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Indian Parliament Passes Finance Bill, 2014 With Amendments

Published on Fri, Aug 01,2014 | 22:12, Updated at Fri, Aug 01 at 22:16Source : Moneycontrol.com 

The Finance Bill, 2014 (Bill) that was presented on 10 July 2014 has been amended by the Hon’ble Finance Minister (FM). The Bill, along with these amendments, has been passed by both the houses of the Indian Parliament. The Bill upon receiving Presidential assent will become law.

Some of the key changes to the Bill have been highlighted below:

Period of Holding of unlisted securities and units of Mutual Funds  

Currently, shares held in a company (whether listed or unlisted), any other security listed on a recognized stock exchange, units of a specified mutual fund, units of Unit Trust of India (UTI) or zero coupon bonds are treated as ‘long term capital assets’ provided they are held for more than 12 months.

 The Bill proposes to change the ‘period of holding’ of the following assets:

  • Unlisted shares (i.e. shares of private limited companies and unlisted public companies, including foreign companies) will be treated as long term capital assets only where they are held for more than 36 months as against 12 months;
  • Units of mutual funds (except equity oriented funds) will be treated as long term capital assets only where they are held for more than 36 months as against 12 months.

The position of period of holding of listed equity shares, units of equity oriented funds and UTI remains unchanged.

This amendment was originally proposed to be made effective from Financial Year (FY) 2014-15. However, with a view to make this amendment prospective in the true spirit, it has been provided that this change would now apply only to transactions that have been entered into after 10 July 2014. Accordingly, unlisted shares and units of mutual funds (except equity oriented funds) which are sold between 1 April 2014 and 10 July 2014 (including these days) would be treated as long term capital assets if they were held for more than 12 months.

Increase in the rate of long-term capital gains tax on transfer of mutual fund units

Long term capital gains arising on transfer of units of a mutual fund (i.e. held for more than 12 months) were taxable at the lower of the following rates:

  • 10% (without the benefit of indexation);
  •  20% (with the benefit of indexation)

There was a tax arbitrage opportunity which existed on account of the concessional long term capital gains tax rate of 10% (without the benefit of indexation) hitherto applicable as opposed to the higher rate of 20% on transfer of other unlisted debt and equity securities. The Bill proposed to remove the benefit of the lower rate of 10% on transfer of units of a mutual fund and resultantly such long term capital gains shall now be taxed at the rate of 20%.

This amendment was originally proposed to be made effective from FY 2014-15. However, with a view to make this amendment prospective in the true spirit, it has been provided that this change would now apply only to transactions that have been entered into after 10 July 2014. Accordingly, units of mutual funds which are sold between 1 April 2014 and 10 July 2014 (including these days) would be able to claim the concessional tax rate of 10% if they were held for more than 12 months.

Transfer Pricing (TP) regulations

In order to align the TP regulations with the best global practices, the FM in his budget speech had proposed to introduce ‘range’ concept for determination of arms’ length price (ALP).

Accordingly, the Bill, as approved by the Parliament, has inserted a proviso that where more than one price is determined by the most appropriate method, the ALP to an international transaction and a specified domestic transaction would be computed in a manner to be prescribed. Henceforth, the existing mechanisms of computing the ALP (i.e. arithmetic mean and range of 3%) would not be applicable.

The amendment will apply from FY 2014-15.

Tax Litigation

Expanding the forum of Authority for Advance Rulings (AAR)

It was proposed to extend the benefit of obtaining an advance ruling in tax matters to Indian resident taxpayers as well (beyond a certain threshold). Additional Benches of the AAR were also proposed to be set up. Accordingly, the Bill has been amended to provide for the same.  In addition to extending the benefit of obtaining an advance ruling to Indian resident tax payers, it is now provided that additional Benches of AAR will be set up at such places as may be specified by the Government. A new post of the Vice-Chairman has also been created and the Vice-Chairman would be a retired judge of a High Court.

Scope of Income Tax Settlement Commission for dispute resolution widened

Currently tax payers cannot approach Settlement Commission during:

  • Pendency of re-assessment proceeding; and
  • Proceedings for making fresh assessment pursuant to orders passed by the Income Tax Appellate Tribunal or revisionary orders passed by the Commissioners of Income Tax, setting aside or cancelling an assessment.

With effect from 1 October 2014, taxpayers can approach the Settlement Commission even in the above cases.

 
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