Introduction

On 30^th April, 2015, the Finance Bill, 2015 was approved in the Lok Sabha with a number of changes in the Finance Bill as proposed on 28^th February, 2015. New amendments are proposed, some proposed amendments are removed. This article will give you an overview of the major changes in the Finance Bill, 2015 as approved by the Lok Sabha.

Residential Status of a Company – Change in applicability of POEM

1. A new concept of “place of effective management”, popularly known as POEM, was introduced in the Finance Bill, 2015 to decide the tax residency of a company.
2. As per the earlier proposal, a company would have been deemed resident in India if its POEM ‘at any time of the year’ in the previous year was in India.
3. This redefinition of tax residency of a company was done with a view to dissuade people from creation of shell companies outside India that are controlled from India to avoid paying tax in India. However, this particular amendment let to a fear amongst the companies that a single board meeting in India could practically get the company a residency tag and consequent tax liability in India.
4. Hence, government has now deleted the phrase ‘at any time of the year’ from the definition of POEM.

Exemption of MAT to not just Foreign Institutional Investors, but to all foreign companies

1. The Finance Bill, 2015 originally proposed that long-term capital gains and short-term capital gains arising to FIIs, on which STT is paid, would be excluded from the chargeability of Minimum Alternate Tax (“MAT”).
2. Such relief was provided only to FIIs without extending it to foreign companies. The foreign company would be liable to pay MAT on capital gains arising from transfer of securities and income arising from royalty, interest or FTS even if such income would not be chargeable to tax or taxable at lower rate in India by virtue of applicable double taxation avoidance agreements (“DTAA”)or any provision of the Income-Tax Act.
3. Now, the Finance Bill, 2015, as passed in the Lok Sabha, extends the relief to the foreign companies as well. Capital gains from transfer of securities, interest, royalty and FTS accruing or arising to foreign company will be excluded from chargeability of MAT if tax payable on such income is less than 18.5%.

Deduction under Section 80D in case of individual

1. The Finance Bill, 2015 as originally proposed increased the deduction under section 80D from Rs.25,000 to Rs.30,000 in case an individual, or his family member or any of his parent is a senior citizen or very senior citizen.
2. Now, in the Finance Bill, 2015 as passed by the Lok Sabha increases the deduction under Section 80D to Rs.25,000 from Rs.15,000 in case individual or his family member or any of his parent is not a senior citizen or very senior citizen.

No MAT to REITs for notional gains

1. Earlier, MAT was applicable on exchange of equity shares of a Special Purpose Vehicle (“SPV”) for Real Estate Investment Trust (“REITs”) or Infrastructure Investment Trust (“InVIT”) units.
2. As per the Finance Bill, 2015 passed in the Lok Sabha, MAT will now not be applicable on notional book gains, arising from exchange of shares in Special Purpose Vehicle with unit of trusts in Infrastructure and Real Estate (REITs/InvITs).
3. No Mat will be applicable on the following amounts:
   • notional gain on transfer of a capital asset, being shares of a SPV to a business trust in exchange of units allotted by that trust;
   • notional gain resulting from any change in carrying amount of said units; and
   • gain on transfer of units referred to in Section 47(xvii).
4. The move will would provide relief to realty players who are planning to launch Real Estate Investment Trusts (REITs) for monetizing their commercial assets.

Change in definition of Income to include subsidy

1. Before the changes introduced in the Finance Bill, 2015 as passed by the Lok Sabha, there was a controversy regarding whether subsidy received by a company would be treated as capital receipt or revenue receipt.
2. There were various judgments on this controversy. Most of the judgments say that the object of the subsidy would determine the subsidy. For eg.:
   • subsidy given by way of refund of sales tax to enable the assessee to run the business more profitably is to be treated as revenue receipt,
   • where subsidy is given to repay the term loans taken by assessee for setting-up new unit/expansion of existing business, it would be treated as capital receipt, etc.
3. Now, this issue has been cleared. There has been a change in the definition of ‘Income’ to include in its definition assistance in form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or in kind.
4. Hence, now subsidies will be treated as Revenue, irrespective of object for which the subsidy is given.

