SKP Tax Alert
06 May 2015 | Volume 8 Issue 3
 Highlights of amendments made in the Finance Bill, 2015
The Finance Bill, 2015 that was presented in the Lok Sabha (India's lower house of Parliament) on 28 February 2015 was passed on 30 April 2015. However, the Bill has been passed with a few changes and additions. While some of these changes were made to provide greater clarity on certain aspects, others bring the propositions (in the Original Bill) in line with the newly effective Income Computation and Disclosure Statement (ICDS). This SKP Tax Alert highlights the changes made to the original Finance Bill, 2015 as presented in the Lok Sabha.
1. Taxability of subsidies
Various judicial precedents[1] brought out debatable principles for tax treatment of the subsidies received by the assessee. The dispute between the Revenue and the taxpayers about the treatment of the subsidy received from the government or any other authority as a capital receipt or revenue receipt has now been resolved by inserting a new clause (xviii) under the definition of 'income' under Section 2(24) of the Income Tax Act (the Act).
Sub-clause (xviii) to Section 2(24) provides that assistance in the form of a subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement (by whatever name called) by the central government or a state government or any authority or body or agency in cash or kind to an assessee (other than one considered under Explanation 10 to Section 43(1)) would be included in the total income of the assessee.
Thus, any subsidy/grant/reimbursement, which is taken into account and reduced from the actual cost of depreciable assets while determining the same under Section 43(1) shall not be treated as income.
The above amendment is proposed to be in line with ICDS VII relating to government grants.
2. Interest on loans taken for the acquisition of an asset  
Currently, any interest paid with respect to capital borrowed for acquisition of assets for the extension of an existing business is not to be allowed as a deduction.
The Finance Bill, 2015, now proposes to remove the words :"for extension of existing business or profession". By doing so, the distinction between the extension of existing business and the existing business has been eliminated.
The above amendment is proposed to be in line with ICDS IX relating to the capitalisation of borrowing costs.
3. Bad debts could be claimed without a write-off in books of accounts
As per ICDS on revenue recognition or provisions, contingent liabilities and contingent assets, certain income which is not recorded in the books of accounts may be required to be recognised for tax purposes. This created apprehensions on the allowability of such write-offs, if the amount becomes irrecoverable

To clarify the above, the Finance Bill, 2015 proposes that such bad debts could be claimed as a deduction without writing them off in the books of accounts if the amount of debt or part thereof has been taken into account in computing the income of the assessee of any previous year.

This amendment is also proposed to bring the law in line with the ICDS.

4. Period of holding and cost of acquisition in case of shares acquired on redemption of Global Depository Receipts (GDRs) defined
The Finance Bill, 2015 proposes and clarifies that the period of holding in case of shares acquired by a non-resident on redemption of GDRs shall be reckoned from the date on which the request for redemption is made by the taxpayer.
Furthermore, it is also proposed that the cost of acquisition of such shares shall be the price prevailing on any recognised stock exchange on the date on which the request for redemption is made by the taxpayer.
5.Effect of Place of Effective Management toned down
When it was first tabled, the Finance Bill 2015 had proposed to amend the residency rule to provide that a foreign company will be treated as a resident of India if its place of effective management (POEM) is in India "at any time" in that year.
Given the wide and litigious interpretation, and apprehensions that surfaced, the Finance Bill, 2015 as passed by the Lok Sabha has proposed to delete the phrase "at any time" to avoid ambiguity.
6. Relief from Minimum Alternate Tax (MAT) provisions for foreign companies
The Finance Bill, 2015 had proposed that capital gains (other than short-term capital gain on which Securities Transaction Tax (STT) is not paid) will not be subject to MAT. This brought about concerns about the taxability of other income of foreign institutional investors (FIIs) and the applicability of MAT on foreign companies.
However, the proposed amendments extend the relief to all foreign companies for various sources of income, such as capital gains, interest, royalty and fees for technical services, thereby not restricting it to capital gains alone.
Correspondingly, the expenditure incurred in connection with the earning of such income debited to the profit & loss account should be excluded while computing book profits.
7. Applicability of MAT on the transfer of shares of a Special Purpose Vehicle (SPV)
Currently, the sponsor of a Real Estate Investment Trust (REIT) is not entitled to preferential capital gain treatment with respect to the sale of units of the REIT. The Finance Bill, 2015 extends this beneficial treatment to a sponsor.
However, this raised certain apprehensions with respect to the applicability of MAT on such gains. The amendments to the Finance Bill, 2015 propose that MAT provisions would not be levied in the following cases i.e. the following should be ignored or reduced while calculating book profits:
  • Notional gain arising on the transfer of shares of an SPV to a Business Trust in exchange of units allotted by that Trust.
  •  Gain arising on a change in the carrying amount of units in the books of the sponsor of the SPV in pursuance of any re-valuation.
  • Actual gain upon transfer of units of a Business Trust recorded in the books at the carrying value of units. 
However, MAT provisions would be applicable on the amount of gain at the stage of transfer of units, such that the gain is computed on the basis of the difference between the sale price of units and cost of shares of the SPV or the carrying amount of shares, if such shares were carried at a value other than the cost.

