We are happy to present the latest edition of Tax Trends, SKP’s Direct Tax Newsletter. This edition

covers the period from January to March 2017.

The Finance Bill, 2017 (Budget 2017) was presented by the government on 1 February 2017. The

Finance Bill has now become a Law and its proposals are now operational.

In order to expedite the implementation of the budget proposals, Budget 2017 was presented one

month in advance of the customary date of last day of February.

Budget 2017 was presented by the Finance Minister against the backdrop of global uncertainty with

major economic and political developments in advanced economies (Brexit and the US presidential

elections) as well as momentous reforms in domestic policy (demonetisation and the transition to

the Goods and Services Tax (GST) regime). Accordingly, Budget 2017 was expected to be a cautious

budget aimed at laying the foundation for India’s future growth and development.

While the expectations around Budget 2017 were varied and numerous, the Finance Minister has

done a fine balancing act and has presented a mature budget, outlining the long-term vision of the

government. The Budget proposals focus on improving the compliance base, providing a reduction

in the corporate tax rate, promoting a less-cash economy and includes certain proposals on the

lines of the Base Erosion and Profit Shifting (BEPS) Action plans. We discuss the highlights of the

Budget 2017 under Spotlight.

Faced with criticism for delay in releasing the tax returns forms, the government released the tax

return forms for Financial Year (FY) 2016-17 on 1 April 2017.

The government is also taking active steps to improve the ease of doing business in India. To this

effect, the government has introduced a facility to issue a Permanent Account Number (PAN) to

newly incorporated companies within a day. As per the statistics published by the government,

more than 99% of newly incorporated companies were allotted a PAN within four hours of making

the application. This is a remarkable step which has substantially reduced the time taken to start a

business.

For individual taxpayers, the PAN will be linked to the Aadhaar number. Unless the PAN is linked to

Aadhaar, the PAN will be considered invalid. This step has been introduced to deal with potential tax

evasion on account of a person having multiple PANs. However, the requirement also applies to

expatriates working in India for a period of more than 182 days. Some relaxation is necessary in this

regard.

The government’s clear focus on improving the tax climate has resulted in a dynamic tax

administration where the government is clarifying its positions quickly.

We hope you find this newsletter useful and we look forward to your feedback. You can write to us

at skp.tax@skpgroup.com.

Warm Regards,

SKP Direct Tax Team

In this issue

Spotlight 2

Legal Updates 4

Tax Talk 6

Compliance Calendar 7

Corporate Tax Myth 7

Contact Us 8

TAX TRENDSVolume 2 Issue 4 | Jan–Mar 2017

2

Finance Act, 2017: Setting the tone for Transformed, Energised and Clean India

Changing the trend of the earlier

governments to present the Budget

by the end of February, the current

government presented the Union

Budget of Financial Year (FY) 2017-18

(Budget 2017) on 1 February 2017,

one month in advance of the practice

followed prior to this year. The

government has ensured that the

Finance Act, 2017 is enacted by 31

March 2017 so that its proposals can

be given effect from 1 April 2017 (the

first day of FY 2017-18).

The Finance Minister, in his Budget

speech, laid out the agenda of Budget

2017L Transform (T), Energise (E) and

Clean (C) India (TEC India). TEC India

seeks to:

‘Transform’ the quality of

governance and quality of life of

people;

‘Energise’ various sections of

society, especially the youth and

the vulnerable, and enable them

to unleash their true potential;

and

‘Clean’ India from evils of

corruption, black money

(including non-transparent

political funding).

Changes to corporate tax

rates

In line with the earlier promises

made of bringing down corporate tax

rates in India, the Finance Minister

has reduced the corporate tax rate

from 30% to 25% for companies

whose turnover for FY 2015-16 did

not exceed INR 500 million. The

reduced corporate tax rate will apply

even if subsequently the turnover

increases above INR 500 million. This

will benefit most of the companies

operating in India.

Measures to check

unaccounted income

To boost the use of digital means for

transacting in India and moving away

from the tendency to use cash (which

resulted in undeclared income and

assets), the government has

implemented certain measures

mentioned below.

