The Finance Bill tabled by the Finance Minister contains certain changes impacting Banks and capital markets. This article discusses key changes:
Generally Indian branch of the foreign bank borrow funds from its head office on which it pays interest. Whether interest paid by a branch in India to its head office abroad should be included while calculating the profits of the branch for tax purposes has long been a subject matter of controversy. Likewise, it is also debatable as to whether interest paid by an Indian branch to its head office is taxable in India or not. The Special Bench of the Income-tax Appellate Tribunal in case of Sumotomo Mitsui Banking Corporation had held that interest payable by branch to head office is payment to self and the same therefore does not give rise to income in India.
It is proposed that any interest payable by a branch of a foreign bank in India to its head office or any other branch of the head office outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in India. For the said purpose, branch of the foreign bank in India shall be deemed to be a person separate and independent of such head office. Accordingly, branch in India shall be obligated to deduct tax at source on any interest so paid.
This amendment would not impact position under the tax treaties. Hence, it may be important to note that foreign banks may still avail the benefits under the relevant tax treaty and hence the litigation on this account may continue.
It is proposed to amend Minimum Alternate Tax (“MAT”) provisions so as to provide that income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable) arising to Foreign Institutional Investor (“FII”), shall be excluded from the chargeability of MAT and the profit corresponding to such income shall be reduced from the book profit. However, calculation of book profit and compliances would continue to be a matter of concern for FIIs.
It is proposed that implementation of GAAR be deferred by two years and GAAR provisions be made applicable from Assessment Year 2018-19. Further, investments made upto March 31, 2017 are proposed to be protected from the applicability of GAAR.
Section 194LD provides for lower withholding tax at the rate of 5 per cent in case of interest payable to FIIs and QFIs on their investments in Government securities and rupee denominated corporate bonds provided that the rate of interest does not exceed the rate notified by the Central Government in this regards. This benefit of existing provision of section 194LD has been extended upto 30th June 2017.
Certain amendments have also been proposed under the withholding tax provisions such as the banks that have adopted core banking solutions are now required to withhold tax on interest at the entity level as against the branch level, tax to be deducted on interest on recurring deposits above Rs. 10,000 and tax to be withheld by cooperative banks from payment of interest on time deposits to its member.