I INTRODUCTION

In a cloudy global situation marked by macroeconomic and political uncertainties, the Indian landscape has remained largely insulated. Over the last two years, there has been a substantial growth in deal inflow across various sectors of the industry, both in terms of volume and value – a hallmark of the government’s unwavering commitment to establish a business-friendly and more governance-oriented financial and economic environment in the country. A testament to this is also India having jumped 30 spots to secure a place among the top 100 countries on the World Bank’s recent ease of doing business ranking list of 2018.

Resurgent India is identified with highly skilled manpower, a young population, a favourable environment for investment and a large domestic consumption market. It is globally acknowledged as the leader for information technology and business outsourcing services. All these factors coupled with a mature legal system and stable political climate make India one of the most sought-after investment destinations in the world economy.

II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT

There are several types of business vehicles that operate in India. Broadly, these include sole proprietorships, partnership firms or limited liability partnerships (LLPs), private limited companies and public limited companies. However, the options available to a non-resident intending to set up a business in India are more specific.

i Corporate

One of the more preferred business vehicles in India is a private company limited by shares, which is incorporated under the Companies Act, 2013 (the Companies Act).

The key differences between a private company and a public company are set out below:

Particulars

Private company

Public company

Basic characteristics

Preferred by small to mid-sized companies

Cannot invite the public to subscribe to its shares or make deposits

Preferred by large companies,

Can invite the public to subscribe to its shares or make deposits

Corporate governance and disclosure requirements

Less compared to public companies

More compared to private companies

Potential listing on stock exchanges

No

Yes

Transferability of shares

Not freely transferable

Freely transferable

Shareholders

Minimum two, and not exceeding 200

Minimum seven, with no upper limit

Directors

Minimum two, and maximum 15; unless special resolutions are obtained

Minimum three, and maximum 15; unless special resolutions are obtained

Requirement to have one director who has stayed in India for a period of at least 182 days in the previous calendar year

Foreign Shareholders

Permitted subject to foreign investment laws

Foreign Directors

Permitted

Timeline for Incorporation

Two to three weeks from name approval

Three to four weeks from name approval

ii Non-corporate

A non-resident may contribute to the capital of a general partnership firm, or a proprietorship concern in India, only with the prior approval of Reserve Bank of India (RBI).

Foreign investment in LLPs is permitted under the automatic route in sectors that are open to 100 per cent FDI under the automatic route. Unlike partnership firms, LLPs are body corporates and have a legal existence that is separate from their partners. An LLP can be incorporated with a minimum of two partners, and unlike partnerships, there is no restriction on the maximum number of partners. The liability of partners in LLPs is limited to the provision of their capital contribution and any other contribution as agreed in the partnership agreement. As a result, a significant benefit that an LLP has over the partnership structure is that a partner of an LLP is not personally liable for an obligation of the LLP or the wrongful act or omission of other partners of the LLP.

Under the IT Act, neither Indian general partnerships nor LLPs are accorded a tax pass-through status, and both qualify as a separate taxpayer category.

III DIRECT TAXATION OF BUSINESSES

i Tax on profits
Determination of taxable profit

Taxable income from business is required to be computed in accordance with either the cash or mercantile system of accounting regularly employed by the taxpayer. Taxable profits are based on accounting profits, but adjustments are for specific expenses allowed or disallowed. All revenue expenditure expended ‘wholly and exclusively’ for the purposes of the taxpayer’s business is generally allowed as a deductible expense.

Further, while computing its taxable income, a taxpayer is entitled to claim certain deductions and industry-specific tax sops, subject to the fulfilment of specific conditions. Adjustments on account of depreciation are available to all categories of taxpayers on an annual basis, where depreciation is to be reduced from the written down value of each ‘block of assets’, namely buildings, furniture and fittings, machinery and plant, intangible assets, etc. It is important to note that depreciation for the purposes of the IT Act is different from depreciation as computed under accounting principles.

Residents are subject to income tax on their worldwide income, whereas non-residents are subject to tax in India only on income that is sourced in India, namely income that: (1) is received or is deemed to be received in India; or (2) accrues or arises or is deemed to accrue or arise in India.

