 7 Direct Tax Laws and International Taxation along with the Supplementary Study Paper 2022 of Final Paper 7 and the webhosted Judicial Update for May, 2023 examination.
Happy Reading!
POWER OF THE CENTRAL GOVERNMENT TO ISSUE DIRECTION FOR GIVING EFFECT TO THE FACELESS SCHEME [SECTION 92CA(9)/(10)]
Section 92CA provides for a procedure for reference to Transfer Pricing Officer (TPO) of any issue relating to computation of arm’s length price in an international transaction or specified domestic transactions.
1
TRANSFER PRICING
The Central Government may make a scheme, by way of notification for the purposes of determination of the arm’s length price, so as to impart greater efficiency, transparency and accountability by –
- eliminating the interface between the Transfer Pricing Officer and the assessee or any other person to the extent technologically feasible;
- optimising utilisation of the resources through economies of scale and functional specialisation;
- introducing a team-based determination of arm’s length price with dynamic jurisdiction [Sub- section (8)].
The Central Government may, for the purpose of giving effect to the scheme made, direct that any of the provisions of this Act would not apply or would apply with such exceptions, modifications and adaptations as may be specified.
However, no direction shall be issued after 31st March, 2024. [Sub-section (9)].
Every notification so issued shall, as soon as may be after the notification is issued, be laid before each House of Parliament [Sub-section (10)].
Note – The above amendment has to be read along with the other provisions of section 92CA discussed in pages 1.71 to 1.73 of the Study Material.
Section 245MA(2A), inter alia, provides that in a case where the specified order is a draft of the proposed order of assessment under section 144C(1), the Assessing Officer shall pass an order of assessment, reassessment or recomputation, in conformity with the directions contained in the order of Dispute Resolution Committee issued under section 245MA, within a period of one month from the end of the month in which such order is received.
It implies that an eligible assessee (being any person in whose case variation arises as a consequence of order of Transfer Pricing Officer and any non-resident or a foreign company) may opt for approaching either the Dispute Resolution Panel under section 144C or the DRC under section 245MA subject to satisfaction of the conditions stipulated thereunder.
Note – The above amendment in section 245MA has to be read along with other content relating to Dispute Resolution Mechanism given in pages 1.78 and 1.79 of the Study Material and the amendments pertaining to section 245MA covered under Chapter 19: Dispute Resolution Committee in the Supplementary Study Paper, 2022 of Final Paper 7: Direct Tax Laws & International Taxation.
PRESENCE OF ELIGIBLE FUND MANAGER IN INDIA NOT TO CONSTITUTE BUSINESS CONNECTION IN INDIA OF SUCH ELIGIBLE INVESTMENT FUND ON BEHALF OF WHICH HE UNDERTAKES FUND MANAGEMENT ACTIVITY [SECTION 9A]
- Fund Management Activity through an eligible fund manager not to constitute business connection [Section 9A(1)]: 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 business connection in India of the said fund, subject to fulfillment of certain conditions.
2
NON-RESIDENT TAXATION
- Location of Fund Manager in India not to affect residential status of an eligible investment fund [Section 9A(2)]: 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.
- Conditions to be fulfilled by an Eligible Investment Fund [Section 9A(3)]: The eligible investment fund means a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit. Further, it should fulfill the following conditions:
- the fund should not be a person resident in India;
- the fund should be a resident of a country or a specified territory with which an agreement referred to in section 90(1) or section 90A(1) has been entered into or should be established or incorporated or registered, outside India in a country or a specified territory notified by the Central Government in this behalf;
- the aggregate participation or investment in the fund, directly or indirectly, by 0persons being resident in India should not exceed 5% of the corpus of the fund;
However, for the purposes of calculation of aggregate participation or investment in the fund, any contribution made by the eligible fund manager during the first 3 years of operation of the fund, not exceeding ` 25 crore, would not be taken into account.
-
- the fund and its activities should be subject to applicable investor protection regulations in the country or specified territory where it is established or incorporated or is a resident;
- the fund should have a minimum of 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 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 50%;
- the investment by the fund in any entity shall not exceed 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 ` 100 crore. If the fund has been established or incorporated in the previous year, the corpus of fund should not be less than ` 100 crore at the end of a period of twelve months from the
last day of the month of its establishment or incorporation;
However, this condition shall not be applicable to a fund which has been wound up in the previous year.
-
- the fund shall not carry on or control and manage, directly or indirectly, any business in India;
- the fund should neither be engaged in any activity which constitutes a business connection in India nor should have 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.
- the remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken on its behalf should not be less than the amount calculated in the prescribed manner.
- Certain conditions not to apply to investment fund set up by the Government or the Central Bank of a foreign State or a Sovereign Fund or other notified fund [Proviso to Section 9A(3)]: The following conditions would, however, not be applicable in case of an investment fund set up by the Government or the Central Bank of a foreign State or a sovereign fund or such other fund notified by the Central Government [i.e., an investment fund set up by a Category-I or Category-II Foreign Portfolio Investor registered under the
SEBI (Foreign Portfolio Investors) Regulations, 2014, made under the SEBI Act, 1992 and an investment fund set up by a Category-I foreign portfolio investor registered under the SEBI (Foreign Portfolio Investors) Regulations, 2019, made under the SEBI Act, 1992]:
- the fund should have a minimum of 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 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 50%.
- Eligible Fund Manager [Section 9A(4)]: The eligible fund manager, in respect of an eligible investment fund, means any person who is engaged in the activity of fund management and fulfills the following conditions:
- the person should not be an employee of the eligible investment fund or a connected person of the fund;
- the person should be registered as a fund manager or investment advisor in accordance with the specified regulations;
The CBDT has, vide Circular No.8/2019 dated 10.5.2019, clarified that a fund manager includes an Asset Management Company (AMC) approved by SEBI under the SEBI (Mutual Funds) Regulations, 1996. This is because AMCs are engaged in the activity of fund management of Mutual Funds and hence are, in substance, Fund Managers.
-
- the person should be acting in the ordinary course of his business as a fund manager;
- the person along with his connected persons shall not be entitled, directly or indirectly, to more than 20% of the profits accruing or arising to the eligible investment fund from the transactions carried out by the fund through such fund manager.
- Furnishing of Statement in prescribed form [Section 9A(5)]: Every eligible investment fund shall, in respect of its activities in a financial year, furnish within 90 days from the end of the financial year, a statement in the prescribed form to the prescribed income-tax authority. The statement should contain information relating to –
- the fulfillment of the above conditions; and
- such other relevant information or document which may be prescribed.
If any eligible investment fund fails to furnish such statement or information or document within 90 days from the end of the financial year, the income-tax authority prescribed under the said sub-section may direct that such fund shall pay, by way of penalty, a sum of
` 5,00,000 [Section 271FAB].
- Non-applicability of special taxation regime under section 9A [Section 9A(6)/(7)]: This special taxation regime would not have any impact on 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 constituted business connection in India of such fund or not.
Further, the said regime shall not have any effect on the scope of total income or determination of total income in the case of the eligible fund manager.
- CBDT to prescribe guidelines for the manner of application of the provisions of this section.
- Certain conditions not to apply or apply with modification to investment fund and its fund manager, if such fund manager is located in an IFSC and has commenced its operation on or before 31.3.2024 [Section 9A(8A)]: The Central Government may, by notification, specify that any one or more of the conditions specified in point (iii) and (v) above would not be applicable or applicable with such modifications, as may be specified in such notification in case of an eligible investment fund and its eligible fund manager, if such fund manager is located in an IFSC as defined in section 80LA and has commenced its operation on or before 31.3.2024:
Accordingly, the Central Government has, vide Notification No. 59/2022 dated 6.6.2022, specified that in case of –
An eligible investment fund –
-
- the following conditions mentioned under section 9A(3) would not be applicable
- the fund should have a minimum of 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 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 50%.
- the condition mentioned above in clause (k) of section 9A(3) would apply after the following modification –
“the fund shall not carry on, or participate in, the day to day operations of any person in India and for this purpose the monitoring mechanism to protect the investment in such person including the right to appoint directors or executive director shall not be considered as participation in day to day operations of such person in India”
Eligible fund manager –
The condition specified in section 9A(4)(b) would apply after the following modification:
“the person is registered as a portfolio manager or an investment advisor in accordance with the IFSC Authority (Capital Market Intermediaries) Regulation 2021 as notified under the IFSC Authority Act, 2019 or such other regulations made under the IFSC Authority Act, 2019”.
- Meaning of certain terms:
|
Term |
Meaning |
|
Associate |
An entity in which a director or a trustee or a partner or a member or a fund manager of the investment fund or a director or a trustee or a partner or a member of the fund manager of such fund, holds, either individually or collectively, share or interest, being more than 15% of its share capital or interest, as the case may be. |
|
Corpus |
The total amount of funds raised for the purpose of investment by the eligible investment fund as on a particular date. |
|
Connected person |
Any person who is connected directly or indirectly to another person and includes,—
|
- any other person who carries on a business, if –
- the person being an individual, or any relative of such person, has a substantial interest in the business of that other person; or
- the person being a company, firm, association of persons, body of individuals, whether incorporated or not, or a Hindu undivided family, or any director, partner or member of such company, firm or association of persons or body of individuals or family, or any relative of such director, partner or member, has a substantial interest in the business of that other person;
INCOME OF A SPECIFIED FUND ON TRANSFER OF CERTAIN ASSET [SECTION 10(4D)]
Following income accrued or arising to or received by specified fund would be exempt –
- any income from transfer of a capital asset, being a bond of an Indian Company or a public sector company (sold by the Government and purchased by the specified fund in foreign currency), GDR or rupee denominated bond of an Indian company or derivative or any other notified security, on a recognized stock exchange located in any IFSC and where the consideration is paid or payable in convertible foreign exchange or
- any income from transfer of securities (other than shares in a company resident in India) or
- any income from securities issued by a non-resident (not being a permanent establishment of a non-resident in India) and where such income otherwise does not accrue or arise in India; or
- any income from a securitisation trust which is chargeable under the head “Profits and gains of business or profession”,
to the extent such income accrued or arisen to, or is received is attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) or is attributable to the investment division of offshore banking unit, as the case may be, computed in the prescribed manner.
