Taxmann's Budget Marathon | International Taxation | Daksha Baxi – Founder | SRI Solutions

1. Taxation of Gaming Receipts

2. International Taxation – Impacting NR & Cross border transactions

Content

2 A. No change in the Definition of Resident – individual or entities

i. Anti-Avoidance Measures

ii.Start-ups

iii.International Financial Services Centre

iv.Rollover capital gains tax benefit capped

v. Provisions impacting cross border M&A

vi.Higher TCS on LRS payments

vii.Taxation on transfer of Market Linked Debentures

viii.NRs made eligible to DTAA benefit for income from MFs

ix.Lower WHT certificate for interest from Business Trust to NRs

x. No tax exemption to foreign news agencies

xi.Transfer Pricing related

Taxation of Gaming Receipts

Taxation of Gaming Receipts

• Section 194B levies tax on winnings from lottery, crossword puzzle, card game and other games

Section 194BB levies tax on winning from racing in any racecourse or for wagering or betting in any race course.

• These winning are taxable at the rate of 30% under Section 115BB if they exceeded INR 10K and include winnings from any sort of gambling or betting of any form

• It was interpreted that each transaction was to exceed INR 10K to become taxable resulting in leakage of tax.

• To plug this loophole, now it is proposed to amend both Section 194B and 194BB as follows :

The winnings, in each case under Sections 194B and 194BB (as amended) will be aggregated. S. 194B specifically excludes winning from online gaming w.e.f. 1 July 2023 .All the transactions will be aggregated to apply the threshold of 10K in each case and losses will also be allowed to be deducted to determine the net taxable winnings under each section. Tax as per Section 115BB would be levied on the net winnings.

• The new Section 194BAwould apply to online gaming winnings.

• A new proposed S. 115BBJ and 194BAprovide definitions for all the aspects of online gaming such as : “computer resource” , “internet” , “online game” , “online gaming intermediary” , “user” , “user account” .

• In case of online gaming, whenever net winning is withdrawn, the 30% tax is to be deducted and the winnings will include both cash and kind. If cash is not enough to cover the tax, payer has to ensure that the tax is paid. If there is balance left at the end of the year in the user account, tax will need to be deducted on the same even if not withdrawn.

The changes in Section 115BB and the new section 115BBJ are effective from 1April 2023

Whereas the change in Section 194B and insertion of Section 194BB are effective from 1 July 2023.

Status Quo in many provisions

• No change in definition of residence either of individuals or of company.

• Residential status of individuals and company continues to be determined as per the provisions of Section 6 of the IT Act as they exist on 31 Jan 2023

• No change in the tax rates or surcharge for NRs except as discussed in this presentation

International Taxation

Anti Avoidance Measures

Gift by resident to NOR taxable in India

With effect from 1April 2023, any gift given to a NOR exceeding INR 50,000 by a resident, will be regarded income from Indian source and will be taxable in the hands of the NOR as income from other sources as described in Section 56(2)(x) read with section 2(24)(xviia). For this, Section 9(1)(viii) is amended. Such payments were already made taxable for an NR since 5 July 2019. This change makes the two provisions aligned.

Payment by Business Trusts to unit holders doubly non taxed is now taxable on Unit holders:

• New sub clause (xii) in Section 56(2) is inserted to include as income, a sum paid to a unit holder of a business trust which is neither interest, nor dividend, nor rental income.

• In case of units of business trust, repayment of debt could be redemption of units. This being repayment of capital, it is capital receipt and unless specific provision to tax it is provided it could not be taxed. Now it is provided that such amount is treated as income of the unit holder under this new subclause (xii) of Section 56(2) read with Section 2(24)(xviic).

• The proviso says that the cost of acquiring the units will be deducted from the payment, thus excluding from tax the return of investment

• Consequent change is made in Section 115UB to clarify that the sum referred to in Section 56(2)(xii) does not qualify to be the income which retains its character as is envisaged under Section 115UB (1),(2)(3).

