The Finance (No. 2) Act, 2014 (Finance Act), includes the following provisions:
- Corporate tax rates remain constant at around 30% for residents and 40% for non-residents, with a few additional incentives and allowances for individual taxpayers. Dividends distributed by Indian companies continue to be subject to a dividend distribution tax of around 15%, albeit one that is now computed on a grossed-up basis.[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”3″ ihc_mb_template=”2″ ]
- The general anti-avoidance rules are still scheduled to take effect from 1 April 2015 and apply to all investments after August 2010. The rules provide extensive powers to the tax authorities to disregard tax-driven structures that are abusive, are not arm’s length, or lack commercial substance.
- Interest income received by a real estate investment trust (REIT) is tax exempt and foreign investors will be subject to a low withholding tax of 5% on interest payouts. For non-resident unit holders, the 5% tax would be the final tax payable by the non-resident, while residents will be subject to tax as per the tax rate applicable to them.
- Where dividends are distributed by a special purpose vehicle (SPV) to a REIT, the existing provision dealing with dividend distribution tax under section 115-O of the Income Tax Act, 1961 (ITA), would apply and the SPV would face a 15% tax on distribution with no further liability on the REIT as a shareholder.
- Where the REIT earns income through capital gains by the sale of shares of the SPV or by the sale of real estate assets held by it, the REIT would be taxed as per regular rates for capital gains under section 112, i.e. 20% for long-term capital gains (units held for more than 36 months) and slab rates for short-term capital gains.
- Separately, where a unit holder disposes of units of a REIT, long-term capital gains would be exempt from tax and short-term capital gains would be taxed at 15% since units would be treated as listed securities under the ITA.
- To provide certainty to foreign institutional investors and foreign portfolio investors, income earned from the sale of securities will be deemed to be capital gains income.
- A concessional withholding tax rate of 5% has been provided up to 2017 for interest on long-term foreign currency denominated bonds. However, the 5% rate applicable to rupee denominated debt instruments including non-convertible debentures will lapse in June 2015, unless extended in next year’s budget.
- The lower 15% tax rate on dividends received by Indian companies from overseas subsidiaries will continue.
- The Finance Act seeks to provide a rollback for advance pricing agreements for up to four years.
- The tax holiday for the power sector has been extended to 2017 and the range of investment-linked allowances has been widened.
- Notable customs and excise duty reliefs are proposed in relation to electronic products as well as renewable energy equipment.
- The government will also closely work with states to roll out the proposed goods and services tax regime, which will simplify and consolidate all indirect taxes.
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The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bangalore, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.
