Key Amendments in International Taxation and Capital Gains for 2024

Finance (No 2.) Bill, 2024 July 2024 W S & ASSOCIATES LLP

Discussion on Amendments in International Taxation

Income -tax Rate Tax rate of foreign company is proposed to be reduced to 35% from 40%. This is a significant change for foreign companies having a branch office, project office or Permanent Establishment (PE) (in any other form) in India. Health and Education Cess continues at 4% on both domestic as well as foreign company. This amendment will be effective from assessment year 2024-25. Impact of Capital Gain Amendments The Finance Bill (2) July 2024, introduces two holding periods: 12 months for listed securities and 24 months for other assets. Listed securities shall be considered as long-term capital assets if they are held for more than 12 months; other capital assets shall be considered as long-term capital assets if they are held for more than 24 months Exemption from income tax on the LTCG of upto INR 1 Lakh on equity shares, unit of equity-oriented funds and units of a business trust is now proposed to be increased to INR 1.25 lakh The short-term capital gains tax rate on STT-paid equity shares is increased to 20%, and the long- term capital gains tax rate for all assets is set at 12.5%, effective April 1, 2025.

Impact of Capital Gain Amendments It is proposed that from 23 July 2024 deduction of income-tax at source on capital gains shall be as under: S No Income Current rate Proposed rate 1 long-term capital gains to non-residents referred to in section 115E of the Act long-term capital gains on sale of equity share or a unit of an equity- oriented fund or a unit of a business trust in section 112A of the Act exceeding Rs 125,000 10% 12.5% 2 10% 12.5% 3 long-term capital gains not being long term capital gains referred to in clauses (33) and (36) of section 10 of the Act Taxability of offshore fund on income received from units purchased in foreign currency or long-term capital gains arising from their transfer in Section 115AB of the Act Tax on income from bonds or Global Depository Receipts purchased in foreign currency or Long-term capital gains arising from their transfer covered under section 115AC and 115ACA of the Act short-term capital on sale of sale of equity share or a unit of an equity-oriented fund or a unit of a business trust referred to in section 111A of the Act 20% 12.5% 4 10% 12.5% 5 10% 12.5% 6 15% 20%

Equalisation Levy (EL) The Finance Act 2020 expanded the scope of EL with effect from 1 April 2020 to cover consideration received/receivable by NR e-commerce operators for e commerce supply or services provided to specified persons (the E-com EL), subject to certain conditions. The E-com EL is levied at the rate of 2% on the amount of consideration received/receivable by NR e- commerce operators Unlike the Ad EL, the obligation for payment of the ESS EL lies with the NR e-commerce operators, who are required to make EL payments on a quarterly basis and file an annual return Income leviable to E-com EL was exempt from income-tax under the normal provisions of the Act. Amendment It has been proposed that the 2% E-com EL will no longer apply to e-commerce supply or services commencing from 1 August 2024. Corresponding income exemption for the Indian corporate tax purposes to the non- resident taxpayers will be available only up to 31 July 2024

Introduction of penalty provisions for non-filing of certain financial information by NR s liaison offices in India Background The Income-tax Act, 1961 currently requires filing of certain financial information to enhance the transparency by notifying the Income Tax Department about certain specified financial transactions by specified persons. This promotes voluntary compliances and enables seamless prefilling of return Form 49C is an annual statement required to be filed by NRs having liaison offices in India. The form must be submitted electronically within 60 days from the end of the financial year Currently there is no penalty for non-compliance on account of filling form 49C Amendment It is proposed to introduce new penalty provision for liaison offices for non-compliance in filing annual statement. The penalty will amount from daily fines of INR 1,000 up to three months and a fixed penalty of INR1 lakh thereafter. This amendment will be effective from 1 April 2024

Buy Back of Shares taxable as dividend The provisions in case of buy back of shares by domestic company are proposed to be amended from 01 October 2024 as under: The sum paid by a domestic company for purchase of its own shares shall be treated as dividend in the hands of shareholders, who received payment from such buy-back of shares The payment shall be charged to income-tax at applicable rates. No deduction for expenses shall be available against such dividend income while determining the income from other sources. The cost of acquisition of the shares which have been bought back would be treated as capital loss in the hands of the shareholder as these assets have been extinguished, which shall be available for set off against the capital gain from sale of shares or otherwise subsequently.