Manner of computation of exempt income of specified fund, attributable to units held by non- resident (not being the permanent establishment of a non-resident in India) in a specified fund [Rule 21AI]
As per Rule 21AI, the income attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) in a specified fund shall be computed in accordance with the following formula, namely –
|
Income exempt under section 10(4D) = A x C1 + B x C2 + D x FI + E x F2, where |
|
|
A |
Any income accrued or arisen to, or received by a specified fund as a result of transfer of capital asset referred to in section 47(viiab) on a recognised stock exchange located in any IFSC and where the consideration for such transaction is paid or payable in convertible foreign exchange; |
|
Note – Capital assets referred to in section 47(viiab) are –
|
|
|
B |
Any income accrued or arisen to, or received by a specified fund as a result of transfer of securities (other than shares in a company resident in India); |
|
C1 |
Ratio of the aggregate of daily ‘assets under management’ of the specified fund held by non-resident unit holders (not being the permanent establishment of a non-resident in India) to the aggregate of daily total ‘assets under management’ of the specified fund, from the date of acquisition of the capital asset referred to in section 47(viiab) to the date of transfer of such capital asset. |
|
C2 |
Ratio of the aggregate of daily ‘assets under management’ of the specified fund held by non-resident unit holders (not being the permanent establishment of a non-resident in India) to the aggregate of daily total ‘assets under management’ of the specified fund, from the date of acquisition of the security (other than shares in a company resident in India) to the date of transfer of such security. |
|
D |
Any income accrued or arisen to, or received by a specified fund from securities issued by a non-resident (not being a permanent establishment of a non-resident in India) and where such income otherwise does not accrue or arise in India; |
|
E |
Any income accrued or arisen to, or received by a specified fund from securitisation trust which is chargeable under the head “Profits and gains of business or profession” |
|
F1 |
Ratio of the ‘assets under management’ in the specified fund held by non-resident unit holders (not being the permanent establishment of a non-resident in India) to the total ‘asset under management’ of the specified fund, as on the date of receipt of such income from securities issued by a non-resident (not being a permanent establishment of a non- resident in India) and where such income otherwise does not accrue or arise in India |
|
F2 |
Ratio of the ‘assets under management’ in the specified fund held by non-resident unit holders (not being the permanent establishment of a non-resident in India) to the total ‘asset under management’ of the specified fund, as on the date of receipt of such income from a securitisation trust which is chargeable under the head “profits and gains of business or profession” |
|
“Assets under management” means the closing balance of the value of assets or investments of the specified fund as on a particular date. The specified fund has to furnish an annual statement of exempt income in the prescribed form electronically under digital signature on or before the due date u/s 139(1). The income attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) in a specified fund would not be exempt under section 10(4D) unless the specified fund furnish the annual statement of exempt income on or before the due date u/s 139(1). [Notification no. 64/2022 dated 16.6.2022] |
|
Manner of computation of exempt income of specified fund, attributable to the investment division of an offshore banking unit [Rule 21AJA]
As per Rule 21AJA, income of specified fund attributable to the investment division of an offshore banking unit has to be computed in accordance with the following formula –
Exempt Income of offshore banking unit =A+B+C+D
|
A |
Any income accrued or arisen to, or received by the eligible investment division as a result of transfer of a capital asset referred to in section 47(viiab) held by it, on a recognised stock exchange located in any International Financial Services Centre (IFSC) and where the consideration for such transaction is paid or payable in convertible foreign exchange. Note – Capital assets referred to in section 47(viiab) are – (ii) Bonds of an Indian company issued in accordance with notified scheme of Central Government or bonds of a public company sold by the government and purchased by the fund in foreign currency
|
|
|
|
B |
Any income accrued or arisen to, or received by the eligible investment division as a result of transfer of securities held by it (other than shares in a company resident in India) |
|
C |
Any income accrued or arisen to, or received by the eligible investment division from securities held by it and issued by a non-resident (not being a permanent establishment of a non-resident in India) and where such income otherwise does not accrue or arise in India |
|
D |
Any income accrued or arisen to, or received by the eligible investment division from a securitisation trust which is chargeable under the head “profits and gains of business or profession” |
|
Any expenditure incurred for the purposes of making or earning income referred to in items A or B or C or D would not be allowed as deduction from income from any other activity or source under any provision of the Act, irrespective of the fact that such expenditure has not been allowed as deduction against income referred to in items A or B or C or D, as the case may be. |
|
The eligible investment division has to furnish an annual statement of exempt income in the prescribed form electronically under digital signature on or before the due date specified u/s 139(1).
The income of a specified fund attributable to an eligible investment division would not be exempt under section 10(4D) unless it furnishes the annual statement of exempt income and the report of audit on or before the said due date. [Notification no. 64/2022 dated 16.6.2022]
Meaning of certain terms:
|
S.No. |
Term |
Meaning |
|
1 |
Securities |
Securities includes
|
It shall also include such other securities or instruments as may be notified by the Central Government. |
||
|
2 |
Investment division of offshore banking unit |
An investment division of a banking unit of a non-resident located in an IFSC, as referred to in section 80LA(1A) and which has commenced its operations on or before 31.3.2024 |
|
3 |
Specified fund |
However, this condition would not apply where any unit holder or holders, being non-resident during the previous year when such unit or units were issued, becomes resident under section 6(1) or (1A) in any previous year subsequent to that year, if the aggregate value and number of the units held by such resident unit holder or holders do not exceed 5% of the total units issued and fulfill such other conditions as may be prescribed; Accordingly, the CBDT has, vide Notification No. 64/2022 dated 16.6.2022, specified the following conditions –
|
The specified fund has to certify that it has fulfilled the above-mentioned conditions and has to furnish information in respect of units held by residents in the annual statement of exempt income. The income attributable to units held by non-resident (not being the permanent establishment of a non- resident in India) in a specified fund shall not be exempt unless the specified fund certifies fulfillment of the said conditions and furnishes the above- mentioned information.
exemption:
|
|
one month prior to the due date u/s 139(1). Such accountant has to furnish by that date the report of such audit in the prescribed form electronically under digital signature;
|
||
|
4 |
Trust |
A trust established under the Indian Trust Act, 1882 or under any other law for the time being in force. |
|
5 |
Unit |
Unit means beneficial interest of an investor in the fund and shall include shares or partnership interests. |
|
6 |
Manager |
Any person or entity who is appointed by the Alternative Investment Fund to manage its investment by whatever name called. Manager may also be same as the sponsor of the Fund. |
|
7 |
Sponsor |
Any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partner in case of LLP. |
Note – As per section 10(23FBC), any income accruing or arising to or received by a unit holder from a specified fund or on transfer of units in a specified fund would be exempt. Specified fund would have the same meaning as assigned above in section 10(4D).
“Specified Fund” referred under section 115AD would also have the same meaning assigned above in section 10(4D)
INCOME OF A NON-RESIDENT AS A RESULT OF TRANSFER OF NON-DELIVERABLE FORWARD CONTRACTS ENTERED INTO WITH AN OFFSHORE BANKING UNIT OF AN IFSC [SECTION 10(4E)]
Any income accrued or arisen to, or received by a non-resident as a result of transfer of non- deliverable forward contracts or offshore derivative instruments or over-the-counter derivatives, entered into with an offshore banking unit of an IFSC as referred to in section 80LA(1A), which fulfils prescribed conditions.
Accordingly, Rule 21AK specifies the following conditions to be fulfilled for claiming such exemption –
- the non-deliverable forward contract or offshore derivative instruments or over-the- counter derivatives is entered into by the non-resident with an offshore banking unit of an IFSC which holds a valid certificate of registration granted under IFSC Authority (Banking) Regulations, 2020 by the IFSC Authority; and
- such contract or instrument or derivative is not entered into by the non-resident through or on behalf of its permanent establishment in India [The offshore banking unit (i.e., a banking branch unit located in an IFSC) has to ensure that this condition is complied with].
Meaning of certain terms:
|
Term |
Meaning |
|
Non-deliverable forward contract |
A contract for the difference between an exchange rate agreed before and the actual spot rate at maturity, with the spot rate being taken as the domestic rate or a market determined rate and such contract being settled with a single payment in a foreign currency. |
|
Offshore banking unit |
A banking branch Unit located in an IFSC, as referred to in section 80LA(1A). |
|
Offshore derivative instrument |
Any instrument, by whatever name called, which is issued overseas by a foreign portfolio investor against securities held by it in India, as its underlying [Regulation 2(1)(o) of the SEBI Foreign Portfolio Investor Regulations, 2019]; |
|
Over-the- counter derivatives |
A derivative contract that is not traded on an exchange but instead is privately negotiated between a purchaser and a seller. |
INCOME OF A NON-RESIDENT BY WAY OF ROYALTY OR INTEREST, ON ACCOUNT OF LEASE OF AN AIRCRAFT OR A SHIP IN A PREVIOUS YEAR, PAID BY A UNIT OF AN IFSC [SECTION 10(4F)]
Income of a non-resident by way of royalty or interest, on account of lease of an aircraft
in a previous year, paid by a unit of an IFSC referred to in section 80LA(1A), if the unit has commenced its operations on or before 31.3.2024.
or a ship
“Aircraft”, means an aircraft or a helicopter, or an engine of an aircraft or a helicopter, or any part thereof.
“Ship” means a ship or an ocean vessel, engine of a ship or ocean vessel, or any part thereof.
