India

India: Multilateral Competent Authority Agreement on Exchange of CbC reports enters into force

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The Ministry of Finance on 28 July 2017 has issued a Notification (No. 75/2017), which announces that the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country (CbC) Reports entered into force for India on 12 May 2016 and is effective between India and other jurisdictions.

India: Tribunal decision on foreign exchange fluctuation gain or loss and arm’s length pricing

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The Income-tax Appellate Tribunal in the case of ACIT v. Rajratna Metal Industries Ltd. [ITA No. 1050/Ahd/2015 with CO No. 91/Ahd/2015, AY: 2010-11] held that a foreign exchange fluctuation gain/loss is an operating item and is not to be excluded for the purpose of computing the arm’s length price (ALP).

The Tribunal also found that income generated by the taxpayer on account of a business transaction which is not related to his international transactions (generation of electricity and sale to the manufacturing business) was not considered to be operating income for this purpose and must be excluded for the purpose of calculating the ALP. However, taking into account the taxpayer’s proposal, the Tribunal agreed to also exclude the expenditure related to that income.

India introduces CbC reporting requirements

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India has included a country-by-country (CbC) reporting requirement in section 286 of the Indian Income-tax Act, 1961, with effect from the financial year 2016-2017. The requirements are principally in line with BEPS Action 13. The first round of CbC reports, if applicable, must be submitted to the Indian tax authorities by 30 November 2017.

In April 2017, the OECD has also released additional guidance for tax administrations to use in implementing CbC reporting. The guidance addresses following issues:

Entities to be reported:

The requirement to file a CbC report applies only in respect of an international group having a consolidated revenue in the preceding year above a threshold limit EUR 750 million. The new documentation regime will apply for Financial Year (FY) 2016-17 (i.e., April 1, 2016 to March 31, 2017), and the first filing will be due by November 30, 2017.

CbCR will include the following information for each entity in the group:

Details of revenue, profit before tax, taxes paid, taxes accrued, stated capital, accumulated losses, tangible assets except for cash or cash equivalents, with regard to each country or territory in which group operates. In addition, details about each company based on the country of establishment and country of residence must be given together with the main business activities of these companies.

Filing requirement:

If the parent entity of an international group is resident in India, it is required to furnish the CbC report by 30 November 2017 for the Financial Year 2016-17. An Indian entity of an international group having an overseas parent is also required to provide details of the overseas parent to the Indian tax authorities.

Local file:

The local file is to be filed locally and it is recommended that it be finalised by the filing date for the local tax return. What needs to be seen is whether local countries impose additional requirements for a local file that will require additional costs to prepare locally tailored documentation reports.

Master file:

The requirement of maintaining a Master File will also take effect from Financial Year 2016-17 onwards. The master file can be prepared either on an overall company basis or a products group basis. However, the OECD provides that if the master file is prepared on a product group basis, information on all product groups must be submitted to all tax authorities, even if the local subsidiary is part of only one product group.

Penalties for non-compliance:

  • Failure to furnish a Master File attract a penalty INR 500,000
  • Failure to furnish the CbC report by a reporting entity, a day wise graded penalty structure would apply (INR 5,000 to 50,000 per day).
  • If the reporting entity has provided any inaccurate information in relation to CbC report, then a lump sum amount of penalty INR 500,000 may be imposed.

However, the tax authority can eliminate or reduce a penalty for a reasonable cause.

India: CBDT issues final rules for valuation of unquoted shares

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The Central Board of Direct Taxes (CBDT) on 12 July 2017 has issued a notification prescribing the method for valuation of unquoted shares for the purposes of Section 56(2)(x) and Section 50CA of the Income-tax Act 1961. The rules will be effective from the 1st day of April 2018 and are to apply in relation to the assessment year 2018-19 and subsequent years.

The CBDT on 5 May 2017 issued a press release along with a draft notification relating to valuation of unquoted shares for the purposes of Section 56(2)(x) and Section 50CA of the Act. It was proposed to amend the rules to prescribe the method of valuation of unquoted shares for the purpose of these sections by taking into account the FMV of jewellery, artistic work, shares and securities and stamp duty value in case of immovable property and book value for the rest of the assets.

India: Physical presence in the source state is not necessary to constitute a service PE

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A recent decision of the Bengaluru Bench of the Income-tax Appellate Tribunal (Tribunal) in the case of: ABB FZ-LLC v. DCIT [ITA(TP) No. 1103/Bang/2013, assessed the India-UAE (United Arab Emirates) Double Taxation Avoidance Agreement (tax treaty) and held that the taxpayer had a Service Permanent Establishment (PE) in India since the taxpayer has been furnishing services to the Indian company even without any physical presence of its employees in India.

With current technology services, information, consultancy, management, etc. can be provided through various virtual modes such as email, the internet, video conferencing, remote monitoring, remote access to the desktop, etc. Under the tax treaty provision for a “Service PE” the relevant factor is not the presence of the employees in the other State for more than nine months, but the rendering of services or activities which are required to be rendered for a period of nine months to create a PE. The Service PE is not dependent upon a fixed place of business as it is only dependent upon the continuation of the activity. As a result, the ruling was in favour of the Indian Revenue Service and the Tribunal held that the consideration for providing services is taxable in India.

