12-Jun-2019: Ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting
The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has approved the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
Impact: The Convention will modify India's treaties in order to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.
Details:
- India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which was signed by the Hon'ble Finance Minister Sh. Arun Jaitley at Paris on 07/06/2017 on behalf of India.
- The Multilateral Convention is an outcome of the OECD / G20 Project to tackle Base Erosion and Profit Shifting (the "BEPS Project") i.e., tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no tax being paid. The BEPS Project identified 15 actions to address base erosion and profit shifting (BEPS) in a comprehensive manner.
- India was part of the Ad Hoc Group of more than 100 countries and jurisdictions from G20, OECD, BEPS associates and other interested countries, which worked on an equal footing on the finalization of the text of the Multilateral Convention, starting May 2015. The text of the Convention and the accompanying Explanatory Statement was adopted by the Ad hoc Group on 24 November 2016.
- The Convention enables all signatories, inter alia, to meet treaty-related minimum standards that were agreed as part of the Final BEPS package, including the minimum standard for the prevention of treaty abuse under Action 6.
- The Convention will operate to modify tax treaties between two or more Parties to the Convention. It will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreement. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
- The Convention will modify India's treaties in order to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.
Background: The Convention is one of the outcomes of the OECD/G20 project, of which India is a member, to tackle base erosion and profit shifting. The Convention enables countries to implement the tax treaty related changes to achieve anti-abuse BEPS outcomes through the multilateral route without the need to bilaterally re-negotiate each such agreement which is burdensome and time consuming. It ensures consistency and certainty in the implementation of the BEPS Project in a multilateral context. Ratification of the Multilateral Convention will enable application of BEPS outcomes through modification of existing tax treaties of India in a swift manner.
17-May-2017: Cabinet approves signing of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting by India
The Union Cabinet has given its approval for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. The Convention is an outcome of the OECD / G20 BEPS Project to tackle base erosion and profit shifting through tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.
The Final BEPS Project identified 15 actions to address BEPS in a comprehensive manner. Implementation of the Final BEPS Package requires changes to more than 3000 bilateral tax treaties which will be burdensome and time consuming. In view of the same, the Convention was conceived as a Multilateral instrument which would swiftly modify all covered bilateral tax treaties (Covered Tax Agreements / CTA) to implement BEPS measures. For this purpose, formation of an Ad-hoc Group for the development of such multilateral instrument was endorsed by the G20 Finance Ministers and Central Bank Governors in February 2015.
Background:
India was part of the Ad Hoc Group of more than 100 countries and jurisdictions from G20, OECD, BEPS associates and other interested countries, which worked on an equal footing on the finalization of the text of the Multilateral Convention, starting May 2015. The text of the Convention and the accompanying Explanatory Statement was adopted by the Ad hoc Group on 24 November 2016.
The Convention implements two minimum standards relating to prevention of treaty abuse and dispute resolution through Mutual Agreement Procedure. The Convention will not function in the same way as an Amending Protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreements. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. The Convention ensures consistency and certainty in the implementation of the BEPS Project in a multilateral context. The Convention also provides flexibility to exclude a specific tax treaty and to opt out of provisions or parts of provisions through making of reservations.
The Convention has been opened for signature as on 31st December 2016 and a first joint signing ceremony is scheduled to be held in Paris on 7th June, 2017. Signature is the first step in the process of expressing consent to be bound by the Convention, which will become binding only upon ratification. A list of Covered Tax Agreements as well as a list of reservations and options chosen by a country are required to be made at the time of signature or when depositing the instrument of ratification.
Cabinet approval has been sought for the signing of the Convention by India. It is also proposed to make a provisional list of Covered Tax Agreements and a provisional list of reservations at the time of signature in June, 2017. Final lists for both will be submitted by India at the time of submission of instrument of ratification.
Signing of the Multilateral Convention will enable the application of BEPS outcomes through modification of existing tax treaties of India in a swift manner. It is also in India's interest to ensure that all its treaty partners adopt the BEPS anti-abuse outcomes. Signing of the Convention will enable curbing of revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.
23-Jun-2019: What is Cess?
Cess is a form of tax charged/levied over and above the base tax liability of a taxpayer. A cess is usually imposed additionally when the state or the central government looks to raise funds for specific purposes. For example, the government levies an education cess to generate additional revenue for funding primary, secondary, and higher education. Cess is not a permanent source of revenue for the government, and it is discontinued when the purpose levying it is fulfilled. It can be levied on both indirect and direct taxes.