Buy Back of Shares taxable as dividend Year Particular Amount Remarks 2020 Purchase (50 shares sold @70/- per share) = Rs. 4000/- (20 shares @60/- per share) = Rs 1,200/- 2024 Buy Back Taxable as Dividend Income in hand of shareholder Treated as per the proposed amendment explained above Capital Loss on Such buy back (20 shares @40/- per share) = Rs. 800/- 2025 Sale Consideration Less: Cost of Acquisition Capital Gain Less: Set off c/f capital Los Chargeable Capital Gain after set off (50 shares sold @70/- per share) = 3500/- (50 shares @40/- per share) = Rs. 2,000/- Rs 1500/- (Rs. 800) Rs. 700/-

Objections before Dispute Resolution Panel (DRP) It is proposed to restrict DRP to not applicable for taxpayers who have undisclosed income pursuant to a search Background Section 144C provides for filing of objections by taxpayer against variations proposed to the income by the AO before the DRP Taxpayers who have variations to income due to TP adjustments and non-resident taxpayers are eligible to file objections before the DRP. There was no exclusion for a taxpayer to file objections before DRP if the taxpayer has undisclosed income pursuant to search proceedings Amendment It is proposed to amend section 144C of the Act to remove the benefit of DRP appeal proceedings where the assessment order is in relation to the assessment of undisclosed income as a result of search (under section 158BA of the Act) or undisclosed income is assessed in the hands of other person on the information arising out of search (under section 158BD of the Act). It is also proposed that the DRP provisions shall not apply to the proceedings concluded under special procedure of assessment for search cases. Taxpayers in this category are only permitted to file an appeal with the Commissioner of Income Tax (Appeals). This amendment will be effective from 1 September 2024

New Provision to promote Cruise Shipping Business Currently, section Section 44B of the Income-tax Act 1961 deal with tax provisions for the shipping business in case of nonresidents. It provides that taxable income would be calculated as 7.5% of the aggregate receipts by nonresident. Ship that carries the passengers, livestock, mail, or other goods which is shipped at a Indian port by a non- resident. Amendment From assessment year 2025-26, a new section 44BBC of the Act is proposed to be inserted which will provide presumptive taxation regime for the non-resident engaged in the business of operation of domestic cruise ships. Under the presumptive regime, 20% of the total amount received/ receivable by, or paid/ payable to, the non-resident cruise-ship operator, on account of the carriage of passengers will be considered as profits and gains of such cruise-ship operator from this business. Further, a new clause (15B) in section 10 is proposed to exempt the lease rentals payable by a foreign company to another foreign company where both foreign companies are subsidiary to the same holding company.

Others With a view to reduce litigation and provide certainty in international taxation, Finance Minister in the speech has intended to expand coverage of Safe Harbour Rules and streamline TP assessment procedures From Assessment year 2024-25, it is proposed to amend section 198 of the Act, to provide that all sums deducted in accordance with the provisions of Chapter XVII-B and income tax paid outside India by way of deduction, in respect of which an assessee is allowed a credit against the tax payable under the Act, are to be included for the purpose of computing the income of the assessee. Capital gains from transfer of unlisted bonds and debentures to be considered as gains from transfer of a short-term capital asset. Presently, transfer/redemption/maturity of Market Linked Debentures (MLDs) and units of a Specified Mutual fund is only treated as Short-term capital asset. The 2024 Budget proposes removing the 10 lakh penalty under sections 42 and 43 of the Black Money Act for not reporting foreign assets (other than real estate) if their total value is less than 20 lakh. This change is effective from October 1, 2024. The exemption also applies to incorrect or non-reporting of these foreign assets.

Others Sub-section (iii) of section 47 of the Act currently exempts transfer of capital asset under gift, will or irrevocable trust. It clearly provides that specified ESOPs are not covered and thus are taxable. However, the litigation on the transfer of capital asset under a gift or will or an irrevocable trust continues. Therefore, it is proposed to replace the proviso as under: Provide that nothing contained in section 45 shall apply to any transfer of a capital asset by an individual or a Hindu undivided family under a gift or will or an irrevocable trust. This amendment will take effect from 1 April 2025 and will, accordingly, apply to assessment year 2025-2026 and subsequent years.

Thank You Shipra Walia Mahajan W S & ASSOCIATES LLP