Capital and income

The IT Act is scheduler in nature and provides for different heads of taxable income. The general rule under Indian domestic law is that all revenue receipts are taxable unless a receipt is specifically exempt and all capital receipts are exempt from taxation unless there is a specific provision to tax it. While calculating taxable business income, only revenue receipts after deducting revenue expenses are considered. The IT Act provides a separate head of ‘income from capital gains’ for levying tax on certain capital receipts. Income from such capital gains is usually taxed at special rates, depending on the nature of the capital asset, and the period of holding. The IT Act also provides a residual category of income, namely ‘income from other sources’, which also taxes certain capital receipts as ordinary income of the taxpayer.

Losses

The IT Act provides for intra-head and inter-head adjustment of losses. If in any year, a taxpayer incurs a loss from any source under a particular head of income, then such taxpayer is allowed to adjust such loss against income from any other source falling under the same head (Intra-head Adjustments). Only after such Intra-head Adjustments are made can a taxpayer adjust losses from one head against income from another head (Inter-head Adjustments). However, there are certain rules for such adjustments. For instance, losses from speculative business can only be set off against income from speculative business, although non-speculative business losses can be set off against income from speculative business; long-term capital losses cannot be set off against any income other than income from long-term capital gains, although short-term capital losses can be set off against short or long-term capital gains, etc.

Losses are usually permitted to be carried forward for a period of eight years immediately succeeding the year in which such loss is incurred.

A taxpayer is not permitted to carry forward any tax losses of the years prior to the relevant financial year, unless shareholders beneficially holding 51 per cent of the voting power as on the last day of the year in which the loss was incurred, and the year in which the loss is desired to be set off, remain the same.

Rates

Rates as prescribed under the IT Act and as mentioned hereinafter are required to be increased by applicable surcharge and education cess (unless otherwise stated). Surcharge is payable as a percentage of the income-tax payable. For domestic companies, the rate of surcharge is 7 per cent (if income > 10 million rupees but ≤ 100 million rupees), and 12 per cent (if income > 100 million rupees). For foreign companies, the rate of surcharge is 2 per cent (if income > 10 million rupees but ≤ 100 million rupees), and 5 per cent (if income of > 100 million rupees). For general partnerships and LLPs, the rate of surcharge is 12 per cent (if income > 10 million rupees), and nil (if income ≤ 10 million rupees). Further, an education cess of 3 per cent on surcharge and tax is also payable on the aggregate of income-tax and surcharge.

Corporate

Domestic companies are liable to tax on their business income at the rate of 30 per cent. Certain domestic companies can choose to avail of a concessional tax rate of 25 per cent, subject to certain conditions. Non-resident companies having a permanent establishment in India are subject to tax on their business income at the rate of 40 per cent.

Domestic companies declaring, distributing, or paying dividends are required to pay an additional dividend distribution tax (DDT) at an effective rate of 20.36 per cent (including applicable surcharge and education cess of 3 per cent) on the dividends distributed. Such dividends are tax exempt in the hands of all non-resident shareholders and resident corporate shareholders.

If the income-tax payable by a domestic company is less than 18.5 per cent of its adjusted book-profits, then such company would be required to pay a minimum amount of tax, known as minimum alternate tax (MAT) at the rate of 18.5 per cent. MAT credit can be utilised over a period of 15 years.

Non-corporate

General partnerships and LLPs are taxed at the rate of 30 per cent. No additional tax is required to be paid by a partnership firm or an LLP at the time of distribution to the partners. Shares of profits received by partners of a general partnership or an LLP are tax-exempt in their hands.

An LLP is usually not subject to MAT. It is subject to an alternate minimum tax (AMT) at the rate of 18.5 per cent, when income tax on its total income is less than 18.5 per cent on its adjusted total income. However, this is applicable only if the LLP claims specified tax holidays or deductions under the IT Act.

Administration

Unlike some other nations, income tax in India is a central (federal) levy, and not a state-specific levy.