INCOME RECEIVED BY A NON-RESIDENT IN AN ACCOUNT MAINTAINED WITH AN OFFSHORE BANKING UNIT IN ANY IFSC [SECTION 10(4G)]
Any income received by a non-resident from portfolio of securities or financial products or funds, managed or administered by any portfolio manager on behalf of such non-resident, in an account
maintained with an Offshore Banking Unit in any IFSC, as referred to in section 80LA(1A), to the extent such income accrues or arises outside India and is not deemed to accrue or arise in India.
“Portfolio manager” shall have the same meaning as assigned to it in regulation 2(1)(z) of the IFSC Authority (Capital Market Intermediaries) Regulations, 2021, made under the IFSC Authority Act, 2019. Accordingly, “Portfolio manager” means a person who pursuant to a contract with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or financial products or funds of the client, as the case may be.
WITHDRAWAL OF EXEMPTION UNDER SECTION 10(8), 10(8A), 10(8B) AND 10(9)
Exemption under section 10(8), 10(8A), 10(8B) and 10(9) have been withdrawn by the Finance Act, 2022 from the A.Y. 2023-24. Accordingly, the above sections discussed in pages 2.63 to 2.64 of the study material have to be ignored.
CLARIFICATION RELATING TO ELIGIBILITY OF EXEMPTION UNDER SECTION 10(23FE) IN RESPECT OF SPECIFIED FUNDS HAVING “INDIRECT” LOANS AND BORROWINGS [CBDT CIRCULAR NO.19/2021 DATED 26.10.2021]
Section 10(23FE) provides for exemption to sovereign wealth funds and pension funds (specified funds) on their income in the nature of dividend, interest and long-term capital gains arising from investment in infrastructure in India made between 1.4.2020 and 31.3.2024, subject to fulfilment of certain conditions.
The seventh proviso to section 10(23FE) provides that in case a sovereign wealth fund or pension fund has loans or borrowings, directly or indirectly, for the purposes of making investment in India, such fund shall be deemed to be not eligible for exemption under section 10(23FE).
In order to address the concern with regard to the term “indirect borrowings” which have not been defined in the section and the consequent eligibility or otherwise of the exemption to the specified fund, where the loan and borrowings have been taken by the specified fund or its holding or any other entity in the chain of holding or any associate thereof, the CBDT has, vide Circular No. 19/2021 dated 26.10.2021, issued the guidelines and clarified the following:
- if the loans and borrowings have been taken by the specified fund or any of its group concern, specifically for the purposes of making investment by the specified fund in India, such fund shall not be eligible for exemption under section 10(23FE); and
- if the loans and borrowings have been taken by the specified fund or any of its group concern, not specifically for the purposes of making investment in India, it shall not be presumed that the investment in India has been made out of such loans and borrowings and such specified fund shall be eligible for exemption under section 10(23FE), subject to the fulfilment of all
other stipulated conditions, provided that the source of the investment in India is not from such loans and borrowings.
Note – The above amendment in section 10(23FE) has to be read along with the other provisions of section 10(23FE) in pages 2.57 to 2.60 of the Study Material.
CAPITAL GAINS ARISING TO A NON-RESIDENT OR A SPECIFIED FUND [SECTION 10(23FF)]
Section 10(23FF) exempts any income of the nature of capital gains, arising or received by a non- resident or a specified fund, on account of transfer of share of a company resident in India, by the resultant fund or a specified fund to the extent attributable to units held by non-resident (not being a PE of a non-resident in India) in such manner as may be prescribed. Such shares were transferred from the original fund, or from its wholly owned special purpose vehicle, to the resultant fund in relocation, and where capital gains on such shares were not chargeable to tax if that relocation had not taken place.
Rule 2DD provides that income of the nature of capital gains, arising or received by a specified fund, which is attributable to units held by non-resident (not being a permanent establishment of a non- resident in India) in such specified fund has to be computed as under –
B
Exempt Income u/s 10(23FF) =A× C
|
A |
Income of the nature of capital gains, arising or received by a specified fund, which is on account of transfer of shares of a company resident in India, by the specified fund and where such shares were received by the specified fund, being resultant fund, in relocation from the original fund, or from its wholly owned special purpose vehicle, and where such capital gains would not be chargeable to tax if the relocation had not taken place |
|
B |
Aggregate of daily ‘assets under management’ of the specified fund which are held by non- resident unit holders (not being the permanent establishment of a non-resident in India), from the date of acquisition of the share of a company resident in India by the specified fund to the date of transfer of such share. |
|
C |
Aggregate of daily total ‘assets under management’ of the specified fund, from the date of acquisition of the share of a company resident in India by the specified fund to the date of transfer of such share. |
Note – “Assets under management” means the closing balance of the value of assets or investments of the specified fund as on a particular date.
Income shall be exempt only when the specified fund furnishes an annual statement of exempt income in the prescribed form electronically under digital signature on or before the due date
specified u/s 139(1). Where such form is not filed by the specified fund, the exempt income would be NIL.
Further, such annual statement in prescribed form has to be certified by an accountant before the specified date [one month prior to the due date u/s 139(1)] and such accountant has to furnish by that date, the certificate in the prescribed form electronically under digital signature.
TRANSFER OF SPECIFIED SECURITIES BY A NON-RESIDENT ON A RECOGNIZED STOCK EXCHANGE LOCATED IN ANY IFSC [SECTION 47(viiab) r.w. NOTIFICATION NO. 89/2022 DATED 3.8.2022]
Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of capital gains tax.
Section 47(viiab) provides that any transfer of the following capital assets by a non-resident on a recognised stock exchange located in any International Financial Services Centre (IFSC), would not be regarded as transfer, where the consideration for such transaction is paid or payable in foreign currency –
- A bond or GDR referred to in section 115AC(1); or
- A rupee denominated bond of an Indian company; or
- A derivative; or
- Any other security notified by the Central Government.
Accordingly, the Central Government has, vide Notification No. 16/2020 dated 5.3.2020 and
Notification No. 89/2022 dated 3.8.2022, specified the following securities:
-
- foreign currency denominated bond;
- unit of a Mutual Fund;
- unit of a business trust;
- foreign currency denominated equity share of a company;
- unit of Alternative Investment Fund,
Bullion Depository Receipt with underlying bullion
which are listed on a recognised stock exchange located in any IFSC in accordance with the regulations made by the SEBI under the SEBI Act 1992 or the IFSC Authority under the IFSC Authority Act 2019, as the case may be.
TRANSFER, IN A RELOCATION, OF A SHARE/UNIT/INTEREST IN ORIGINAL FUND [SECTION 47(viiad) r.w. NOTIFICATION NO. 80/2022 DATED 8.7.2022]
As per section 47(viiad), any transfer by a shareholder or unit holder or interest holder of original fund, in a relocation, of a capital asset, being share or unit or interest held by the shareholder in the original fund in consideration for the share or unit or interest in the resultant fund would not be regarded as transfer.
Original fund – A fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit and fulfils the following conditions, namely-
- 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 referred to in section 90(1) or 90A(1) has been entered into; or is established or incorporated or registered in a country or a specified territory as may be notified by the Central Government in this behalf;
- 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; and
- fulfils such other conditions as may be prescribed.
Accordingly, vide Notification No. 80/2022 dated 8.7.2022, Rule 21AL prescribes that the aggregate participation or investment in the original fund, directly or indirectly, by persons resident in India shall not exceed 5% of the corpus of such fund at the time of transfer of a capital asset to a resultant fund being a Category III Alternative Investment Fund.
Relocation – Transfer of assets of the original fund, or of its wholly owned special purpose vehicle, to a resultant fund on or before 31.3.2023, where consideration for such transfer is discharged in the form of share or unit or interest in the resulting fund to –
- shareholder or unit holder or interest holder of the original fund, in the same proportion in which the share or unit or interest was held by such shareholder or unit holder or interest holder in such original fund, in lieu of their shares or units or interests in the original fund; or
- the original fund, in the same proportion as referred to in (i), in respect of which the share or unit or interest is not issued by resultant fund to its shareholder or unit holder or interest holder.
Resultant fund – A fund established or incorporated in India in the form of a trust or a company or a limited liability partnership, which
- has been granted a certificate of registration as a Category I or Category II or Category III AIF, and is regulated under the SEBI (Alternative Investment Fund) Regulations, 2012 made under the SEBI Act, 1992 or IFSC Authority Act, 2019; and
- is located in any IFSC as referred to in section 80LA(1A).
Note – The above provisions of section 47(viiab) and 47(viiad) have to be read along with the other provisions of section 47 given in pages 2.84 to 2.89 of the Study Material.
NOTIFICATION OF COST INFLATION INDEX FOR FINANCIAL YEAR 2022-23 [NOTIFICATION NO. 62/2022, DATED 14.6.2022]
Clause (v) of Explanation to section 48 defines “Cost Inflation Index”, in relation to a previous year, to mean such Index as the Central Government may, by notification in the Official Gazette, specify
in this behalf, having regard to 75% of average rise in the Consumer Price Index (Urban) for the immediately preceding previous year to such previous year.
Accordingly, the Central Government has, in exercise of the powers conferred by clause (v) of
Explanation to section 48, specified the Cost Inflation Index for the financial year 2022-23 as 331.
|
S.No. |
Financial Year |
Cost Inflation Index |
S.No. |
Financial Year |
Cost Inflation Index |
|
1 |
2001-02 |
100 |
12 |
2012-13 |
200 |
|
2 |
2002-03 |
105 |
13 |
2013-14 |
220 |
|
3 |
2003-04 |
109 |
14 |
2014-15 |
240 |
|
4 |
2004-05 |
113 |
15 |
2015-16 |
254 |
|
5 |
2005-06 |
117 |
16 |
2016-17 |
264 |
|
6 |
2006-07 |
122 |
17 |
2017-18 |
272 |
|
7 |
2007-08 |
129 |
18 |
2018-19 |
280 |
|
8 |
2008-09 |
137 |
19. |
2019-20 |
289 |
|
9 |
2009-10 |
148 |
20. |
2020-21 |
301 |
|
10 |
2010-11 |
167 |
21. |
2021-22 |
317 |
|
11 |
2011-12 |
184 |
22. |
2022-23 |
331 |
Note – This table of CII has to be read in the place of the table of CII given in pages 2.90 and 2.91 of the Study Material.
