PwC DTC Impat Real Estate

8/6/2019 PwC DTC Impat Real Estate

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Background

The Finance Minister of India tabled The Direct Taxes Code, 2010 ("DTC") in Parliament for debate and

discussion on 30 August 2010. The DTC will be effective from 1 April, 2012 and not from 1 April, 2011, ashad been intended earlier.

This alert outlines key proposals in the DTC relating to the Real Estate sector. For other key generalproposals, please refer to our Snapshot on DTC 2010, which has been sent separately.

Key General Proposals

Tax Rates for companies

Particulars Income tax Act 1961 (Act) DTC

Domestic Co 33.22% 30%

Foreign Co 42.23% 30%

Branch Profit tax - 15%

MAT* 19.93% on Book Profits 20% on Book Profit

DDT 16.61% 15%

Wealth Tax 1% on Net Wealth exceeding Rs. 3mn 1% on Net Wealth exceeding Rs. 10mn

* MAT credit reinstated and allowed to be carried forward up to 15 years

The Direct Taxes Code, 2010Specific proposals for Real Estate sector


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PricewaterhouseCoopers

General Anti-Avoidance Rule (GAAR)

GAAR empowers the Commissioner ofIncome-tax to amend, disregard or re-characterise or declare an arrangement asimpermissible:

- If the arrangement entered into was withthe objective of obtaining tax benefit and,inter alia, lacks commercial substance ormisuses the provisions of the DTC.

GAAR provisions would override provisions oftax treaties.

- Thus, GAAR provisions are highlysubjective and provide sweeping powersto the tax department.

Controlled Foreign Company (CFC)

CFC provisions introduced with a view to taxthe passive income earned by foreigncompany directly or indirectly controlled by aresident in India.

CFC means a foreign company, whichsatisfies the following conditions:

- The foreign company is controlled byresident tax payers - control defined to

mean one or more persons resident inIndia, individually or collectively, directly orindirectly, holding shares carrying not lessthan 50% of the voting power or capital ofthe company, and

- Such foreign company is a resident of acountry with lower level of taxation, i.e. theamount of tax payable in foreign country isless than 50% of the corresponding taxpayable under the DTC.

CFC provisions not triggered in case the

foreign company is listed on a stock exchangeor is engaged in "active trade or business"(subject to certain conditions) or specifiedincome does not exceed Rs 2.5 mn.

Thus, it is pertinent to keep in perspective theCFC provisions while making any outboundinvestments, considering that the underlyingforeign tax credit (corporate tax paid by theoverseas subsidiary in that country)mechanism is currently not provided in DTC.

Indirect transfer of capital asset situated inIndia

Income accrued from indirect transfer ofcapital asset situated in India would beconstrued as income deemed to accrue in

India in addition to direct transfer of capitalasset.

However, indirect transfer of asset not taxablein India, if fair market value of India assets ofthe transferor company represent less than50% of the total fair market value of the allassets owned by the company at any time in12 months preceding the transfer.

Formula for calculation of income in case of anindirect transfer has been specified.

Offshore borrowings

Interest paid by offshore investors makinginvestments in India to overseas lenders liableto tax in India if such interest is claimed as anallowable deduction by the offshore investorfrom calculating its tax base in India.

Tax treaty eligibility

In line with the provisions of IT Act, the tax

payer under the provisions of DTC will be ableto opt for the beneficial provisions between theDTC and the relevant DTAA.

However DTAA will not have preferential statusin the following circumstances:

- where GAAR provisions are invoked;

- where Controlled Foreign Corporationprovisions are invoked; or

- where Branch profits tax is levied.


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Key Proposals relating to Real Estate Sector

Tax / Incentive Regime for Specified business:

Under DTC, it is proposed to shift from Profitlinked deductions to Investment linkeddeduction.

Investment linked deduction envisages

reduction of the following expenditure fromGross Income:

a) Operating expenditure including financecharges and expenditure on licensecharges and rental fees;

b) Capital expenditure excluding expenditureon acquisition of land or long term lease,goodwill or financial instrument;

c) Above expenditure in points (a) and (b)incurred before the commencement ofbusiness.

SEZ Developers

Deduction for Developers of Special EconomicZones (SEZ) notified on or before 31 March,2012:

Deduction for developers of SEZ notified on orbefore 31 March, 2012 and engaged in thebusiness of developing, operating andmaintaining SEZ, shall be grand-fathered andsuch developers will continue to be eligible forprofit linked deductions for the balance period.

Profits for computing deduction after 31March, 2012 will be computed as per thecomputation mechanism provided in DTC.However, expenditures as specified in points(b) and (c) above shall not be allowed.