The Ministry of Finance of the government of India governs and administers the IT Act through the CBDT, which from time to time, issues notifications, circulars and instructions, etc., to clarify or interpret the provisions of the IT Act. In addition to this, every year, the Finance Minister of India proposes amendments to the IT Act and revises the applicable rates of taxation annually through the Finance Bill for that year. Once the Indian Parliament approves the proposed amendments, the Finance Bill is enacted and the relevant changes or amendments get incorporated into the law.

The Indian tax year runs from 1 April to 31 March. Certain taxpayers having business income are required to get their account books audited for tax purposes. All companies are required to electronically file income tax returns on or before 30 September of the year following the tax year. In the event transfer pricing provisions are applicable, the due date for filing tax returns is extended to 30 November.

Further, quarterly returns have to be filed for withholding taxes in the prescribed form and manner.

On filing of tax returns, details furnished by the taxpayer are assessed by the tax authorities, and accordingly, an ‘assessment order’ is passed by the ‘assessing officer’ after giving an opportunity of being heard to the taxpayer. A detailed appeal process is provided in the IT Act, which allows taxpayers to challenge an order passed by the tax authorities. The Supreme Court of India (i.e., the apex court of India), and the various High Courts provide a ruling on the law and do not engage in a fact-finding exercise.

Further, an advance ruling may be obtained from the Authority for Advance Rulings (AAR) on any question of law or fact in respect of a transaction undertaken or proposed to be undertaken by a non-resident or with a non-resident. Such a ruling obtained from the AAR is then binding on the revenue authority and the applicant in respect of the concerned transaction.

Tax grouping

India does not recognise group taxation, and each company in a group (or otherwise) is taxed as a separate company.

ii Other relevant taxes
Indirect Taxes

The goods and services tax (GST) legislation has been enacted by the Indian government with effect from 1 July 2017. GST overhauls much of the indirect taxation framework in India, and has subsumed most of the erstwhile indirect taxes such as sales tax or VAT, service tax, excise duty, entertainment tax (unless levied by local bodies), entry tax, additional customs duty (countervailing duty), special additional duty of customs, surcharges and cesses. Basic customs duty on import of goods into India remains outside the GST ambit. Further, certain tobacco, petroleum and alcohol products remain outside GST, and will continue to be taxed as per the earlier system. As opposed to the multiple taxable events under the erstwhile indirect tax regime, such as manufacture, sale, provision of service, etc., the GST law imposes tax on a single taxable event, ‘supply’ which covers all kinds of transactions such as sale, transfer, barter, lease, provision of service, etc., unless specifically exempted. Both the centre and the states simultaneously levy GST across the value chain.

While problems of immediate migration costs are posed by it, the overall economy is expected to benefit from a more seamless movement of goods and service, and a less burdensome indirect tax credit and compliance regime. GST allows for seamless credit flow throughout the value chain with fewer restrictions to mitigate the cascading effect of taxes.

Stamp duty/registration fees

Separately, all legal documents are required to be stamped in India, and documents that have the effect of transferring immovable property are mandatorily required to be registered.

IV TAX RESIDENCE AND FISCAL DOMICILE

i Corporate residence

A company is said to be resident in India in a financial year, if (1) it is an Indian company (i.e., incorporated in India), or (2) its ‘place of effective management’ (POEM) is in India. The phrase ‘place of effective management’ has been explained to mean2 ‘A place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.’ The CBDT has issued guidelines for the determination of POEM of a company. If a foreign company’s POEM is considered to be in India, its global income shall be chargeable to tax in India at the rate of 40 per cent.

As per the Guidelines, (based on the average data of the relevant year and two years prior to such relevant year) in case of a company that is engaged in ‘active business outside India’,3 its POEM shall be presumed to be outside India, if the majority of meetings of the board of directors of the company are held outside India and the board of directors of the company exercise their powers of management and do not stand aside enabling either their holding company or such other person resident in India to exercise the said power. However, if the company is not ‘engaged in active business outside India’, then the determination of POEM for such company shall be to:

  • a identify or ascertain the person or persons who actually make the key management and commercial decisions for conduct of the company’s business as a whole; and
  • b identify the place where these decisions are in fact being made.
ii Branch or permanent establishment

A non-resident entity may set up branch, liaison or project offices in India. While a liaison office acts as a representative office of its parent company in India, a branch office is an establishment of the parent entity and can carry out the same or substantially the same activities as its parent company. A project office is permitted for specific projects to be undertaken in India, by the person resident outside India. Although these vehicles may be used by a non-resident, their use is not particularly popular given that the activities that such offices may undertake are heavily regulated and restricted by the RBI.

