Impact of Budget on foreign firms

FOREIGN ENTERPRISE

The Securities Transaction Tax (STT) was introduced by Finance (No. 2) Act, 2004. The rate of tax applicable for purchase and sale of equity share or unit of equity-oriented fund, where the transaction is settled by actual delivery, continues to be 0.125 per cent and where the delivery is not so settled STT is 0.025 per cent. The applicable rate of STT for derivatives is 0.017 per cent.

Significance of STT in income tax is that the transactions on which STT is paid are liable to be taxed at special rate of tax, which is comparatively lower than normal rate of tax.

The Finance Bill, 2008 proposes following changes:
(i) Applicability of STT on both sellers and purchasers of options;
(ii) Any amount of STT paid by the assessee shall be allowed as deduction u/s 36 of the Income-tax Act provided that income from taxable securities transactions is offered to tax under business head. But, it is proposed to discontinue the rebate available to such assessee against the tax payable by him. Thus, full credit of STT was available against income tax payable, which has been discontinued.
As a result, although the taxable income of an assessee may get reduced but the effective tax payable by him will increase.

Increase in tax rates for Short Term Capital Gain
Under the existing provisions, a special tax rate of 10 per cent is provided on short-term capital gain arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity-oriented fund, where such transaction is chargeable to STT. This rate is proposed to be increased to 15 per cent. This increase will seriously affect FII's whose volume of transactions generating short-term capital gains is enormous.

Provision for furnishing of information u/s 195
Any person responsible for paying any interest or any other sum chargeable to tax (except income chargeable under the head "salaries") to a non-resident or to a foreign company is responsible to deduct tax at source at the rates in force. Currently, the person making the remittance is required to furnish an undertaking addressed to the Assessing Officer accompanied by a certificate from a CA in a specified format. This undertaking and certificate is submitted to the Reserve Bank of India or its authorised dealers who, in turn, are required to forward a copy of the same to the Assessing Officer.

To monitor and track transactions, the Finance Bill proposes to introduce e-filing of the information in the certificate and undertaking. As a result, the foreign companies who were not filing returns in India, which is obligatory upon them to file, will be easily traceable by the income tax department.

Capital gains on transfer of foreign currency exchangeable bonds
In 1992, the Government allowed established Indian companies to issue foreign currency convertible bonds (FCCB) with special tax regime.

The Government has now allowed established Indian companies to issue FCEB. They differ from FCCBs inasmuch as the latter can only be converted into shares of the issuing company, whereas FCEBs can also be converted into or exchanged for the shares of a group company. With a view to providing a level playing field to FCEBs, it is proposed to provide that the conversion of FCEBs into shares or debentures of any company shall not be treated as a 'transfer'. As a result, there will be no capital gains tax.

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