8. Exemption from some conditions if the investment fund owned by a foreign government or the central government or other notified funds 
The Finance Bill, 2015 laid down certain conditions based on which an offshore fund and fund manager would not give rise to a business connection in India. Some of the conditions that must be satisfied by the offshore fund are:
  • The fund should have a minimum of 25 members who are persons, not connected directly or indirectly;
  • Any member of the fund, along with the connected persons, shall not have participation interest exceeding 10% either directly or indirectly in the fund;
  • Aggregate participation interest, whether directly or indirectly, of ten or less members along with their connected persons, must be less than 50% in the fund.
It has been proposed that the above three conditions will not apply in case of investment funds which are set up by the government of foreign states, the central bank of a foreign state, a sovereign fund, or such other funds as may be notified by the Indian government, subject to the fulfilment of conditions as may be specified. Furthermore, the special regime must be applied in accordance with guidelines issued and in such manner as the administrative board may prescribe.
9. Additional incentives extended to the states of Bihar and West Bengal
The Finance Bill, 2015 had proposed benefits of enhanced depreciation from 20% to 35% under Section 32(iia) of the Act and investment allowance @ 15% of the amount of investment in new plant and machinery under the new Section 32AD, with respect to new plant and machinery acquired and installed during the specified period for setting up manufacturing units. Such benefits were only restricted to the notified backward areas of the states of Andhra Pradesh and Telangana. This incentive has now been proposed to be extended to the notified backward areas of Bihar and West Bengal as well.
10. Mandatory filing of tax return by a resident holding foreign assets
The amendment proposed to Section 139(1) of the Act states that a person, being resident and ordinarily resident, has to mandatorily furnish his Return of Income even if his total income does not exceed the maximum amount not chargeable to tax, if he at any time during the tax year:
  • holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India; or
  • is a beneficiary of any asset (including any financial interest in any entity) located outside India.
Furthermore, if the income from the abovementioned assets is already included in income of the legal owner of such asset in accordance with the provisions of the Act then, the above person is not required to furnish a return.
The expressions 'beneficial owner' and 'beneficiary' have also been defined.
11. Approving the deduction limit under Section 80D
Originally, the Finance Bill, 2015 was ambiguous on the limits of deduction. It is now clarified that the enhanced limits for deduction of the payment of premium on medical insurance for self and family members is raised from the existing limits of INR 15,000 to INR 25,000. In addition, for senior citizens, the limit has been raised from INR 20,000 to INR 30,000.
12. Deduction with respect to new pension scheme
The Finance Bill, 2015 as passed by the Lok Sabha proposes to clarify that a deduction of INR 50,000 under 80CCD of the Act is over and above the normal ceiling limit of INR 150,000.
13. Amount paid for the purchase of sugarcane allowed only to the extent of the price fixed by the government
A new clause (xvii) is proposed to be inserted in Section 36(1) to provide that the amount of expenditure incurred by a co-operative society engaged in the business of manufacturing sugar, the purchase of sugarcane at a price equal to or less than the price fixed or approved by the government could be allowed as a deduction.
[1] CIT v. Ponni Sugars & Chemicals Ltd (2008) 174 Taxmann 87 (SC)
Sahney Steel & Press Works Ltd vs CIT (1997) 94 Taxmann 368 (SC)

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