A branch of a foreign company is taxed as a foreign company in India at the rate of 40 per cent.

Activities carried out by foreign companies should be carefully examined to determine the existence of a permanent establishment (PE) of the foreign company in India. In the case of a PE, income of the foreign company that is attributable to the activities of the PE in India will be subject to tax at the rate of rate of 40 per cent.

Typically, the kinds of PEs common to India’s tax treaties are fixed place PE, service PE and dependent agent PE.

For the purpose of attribution of profits, the Indian PE is considered as a fictional entity separate from the foreign enterprise dealing with the latter on an arm’s length basis. No specific rules for attribution of profits are provided under Indian laws, and such attribution is a complex determination.

V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT

i Holding company regimes

India does not have any participation exemption or qualifying dividend regime.

ii IP regimes

By way of the Finance Act, 2016, the Government put in place a concessional taxation regime for income from patents. Following Action Plan 5 of the OECD’s BEPS Project, the government has adopted the nexus approach, which prescribes that income arising from the exploitation of IP should be attributed and taxed in the jurisdiction where substantial R&D activities are undertaken, rather than the jurisdiction of legal ownership only.

Accordingly, the IT Act was amended to provide that, where the total income of an ‘eligible taxpayer’ includes any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the rate of 10 per cent on the gross amount of royalty.

iii State aid

As a welfare economy, the Indian government offers subsidies in various sectors such as agriculture, small and medium enterprise industry, railways, and infrastructure.

Separately, under the Special Economic Zones Act, 2005, the government has identified certain zones in the country, where through favourable economic policies, business incentives and tax breaks, a conducive environment has been sought to be created for export-oriented businesses. In addition to the deductions otherwise available, the IT Act also provides for profit-linked deductions to certain taxpayers such as units established for export in special economic zones (SEZs).

VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS

i Withholding on outward-bound payments (domestic law)

Tax is to be withheld by the payer on all payments to non-residents that are chargeable to tax in India. The withholding rate is prescribed and depends on the nature of payment, and is subject to any relief under the relevant tax treaty between India and the country of residence of the payee. Set out below are the withholding tax rates in terms of India’s domestic laws:

Income stream

Tax rate

Dividends

Nil

Interest

5 per cent to 40 per cent (depending on currency of loan, etc)

Royalty

10 per cent

Fees for technical services

10 per cent

ii Domestic law exclusions or exemptions from withholding on outward-bound payments

India does not have a parent–subsidiary or participation exemption regime.

However, capital gains arising from the transfer of certain instruments may be subject to a reduced rate of withholding in terms of India’s domestic law. For instance, long-term capital gains arising on transfer of listed equity shares (including units of an equity-oriented fund) executed on a recognised stock exchange in India, where securities transaction tax (STT)4 has been paid, is exempt from tax in India subject to some conditions.

Section 90(2) of the IT Act provides that where India has entered into a double taxation avoidance agreement with any country, the provisions of the IT Act or the double taxation avoidance agreement, whichever are more beneficial to the taxpayer, shall apply. Accordingly, the withholding tax rates under India’s domestic law are subject to the provisions of the applicable tax treaty.

iii Double tax treaties

India has a vast tax treaty network and has signed DTAs with over 80 countries across the globe. While the rates may vary from treaty to treaty, set out below are some of the common reduced withholding rates across most treaties:

Income stream

Tax rate

Interest

7.5 per cent to 15 per cent

Capital gains

Generally, sale of shares is taxable in India at domestic tax rates.