Deduction for SEZ Developers notified after 31March, 2012:

Investment linked deduction would beavailable to entities engaged in the businessof developing SEZs notified post 31 March,2012.

Applicability of MAT and DDT to all SEZdevelopers

Under the present regime, provisions of MATand DDT are not applicable to SEZDevelopers. However, under the DTC, SEZDevelopers would be liable to pay MAT andDDT. This would also apply to SEZ developersoperating currently as well as those notifiedprior to 31 March, 2012, even if they areeligible for the profit linked deductions. This

could increase the tax burden substantially.

SEZ Units

Deduction for SEZ Units commencing operationson or before 31 March, 2014

Deductions allowed to SEZ units under the ITAct will continue to be available to unitscommencing operations before 31 March,2014 subject to specified conditions. Profits for

computing deduction after 31 March, 2014 willbe computed as per the computationmechanism provided in DTC. However,expenditures as specified in points (b) and (c)above shall not be allowed.

Deduction for SEZ Units commencing operationsafter 31 March, 2014

SEZ units commencing operations after 31March, 2014 shall be entitled to investmentlinked deductions as applicable to SEZdevelopers. As stated in point (b) above, sincecapital expenditure excludes long term lease,such long term lease will not be allowed as adeduction to SEZ units for computation ofprofits. This will have a huge impact for SEZunits that will claim investment linkeddeduction under DTC.

SEZ units are now brought within the ambit ofMAT. DDT continues to be applicable to theunits.

It would be a critical issue to examine whether thetax and incentive regime for SEZ Developers andSEZ Units as proposed under the DTC would beapplicable, considering the overriding provisions ofthe SEZ Act, 2005 which notified the beneficial taxprovisions for SEZ Developers and SEZ Units.

Infrastructure Companies

Deduction for companies engaged indevelopment, operating or maintaining an

infrastructure facility commencing business onor before 31 March, 2012, shall be grand-fathered and such companies will continue tobe eligible for profit linked deductions for thebalance period. Profits for computingdeduction after 31 March, 2012 will becomputed as per the computation mechanismprovided in DTC. However, expenditures asspecified in points (b) and (c) above shall notbe allowed.

The benefit of grandfathering not available to

companies engaged in the business ofdevelopment, operation and maintenance ofindustrial parks.


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Investment linked deduction would beavailable to entities engaged in the businessof developing, operating or maintaininginfrastructure facility commencing operationspost 31 March, 2012.

Housing Projects & Hotels

Under the current tax regime, profit baseddeductions is allowed to the undertakingsengaged in the business of:

- developing and building housing projectsapproved before 31 March, 2008, subjectto certain specified conditions

- hotels located in specified area andbuilding, owning and operating aconvention centre located in specifiedarea, subject to certain specifiedconditions

The above mentioned projects eligible fordeduction till 31 March, 2012 shall continue tobe eligible for profit linked deductions, underthe DTC for the balance period.

Further, investment linked deduction shall beallowed to the undertakings engaged in thebusiness of:

- developing and building a housing projectunder a scheme for slum redevelopmentor rehabilitation framed by the Central

Government or a State Government andnotified and commences operation on orafter the 1 April, 2010,

- building and operating, anywhere in India,a new hotel of two star or above categoryas classified by the Central Governmentand commences operation on or after the1 April, 2010.

Characterisation of Income:

Income from letting out of house property tobe compulsorily characterized as Income fromHouse Property except for hospital, hotel,convention centre, cold storage and SpecialEconomic Zone.

Capital Gains on sale of land or building (notbeing a business capital asset)

For the purpose of computing capital gains ontransfer of land or building, the stamp dutyvalue of such land or building shall beconsidered to be the full value ofconsideration, as against the current lawwhich requires substitution of stamp value incase it is more than the sale consideration.

Others

Deduction in respect of any interest payableon Housing loan continues to be available toIndividual / HUF.

Contacts

Gautam Mehra

Executive Director

Tax & Regulatory Services

Tel No. +91-22-66891155

Email: [email protected]

Akash Gupt

Executive Director

Tax & Regulatory Services

Tel No. +91 -124-3306001

Email:[email protected]

The above information is a summary of recent developments and is not intended to be advice on any particular matter. PricewaterhouseCoopers expressly disclaims liability to any person in respect of anything done in

reliance of the contents of these publications. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of PricewaterhouseCoopers, this Alert

may not be quoted in whole or in part or otherwise referred to in any documents

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PwC DTC Impat Real Estate