SURCHARGE
The rates of surcharge applicable for A.Y.2023-24 are as follows:
Individual/HUF/AOP (other than an AOP consisting of only companies as members)/BOI/Artificial juridical person
Income-tax computed applying the slab rates or section 111A or section 112A
or section 112
or section 115BAC would be increased by surcharge given under the following table –
|
Particulars |
Rate of surcharge on income- tax |
Example |
||
|
Components of total income |
Applicable rate of surcharge |
|||
|
(i) |
Where the total income (including dividend income and capital gains chargeable to tax u/s 111A, 112 and 112A) > ` 50 lakhs but ≤ ` 1 crore |
10% |
Example |
|
` 20 lakhs;
` 15 lakhs; |
Surcharge would be levied@10% on income-tax computed on total income of ` 90 lakhs. |
|||
` 20 lakhs; and
` 25 lakhs |
||||
|
(ii) |
Where total income (including dividend income and capital gains chargeable to tax u/s 111A, 112 and 112A) > ` 1 crore but ≤ ` 2 crore |
15% |
Example |
|
` 10 lakhs;
` 40 lakhs;
` 55 lakhs;
` 35 lakhs; and
` 50 lakhs |
Surcharge would be levied@15% on income-tax computed on total income of ` 1.90 crores. |
|||
|
(iii) |
Where total income (excluding dividend income and capital gains chargeable to tax u/s 111A, 112 and 112A) > ` 2 crore but ≤ ` 5 crore |
25% |
Example |
|
` 51 lakhs;
` 44 lakh;
` 55 lakh; and
` 3 crores |
Surcharge@15% would be levied on income-tax on:
chargeable to tax u/s 111A;
112; and
Surcharge@25% would be leviable on income-tax computed on other income of ` 3 crores included in total income |
|||
|
The rate of surcharge on the income-tax payable on the portion of dividend income and capital gains chargeable to tax u/s 111A, 112 and 112A |
Not exceeding 15% |
|||
|
(iv) |
Where total income (excluding dividend income and capital gains chargeable to tax u/s 111A, 112 and 112A) > ` 5 crore |
37% |
Example |
|
` 60 lakhs;
` 50 lakhs; |
Surcharge@15% would be levied on income-tax on:
|
|||
|
Rate of surcharge on the income-tax payable on the portion of dividend income and capital gains chargeable to tax u/s 111A, 112 and 112A |
Not exceeding 15% |
` 65 lakhs; and
` 6 crore |
chargeable to tax u/s 111A;
112; and
Surcharge@37% would be leviable on the income-tax computed on other income of ` 6 crores included in total income. |
|
|
(v) |
Where total income (including dividend income and capital gains chargeable to tax u/s 111A, 112 and 112A) > ` 2 crore in cases not covered under (iii) and (iv) above |
15% |
Example |
|
` 55 lakhs;
60 lakhs;
` 55 lakhs; and
` 1.10 crore |
Surcharge would be levied@15% on income-tax computed on total income of ` 3.22 crore. |
|||
An AOP consisting of only companies as members
-
-
- In case of an AOP consisting of only companies as members, whose total income > ` 50 lakhs but is ≤ ` 1 crore
-
Where the total income exceeds ` 50 lakhs but does not exceed ` 1 crore, surcharge is payable at the rate of 10% of income-tax computed applying the slab rates or section 111A or section 112 or section 112A.
In case of an AOP consisting of only companies as members, whose total income > ` 1 crore
Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 15% of income- tax computed applying the slab rates or section 111A or section 112 or section 112A.
Note – The Finance (No. 2) Act, 2019 has levied an enhanced surcharge of 25% and 37%, where
the total income of an individual/HUF/AOP/BOI exceeds ` 2 crores and ` 5 crores, respectively. However, the enhanced surcharge has been withdrawn on tax payable at special rates under section 111A and 112A by both resident and non-resident assessees on short-term and long-term capital gains arising from the transfer of equity share in a company or unit of an equity-oriented fund/ business trust, which has been subject to securities transaction tax.
With effect from A.Y. 2023-24, the enhanced rate of surcharge would also not be applicable on long-term capital gains chargeable to tax under section 112. Accordingly, the above table containing the rates of surcharge has to be read in the place of the table given in pages 2.100-2.101 of the Study Material.
REFUND FOR DENYING LIABILITY TO DEDUCT TAX UNDER SECTION 195 [SECTION 239A]
- Application for refund of tax – This section provides that where under an agreement or other arrangement, in writing, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may file an application before the Assessing Officer for refund of such tax in prescribed form and manner.
- Time limit for filing application – Such application may be filed within 30 days from the date of payment of such tax.
- Passing of order by Assessing Officer – The Assessing Officer has to, by an order in writing, allow or reject the application. However, no application would be rejected unless an opportunity of being heard has been given to the applicant. The Assessing Officer, may, before passing an order make such inquiry as he considers necessary.
- Time limit for passing order – The order has to be passed within 6 months from the end of the month in which application for refund is received.
Section 248 provides that where under an agreement or other arrangement, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income.
Consequent to insertion of section 239A, the provisions of section 248 will not apply in cases where tax is paid to the credit of the Central Government on or after 1st April, 2022.
Simultaneously, an order passed by the Assessing Officer under section 239A has been included in the list of appealable orders under section 246A(1) against which appeal may be filed to the Commissioner (Appeals).
SPECIAL PROVISIONS FOR COMPUTING TAX ON INCOME OF SPECIFIED FUND OR FOREIGN INSTITUTIONAL INVESTORS FROM SECURITIES OR CAPITAL GAINS ARISING FROM THEIR TRANSFER [SECTION 115AD(1A) AND (1B)]
Section 115AD provides for taxation of income of a specified fund which includes income in respect of securities (other than income on units of Mutual Fund specified u/s 10(23D) or units of UTI) and short-term or long-term capital gain arising from the transfer of such securities.
In case of specified fund, the provisions of this section would apply only to the extent of income that is attributable to units held by non-resident (not being a permanent establishment of a non-resident in India) calculated in the prescribed manner [Section 115AD(1A)].
Determination of income of a specified fund attributable to units held by non-residents [Section 115AD(1A) read with Rule 21AJ]
For the purposes of section 115AD(1A), the income of a specified fund by way of short-term or long- term capital gains, referred to in section 115AD(1)(b), attributable to the units held by non-resident (not being the permanent establishment of a non-resident in India) shall be calculated in accordance with the following formula, namely –
A = B x C
where,
A = income attributable to the units held by non-resident (not being the permanent establishment of a non-resident in India)
B = income arising from transfer of the security
C = ratio of the aggregate of daily ‘assets under management’ of the specified fund held by non- resident unit holders (not being the permanent establishment of a non-resident in India) to the aggregate of daily total ‘assets under management’ of the specified fund, from the date of acquisition of the security to the date of transfer of such security.
For the purposes of section 115AD(1A), the income of a specified fund by way of income received in respect of securities, referred to in section 115AD(1)(a), attributable to the units held by non- resident (not being the permanent establishment of a non-resident in India) shall be calculated in accordance with the following formula, namely –
X = Y x Z,
where,
X = income attributable to the units held by non-resident (not being the permanent establishment of a non-resident in India)
Y = income received in respect of securities
Z = ratio of the ‘assets under management’ in the specified fund held by non-resident unit holders (not being the permanent establishment of a non-resident in India) to the total ‘asset under management’ of the specified fund, as on the date of receipt of such income.
“Assets under management” means the closing balance of the value of assets or investments of the specified fund as on a particular date.
The specified fund has to furnish an annual statement of income eligible for concessional taxation electronically under digital signature on or before the due date u/s 139(1).
The income of a specified fund attributable to the units held by a non-resident (not being the permanent establishment of a non-resident in India), would not be eligible for tax rates specified under section 115AD unless it furnish the annual statement of income eligible for concessional taxation on or before the said due date. [Notification no. 64/2022 dated 16.6.2022]
Determination of income of specified fund, attributable to the investment division of an offshore banking unit [Section 115AD(1B) read with Rule 21AJAA]
Where the specified fund is investment division of an offshore banking unit, the provisions of section 115AD would apply to the extent of income that is attributable to the investment division of such banking units, calculated in prescribed manner [Section 115AD(1B)].
Rule 21AJAA provides for the manner of determination of income of specified fund, attributable to the investment division of an offshore banking unit for the purposes of section 115AD.
For the purposes of section 115AD(1B), income of specified fund, being the investment division of an offshore banking unit has to be computed in accordance with the following formula –
𝐴𝐴 + 𝐵𝐵 + 𝐶𝐶 + 𝐷𝐷 + 𝐸𝐸 + 𝐹𝐹
|
A |
Long term capital gain on transfer of securities (other than units of Mutual Fund specified u/s 10(23D) or units of UTI) referred to in section 112A, accrued or arisen to, or received by the eligible investment division and held by such investment division |
|
B |
Long term capital gain on transfer of securities (other than units of Mutual Fund specified u/s 10(23D) or units of UTI) other than those referred to in section 112A, accrued or arisen to, or received by the eligible investment division and held by such investment division |
|
C |
Short term capital gain on transfer of securities (other than units of Mutual Fund specified u/s 10(23D) or units of UTI) referred to in section 111A, accrued or arisen to, or received by the eligible investment division and held by such investment division; |
|
D |
Short term capital gain on transfer of securities (other than units of Mutual Fund specified u/s 10(23D) or units of UTI) other than those referred to in section 111A, accrued or arisen to, or received by the eligible investment division and held by such investment division |
|
E |
Income from securities referred to in section 194LD (Rupee denominated bonds of Indian company/government securities/municipal debt securities issued on or before 30.6.2023) held by the eligible investment division; |
|
F |
Income from securities, held by the eligible investment division other than
|
|
Any expenditure incurred for the purposes of making or earning income referred to in items A or B or C or D or E or F would not be allowed as deduction from income from any other activity or source, irrespective of the fact that such expenditure has not been allowed as deduction against income referred to in items A or B or C or D or E or F, as the case may be. |
|
The eligible investment division has to furnish an annual statement of income, eligible for taxation under section 115AD(1B) in the prescribed form electronically under digital signature on or before the due date specified u/s 139(1).
