01 March 2015

Budget 2015 - Major changes proposed in Direct Tax

The Finance Minister presented the Finance Bill, 2015 today. While no major relief has been announced on personal taxation, corporate taxes are proposed to be rationalised in a phased manner to bring down the rate of taxation. However, for the present, no change has been announced on rates of tax for companies. Incentives for investment in notified backward areas of Andhra Pradesh and Telangana as also for investment in new plant and machinery in these states and abolition of wealth tax are among the more populist measures.  This year also saw some enhancement with tax exemption for investment in pension funds and for medical insurance premium. 


Residential Status of Company (Section 6)

A company is said to be resident in India in any previous year, if it is an Indian company; or  its place of effective management, at any time in that year, is in India. Place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. As per the existing definition the second condition a company will be a resident,  if during the relevant previous year,  ‘the control and management  of its affairs was situated wholly in India’.


Income deemed to accrue or arise in India (Section 9)

It is proposed to insert Explanation 6 declaring that the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India if on the specified date the value of such assets excess INR 10 crores and represent at least 50% of value of all assets owned by the company or entity. Explanation 5 to Section 9(1)(i) states that  an asset or a capital asset being  any share or interest, in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share  or interest derive its value substantially from the assets (whether tangible or intangible) located in India.


Proposed Explanation after Section 9(v)( c)

To declare that in case of a non-resident engaged in banking business, any interest by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India.


Business connection (Section 9A)

As per the proposed new Section 9A, where the fund management activity of an eligible investment fund carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund.  An eligible investment fund shall not be said to be resident in India for the purpose of that section merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India. Also, conditions including  fund not being resident of India, being a resident of a country with which India has  a DTAA,  a minimum of twenty-five members who should not be directly or indirectly, not connected and so on.

A few other important changes are:

  • Raising the threshold for applicability of transfer pricing provisions to specified domestic transactions to INR 20 crores from the existing INR 5 crores.
  • Reduction in rate of tax on royalty and FTS payments made to non-residents to 10%.
  • Restricting any person related to a person from approaching the Settlement Commission
  • Clarifying the term ‘prejudicial to revenue’ as regards revision of orders by providing inter alia that an order shall deemed to be erroneous if it is passed without making inquiries and verification which should have been made, it is not passed in accordance with any decision by Courts which is prejudicial to the assessee or any other person.


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