The Tribunal also considered the services provided by the taxpayer in the form of parts or permissions for the use of the particular knowledge, knowledge and experience of the taxpayer and the term “license fees” under Article 12 (3) of the tax treaty. Visits of the taxpayer’s officials were only for the purpose of providing access to the use of the information on the industrial/commercial / scientific experience and to help commercial use. The dominant feature of the agreement between the taxpayer and the Indian company was to provide secret and confidential intellectual property rights (IPR) information. The tribunal noted that the tax treaty clearly uses the word for the “use of” or “right to use”, commercial, scientific equipment and has not used the word either “mediation” or “alienation” of expertise. The language used in the tax treaty is clear and unambiguous and therefore the reading of words “alienation” or “mediation” of know-how in the tax revenue is not permitted.

India: Government removes additional excise duty on tobacco, cigarettes under GST

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After the GST implementation in India, the finance ministry has removed an additional excise duty on tobacco, pan masala and cigarettes with effect from 1 July 2017. The revenue department also withdraws the central excise notification dated February 27, 2010, which deals with excise duty rate on unmanufactured tobacco and chewing tobacco.

The GST Constitutional (Amendment) Act permits the Centre to levy excise duty on six items including tobacco and tobacco products. The other items are petroleum crude, diesel, petrol, natural gas and ATF.

After the execution of Goods and Services Tax (GST) from July 1, the central excise notifications for tobacco, pan masala and cigarettes had to be brought in line with the new indirect tax regime. Under the GST, a cess is levied on demerit and luxury goods over and above the peak GST rate of 28%. The cess on pan masala has been decided at 60 per cent, while in tobacco the levy will vary from 71-204%.

India: GST Rates for Goods and Services approved by GST Council

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The GST Council held its 14th meeting in Srinagar on 18 May 2017 and 19 May 2017. In the meeting, the GST council has approved seven GST rules relating to Registration, Invoice, and Valuation, Input Tax Credit, Payment, Refund and Composition.

The GST Council has broadly approved the GST rates for about 1211 items along with the GST rates for services at a nil rate, 5%, 12%, 18% and 28%. The Council has also approved the GST Rate Schedule for Services to be taxed under a Reverse Charge along with the rates of GST Compensation Cess to be levied on certain goods.

The GST Council has finalised the following tax rates under GST:

0% tax (No tax):

  • Goods and foods: No tax (0%) will be imposed on items such as jute, fresh meat, fish chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi, Sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom, bones and horn cores, bone grist, bone meal, etc.; hoof meal, horn meal, cereal grains (hulled), palmyra jaggery, salt (all types), kajal, children’s picture, drawing or colouring books,  or human hair.
  • Services: Hotels and lodges with tariff below Rs 1,000 have been exempted from GST. Rough precious and semi-precious stones will attract a GST rate of 0.25 per cent.

5% Tax:

  • Goods: Items such as fish fillet, apparel below Rs 1000, packaged food items, footwear below Rs 500, cream, skimmed milk powder, branded paneer, frozen vegetables, coffee, tea, spices, pizza bread, rusk, sabudana, kerosene, coal, medicines, stent, lifeboats, cashew nuts, cashew nuts in the shell, raisins, ice and snow, biogas, insulin, agarbatti, kites, postage or revenue stamps, stamp-post marks, first-day covers.
  • Services: Transport services (railways, air transport) and small restaurants will be under the 5% category because their main input is petroleum, which is outside GST ambit.

12% Tax:

  • Goods : Apparel above Rs 1000, frozen meat products , butter, cheese, ghee, dry fruits in packaged form, animal fat, sausage, fruit juices, Bhutia, namkeen, Ayurvedic medicines, tooth powder, agarbatti, colouring books, picture books, umbrella, sewing machine, cellphones, ketchup and sauces, all diagnostic kits and reagents, exercise books and note books, spoons, forks, ladles, skimmers, cake servers, fish knives, tongs, spectacles (corrective), playing cards, chess boards, carom boards and other board games, like ludo,
  • Services: State-run lotteries, non-AC hotels, business class air ticket, fertilisers and work contracts will fall under 12 per cent GST tax slab.

18% Tax:

  • Goods: Most items are under this tax slab which includes footwear costing more than Rs 500, Trademarks, goodwill, software, bidi patta, biscuits (all categories), flavoured refined sugar, pasta, cornflakes, pastries and cakes, preserved vegetables, jams, sauces, soups, ice cream, instant food mixes, mineral water, tissues, envelopes, tampons, note books, steel products, printed circuits, camera, speakers and monitors, Kajal pencil sticks, Headgear and parts thereof, Aluminium foil, Weighing Machinery (other than electric or electronic weighing machinery), printers (other than multifunction printers), electrical transformers, CCTV, optical fiber, bamboo furniture, swimming pools and paddling pools, curry paste; mayonnaise and salad dressings; mixed condiments and mixed seasonings
  • Services: AC hotels that serve liquor, telecom services, IT services, branded garments and financial services will attract 18 per cent tax under GST. Also included in this category are room tariffs between Rs 2,500 and Rs 7,500 and restaurants inside five-star hotels.

28% Tax:

  • Goods: Bidis, chewing gum, molasses, chocolate not containing cocoa, waffles and wafers coated with chocolate, pan masala, aerated water, paint, deodorants, shaving creams, after shave, hair shampoo, dye, sunscreen, wallpaper, ceramic tiles, water heater, dishwasher, weighing machine, washing machine, ATM, vending machines, vacuum cleaner, shavers, hair clippers, automobiles, motorcycles, and aircraft for personal use will attract 28 per cent tax slab under GST.
  • Services: Private-run lotteries authorised by the states, hotels with room tariffs above Rs 7,500, 5-star hotels, race club betting and cinemas will attract tax 28 per cent tax under GST.