The law now imposes penalty on any

person receiving cash of INR 200,000

or more:

From a single person; or

For a single transaction; or

For one event/occasion.

The penalty will be equal to the

amount received in cash. These

penalty provisions are quite stringent

and cover artificial mechanisms to

receive consideration in cash over a

period of time. This is a significant

measure to reduce cash transactions

in the economy.

Furthermore, the threshold for

claiming tax deductible expenditure

for any payment in cash has been

reduced from INR 20,000 to INR

10,000. This provision would now

also apply to claim of depreciation on

capital expenditure incurred in cash

in excess of INR 10,000.

The Budget also provides that

political parties receiving any cash

contribution in excess of INR 2,000

would not be eligible for claiming tax

exemption. This is seen as a bold step

and a reflection of the strong resolve

of the Modi government to make

India a less-cash economy. Similarly,

any person making a donation in

excess of INR 2,000 in cash would not

be eligible to claim a deduction of the

same from their taxable income.

For cases of receipt of property for

inadequate consideration, separate

provisions are also introduced to tax

the amount of inadequate

consideration in the hands of the

receiver of the property.

SPOTLIGHT

3

Promoting tax compliance

A delay in filing tax returns would

attract a penalty of INR 5,000. This

penalty was not commonly levied and

the cost of recovering the penalty was

higher than the penalty amount itself.

To ensure timely tax compliance, the

government has now introduced late

filing fees of INR 1,000/5,000/10,000

in different cases. This fee shall be

levied automatically without any

requirement of launching separate

proceedings. This move is expected

to significantly improve the timely

filing of tax returns.

The time allowed for filing of revised

tax returns has also been reduced.

Ease of doing business

Interest on loans obtained in foreign

currency or by way of Rupee

Denominated Bonds (Masala Bonds)

enjoyed a concessional tax rate of

5%. This made these borrowings

attractive. In a welcome move, the

government has extended this

benefit up to 30 June 2020.

Furthermore, the time allowed to the

tax authorities to complete Revenue

Audits (scrutiny assessment) will also

be reduced in a phased manner. This

move will ensure a speedier disposal

of revenue audits.

Relaxations to small

taxpayers

For small taxpayers opting for

presumptive taxation, the

presumptive income rate has been

reduced from 8% to 6% of turnover.

This reduction will be applicable only

for sales proceeds received through

any means other than cash.

Certain pending reforms

Budget 2017 has fallen short of

fulfilling certain expectations from

taxpayers.

On the corporate tax side, it was

widely expected that the Income

Computation and Disclosure

Standards (ICDS) would be scrapped

or simplified. The Budget proposals

were silent on any changes to the

ICDS regime. It was also expected

that the rate of Minimum Alternate

Tax (MAT) should be reduced along

with a reduction in the normal tax

rate. While the normal tax rate has

been reduced for most of the

companies, the MAT rate continues at

its existing levels. This has resulted in

a narrow gap between the normal tax

rate and the MAT rate.

On the personal taxation front, while

the Finance Minister acknowledged

that salaried taxpayers are more

diligent in paying taxes and filing

returns, the Budget proposals did not

contain any significant tax relief for

individual taxpayers.

On an overall basis, the Finance

Minister has presented a balanced

and mature Budget. The fine print of

the Budget has many more changes.

A detailed analysis of all Budget 2017

provisions can be read here.

4

LEGAL UPDATES

Sale of ‘copyrighted article’

different from sale of

‘copyright’ and would not be

considered as royalty

CIT vs Vinzas Solutions India (P)

Ltd (Tax Appeal No. 861 of 2016

Madras High Court)

The taxpayer was an Indian company

and was a dealer of computer

software. The company would

purchase customised software from

various parties in India and sell the

same to various customers. The

taxpayer did not withhold any taxes

at the time of making the payment for

the purchase of the software.

