Taxation
Taxation of investment vehicles: Will the Budget set right the distortions - I

Financial markets are hopeful that the Budget will clarify different and confused tax provisions regarding investment vehicles such as mutual funds, trusts and private equities

 

All over the world, there are clear rules for being eligible for pass-through status, but unfortunately, the principles on representative taxation in India have never been designed to tax collective investment devices. These principles have been created over the years to tax trusts where tax payers may create pools of assets/ income which beneficially belong to a tax payer, but are not legally his. Therefore, there are situations where such a “representative assessee” is required to pay tax at maximum marginal rate (MMR) which defeats the purpose of these collective investment vehicles at the first place.
 
The least what Finance Minister Arun Jaitley should do, in Budget 2015, is to set right the highly distorted scene of taxation of investment vehicles. These vehicles include the private equity (PE) funds and venture capital funds (VCFs), collectively called alternative investment funds (AIFs), securitisation vehicles, real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). Lest you should think these are some esoteric instruments that don’t matter to the country’s economy in general, you are actually mistaken. Each of these investment vehicles is crucial for the country’s economy:
 
A large part of the foreign direct investment into the country comes through these vehicles. Over years, private equity funds have brought billions of funds into the country.  The India Private Equity Report, 2014 states that in 2014, Indian PE industry did deals worth $11.8 billion -- lower than the 2011 levels which were at $14.8 billion. It is important to note that capital is much more important than debt- capital and is like the foundation of a business on which the edifice of debt is built.
 
Securitisation activity is crucial for the business model of the non-banking finance companies in the country which supplement bankers’ access to the so-called priority sector lending market. NBFCs are instruments of financial inclusion, and their business model substantially hinges on securitisation. 
 
REITs have been proposed in the last Budget, but have not taken off at all. REITs are expected to be crucial in reviving or unlocking investments in commercial real estate. Commercial real estate has a substantial multiplier effect - it brings employment, affects core sector industries, and so on.
 
Infrastructure investment trusts, another non-starter, was expected to revive the so-very-crucial infrastructure sector in the country. 
 
Tax issues continue to baffle funds:
 
Currently, the tax law pertaining to taxation of investment conduits is either legislatively uncertain, or is lopsided. The different taxing principles under the Income Tax Act, 1961, for taxing different forms of investment vehicles in India are as follows:
 
Mutual funds, taxed under Section 115 R
 
Venture capital funds, taxed under Section 10 (23FB) read with Section 115U
 
Alternative investment funds – no tax provisions, hence, taxed under normal tax principles of representative taxation
 
Securitisation trusts – taxed under Section 115TA to 115TC (Chapter XII EA)
 
Real estate investment trusts – Section 10 (23FC), 10 (23FD) and 10 (38) read with Section 115 UA
 
All other collective investment vehicles – no tax provisions, hence, taxed under normal tax principles of representative taxation
 
The various fund structures existing in India are covered by different tax regime. Even though the fund structures are similar, the practice of applying different tax principles on them is not clear. This divergence creates much ambiguity on the whole. In some investment vehicles there is a partial pass-through and in some cases there is representative taxation made applicable. While the intent with which each of these vehicles is set up is similar, the tax implications vary across vehicles.
 
Most of these vehicles are set up in a trust form (a non-charitable business trust) and there have several issues with regard to such trusts being revocable, determinate, discretionary or otherwise. The tax treatment of these trusts has been dependent on the nature of these trusts.

The critical issue in taxation for consideration, for all these conduits is whether there will be a pass-through for tax purposes, or the fund is a tax-opaque entity. A pass-through taxation is the most convenient form of taxation, as the investors pay their own taxes, and the fund as a collective investment device is not required to pay any taxes at the fund level. All the more there is no duplication of taxes or leakage of taxes. On the other hand, if there is a claim to tax as an AOP, company, firm or as a representative assessee, the fund itself is not tax transparent. The tax officer taxes the fund; the distributions made by the fund may not be chargeable to tax. 
 
Far from following a clean pass-through principle, the Indian system is extremely muddy, allowing for contradictory interpretations. A recent ruling of Bangalore Income Tax Tribunal has shown this. We explain that in the next part, and also how to clean things up.
 