The income of an eligible investment division would not be eligible for tax rates specified under section 115AD unless the eligible investment division furnishes an annual statement of income eligible for taxation under section 115AD(1B) on or before the said due date [Notification no. 64/2022 dated 16.6.2022].
Note – The provisions of section 115AD(1A) and (1B) discussed above have to be read along with the other provisions of section 115AD discussed in pages 2.119 to 2.124 of the Study Material.
BOARDS FOR ADVANCE RULINGS – AN INTRODUCTION
In order to address the concern of pendency of applications on account of vacancy of posts of Chairman and Vice-Chairman for long period of time due to non-availability of eligible persons, three Boards for Advance Rulings have been constituted for giving advance rulings on or after 1.9.2021, and accordingly, the Authority for Advance Rulings would cease to operate with effect from such date. Every such Board shall consist of two members, each being an officer not below the rank of Chief Commissioner, as may be nominated by the Board. The ruling pronounced or order passed by the Board for Advance Rulings is appealable before the High Court. The Finance Act, 2021 has empowered the Central Government to make a scheme by notification in the Official Gazette for the purpose of giving advance ruling by Boards for Advance Rulings to impart greater efficiency, transparency and accountability by eliminating interface between the Boards for Advance Rulings and the applicants to the extent technologically feasible, by optimising utilisation of resources and introducing dynamic jurisdiction.
4
ADVANCE RULINGS
Accordingly, with the constitution of Boards for Advance Rulings, with effect from 1.9.2021, the Authority for Advance Rulings shall cease to operate.
CONSTITUTION OF BOARD FOR ADVANCE RULINGS [SECTION 245-OB]
One or more Boards for Advance Rulings, as may be necessary, shall be constituted by the Central Government for giving advance rulings under Chapter XIX-B with effect from a date appointed by notification in the Official Gazette. Accordingly, the Central Government has, in exercise of such powers, vide Notification No.96/2021 dated 1.9.2021, constituted three Boards for Advance Rulings, for the purposes of giving advance rulings under Chapter XIX-B on or after 1.9.2021. Board for Advance Rulings – I and Board for Advance Rulings – II have their headquarters in Delhi and Board for Advance Rulings – III has its headquarters in Mumbai.
Every such Board for Advance Ruling shall consist of two members, each being an officer not below the rank of Chief Commissioner, as may be nominated by the Board.
-
- Advance Ruling [Section 245N(a)]: The meaning of Advance Ruling is detailed hereunder:
|
Section |
Determination by the Board for Advance Rulings |
|
245N(a)(i) |
in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant. |
|
245N(a)(ii) |
in relation to the tax liability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident and such determination shall include the determination of any question of law or of fact specified in the application. |
|
245N(a)(iia) |
in relation to the tax liability of a resident applicant, arising out of a transaction which has been undertaken or is proposed to be undertaken by such applicant and such determination shall include the determination of any question of law or of fact specified in the application. |
|
245N(a)(iii) |
in respect of an issue relating to computation of total income which is pending before any Income-tax Authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or fact in relation to such computation of total income specified in the application. |
|
245N(a)(iv) |
or decision whether an arrangement, which is proposed to be undertaken by any person being a resident or a non-resident, is an impermissible avoidance arrangement as referred to in Chapter X-A or not. |
-
- Applicant [Section 245N(b)(A)]: ‘Applicant’ means any person who –
- is a non-resident referred to in section 245N(a)(i) above; or
- is a resident referred to in section 245N(a)(ii) above; or
- is a resident referred to in section 245N(a)(iia) above falling within any such class or category of persons as the Central Government may, by notification in the Official Gazette, specify.
- Applicant [Section 245N(b)(A)]: ‘Applicant’ means any person who –
[A resident in relation to his tax liability arising out of one or more transactions valuing
` 100 crore or more in total which has been undertaken or is proposed to be undertaken would be an applicant – Notification No.73/2014 dated 28.11.2014]; or
-
-
- is a resident falling within such class or category of persons as the Central Government may, by notification in the Official Gazette, specify in this behalf [Public sector company as defined under section 2(36A) of the Income-tax Act, 1961 – Notification No. 725(E) dated 3.8.2000]; or
- is referred to in section 245N(a)(iv) above; and
-
who makes an application for advance ruling under section 245Q(1).
|
Who can be an applicant in relation to different clauses of section 245N(a) defining advance ruling? |
||
|
S. No. |
Applicant u/s 245N(b) |
Advance Ruling u/s 245N(a) means determination by the BAR in relation to |
|
(i) |
Non-resident (NR) |
A transaction which has been undertaken or is proposed to be undertaken by him. |
|
(ii) |
Resident |
The tax liability of a NR arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such NR and such determination shall include the determination of any question of law or of fact specified in the application. |
|
(iii) |
Resident of class or category of persons notified by Central Government |
The tax liability of a resident applicant, arising out of a transaction which has been undertaken or is proposed to be undertaken by such applicant and such determination shall include the determination of any question of law or of fact specified in the application. |
|
Note: The Central Government notified a resident, in relation to his tax liability arising out of one or more transactions valuing ` 100 crore or more in total. |
||
|
(iv) |
Resident of class or category of persons notified by Central Government |
an issue relating to computation of total income which is pending before any Income-tax Authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or fact in relation to such computation of total income specified in the application. |
|
Note: A public sector undertaking has been notified by the Central Government. |
||
|
(v) |
Resident or NR |
whether an arrangement, which is proposed to be undertaken by any person being a resident or a NR, is an impermissible avoidance arrangement as referred to in Chapter X-A or not. |
Restrictions on Appellate Authority: Section 245RR provides that where a resident applicant has made an application to the Board for Advance Rulings in respect of an issue for decision of Board for Advance Rulings, then, no Income-tax Authority or Tribunal shall take any decision in respect of such issues. In other words, a resident assessee cannot pursue both the remedies, i.e., an appeal or revision before Income-tax Authority/Appellate Authority as well as an application for Advance Ruling to Board for Advance Rulings, in respect of an issue.
VACANCIES, ETC., NOT TO INVALIDATE PROCEEDINGS [SECTION 245P]
A proceeding before, or pronouncement of advance ruling by, the Board for Advance Rulings would not be questioned or would not be invalid on the ground merely of the existence of any vacancy or defect in the constitution of the Board for Advance Rulings.
APPLICATION FOR ADVANCE RULING [SECTION 245Q]
Section 245Q(1) provides that an applicant desirous of obtaining an advance ruling may make an application stating the question on which the advance ruling is sought in the prescribed form and in the prescribed manner.
As per section 245Q(2), the application has to be accompanied by a fee of ` 10,000 or such fee as may be prescribed, whichever is higher.
Rule 44E prescribes the fees mentioned in column (3) to be paid by the applicant mentioned in column (1) in the cases of column (2).
|
Category of applicant |
Category of case |
Fee |
|
(1) |
(2) |
(3) |
|
An applicant referred to in sub-clauses (i) or (ii) or (iia) of clause (b) of section 245N |
Amount of one or more transaction, entered into or proposed to be undertaken, in respect of which ruling is sought does not exceed ` 100 crore. |
` 2 lacs |
|
Amount of one or more transaction, entered into or proposed to be undertaken, in respect of which ruling is sought exceeds ` 100 crore but does not exceed ` 300 crore. |
` 5 lacs |
|
|
Amount of one or more transaction, entered into or proposed to be undertaken, in respect of which ruling is sought exceeds ` 300 crore. |
` 10 lacs |
|
|
Any other applicant |
In all cases |
` 10,000 |
Rule 44E prescribes the forms of application for obtaining an advance ruling. Every application under Rule 44E shall be accompanied by the proof of payment of fees.
Section 245Q(3) enables that an applicant to withdraw an application within 30 days from the date of the application.
Where an application for advance ruling is made before 1.9.2021 and in respect of which no order has been passed or no advance ruling has been pronounced by Authority of Advance Ruling before such date, such application along with all the relevant records, documents or material, by whatever name called, on the file of the Authority would be transferred to the Board for Advance Rulings and shall be deemed to be the records before the Board for Advance Rulings for all purposes.
PROCEDURE ON RECEIPT OF APPLICATION [SECTION 245R]
The Board, on receipt of an application, will send a copy to the Principal Commissioner or Commissioner concerned and wherever considered necessary, also call upon the Principal Commissioner or Commissioner to furnish relevant records. Such records will be returned to the Principal Commissioner or Commissioner as soon as possible.