The tax officer held that the purchase

of software was payment of royalty

under the domestic tax law1 and

therefore, the taxpayer was required

to withhold taxes on the purchase

consideration. Since the taxpayer had

not withheld taxes, the expenditure

on purchase was not considered tax

deductible.2

The High Court, relying on various

judicial precedents, observed that

royalty is a share of the product or

profit reserved by the owner for

permitting another to exploit/use the

property. There is difference in ‘sale

of copyrighted article’ and ‘sale of

copyrights in an article’. The High

Court further held that the taxpayer is

a dealer who does not have any right

in the software and merely sells the

tailor-made software purchased from

various companies to its customers.

Therefore, the payment made by the

taxpayer for purchase of software

was not royalty.

Reimbursement of salary

cost under secondment

agreement, chargeable to

tax as Fees for Technical

Services (FTS)

Flughafen Zurich AG vs DDIT (ITA

No. 1525/Bangalore/2010 and

others)

The taxpayer, a Swiss company,

entered into a secondment

agreement with BIAL, an Indian

company. The seconded employees

held managerial positions in BIAL. As

per the secondment agreement, the

employees would work under the

control and supervision of BIAL.

Salary to the employees were paid by

the taxpayer as well as BIAL. BIAL

withheld taxes on the entire salary

taxable in India. The salary paid by

the taxpayer was reimbursed by BIAL.

The tax officer contended that the

reimbursement of salary costs

constituted the taxpayer’s income in

India. He contended that merely on

the basis of certain terms of the

secondment agreement, there would

not be an employer-employee

relationship between BIAL and the

seconded employees. The payments

received by the taxpayer from the

Indian company was towards the

supply of services through skilled

manpower and was taxable as FTS

under the domestic law and the

applicable tax treaty.

The tribunal observed that the

purpose of the secondment

agreement was to provide highly

qualified personnel having expertise

in services. Even if the secondment

period was long and had certain

restrictive terms, it did not result in

the termination of the employer-

employee relationship between the

taxpayer and the seconded

employees. Accordingly, the payment

made by BIAL was consideration for

receiving technical services and

taxable in India.

1) Section 194J read with Explanation 4 to Section 9(1)(vi) of the Income Tax Act, 19612) As per the provisions of Section 40(a)(ia)

5

Interest paid by Indian

Permanent Establishment (PE)

to its UK Head Office (HO)

would not be allowed as a tax

deductible expense for the

Indian PE

Standard Chartered Grindlays Pty

Ltd vs DDIT (ITA No. 3578/

Delhi/2013)

The taxpayer, a banking company

incorporated in the UK, carried on

banking business through its branch

office in India (Indian PE). In order to

comply with the order of the Reserve

Bank of India (RBI), the Indian PE was

required to deposit a certain amount

with the National Housing Bank (NHB).

For this, the Indian PE borrowed funds

from its UK Head Office (HO). The

Indian PE paid interest on borrowed

funds to the UK HO and claimed the

same as tax deductible expense for

Indian tax purposes.

The tax officer held that Article 7(5) of

the India-UK Tax Treaty provides that

expense incurred for the business of the

PE would be tax deductible subject to

the domestic laws of the country in

which the PE is situated. The tax officer

held that under the ITA, payment made

to oneself is not tax deductible. Hence,

interest paid to the HO was not tax

deductible in India.

The tribunal observed that even if there

was an exception in Article 7(7) of India-

UK treaty for allowance of interest

expense for PE, the expense deduction

is subject to Article 7(5) of India-UK

treaty. As per Article 7(5) of India-UK tax

treaty, the deduction of expense is

subject to domestic law and as payment

made by the PE to the HO is considered

as payment to self under the ITA, the

tribunal upheld the order of tax officer.

Fee paid for rights in

connection with

advertisement and promotion

would not be considered as

royalty under Section 9(1)(vi)

of ITA

Reebok India Company vs DCIT (ITA

No. 954 and 1620/Delhi/2016)

The taxpayer, an Indian resident,

entered into an agreement with ICC, a

company resident of the British Virgin

Island (BVI) for the acquisition of

various rights against payments of a

‘rights fee’. As per the agreement, one

of the rights allowed the taxpayer to

become the official partner of ICC

events and to advertise/promote its

products during ICC events. The

agreement also allowed the use of

marks (ICC logo, etc.) for promotion and

advertisement. The taxpayer, while

making payment for rights fee, did not

withhold taxes.