The government can impose cess for purposes such as disaster relief, generating funds for cleaning rivers, etc. For example, after Kerala floods in the year 2018, the state government imposed a 1% calamity cess on GST and became the first state to do it. In other instances, the central government may levy an education cess, or a health cess, or a sanitation cess. All these levies are usually imposed as a percentage of the taxpayer’s basic tax liability. Under the GST (Goods and Services Tax) regime, certain sin goods and luxury items also attract a cess.
Cess is different from taxes such as income tax, GST, and excise duty etc. as it is charged over and above the existing taxes. While all taxes go to the Consolidated Fund of India (CFI), cess may initially go to the CFI but has to be used for the purpose for which it was collected. If the cess collected in a particular year goes unspent, it cannot be allocated for other purposes. The amount gets carried over to the next year and can only be used for the cause it was meant for. The central government does not need to share the cess with the state government either partially or in full, unlike some other taxes.
The procedure for introducing cess is comparatively simpler than getting the provisions done for introducing taxes, which usually means a change in the law. Cess is also easier to modify and abolish.
Types of cess in India
- Education Cess: Education cess was introduced to finance and provide standard quality education to poor people.
- Health and education cess: Proposed in Budget 2018 by Finance Minister Arun Jaitley to meet the education and health needs of rural and Below Poverty Line (BPL) families.
- Swachh Bharat Cess: Introduced in 2015, a 0.5% Swachh Bharat cess was imposed to fund national campaign for clearing the roads, streets and the infrastructure of India.
- Krishi Kalyan Cess: This cess was aimed at developing the agricultural economy, and was collected at the rate of 0.5%.
- Infrastructure Cess: Announced in Union Budget 2016, this cess was charged on the production of vehicles.
In the case of the cess levied on direct taxes, it is added to the basic tax liability of the taxpayer and is paid as a part of the total tax paid by the taxpayers themselves. In the case of the cess levied on indirect taxes, such as service tax or sales tax, or GST in India’s case, it is paid by the producer of the goods and services. This usually adds to the cost of making goods and services, and eventually, the consumer might end up bearing the higher cost.
26-Jun-2019: Tax Exemption to Start-Ups
Startups receiving investments from Ventures Capital Fund are exempt from taxation as per provision of Section 56, (2) (vii b) of Income Tax Act 1961 (Act). Angel Fund is sub category of Ventures Capital Fund under Category-I Alternative Investment Fund (AIF), hence, eligible for the same exemption.
Several round of discussions have been held by Department for Promotion of Industry & Internal Trade (DPIIT) with the Startup ecosystem to address their concerns. Consequently, a notification number G.S.R. 127(E), dated 19th February, 2019 was issued by DPIIT. Central Board of Direct Taxes (CBDT) vide their notification number S.O. 1131(E) dated 5th March 2019 has notified that provisions of Section 56 (2) vii(b) of Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the said consideration has been received from a person, being a resident, by a company which fulfils the conditions specified in notification number G.S.R. 127(E), dated 19th February, 2019 of DPIIT.
Department of Revenue had earlier issued an advisory on 24th December, 2018 based on representations received from various startup companies that no coercive measures to recover the outstanding amount should be taken for startup companies, if additions have been made by Assessing Officer under Section 56(2) vii(b) of Income Tax Act, 1961 after modifying /rejecting evaluation so furnished under Rule 11 UA (2) of Income Tax Rule, 1962.
The provisions of the notification number G.S.R. 127(E) dated 19th February 2019 have been fully implemented, easing norms for providing tax relief to Startups on angel investments.
DPIIT accepts applications and declarations from Startups applying for Angel Tax Exemption and on the receipt of the same DPIIT forwards these applications to CBDT. As on 21st June, 2019 a total of 944 applications for Angel Tax Exemption have been received. Thirty-nine applications have been found to be incomplete, and 203 applications were repeat or modified applications. CBDT has exempted 702 startups under this provision.
7-Feb-2019: Effect of Angel Tax on Indian Startup Ecosystem
The Government of India has continuously engaged with all stakeholders to address relevant issues related to the Indian Startup eco-system.
The Department for Promotion of Industry and Internal Trade (DPIIT) issued notification in April 2018 for easing the norms for providing tax exemption to the Startup companies and further amended the notification on 4th February 2019.
As per the notification, an entity is considered as a Startup:
- Upto a period of seven years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India. In the case of Startups in the biotechnology sector, the period shall be upto ten years from the date of its incorporation and registration.
- Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25 crore.
- Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
A Startup which is recognised by DPIIT is eligible to apply for approval for the shares already issued or proposed to be issued if the following conditions are fulfilled
- aggregate amount of paid up share capital and share premium of the startup after the proposed issue of share, if any, does not exceed ten crore rupees.
- The investor or proposed investor shall have —
- returned income of Rs. 50 lakh or more for the financial year preceding the year of investment or proposed investment; and
- net worth exceeding Rs. 2 crore or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of investment or proposed investment.
Provided that in case the approval is requested for shares already issued by the Startup, no application shall be made if assessment order has been passed by assessing officer for the relevant financial year.
The application, accompanied by the documents specified therein, shall be transmitted by DPIIT to CBDT with the necessary documents. CBDT within a period of 45 days from the date of receipt of application from DPIIT may grant approval to the Startup or decline to grant such approval.
The Government has not conducted any survey to assess the adverse effects of angel tax on the Indian startup ecosystem.
22-Dec-2018: Angel Tax Controversy
The present government has always believed in 'minimum government, maximum governance’ and has given young population a level playing field to start their own business and created a eco system which allows them to grow. Over the past few weeks, several startups have reportedly been receiving notices from the I-T department asking them to clear taxes on the angel funding they raised, and in some cases, levying a penalty for not paying Angel Tax.
It all started by previous government which introduce section 56(2)(vii b) in 2012 to fight money laundering. This section was purely introduce so that the valuation of the company shall be at fair market value or any other method as adopted by AO.
What does the section 56(2)(vii b) say? If a company has issued shares to an angel investor at a price which is higher than its fair market value, the extra amount received by the company will be taxed at 30.9%. For example, if a company's shares are valued at Rs 100 each, and it sells them to an angel investor at Rs. 150 , the additional Rs. 50 would be treated as its income and not an investment. The company would then have to pay income tax on that extra Rs. 50 along with any additional penalty which IT department may impose.
Further startup has also received notices under section 142(1) of the I-T Act, which ask companies tax returns, creditworthiness, bank details and correspondence of angel investors who have put money in a startup. The assessing officer has to complete an assessment within 21 months of the end of the assessment year or 33 months of the end of the financial year.
But four years down the line in 2018, it's tougher for young people trying to start their own businesses as hundreds of startups have been served notices under a section of the Income Tax Act which has come to be known as the 'Angel Tax', under section 56(2)(vii b) and Section 142(1). The sudden demand for additional documents increases compliance costs for startups, who are usually struggling with finance and time.
Valuations of startups conducted by experts or chartered accountants were based on assumptions and future growth projections provided by the founders, which were achieved or not achieved in actuality. The tax department has started issuing notices on these valuations to the experts or chartered accountants now, and sought explanations on these assumptions and projections, which happen to be the controversy around angel tax Income-tax officers claim that the scrutiny on startups is mainly due to concerns that black money may have changed hands and are investigating if some of these investments were for converting black money (unaccounted money) to white (legal money).
In a notification dated May 24, 2018, the Central Board of Direct Taxes (CBDT) had exempted angel investors from the Angel Tax clause subject to fulfilment of certain terms and conditions, as specified by the Department of Industrial Policy and Promotion (DIPP).
Startups have been asked to register with the Department of Industrial Policy & Promotion (DIPP) to avoid getting such tax demands. However, only those companies which are less than seven years old, have never had an annual turnover of more than Rs. 25 crore and did not get more than 10 crores in total from angel investors qualify as startups. This means that startups who have done well with more than 25 Crore turnover are automatically disqualified. Media reports suggest even startups who are registered with DIPP have received notices.
The Central Board of Direct Taxes (CBDT) said in a recent statement that no coercive action related to tax demands would be made till the time an expert panel resolved the issue of taxing startups. CBDT recognizes that startups are going to bring a lot of innovation to the country and, therefore, have to be supported in every possible manner.
The startup ecosystem has created thousands of new job from e-commerce firms to food delivery apps. CBDT and government in desperate for more taxes are discouraging startups as most of the entrepreneurs who have received notice are spending lot of time and efforts in replying and making assessing officer understand valuations for startup. If entrepreneur has to spend so much time on compliance of taxes then how they are going to run the business? Many entrepreneurs are now considering registering their companies overseas in countries like Singapore. In many cases, the tax liability far exceeds the capital available with the company and many entrepreneurs are left with no option but to seriously consider a shutdown.