Issues in Tax on doubly non-taxed income distributed by Business Trusts

However, this is out of step with the normal provision of taxing the gains as capital gains, which is the case world over. Suggestions are made to the FM that this should be taxed as capital gains and not as “income from other sources” which is taxed at higher rate of tax than capital gains.

Another issue is that if the SPV has bought back its shares, the sums received by the Business Trust would not fall in the categories listed under Section 10(23FC) & (23FCA), i.e. interest, dividend or rent. If such distribution is not taxable due to Section 115Q read with Section 2(34A) in the hands of shareholders, then when the Business Trust makes the payment to the unit holders, it seems incorrect to tax such income in the hands of the unit holders. If at all, such income should be taxed as capital gains under Section 46A and not as other income under Section 56(2)(xii) as is proposed.

The new provisions become applicable for the FY 2023-24 (AY 2024-25)

Start-Ups

• The sunset date to set up start up to avail the beneficial tax regime under Section 80-IAC (100% tax exemption for 3 years out of the first 10 years) is extended to 31 March 2024 from 31 March 2023.

• Also under Section 79(1) the carry forward of losses for set off has been extended to 10 years in place of 7 years, to be in line with Section 80IAC

International Financial Service Centre

 Relocation of Funds

Section 47(viiad)exempts capital gains in case where there is transfer of assets by an offshore fund(fulfilling prescribed conditions) or their unit holders to a Cat I, II or III AIF located in International Financial Services Centre – known as relocating of fund to IFSC. The sunset date for this exemption was 31 March 2023. This has been extended to 31 March 2025 to continue to facilitate this transfer and give boost toAIFs to locate in IFSC.

This would also result in transfer of units held by unit holders. The same is also exempt and the new sunset date will apply

• Further exemption from tax to NR Holders of ODI

With effect from FY 2023-24 (AY 2024-25), additional tax exemption is provided to NR holders of Overseas Derivative Instruments(“ODI”) entered with an offshore banking unit of an IFSC which fulfils prescribed conditions under Section 80LA(1A). Such ODI holders were exempt from tax on transfer of the ODI. It is now proposed to exempt them from tax on distribution of income to them by the offshore banking unit, to the extent that the distributed income is taxed in India under Section 115AD in the hands of the offshore banking unit.

Cap on rollover CGT exemption – NR individuals impacted

Exemption from LTCGT on Sale of Residential House

 Section 54 provided exemption from long term capital gains tax for gains realised upon sale of residential house if such gains were used to purchase another residential house in India within 12 months prior or two years after the sale or construction of another residential house within 3 years of sale. Currently there is no limit on the amount of capital gains which would be exempt under this provision.

Exemption from LTCG on sale of any long-term capital asset

 Section 54F exempts an individual and HUF (including NR, NRI) from capital gains tax if the individual or HUF invests the sale consideration received on sale of any other long term capital asset in a new residential house if purchased within 12 months before or 2 years after the sale or constructed within 3 years after the sale

The proposed Cap

It is now proposed to restrict the exemption under S. 54 to the gains of INR 10 cr on residential house. Gains more than 10 cr, even if used for new residential house, will now be taxed. The exemption of LTCG tax under S.54F is also proposed to be capped at INR 10 cr on sale of LT Capital asset even if the investment in new residential house is more than 10 cr.

Representations are made to remove this restriction under S. 54 for residential property since genuine cases would suffer in this case.

 Both these changes are effective from FY 2023-24 (AY 2024-25)

Provisions impacting cross border M&A

Expanding applicability of Angel Tax to NRs

To achieve the objective of prevention, generation and circulation of unaccounted money through share premium, this section which was restricted to receipt of money from residents is now expanded to cover nonresidents.

This change becomes effective for the FY 2023-24 (AY 2024-25)

Receipt of premium from VCCs or VCFs continues to be outside the purview of this tax.

Also premium received from persons notified by central govt continue to be exempt as before.

There is no change in how the FMV is to be determined. Higher of Rule 11U & 11UA or based on the value of assets including intangibles such as goodwill, know-how, patents, copyrights, trademarks, licences, franchise or any other business or commercial rights of similar nature is to be adopted.