(Vinod Kothari is a chartered accountant, trainer and author. Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd)

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Now, you can port your mobile number across circles

TRAI has allowed pan-India mobile number portability from 3rd May. This will allow mobile subscribers to retain and use same number with local mobile operator across the country

 

Mobile subscribers in India will be able to port their numbers anywhere in the country while changing service providers from 3rd May. 
 
While amending a regulation, the Telecom Regulatory Authority of India (TRAI) said, it has "...issued sixth amendment to the Telecommunication Mobile Number Portability Regulation, 2009, which will facilitate full mobile number portability (MNP) in the country, from 3 May 2015.”
 
At present, mobile number portability or MNP allows subscribers to change their service provider while retaining the same number only within a telecom circle, which in most cases, is limited to a State.
 
A person, for instance, while shifting from Mumbai to Kolkata or Tamil Nadu will be able to retain the same mobile number while selecting a service provider in that new location.
 
On 3 November 2014, the Department of Telecom (DoT) had issued amendments to the MNP licence agreement stating that MNP is to be implemented across the country within six months from the date of amendment of the licences.
 
“Accordingly, the Authority has made the Sixth Amendment to the MNP Regulations effective from 3 May 2015,” TRAI said. 
 

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Spouses of H-1B visa holders can get US work permits from 26th May

Once the USCIS approves Form I-765 and H-4, dependent spouse would receive an Employment Authorisation Card, allowing he or she to work in the US

 

The US has announced that it will provide work permits to spouses of H-1B visa holders beginning 26th May, a move that is expected to benefit thousands of talented and professional Indian spouses who come to America but are unable to work.
 
Under existing laws, spouses of H-1B visa holders, many of whom are Indians, are not eligible to work.
 
The US Citizenship and Immigration Services (USCIS) will begin accepting applications for work visas from H-1B spouses on 26th May.
 
Once USCIS approves the ‘Form I-765’ and the H-4 dependent spouse receives an Employment Authorisation Card, he or she may begin working in the United States.
 
USCIS estimates the number of individuals eligible to apply for employment authorisation under this rule could be as high as 179,600 in the first year and 55,000 annually in subsequent years. The move has been welcomed by Indian-Americans.
 
South Asian Americans Leading Together (SAALT) in a statement applauded the US government for announcing that it will extend work authorisation, effective 26 May 2015, to some H-4 dependent spouses of H-1B visa holders who are seeking employment-based lawful permanent resident (LPR) status.
 
The USCIS, in a statement, said the Department of Homeland Security is extending the eligibility for employment authorisation (EAD) to certain H-4 dependent spouses of H-1B non-immigrants, who are seeking employment-based Permanent Residency.
 
Eligible individuals include certain H-4 dependent spouses of H-1B non-immigrants (principal H1B worker) who are the beneficiaries of an approved ‘Form I-140’, Immigrant Petition for Alien Worker, or satisfy at least one or more of the three conditions.
 
The conditions include that the principal H1B worker has an approved ‘I-140’ or is currently on an extended H1B status beyond the 6-year limitation based upon an I-140 petition application pending for at least 365 days (one calendar year)
 
“This decision is going to directly affect many of our life members as they would now be able to join the professional workforce and chase the ‘American Dream’,” the Telugu Association of North America said in a statement.
 
Recent State Department figures show that approximately 76% of those who received H-4 status in 2013 were from South Asian countries.
 
“Many H-4 dependent spouses have found themselves to be involuntary homemakers upon their arrival to the US, which not only impacts their family income and sustainability, but also diminishes their ability to expand upon professional skills,” SAALT said.
 
SAALT has called on USCIS to allow all employment authorisation for all H-4 visa holders, as H-1B workers and their families are most successful when H-4 visa holders have the ability to contribute to their household income and our economy and pursue their goals.
 
“Today’s announcement is a welcome first—step that will dramatically help some families in the US but the success of H-1B workers, their families and our nation’s economic growth is limited when only some H-4 visa holders are eligible for work authorisation,” it said.
 

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