After examining the application and the records called for, the Board may either allow or reject an application. However, the Board shall not allow an application where the question raised in the application is:
|
Pending |
with |
is already pending before any income-tax authority, or Appellate Tribunal or |
|
income-tax |
any court. |
|
|
authorities/ tribunal/court |
However, a resident falling within any class or category of persons as notified by the Central Government can seek for advance ruling even if |
|
|
question raised is pending before any income-tax authority or Appellate |
||
|
Tribunal. |
||
|
Determination of Fair Market Value |
involves the determination of the fair market value of any property; |
|
|
Transaction |
relates to a transaction or issue which is designed prima facie for avoidance |
|
|
designed |
for |
of income-tax (except in case of a resident applicant falling within any class |
|
avoidance |
of |
or category of persons as notified by the Central Government or in the case |
|
income-tax |
of resident or a non-resident for determination of whether an arrangement, |
|
|
which is proposed to be undertaken, is an impermissible avoidance |
||
|
arrangement). |
||
However, no application shall be rejected unless an opportunity has been given to the applicant of being heard. Further, where an application is rejected, the reason for rejection shall be given in the order. A copy of every order shall be sent to the applicant and to the PCIT/CIT.
Where an application is allowed, the Board would pronounce its advance ruling on that question specified in the application, after examining such further material as may be placed before it by the applicant or obtained by the Board. Where a request is received from an applicant, the Board has to provide an opportunity of being heard, either in person or through a duly authorised representative, before pronouncing its advance ruling.
Time limit for pronouncement of advance Ruling – The Board has to pronounce the advance ruling within 6 months from the receipt of application by the Board. A copy of advance ruling pronounced, duly signed by the Members and certified, has to be sent to the applicant and to the PCIT/CIT, as soon as may be, after pronouncement.
Faceless Scheme for Advance Rulings – The Central Government is empowered to make a scheme by notification in Official Gazette for the purpose of giving advance rulings so as to impart greater efficiency, transparency and accountability by:
- eliminating the interface between the Board for Advance Rulings and the applicant in the course of proceedings to the extent technologically feasible;
- optimising utilisation of the resources through economies of scale and functional specialisation;
- introducing a system with dynamic jurisdiction.
Applicability or non-applicability of other provisions of the Act [Section 245R(10)] – The Central Government may, for the purpose of giving effect to the above scheme, by notification in the Official Gazette, direct that any of the provisions of the Income-tax Act, 1961 would not apply or would apply with such modification, exceptions and adaptations as specified.
No such direction can, however, be issued by the Central Government after 31st March, 2023.
Notification issued above to be laid before each House of Parliament [Section 245R(11)] – Every such notification issued by the Central Government either under sub section (9) or (10) of the section 245R has to be laid before each House of Parliament as soon as may be after issue of such notification.
ADVANCE RULING TO BE VOID IN CERTAIN CIRCUMSTANCES [SECTION 245T]
Where the Board for Advance Rulings finds, on a representation made to it by the PCIT/CIT or otherwise, that an advance ruling pronounced has been obtained by the applicant by fraud or misrepresentation of facts, the Board may, by order, declare such ruling to be void ab initio.
The provisions of the Income-tax Act, 1961 would apply (after excluding the period beginning with the date of such advance ruling and ending with the date of order under this section) to the applicant as if such advance ruling had never been made.
A copy of this order has to be sent to the applicant and the Principal Commissioner or Commissioner.
POWERS OF THE BOARD FOR ADVANCE RULINGS [SECTION 245U]
The Board for Advance Rulings shall have all the powers of the Civil Court in respect of discovery and inspection, enforcing the attendance of any person, including any officer of a banking company and examining on oath, issuing commissions and compelling the production of books of accounts and other documents. The Board shall be deemed to be a Civil Court for the purposes of section 195 of the Code of Criminal Procedure, 1973 which provides for prosecution for contempt of lawful authority of public servants, for offences against public justice. Every proceeding before the Board shall be deemed to be a judicial proceeding under the Indian Penal Code.
However, the Board shall not be deemed to a Civil Court for the purpose of Chapter XXVI of the Code of Criminal Procedure, 1973 containing the provisions as to offences affecting the administration of justice.
Appeal to High Court by applicant [Section 245W(1)] – The applicant who is aggrieved by any ruling pronounced or order passed by the Board for Advance Rulings or the Assessing Officer, on the directions of the Principal Commissioner or Commissioner, may appeal to the High Court against such ruling or order of the Board of Advance Rulings. He has to do so within sixty days from the date of the communication of that ruling or order, in the prescribed form and manner.
The CBDT has, vide notification no. 57/2022 dated 31.5.2022, inserted Rule 44FA wherein it provides that the form and manner of filing appeal shall be the same as provided in the applicable procedure laid down by the jurisdictional High Court for filing an appeal to the High Court.
However, where the High Court is satisfied, on an application made by the appellant in this behalf, that the appellant was prevented by sufficient cause from presenting the appeal within the 60 day period as specified above, it may grant further period of 30 days for filing such appeal.
Appeal to High Court by Assessing Officer [Section 245W(2)] – For the purpose of appeal to the High Court by the Assessing Officer, the Central Government is empowered to make a scheme by notification in Official Gazette so as to impart greater efficiency, transparency and accountability by:
- optimising utilisation of the resources through economies of scale and functional specialisation;
- introducing a team-based mechanism with dynamic jurisdiction.
Applicability or non-applicability of other provisions of the Act [Section 245W(3)] – The Central Government may, for the purpose of giving effect to the above scheme, by notification in the Official Gazette, direct that any provision of the Income-tax Act, 1961, would not apply or would apply with such modification, exceptions and adaptations as specified.
No such direction can, however, be issued by the Central Government after 31st March, 2023.
Notification issued above to be laid before each House of Parliament [Section 245W(4)] – Every such notification issued by the Central Government either under section 245W(2)/(3) has to be laid before each House of Parliament as soon as may be after issue of the said notification.
Notes: (1). Students are advised to read the above content in place of the content given in pages from 4.2 to 4.17 in the Study Material, since provisions relating to Authority for Advance Rulings are not applicable for May, 2023 Examination. Accordingly, Q.1 to Q.3 and answers thereto given under “Test Your Knowledge” in the Study Material based on Authority for Advance Rulings have to be ignored.
(2) Accordingly, content discussed in point (e) in page no. A.25 in the Guidance Note on MAP given as Annexure 6 in the Study Material has to be ignored. Also, content discussed in point (d) in page no. A.24 relating to Settlement Commission has to be ignored.
CLARIFICATION REGARDING THE MOST-FAVOURED-NATION (MFN) CLAUSE IN THE PROTOCOL TO INDIA’S DTAAS WITH CERTAIN COUNTRIES [CIRCULAR NO.3/2022 DATED 3.2.2022]
The Protocol to India’s DTAAs with some of the countries, especially European States and OECD members (The Netherlands, France, the Swiss Confederation, Sweden, Spain and Hungary) contains a provision, referred to as the Most-Favoured-Nation (MFN) clause. Though each MFN clause in these DTAAs has a different formulation, the general underlying provision is that if after the signature/ entry into force (depending upon the language of the MFN clause) of the DTAA with the first State, India enters into a DTAA with another OECD Member State, wherein India limits its source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) to a rate lower or a scope more restricted than the scope provided for those items of income in the DTAA with the first State, such beneficial treatment should also be extended to the first State.
7
TAX TREATIES: OVERVIEW, FEATURES, APPLICATION & INTERPRETATION
Through this circular, the CBDT clarifies that the applicability of the MFN clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) provided in India’s DTAAs with the third States will be available to the first (OECD) State only when all the following conditions are met:
-
- The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State;
- The second treaty is entered into between India and a State which is a member of the OECD
at the time of signing the treaty with it;
-
- India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and
- A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of section 90(1) of the Income-tax Act, 1961.
If all the conditions enumerated in (i) to (iv) are satisfied, then, the lower rate or restricted scope in the treaty with the third State is imported into the treaty with an OECD State having MFN clause from the date as per the provisions of the MFN clause in the DTAA, after following the due procedure under the Indian tax law.
However, notwithstanding the clarification given above, where in the case of a taxpayer there is any decision by any court on this issue favourable to such taxpayer, this Circular will not affect the implementation of the court order in such case.
Note – On account of this Circular, Question No. 6 and answer thereto given under Test Your Knowledge from Page no. 7.42 – 7.44 has to be ignored.
ILLUSTRATION
Matrix Inc. incorporated in Country X, holds 26% controlling interest in Pilu Ltd., an Indian Company. Pilu Ltd. declared dividend of ` 50,00,000 during the P.Y. 2022-23. The DTAA between India and Country X, which came into force on 1.1.2018, provides for taxation of dividend @15%. Thereafter, India entered into a DTAA with Country Y, which came into force from 15.5.2018. The India-Country Y DTAA, inter alia, provides for concessional tax rate of 10% in respect of dividend. Country X is an OECD member since 2015 and Country Y is also an OECD member since 2017.
Mr. Jack, CFO of Matrix Inc. seeks your opinion on whether the concessional tax rate provided in the DTAA between India and Country Y can be availed by a resident of Country X and if so, are there any further conditions to be satisfied in this regard. You may assume that the protocol annexed to India’s DTAAs with all OECD member countries contain the relevant tax parity clause.
Would your answer change, if Country Y had become an OECD member only in the year 2020?