Question arises whether Customer database, Employees’ skills etc can be part of these assets since in practice many a times the high premium results from the value placed on these intangibles of such companies.

Provisions impacting cross border M&A

Consideration paid to target or its promoters or shareholders for non-compete or intangibles will now be taxed

• Consideration paid in M&A for acquisition of intangibles was not considered taxable since the law did not provide the mechanism to compute capital gains and there was no provision to determine cost of acquisition. There have been significant litigation in this regard.

• It is now proposed that from FY 2023-24 (AY 2024-25), Section 55(1)(b) would be amended to include a new form of assets of ‘any other intangible asset’or ‘a payment for non-compete to give up any other right’.

• The cost of acquisition of such intangible asset will be considered nil.

• Thus, the entire amount paid will become capital gain.

• Similarly, cost of improvement for such assets is also prescribed to be nil. Where the intangible asset is an acquired one, the cost of acquisition will be the price paid on its acquisition.

Long term or short-term capital gain?

The law is silent on whether such gain will be long term or short term. Where the intangible as defined above is an acquired property under M&A, it should be possible to ascertain whether the gain is long term or short term based on when it was acquired. Where it is self generated, there is no guidance. A clarification in this regard would avoid any litigation.

Hike in TCS on payment under LRS

For any payment a resident makes under LRS (i.e. FEMA permits external remittance upto USD 250,000 per FY per person), other than for education or medical treatment, the TCS to be collected by the remitter has been hiked from 5% to 20% from 1 July 2023 without any exempt threshold . No logic given in the memorandum for the 4 fold hike

Higher tax on sale of market linked debentures

Currently long term gains on transfer of listed MLD are taxed at 10% (without indexation).

It is now proposed to introduce a new Section 50AA which will become effective from FY 2023-24 (AY 2024-25) under which such gains would be deemed short term and will be taxed at rates applicable to short term capital gains.

Since the language is to tax them at ‘applicable rates’ , it may be assumed that on listed MLDs the gains will be taxed at 15% and on others, they will be taxed at the rate applicable to the seller.

The reasoning for this change is that the MLDs are in the nature of derivatives as they are linked to the performance of the underlying securities in the market and hence should be taxed as income from derivatives.

MLD is defined to mean security which has underlying principal component in the form of debt security and the returns are linked to the market returns and includes any security classified or regulated as MLD by SEBI

NRs made eligible to DTAA benefits for income from MFs

Where an NR (company or individual) has invested in units of mutual funds as referred to in Section 10(23D) or a specified company referred to in Section 10(35), the rate of withholding under Section 196A will now be lower of 20% or as provided in the relevant DTAA applicable to the NR, provided the NR submits the TRC as required under section 90 or 90A

Such specific provision will enable the MFs to use the DTAA rates without any hassle

Lower WHT certificate for interest from Business Trust to NRs

Section 197(1) lists several sections under which TDS payment to NR at lower rate qualify for obtaining withholding certificate from tax officer. Interest to be paid by a Business Trust to NRs under Section 194LBAat 5% was missing from this list of sections under section 197(1). This anomaly is rectified and a unit holder in a Business Trust, whose interest payment qualifies under Section 194LBAwill now be able to apply for lower withholding rate certificate.

Note : This helps in avoiding application of Pilcom decision of the SC

No tax exemption to foreign news agencies

With effect from FY 2023-24 (AY 2024-25), the exemption available to a foreign news agency as specified in Section 10(22B) is no longer available.

It will now be taxed under the normal provisions applicable to an NR – depending on the character of income – if business income, whether it has a BC or PE and whether it qualifies as royalty or any other category of income earned by it. Whether it is eligible to DTAA benefits or otherwise will determine the tax rate

Reduction of time in furnishing response to notice under Transfer Pricing

With effect from 1 April 2023, Section 92D (3) is amended and now, the tax payer would have only 10 days to submit the response to notice given by the tax department under the proceedings for transfer pricing. This is reduced from 30 days.