Fees for technical services or royalty

10 per cent

iv Taxation on receipt

Foreign dividends received by an Indian resident are taxed as ordinary income, namely at the rate of 30 per cent in the case of an Indian company, and at the applicable slab rate in the case of an individual. However, credit for foreign taxes paid (on dividends or otherwise) should be available to the Indian resident. Foreign dividends may be subject to a reduced rate of 15 per cent in the hands of an Indian company, if the Indian company holds 26 per cent of shares in the foreign company.

However, DDT, being an additional corporate tax on the Indian distributing company, is generally not impacted by tax treaties. As a result, the availability of credit for DDT in the home country of the non-resident shareholder is doubtful.

VII TAXATION OF FUNDING STRUCTURES

i Thin capitalisation

The Finance Act, 2017 introduced limited thin capitalisation norms in India’s extant transfer pricing regime, according to which, the Indian ‘associated enterprise’ would not be permitted a deduction of interest (payable to its non-resident ‘associated enterprise’) exceeding 30 per cent of the earnings, before interest, taxes, depreciation and amortisation, if the total amount of such interest exceeds 10 million rupees per year. If the interest is not eligible for deduction in a particular year, the same can be carried forward for eight years, and the same shall be allowed to the extent of maximum allowable interest expenditure for the relevant year.

ii Deduction of finance costs

Interest payments by an Indian company to a non-resident shall be eligible to be deducted as an expense by the Indian company, if the loan is for its business purpose. However, if the Indian company and the non-resident are regarded as ‘associated enterprise’ in terms of the (Indian) transfer pricing regulations, such interest payments shall be subject to the arms’-length requirement, and also thin capitalisation norms as set out above.

iii Restrictions on payments

In terms of the Companies Act, dividend can be declared by a company out of profits of the current financial year or any previous year, only after providing for depreciation in accordance with the provisions of the said Act. In case of inadequacy of profits in any financial year, a company may declare dividend out of the accumulated profits earned by it in previous years, and transferred to the reserves in accordance with the prescribed rules. However, such dividend can only be declared from the free reserves of the company.

iv Return of capital

A company may undertake a scheme of buy-back to purchase its own shares from its free reserves, securities premium account, or the proceeds of the issue of any shares. For a company to be able to undertake a buy-back, the same should be authorised by its charter documents. Further, generally buy-back requires shareholder approval by way of a special resolution.

There are certain other restrictions on a company undertaking a scheme of buy-back, including inter alia, that a company cannot issue fresh shares (of the same kind as those bought back) for a period of six months since the date of buy-back, there has to be a cooling off period of at least one year between two consecutive buy-backs, and only fully paid-up shares can be bought back.

Buy-back of unlisted shares is subject to tax at the rate of 20 per cent in the hands of the company on the amount of buy-back price which is in excess of the amount received by it for the issue of such shares. There are specific rules prescribed to determine the amount received for the purpose of computing this tax. Once such tax is paid by the company, no further tax shall be payable on such amount by the shareholders.

Buy-back of listed shares result in capital gains tax for the shareholders.

In capital reduction, to the extent of accumulated profits, the company is required to pay DDT on the amount returned to the shareholder. Though the rate of buy-back tax is slightly higher than the rate of DDT, in case of a buy-back, the company is allowed to reduce the amount which it had received at the time of share issuance from the buy-back consideration to arrive at the buy-back tax. This is not permitted in case of DDT, as DDT is payable on the gross amount of dividend.

VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES

i Acquisition

Acquisitions may be structured at: (1) the entity level, by acquisition of shares in a fresh issue or share buyout or merger/amalgamation; or (2) the business level, by acquisition of the entire business (referred to as slump sale in the Indian context), cherry-picking certain assets or demerger. A foreign investor looking to acquire certain Indian assets or businesses would need to have an Indian entity that acquires the business or assets.

The preferred mode of acquisition would depend on various considerations, such as the commercial objective sought to be achieved, tax efficiency, ability of the target to carry forward past tax losses, regulatory aspects, etc.

Other structuring considerations include the choice of intermediate holding jurisdiction (IHJ) to acquire or set up the Indian target, and choice of instrument for investing into the Indian target. Further, with ‘substance’-driven taxation and evolving tax laws aimed at protecting the source country’s tax base, aspects such as valuations and transaction documentation assume significance and tend to become major negotiation points.

