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Tax Provisions For Business Trust in India

Business Trust concept is introduced under Finance Act, 2014. The tax structure of the Business Trust is basically similar to the tax structure of venture capital (undertakings, Fund & Company). Provisions relating to business trust are as follows:

VARIOUS SOURCES OF INCOME OF BUSINESS TRUST

  • dividend on Shares of SPV (Special Purpose Vehicle)
  • Rental Income from Properties
  • Interest on Loans to SPV
  • Capital Gain on Transfer of Assets of Business Trust

BRIEF INTRODUCTION

Before we understand Tax implications of above Incomes of a Business Trust, Let’s have a brief outlook of overall structure of Business Trust.

Business Trust which is also referred as Real Estate Investment Trust (REIT) is basically a Trust which allows investors to invest in the trust by purchasing units of the trust. Hence investors of trust become unit holders. Then the amount received by trust by selling units is further invested by the trust in Real state either directly or through a SPV(Special Purpose Vehicle). In such a way unit holders of trust enjoy benefit of inflation in property.

TREATMENT OF VARIOUS INCOMES EARNED BY BUSINESS TRUST UNDER INCOME TAX ACT

  1. INTEREST ON LOAN TO SPV

Section 10(23FC)

This income is exempt u/s 10(23FC) in the hands of  Business Trust & when passed on to unit holders is taxable in the hands of unit holders as interest income. Trust is required to do TDS @ 10% while distributing interest income to resident unit holders & @ 5% while distributing to non-resident unit holders.

 

  1. RENTAL INCOME FROM PROPERTIES

Section 10(23FCA)

This income is exempt u/s 10(23FCA) in the hands of  Business Trust & when passed on to unit holders is taxable in the hands of unit holders as Rental income.

 

  1. DIVIDEND RECEIVED ON SHARES OF SPV

SEC10(34)

This income is exempt in the hands of business trust as well as its unit holders, subject to Dividend Distribution Tax (DDT) is paid by SPV on such income.

 

  1. CPITAL GAIN ON TRANSFER OF ASSETS OF BUSINESS TRUST
  • Long Term capital gains will be covered by provisions of sec 112
  • Short term Capital Gain on transfer of assets is taxable at the maximum marginal rate i.e. 33.99% subject to provisions of Section 111A.
  • As per section 115UA (2), Other Incomes of Business Trust shall be taxable at the maximum marginal rate i.e. 33.99%.

 

Analysis

  • Interest income as referred to in section 10(23FC) and rental income as referred to in section 10(23FCA) is exempt in the hands of Business Trust.
  • Long term capital gain on transfer of assets of Business Trust is taxable in the hands of Business Trust at rates given in Section 112.
  • Short term Capital Gain on transfer of assets is taxable at the maximum marginal rate i.e. 33.99% subject to provisions of Section 111A.
  • Dividend received by Business Trust will be exempt in the hands of business trust u/s 10(34).
  • As per section 115UA (2), Other Incomes of Business Trust shall be taxable at the maximum marginal rate i.e. 33.99%.

 

OTHER RELATED PROVISIONS

  • As per section 115UA (1), any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.
  • Short term capital gain in the hands of unit holder on transfer of a short term capital asset, being units of business trust on sale of which STT is paid is taxable at the rate of 15% as per section 111A.
  • Long term capital gain in the hands of unit holder on transfer of long term capital asset, being units of business trust on sale of which STT is paid is exempt as per section 10(38). For long term, period of holding to be taken should be more than 36 months.

CAPITAL GAIN IN HANDS OF UNIT HOLDERS WHO ACQUIRED UNITS IN CONSIDERATION OF TRANSFER OF SHARES OF SPV

  • As per section 47(xvii), any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor shall not be regarded as transfer. Hence, no capital gain shall arise in the hands of shareholders of SPV at the time of exchange of shares of SPV with units of Business Trust.
  • As per proviso to section 111A, provisions of section 111A shall not apply in respect of any income arising from transfer of units of a business trust which were acquired by the assessee in consideration of a transfer as referred to in clause (xvii) of section 47.Thus, such short term capital gain shall not be taxable at the rate of 15% but shall be taxable normal tax rates in the hands of assessee.
  • As per proviso to section 10(38), provisions of section 10(38) shall not apply in respect of any income arising from transfer of units of a business trust which were acquired in consideration of a transfer referred to in clause (xvii) of section 47.Thus, such long term capital gain shall not be exempt but shall be taxable at the rate of 20% as per section 112.

Amendment in Service Tax rate and its implication w.e.f. 01st June, 2015

1. What is the new rate of service tax?

New rate of service tax is a consolidated rate which is 14%.

2. What is effective date of applicability?

New rate is effective from 01.06.2015

3. How to calculate tax?

14% is applied on value of taxable services which are provided on or after 01/06/2015. However services which have been provided before 01/06/2015 are taxable @ 12.36% (existing rate) only.

4. What is the overall impact of new service tax rate on existing situation?

Overall impact is categorized as under:

A. CESS

Education cess (2%) & higher & education cess (1%)  are not applicable from 01/06/2015.

B. DATE OF COMPLETION OF SERVICE

If invoice is raised in the month of May for services to be provided in June 2015, the rate of service tax would be applicable is the rate which is in effect on the date of payment. In simple terms, if payment is made in June 2015, the rate will be 14% & if payment is made before June 2015, rate will be 12.36%)

C. POINT OF TAXATION RULES, 2011

Rules are still relevant to determine point of taxation. Rule 4 provides determination of point of taxation in case of change in effective rate of tax. It is to be applied as it is.

D. SECTION 67A V/S POINT OF TAXATION (POT) RULES, 2011

There is a conflict that needs to be resolved by the CBEC.

CONFLICT IS

As per POT, rate of service tax has been increased to 14%, but if payment is received before change in service tax rate & invoice is issued after change in service tax rate & service is also provided after change in tax rate then as per rule 4 new rate of tax will be applicable

 

As per sec 67A, if advance money is received, the rate of tax applicable will be the rate applicable on the date on which advance money is received. Since it is received before the change in rate of tax. Hence 12.36% will be applicable.

5. Is there anything new propsed with applicability of new rate?

YES! SWACHH BHARAT CESS (SB CESS) @ 2% is applicable on VALUE of TAXABLE SERVICES & any services provided by Govt. or any local authority to Business entity to be notified later on.

Govt. will specify categories of taxable services categorise on which SB cess would be leviable.

Purpose of SB cess is to maintain project of clean india commenced by our PRIME MINISTER MR. NARENDRA MODI.

Below is the list of few major services (not exhaustive list) which will be covered by new service tax rate.

  1. Using debit cards & credit cards
  2. Cable & dth services
  3. Beauty parlaour
  4. Courier services
  5. Laundry services
  6. Stock broking & asset management services
  7. Insurance services
  8. Restaurant services
  9. Telephone & communication services
  10. Using a cab service
  11. Construction services

But not applicable on PACKAGED FRUITS & VEGETABLES

6. Can you tabulate the effect of new & old service tax rate?

     FOR SERVICES PROVIDED BEFORE JUNE

 

 

Case

Services provided before june Invoice raised before june Payment made before June

Rate

1

Yes Yes yes

12.36%

2

Yes Yes No

12.36%

3

Yes No yes 12.36%
4 Yes No No

EFFECTIVE RATE ON Date of invoice or date of payment whichever is earlier

 

    FOR SERVICES PROVIDED AFTER JUNE

  

Case

Services provided after june Invoice raised before june Payment made before june Rate

1

Yes yes yes 12.36%

2

Yes no no

14%

3 Yes yes no

14%

4 Yes no yes

14%