Mandatory filing of return in case assessee holds foreign assets

1. A proviso has been replaced in the Finance Bill, 2015 as passed by the Lok Sabha to make mandatory, filing of return by a person being a resident other than not ordinarily resident in India, who at any time during the previous year,
   • holds, as a beneficial owner or otherwise, any asset (including financial interest in any entity) located outside India or has signing authority in any account located outside India; or
   • is a beneficiary of any asset (including any financial interest in any entity) located outside India.
2. However, where the assessee is an individual who is a beneficiary of any asset (including any financial interest in any entity) located outside India and if income arising from such an asset is includible in the income of the person who is beneficial owner of such an asset, the filing of return shall not be mandatory.
3. The meaning of the ‘beneficial owner’ and ‘beneficiary’ shall be:
   • ‘Beneficial owner’ in respect of an asset means an individual who has provided, directly or indirectly, consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person;
   • ‘Beneficiary’ in respect of an asset means an individual who derives benefit from the asset during the previous year and the consideration for such asset has been provided by any person other than such beneficiary.

Interest in respect of capital borrowing not allowed as expenditure before till the asset is put to use

1. Currently, Section 36(1)(iii) allows deduction for interest paid in respect of capital borrowed for the purposes of the business or profession while computing the income from business or profession. However, any interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession shall not be allowed as deduction for any period till the date on which such asset was first put to use.
2. The Finance Bill, 2015 as passed by Lok Sabha has removed this differential treatment for allowability of interest in case of capital borrowed for purchase of asset for existing business and for extension of existing business.
3. It has deleted the words “for extension of existing business or profession” from proviso to Section 36(1)(iii).
4. Thus, in any case, the interest on borrowings used for acquisition of asset shall not be allowed as deduction till the asset is put to use.

Bad-Debts allowed as expenditure without writing off the debt in the books of account

1. Currently, section 36(1)(vii) allows the assessee to claim bad debts as expenditure while calculating the profit or loss of the assessee. However such bad debts can be claimed as expenditure only when they are written off as irrevocable in the books of accounts of the assessee for the previous year.
2. This led to a loss for the assessee as no deduction was allowed to an assessee if any income, not recorded in books of accounts but offered to tax as per Income Computation and Disclosure Standards, turned into bad-debts. Hence the assessee could not write-off a debt which was not recorded in the books of accounts but was actually offered to tax, as it could not fulfill the condition of writing off the debt from the books.
3. In order to remove this anomaly, Finance Bill, 2015 as passed by the Lok Sabha has added a proviso to Section 36(1)(vii) where bad-debts could be claimed without writing them off from the books of account if the amount of debt or part thereof has been taken into account while computing the income of the assessee of the previous year or of an earlier previous year on the basis of income computation and disclosure standard notified under section 145(2) without recording the same in the accounts.

Special allowances for setting up an undertaking or enterprise in the backward area of Bihar and West Bengal

1. In the Finance Bill, 2015, introduced in 28^th February, 2015, special allowances of depreciation and investment allowance were given on acquisition of new plant and machinery for an undertaking/ enterprise set up in notified backward areas of Andhra Pradesh and Telangana.
2. Now these benefits are also extended to the notified backward areas of Bihar and West Bengal.
3. The benefits include:
   • Higher additional depreciation at the rate of 35% (instead of 20%) in respect of the actual cost of new machinery or plant acquired and installed, and
   • Additional investment allowance of an amount equal to 15% of the cost of new asset acquired and installed by an assessee if,
4. The above benefits are available if
   • The assessee sets-up an undertaking or enterprise, on or after 1^st April, 2015, in any notified backward areas in the State of Bihar and the State of West Bengal; and
   • new assets are acquired and installed during the period between 01-04-2015 and 31-03-2020.