Recently, India’s tax treaties with Mauritius and Singapore have been revised, in terms of which, capital gains arising to tax residents of such jurisdictions from the sale of shares of Indian companies acquired on or after 1 April 2017 shall be taxable in India. The amendments do not impact the beneficial capital gains tax treatment in relation to investment in instruments other than shares (regardless of the time of investment), and in relation to shares acquired prior to 1 April 2017 (regardless of when the exit occurs).

The choice of instrument for investment, that is, shares (equity or preference shares) or debt, would primarily depend on the commercial objectives, regulatory considerations and rights sought to be acquired by the investor, and would entail different tax implications for the investor as well as the investee.

Further, it is important to ensure that appropriate valuations are undertaken at the time of the investment, failure of which can lead to adverse tax consequences for both the seller as well as the acquirer. For instance, for determination of capital gains taxation on the transferor of unquoted shares, the fair value of the shares shall be deemed to be the minimum sale consideration. Further, receipt of property (including shares and securities) by an investor at a discount to fair value, can lead to the discount being taxed as ordinary income in the hands of the investor.

Where Indian assets are indirectly acquired at an offshore level through the acquisition of shares in a foreign entity, an Indian tax charge will be triggered if the foreign target derives ‘substantial value’ (as defined) from India. Thus, prescribed valuations should be carried out to assess the Indian tax impact in such a case.

ii Reorganisation

Amalgamations and demergers are tax-neutral in India, provided certain specified conditions are satisfied.

The Indian government in April 2017 enacted certain provisions of the Companies Act that permit cross border mergers. However, there has been no corresponding amendment to the IT Act. Accordingly, only inbound mergers are tax-neutral, subject to conditions.

iii Exit

The sale of equity and debt instruments, specific assets or the entire business on a going-concern basis by a non-resident investor will entail capital gains tax in India that could vary from nil to 40 per cent, (depending on the nature of the instrument and the period of holding), subject to relief under the applicable tax treaty.

IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION

i General anti-avoidance

The General Anti-Avoidance Rules (GAAR) included in the IT Act came into effect on 1 April 2017. GAAR may be invoked, where the main purpose of an arrangement is to obtain a tax benefit. GAAR provisions empower the tax authorities to investigate any such arrangement as an ‘impermissible avoidance arrangement’, and consequently disregard entities in a structure, reallocate income and expenditure between parties to the arrangement, alter the tax residence of such entities and the legal situs of assets involved, treat debt as equity and vice versa, and the like. By doing so, the tax authorities may even deny tax benefits conferred under a tax treaty. Accordingly, it must be ensured that there is justifiable commercial substance in the structure in order to avail of any beneficial taxation under the IT Act or a tax treaty.

ii Controlled foreign corporations (CFCs)

India does not have any rules for CFCs.

iii Transfer pricing

Transfer pricing regulations5 are applicable to ‘international transactions’ carried on between two or more ‘associated enterprises’ (AEs), where either both or at least one party to the transaction is a non-resident. The term ‘AE’ has been defined in the IT Act to include, inter alia, any enterprise that participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of another enterprise.6 The transfer pricing regulations provide that any income arising from such an international transaction would be computed having regard to the principle of an arm’s-length price (ALP). The transfer pricing regulations also prescribe the methods that a taxpayer can adopt to arrive at an ALP, and the documentation that is required to be maintained by the taxpayer to demonstrate that the ALP adopted by it is in accordance with the transfer pricing regulations.

The transfer pricing regulations also provide for ‘secondary adjustments’, which essentially mean that an AE (being a non-local entity) will have to make a secondary adjustment in its books as a consequence of a primary adjustment to the taxpayer in India.

Safe harbour rules that prescribe conditions and circumstances under which the transfer price adopted by parties to a transaction would be immune from questioning by the Indian tax authorities have been prescribed.

An advance pricing agreement scheme and country-by-country reporting requirements have also been introduced in India.

iv Tax clearances and rulings

As set out earlier, an applicant may approach the AAR for an advance ruling for transactions with a non-resident.