SOLUTION
The CBDT has, vide Circular No. 3/2022 dated 3.2.2022, clarified that the applicability of the Most Favoured Nation (MFN) clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income including dividends provided in India’s DTAAs with the third State (Country Y, in this case) will be available to the first (OECD) State (Country X, in this case) only when all the following conditions are met:
|
Condition |
Satisfaction of condition in the case on hand |
|
|
(i) |
The second treaty (with the third State) is entered into after the signature/ Entry into Force of the treaty between India and the first state |
This condition is satisfied as India has entered into a DTAA with Country Y on 15.5.2018, after it has entered into a DTAA with Country X on 1.1.2018. |
|
(ii) |
The second treaty is entered into between India and a State which is a member of the OECD at the time of signing the treaty with it; |
This condition is satisfied as India has entered into a DTAA on 15.5.2018 with Country Y, which is a member of OECD since 2017. Hence, on 15.5.2018, Country Y was an OECD member. |
|
(iii) |
India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of relevant items of income |
This condition is satisfied since in DTAA between India and Country Y, dividend is taxable@10%. |
|
(iv) |
A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State as required by the provisions of section 90(1) of the Income-tax Act, 1961. |
In this case, conditions (i), (ii) and (iii) mentioned above have been satisfied. The concessional rate of 10% can be applied for taxing the dividend received by Matrix Inc. from Pilu Ltd., an Indian company, only if India has issued a separate notification importing the benefits of India-Country Y tax treaty into India- Country X tax treaty, as required by the provisions of sections 90(1). If such notification has been issued, then, the concessional rate of 10% can be applied for taxing the dividend received by Matrix Inc. from Pilu Ltd., an Indian company; otherwise it cannot be applied, even if other conditions are satisfied. |
In case if Country Y became an OECD member only in the year 2020, then, the concessional rate of 10% cannot be applied for taxing dividend received by Matrix Inc. from Pilu Ltd., since Country Y was not an OECD member on 15.5.2018, at the time when India signed the DTAA with it. Consequently, condition
(ii) mentioned above would not be satisfied in such a case. Hence, dividend received by Matrix Inc. from Pilu Ltd. would be subject to tax@15%.
OECD – BEPS 2.0 – CONSENSUS BASED SOLUTION FOR TAX CHALLENGES ARISING OUT OF DIGITALISATION
The 2015 Action 1 report provided for options to safeguard against BEPS on account of digitalisation, however it did not provide for any recommendations and left it to the discretion of the countries to resort to these measures as part of their domestic law. The report also indicated that it was agreed between the members to continue to monitor developments in respect of the digital economy.
8
ANTI-AVOIDANCE MEASURES
The OECD Inclusive Framework on BEPS having global membership, delivered a blueprint report in October 2020 including concrete proposals framed within two complementary pillars, namely, Pillar One and Pillar Two.
As of October 2021, over 135 countries and jurisdictions have joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. It represented a major step forward in the reform of the international tax system and the outcome of intensive work carried out under BEPS Action 1 “Addressing the tax challenges arising from the digital economy,” which has been the top priority of the OECD/G20 Inclusive Framework, notably since the establishment of the Two-Pillar approach.
Pillar 1 – Re-allocation of taxing rights
This Pillar approach will ensure a fairer distribution of taxing rights among countries with respect to the largest and most profitable multinational enterprises (MNEs). It will reallocate taxing rights over a portion of the residual profits of MNEs (Amount A) to the market countries and jurisdictions where they have business activities, regardless of whether they have a physical presence there. Specifically, multinational enterprises with global revenues above EUR 20 billion and profitability above 10% will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions using an innovative, formulaic approach.
This Pillar also provides for a simplified and streamlined application of the arm’s length principle to some in-country baseline marketing and distribution activities (Amount B).
Pillar 2 – Global anti-base erosion mechanism (GloBE)
This Pillar consists of the Global Anti-Base Erosion (GloBE) Rules and a treaty-based Subject to Tax Rule (STTR). The GloBE Rules introduce a 15% global minimum tax that applies to MNE groups with consolidated revenues of at least EUR 750 million. GloBE Rules are the coordinated system of rules, under a common framework, which ensures in-scope MNE groups pay at least the agreed minimum level of tax on the income arising in each of the jurisdictions in which they operate. The minimum level of tax may also be imposed locally under a qualified domestic minimum top-up tax. The STTR allows source jurisdictions to impose limited source taxation on certain related party payments that are subject to tax below a minimum rate.
The Pillar Two Model Rules (also referred to as the “Anti Global Base Erosion” or “GloBE” Rules), released on 20th December 2021, are part of the Two-Pillar Solution to address the tax challenges of the digitalization of the economy that was agreed by 137 member jurisdictions of the OECD/G20 Inclusive Framework on BEPS and endorsed by the G20 Finance Ministers and Leaders. They were developed by delegates from all Inclusive Framework member jurisdictions and agreed and approved by consensus. The related Commentary was published in March 2022.
The Pillar Two Model Rules are designed to ensure large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate. They are drafted as model rules that provide a template that jurisdictions can translate into domestic law, which should assist them in implementing Pillar Two within the agreed timeframe and in a co-ordinated manner.
Overview of GloBE rules
The Pillar Two Model Rules consist of the following 10 chapters –
|
Chapter |
Contents |
|
1 |
This Chapter addresses questions of scope. Taxpayers that either have no foreign presence or that have less than EUR 750 million in consolidated revenues are not in scope of the Model Rules. In addition, the Pillar Two Model Rules do not apply to government entities, international organisations and non-profit organisations (preserving domestic tax exemptions for sovereign, non-profit and charitable entities), nor do they apply to entities that meet the definition of a pension, investment or real estate fund (preserving the widely shared tax policy of not wishing to add an additional layer of taxation between the investment and the investor). These entities are excluded even if the MNE group they control remains subject to the rules. |
|
2 to 5 |
These Chapters contain the key operative rules that set out the calculation and charging provisions. Chapters 2 to 5 set out the key operative provisions that every in-scope MNE would |
|
apply. An MNE can apply the rules in the following steps:
Calculation of the effective tax rate In order to know if top-up tax is owed, rules are needed to calculate the Effective Tax Rate (ETR) in each jurisdiction where the MNE operates. This requires first a calculation of the income, and second a calculation of the tax on that income. Under Chapter 3, the income (or loss) is calculated based on financial accounts, which provides a base that is harmonised across all jurisdictions. Certain adjustments are needed to better align the financial accounts with tax purposes. These have been kept to a minimum and are made where necessary to reflect common permanent differences, such as to remove most dividends and equity gains so that the minimum tax does not apply to such income, or to remove expenses disallowed for tax purposes such as bribes and to correct prior year errors. There is also an exclusion for international shipping income. Under Chapter 4, the tax attributable to that income is calculated. It includes income taxes, defined in a way to provide consistent and flexible recognition across a wide range of tax systems, but does not include non-income based taxes such as indirect taxes, payroll and property taxes. Chapter 4 also sets out rules for addressing temporary differences, which arise when income or loss is recognised in a different year for financial accounting and tax. Calculation of the top-up tax Once the effective tax rate is calculated (i.e. the tax divided by the income, and aggregated on a per jurisdiction basis), Chapter 5 then determines how much top-up tax is owed. The rate of tax owed is the difference between the 15% minimum rate and the ETR in the jurisdiction. That top-up tax percentage is then applied to the GloBE income in the jurisdiction, after deducting a substance-based income exclusion (Refer Clarification No. 6 given on page no. 42). The substance-based income exclusion reduces the exposure to the minimum tax and is calculated as a percentage mark-up on tangible assets and payroll costs. Finally, if a jurisdiction has a domestic minimum tax that is consistent with the Pillar Two Model Rules, such domestic tax is credited against any Pillar Two minimum tax liability. |
|
|
6 |
This Chapter deals with mergers and acquisitions. Accordingly, taxpayers that have engaged in mergers or acquisitions during the year also need to consider the rules in this Chapter. |
|
7 |
This Chapter provides special rules that apply to a relatively narrow range of taxpayers subject to tax neutrality or existing distribution tax regimes. |
|
8 |
This Chapter provides an internationally co-ordinated approach to administering the rules. This includes a standardised information return to facilitate the co-ordination of compliance and reduce burdens on taxpayers, as well mechanisms to avoid duplicative reporting and the scope to release co-ordinated guidance on the application of the rules in practice. This Chapter also provides for the possibility of safe harbours that would reduce administrative burdens, where particular operations of an MNE are almost certain to be taxable above the minimum rate. |
|
9 |
This Chapter provides for rules on transition. The transition provisions therein take existing tax attributes into account, including all pre-existing tax losses, to simplify the application of the rules and reduce compliance burdens when an MNE first comes into scope of the Pillar Two Model Rules. It also has a limitation of the application of the UTPR (Under-taxed profits) when an MNE is in its initial phase of expanding abroad. |
|
10 |
This Chapter sets out the necessary definitions, and the rules for determining where an entity is located for the purpose of applying the calculations in Chapters 2-5, which are needed to give effect to the jurisdiction-by-jurisdiction approach. |
As a general matter, the Pillar Two Model Rules have been designed to make sure they accommodate a diverse range of tax systems, including different tax consolidation rules, income allocation, entity classification rules etc., as well as rules for specific business structures such as joint ventures and minority interests. As such, many of the specific provisions of the Pillar Two Model Rules will not apply to all jurisdictions or each individual in scope MNE.
Clarifications relating to GloBE Rules
- Scope of GloBE Rules: Taxpayers that either have no foreign presence or that have less than EUR 750 million in consolidated revenues are not in scope of the Model Rules. The GloBE Model Rules will apply to MNEs that have consolidated revenues of EUR 750 million in at least two out of the last four years. This revenue threshold is broadly similar to that used for Country-by-Country Reporting (CbCR purposes), and is estimated to cover over 90% of the global corporate income tax base. Government entities, international organisations, non- profit organisations, pension funds or investment funds that are ultimate parent entities of an MNE Group (and certain holding vehicles of such entities) are excluded entities that are not subject to the GloBE rules, but this exclusion does not affect the MNE Group owned by such entities, which will remain in scope of the GloBE rules if the group as a whole otherwise meets the consolidated revenue threshold.
- Effective tax rate of 15%: Taxpayers in scope of the rules calculate their effective tax rate for each jurisdiction where they operate, and pay top-up tax for the difference between their effective tax rate per jurisdiction and the 15% minimum rate. Any resulting top-up tax is generally charged in the jurisdiction of the ultimate parent of the MNE.
A de minimis exclusion applies where there is a relatively small amount of revenue and income in a jurisdiction. The Pillar Two Model Rules also contemplate the possibility that jurisdictions introduce their own domestic minimum top-up tax based on the GloBE mechanics, which is then fully creditable against any liability under GloBE, thereby preserving a jurisdiction’s primary right of taxation over its own income.
