TDS on payments by Category-I & II Alternate Investment Funds to its investors
Union Budget 2016: The Finance Act, 2015 had inserted a special taxation regime in respect of Category-I and II Alternative Investment Funds (investment fund) registered with SEBI. The special taxation regime is intended to ensure tax pass through status in respect of these investment funds which are collective investment vehicles. The special regime is contained in sections 10(23FBA), 10 (23FBB), 115UB and 194LBB of the Act. Under this regime, the income of the investment fund (not being in the nature of business income) is exempt in the hands of investment fund but income received by the investor from the investment fund (other than income which is taxed at the level of investment fund) is taxable in the hands of investor. The taxation in the hands of investors is in the same manner and in the same proportion as it would have been, had the investor received such income directly and not through the investment fund. The existing provisions of section 194LBB provides that in respect of any income credited or paid by the investment fund to its investor, a tax deduction at source (TDS) shall be made by the investment fund @ 10% of the income. Under section 197 of the Act, facility for certificate for deduction of tax at lower rate or no deduction is available in respect of sections enumerated therein, if the Assessing Officer is satisfied that total income of the recipient justifies issue of such certificate, section 194LBB is currently not included in this provision.
It has been represented that the existing TDS regime has created certain difficulties. The non-resident investor is not able to claim benefit of lower or NIL rate of taxation which is available to him under the relevant Double Taxation Avoidance Agreement (DTAA), and deduction of tax @10% is to be undertaken mandatorily even if under DTAA, the income is not taxable in India. There is no facility for any investor to approach the Assessing Officer for seeking certificate for TDS at a lower or NIL rate in respect of deductions made under section 194LBB.
In order to rationalise the TDS regime in respect of payments made by the investment funds to its investors, it is proposed to amend section 1 94LBB to provide that the person responsible for making the payment to the investor shall deduct income-tax under section 194LBB at the rate of ten per cent where the payee is a resident and at the rates in force where the payee is a non-resident (not being a company) or a foreign company. Further, it is proposed to amend section 197 to include section 1 94LBB in the list of sections for which a certificate for deduction of tax at lower rate or no deduction of tax can be obtained. Consequential changes are also proposed to be made to the definition of “rates in force” so as to include section 194LBB in it.
These amendments will take effect from 1stJune, 2016.
Clause 3 of Finance Bill 2016
Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
Sub-clause (a) of the said clause seeks to amend clause (14) of the aforesaid section which defines “capital asset” and item (vi) of the said clause (14) excludes from the definition of capital asset, inter alia, Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. It is proposed to amend item (vi) of the said clause (14) so as to also exclude the deposit certificates issued under the Gold Monetisation Scheme, 2015 from the definition of capital asset.
This amendment will take effect retrospectively from 1st April, 2016 and will, accordingly, apply in relation to assessment year 2016-2017 and subsequent years.
Sub-clause (b) of the said clause proposes to insert a new clause (23C) to define the term “hearing” so as to include communication of data and documents through electronic mode.
This amendment will take effect from 1st June, 2016.
Sub-clause (c) of the said clause proposes to amend clause (24) relating to the definition of income.
Sub-clause (xviii) of clause (24) of the aforesaid section, inter alia, provides that any assistance in the form of a subsidy or grant or cash incentives, etc., by the Central or a State Government to any assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset, in accordance with Explanation 10 to clause (1) of section 43, shall be included in the definition of income.
It is proposed to amend the said sub-clause (xviii) so as to provide that subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be, shall also not form part of income.
This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
Sub-clause (d) of the said clause seeks to amend clause (37A) of the said section so as to provide that for the purposes of deduction of tax under section 194LBB, or section 194LBC the “rates in force” in relation to an assessment year or financial year shall mean the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90 or notified by the Central Government under section 90A, whichever is applicable.
This amendment will take effect from 1st June, 2016.
Clause 81 of Finance Bill 2016
Clause 81 of the Bill seeks to amend section 194LBB of the Income-tax Act relating to income in respect of units of investment fund.
The aforesaid section provides that where any income other than that proportion of income which is of the same nature as income referred to in clause (23FBB) of section 10, is payable to a unit holder in respect of units of an investment fund specified in clause (a) of the Explanation 1 to section 115UB, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.
It is proposed to amend the said section so as to provide that the income-tax on such payment shall be deducted––
(i) at the rate of ten per cent. in a case where the payee is a resident;
(ii) at the rates in force in a case where the payee is a nonresident (not being a company) or a foreign company.
This amendment will take effect from 1st June, 2016.
Clause 83 of Finance Bill 2016
Clause 83 of the Bill seeks to amend section 197 of the Income-tax Act relating to certificate for deduction at lower rate.
It is proposed to amend sub-section (1) of the said section to provide that where, in the case of any income of any person or sum payable to any person, the income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment under the provisions of section 194LBB and section 1 94LBC the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the Assessing Officer shall on an application made by the assessee in this behalf, give to him such certificate as may be appropriate.
This amendment will take effect from 1st June, 2016.