Further, if during pendency of any tax proceedings, a taxpayer transfers certain specified assets (such as land, building, plant, machinery, shares, securities, etc.), then the tax authorities are empowered to treat such transfer of assets as void against taxes for recovery of any tax claims arising pursuant to conclusion of such proceedings. However, such transfer will not be treated as void, if: (1) a no objection certificate had been obtained by the seller from the tax authorities prior to such transaction; or (2) the transfer is done for adequate consideration and without notice of the pendency of any proceedings or tax payable by the transferor. Therefore, such a tax clearance is important as it protects the buyer with respect to outstanding tax demands of the seller, or tax proceedings which are pending at the time of transfer of assets.

X YEAR IN REVIEW

The beginning of the financial year marked a revolutionary cusp for the Indian tax landscape. Amendments to some of India’s key tax treaties came into effect, GAAR became effective and the scope of fair value basis taxation under India’s domestic tax law was widened.

India remains committed to the OCED’s BEPS Project, and has undertaken several steps towards its implementation. Apart from incorporating the nexus approach of Action Plan 5 in its patent box regime, in keeping with Action Plan 1 on tax challenges of the digital economy (see the Finance Act, 2016), India introduced an equalisation levy of 6 per cent in respect of certain specified digital services in the online marketing and advertising space rendered by non-residents who do not have a PE in India. India has also incorporated recommendations of Action Plan 13 of the BEPS Project on country-by-country reporting in respect of an international group in India’s domestic tax law.

Further, as part of Action Plan 15, the OECD released the text of the Multilateral Instrument (MLI) in November 2016. The first joint signing ceremony of the MLI was held on 7 June 2017, whereby 68 contracting states (including India) signed the MLI. India has announced 93 of its DTAs will be covered by the MLI.

XI OUTLOOK AND CONCLUSIONS

While India is committed to protect its tax base, prevent double non-taxation and arrest revenue losses to the public exchequer, the current government has consciously sought to fashion a taxation regime that is non-adversarial and not based on retrospective taxation and tax uncertainty.

The last one year has witnessed several sweeping legislative overhauls. The Insolvency and Bankruptcy Code, 2016 was introduced to facilitate the corporate insolvency resolution process and stimulate India’s massive roster of non-performing assets; the Real Estate (Regulation and Development) Act, 2016 was passed to protect the interests of home buyers and provide a fillip to investments in the real estate sector; and GST was introduced to streamline the indirect tax regime in India.

Further, abolishment of the Foreign Investment Promotion Board, provisioning of single-window clearances for foreign direct investment and removal of several sectoral caps further demonstrate the government’s commitment to establish a sound business environment and boost investor confidence.

1 Surajkumar Shetty is a principal associate, Raghav Kumar Bajaj is a senior associate and Ishani Kundu is an associate at Khaitan & Co. This chapter was written with specialist input from Bijal Ajinkya, a partner at the firm.

2 Section 6(3) of the (Indian) Income-tax Act, 1961.

3 The Guidelines define a company to be engaged in ‘active business outside India’ if: (1) the company’s passive income is not more than 50 per cent of its total income; (2) less than 50 per cent of its total assets are situated in India; (3) less than 50 per cent of total number of employees are situated in India or are resident in India; and (4) the payroll expenses incurred on such employees is less than 50 per cent of its total payroll expenditure. The Guidelines define ‘passive income’ of a company shall be the aggregate of: (1) income from the transactions where both the purchase and sale of goods is from or to its associated enterprises; and (2) income by way of royalty, dividend, capital gains, interest or rental income.

4 STT is payable on certain on-market transactions (sale and purchase) ranging from 0.001 per cent to 0.2 per cent on the value of the transaction.

5 Transfer pricing regulations are included in the Income Tax Act, 1961 itself as Chapter X (comprising Sections 92–94B), and the rules framed thereunder, i.e., Rules 10A–10THD of the Income-tax Rules, 1962.

6 Further, two or more enterprises would be deemed to be AEs under specific circumstances by virtue of shareholding, borrowing, guarantees, licensing of trademarks, purchase, sales or where enterprises have any relationship of ‘mutual interest’ as may be prescribed by the government.