The GloBE rules are based on an effective tax rate. While headline corporate income tax rates are higher than 15% in many jurisdictions, MNEs often have an effective tax rate on that income that is significantly lower than the headline rate as a result of deductions, exclusions and credits provided under local law. Furthermore, the exemptions (or indefinite deferral) provided to firms for foreign income, combined with the ability of MNEs to structure their offshore arrangements in a way that limits their exposure to foreign taxes, means that an MNE’s effective tax rate on foreign income can be much lower than 15% and may even be close to zero in some cases. The GloBE rules will ensure that foreign income will be taxed at an effective rate of at least 15%, restoring a level playing field and eliminating the need for countries to offer very low tax rates in order to compete for inbound investment.
- MNEs to pay a minimum level of tax on the income they earn in each jurisdiction: Countries that choose to introduce the Global Anti-Base Erosion (GloBE) rules have agreed to do so in a consistent and co-ordinated way. The inter-locking nature of the GloBE rules means that their adoption by a critical mass of jurisdictions will be sufficient to ensure that MNEs are required to pay the minimum level of tax on their profits arising in each jurisdiction where they operate. The GloBE rules incorporate an agreed rule order together with backstop or secondary rules that apply if a country where an MNE is based does not apply the primary rule. For instance, if the country where the MNE is headquartered does not subject the ultimate parent entity of the MNE group to the primary income inclusion rule (or “IIR”), another parent entity in the group, further down in the ownership chain, must apply the IIR under the agreed rule order. If even this does not result in the income of the MNE Group being subject to tax at the 15% minimum tax rate, the further backstop of the “UTPR” (untaxed profits) kicks in, which ensures the payment of the minimum tax through a denial of deduction or similar mechanism in all the countries where the MNE has a presence.
The interlocking nature of these rules therefore ensures that top-up tax will be collected in jurisdictions that have introduced the GloBE rules even where the MNE operates in or through other jurisdictions that have not implemented the rules. While countries are not required to adopt the GloBE rules, jurisdictions that adopt the GloBE rules will apply an effective tax rate test using a common tax base and a common definition of covered taxes to determine whether an MNE is subject to an effective tax rate below the agreed minimum rate of 15% in any jurisdiction where it operates. Having a common, consistent effective tax rate test as the foundation of the global minimum tax rules ensures a level playing field and puts a floor under tax competition.
- Benefits of the global minimum tax rules for Inclusive Framework members and the impact on developing countries: With a minimum effective tax rate of 15%, the GloBE rules are expected to generate around USD 150 billion in additional global tax revenues per year. This includes not only the revenues expected from the application of the rules themselves, but also additional corporate income tax revenues expected from the resulting reduction in profit shifting activity as a consequence of introducing the rules. A jurisdictional effective tax rate of 15% is a big step up from the historically often very low rates on foreign source income of MNEs.
The GloBE rules acknowledge the calls from developing countries for more transparent, mechanical, predictable rules to level the playing field and reduce the incentive for MNEs to shift profits out of developing countries. The GloBE rules are expected to reduce pressure on governments to offer wasteful tax incentives and tax holidays, while still providing a carve- out for certain income that arises from real substance. In addition to this, developing countries are expected to be able to further protect their tax base through the application of a treaty based Subject to Tax Rule (STTR) which will allow countries to retain their taxing right, which they may have otherwise ceded under a tax treaty, on certain payments made to related parties abroad which often pose BEPS risks, such as interest and royalties.
- GloBE rules – A Common Approach: The GloBE rules are not mandatory but have been agreed as a “common approach”. This means that jurisdictions are not required to adopt the GloBE rules, but if they choose to do so, they agree to implement and administer them in a way that is consistent with the agreed outcomes set out under those rules. Even if they do not implement the rules, agreement on a common approach means that one jurisdiction accepts the application of the GloBE Rules by another in respect of MNEs operating in its jurisdiction.
- Role of substance carve-out in the global minimum tax calculation and likely impact on investment incentives – The substance carve-out excludes from the GloBE tax base a certain amount of income calculated by reference to a fixed return on assets and payroll expenses in each jurisdiction. The amount of this substance-based income exclusion is equal to the sum of (i) 5% of the carrying value of tangible assets located in the jurisdiction and (ii) 5% of the payroll costs for employees that perform activities in the jurisdiction. The GloBE rules also provide for a 10-year transition period in recognition of the potential impact of the GloBE rules on existing incentives and existing investment. The Transition Period starts with a 10% carve-out for payroll costs and 8% carve-out for tangible assets, with these carve-out percentages declining to 5% over time. A substance carve-out based on assets and payroll costs allows a jurisdiction to continue to offer tax incentives that reduce taxes on routine returns from investment in substantive activities, without triggering additional GloBE top-up tax. Given the carve-out covers investment in both tangible assets and payroll it will have broad application to a wide range of different industries.
- Mechanisms to adjust timing differences – Income or loss may be recognised in a different year for financial accounting and tax. Given that the GloBE rules rely on the financial accounts for calculating the tax base, special rules are needed to adjust for fluctuations in the effective
tax rate that are attributable to these timing differences. MNEs already use deferred tax accounting principles to track differences between financial accounting and local tax in the timing in the recognition of income and expenses. The GloBE rules leverage these deferred tax accounting mechanisms to adjust for timing differences under GloBE.
When an item of income is recognised for GloBE purposes before it is recognised for local tax purposes, credit is given at the minimum rate for the tax that will be paid in the future with respect to such income (i.e., a deferred tax liability). Because credit is given for tax to be paid in the future, the timing difference does not give rise to minimum tax. The GloBE deferred tax accounting mechanism incorporates a number of limitations on the use of deferred tax accounting that are designed to protect the integrity of the outcomes under the GloBE rules.
Notes – (1) The developments relating to Pillar One and Pillar Two given above will replace the contents given in pages 8.7 and 8.8 of the Study Material under “OECD – BEPS 2.0 – Consensus based solution for tax challenges arising out of digitalization”. These developments will have to be read along with the other contents under “(3) Action Plan 1 – Addressing the Tax Challenges of the Digital Economy” given in pages 8.6 to 8.10.
(2) On account of withdrawal of section 115BBD, content relating to the said provision discussed in pages
8.16 and 8.81 has to be ignored.
Resources: The discussion on Pillar One and Pillar Two contained in this chapter is essentially based on the contents available at the website https://www.oecd.org/tax/beps/tax-challenges-arising-from-the- digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm#examples. The Clarifications relating to GloBE Model Rules are contained in the FAQs available at https://www.oecd.org/tax/beps/pillar-two-model-GloBE-rules-faqs.pdf
ANNEXURE – 5
Rule 128 Foreign Tax Credit
- An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule:
Provided that in a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India.
- The foreign tax referred to in sub-rule (1) shall mean,—
- in respect of a country or specified territory outside India with which India has entered into an agreement for the relief or avoidance of double taxation of income in terms of section 90 or section 90A, the tax covered under the said agreement;
- in respect of any other country or specified territory outside India, the tax payable under the law in force in that country or specified territory in the nature of income-tax referred to in clause (iv) of the Explanation to section 91.
- The credit under sub-rule (1) shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty.
- No credit under sub-rule (1) shall be available in respect of any amount of foreign tax or part thereof which is disputed in any manner by the assessee:
Provided that the credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if the assessee within six months from the end of the month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an evidence to the effect that the liability for payment of such foreign tax has been discharged by him and furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed.
- The credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India and shall be given effect to in the following manner:—
- the credit shall be the lower of the tax payable under the Act on such income and the foreign tax paid on such income :
Provided that where the foreign tax paid exceeds the amount of tax payable in accordance with the provisions of the agreement for relief or avoidance of double taxation, such excess shall be ignored for the purposes of this clause;
- the credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted.
- In a case where any tax is payable under the provisions of section 115JB or section 115JC, the credit of foreign tax shall be allowed against such tax in the same manner as is allowable against any tax payable under the provisions of the Act other than the provisions of the said sections (hereafter referred to as the “normal provisions”).
- Where the amount of foreign tax credit available against the tax payable under the provisions of section 115JB or section 115JC exceeds the amount of tax credit available against the normal provisions, then while computing the amount of credit under section 115JAA or section 115JD in respect of the taxes paid under section 115JB or section 115JC, as the case may be, such excess shall be ignored.
- Credit of any foreign tax shall be allowed on furnishing the following documents by the assessee, namely:—
- a statement of income from the country or specified territory outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67 and verified in the manner specified therein;
- certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee,—
- from the tax authority of the country or the specified territory outside India; or
- from the person responsible for deduction of such tax; or
- signed by the assessee:
Provided that the statement furnished by the assessee in clause (c) shall be valid if it is accompanied by,—
-
-
- an acknowledgement of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee;
- proof of deduction where the tax has been deducted.
-
The statement in Form No. 67 referred to in clause (i) of sub-rule (8) and the certificate or the statement referred to in clause (ii) of sub-rule (8) shall be furnished on or before the end of the assessment year relevant to the previous year in which the income
referred to in sub-rule (1) has been offered to tax or assessed to tax in India and the return for such assessment year has been furnished within the time specified under sub-section (1) or sub-section (4) of section 139:
Provided that where the return has been furnished under sub-section (8A) of section 139, the statement in Form No. 67 referred to in clause (i) of sub-rule (8) and the certificate or the statement referred to in clause (ii) of sub-rule (8) to the extent it relates to the income included in the updated return, shall be furnished on or before the date on which such return is furnished.
- Form No.67 shall also be furnished in a case where the carry backward of loss of the current year results in refund of foreign tax for which credit has been claimed in any earlier previous year or years.
Explanation.— For the purposes of this rule ‘telegraphic transfer buying rate’ shall have the same meaning as assigned to it in Explanation to rule 26.
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