The tax officer held that the payment

made by the taxpayer is for the right to

use the logo of ICC and hence the same

should be treated as royalty.

Accordingly, the tax officer considered

the payment made by the taxpayer to

ICC for right fees as non- tax deductible.

The tax tribunal observed that right fees

paid by the taxpayer for certain rights

like tickets, boards and signage, etc. was

without the use of marks of ICC and

hence would not qualify as royalty. In

respect of other rights, the tax tribunal

held that these rights were used

alongside the taxpayer’s logo for the

purpose of advertising and promotion

of the taxpayer’s product and not for

the sale of its products. The tax tribunal

also relied on court rulings wherein it

was held that where the use of logo is

incidental to rendition of advertisement

and publicity services, the payments

would not be construed as royalty.

Accordingly, the tax tribunal held that

the payment of rights fee cannot be

considered as royalty.

6

CBDT sets 31 May 2017 as

the deadline for verification

of cash deposits under

Operation Clean Money [Excerpts from The Indian

Express, 19 April 2017]

The Indian Express has reported that

the Central Board of Direct Taxes

(CBDT) has set a deadline of 31 May

2017 for tax officers to complete the

verification of cash deposits made

during the demonetisation period of

8 November 2016 to 31 December

2016. This step is being taken under

‘Operation Clean Money’ launched by

the Central government to identify

unaccounted money deposited in

banks during the demonetisation

period.

Government may put in

place a payment gateway to

prevent passing on of

equalisation levy to the

taxpayers

[Excerpts from The Business

Standard, 18 April 2017]

The Business Standard has reported

that the government is contemplating

introducing a payment gateway to

prevent passing on of equalisation

levy by global advertisement

companies to their customers in

India.

Paris replacing Mauritius as

tax haven

[Excerpts from The Economic

Times, 18 April 2017]

The Economic Times has reported

that with the amendments to India’s

tax treaties with Mauritius and

Singapore, overseas investors are

looking at France as an alternative to

invest in India through Participatory

Notes. These investment structures

appear to be relying on the

favourable India-France Tax Treaty.

13.7 million taxpayers who

did not file their tax returns

are on the radar of CBDT

[Excerpts from The Indian

Express, 7 April 2017]

The Indian Express has reported that

the CBDT is employing a ‘360-degree

profiling’ of taxpayers by linking

information provided by banks,

financial institutions and other

reporting agencies. Based on this, the

CBDT has prepared a list of 13.7

million taxpayers having potential tax

liabilities but who have not filed their

tax returns.

TAX TALK

7

Corporate Tax Myth

Transactions carried out before 1 April 2017 will not be covered under the General Anti-Avoidance Rules.

To understand the implications of this myth, please write to skp.tax@skpgroup.com.

Compliance Calendar (April to June 2017)

Due Date Compliances

30 April TDS payment for TDS and TCS deducted/collected in March 2017

7 May Payment of TDS and TCS deducted/collected in April 2017

15 May Filing of TCS statements for the period from January to March 2017

30 May Submission of Annual Statement in Form 49C by a Liaison Office for Financial Year (FY) 2016-17

31 May Filing of TDS statements for the quarter of January to March 2017

31 May Issuance of Form 16 (TDS certificate for TDS on salaries) for FY 2016-17

31 May Submission of Annual Information Return by specified taxpayers

31 May Submission of Annual Statement of Reportable Accounts under FATCA and CRS, by specified taxpayers

7 June Payment of TDS and TCS deducted/collected in May 2017

15 June Issuance of TDS certificates (Form 16A) for the quarter of January to March 2017

15 June Payment of first instalment of advance tax for FY 2017-18 (15% of the estimated tax liability to be deposited on a cumulative basis)

8

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