India Regulatory Brief: New Rules to Ease Double Taxation, Contract Workers to Benefit from New Minimum Wage

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New Tax Rules to Bring Relief from Double Taxation

The Central Board of Direct Taxes (CBDT) has drafted new rules regulating the use of Foreign Tax Credits (FTC), bringing relief to corporates and individuals with overseas income. According to national tax experts, the proposed framework allows credits to be claimed on income tax, surcharges, cesses, and Minimum Alternate Tax (MAT) liability.

The rules state that FTC can be claimed only if the taxpayer has paid tax in a foreign country and the same income is subject to Indian taxes. Assuming that income meets this requirement, all claims are to be backed by certain documents, which include a tax certificate from the foreign country – specifying the nature of income and tax amount deducted or paid – acknowledgement of paid taxes, and a declaration of no dispute over the tax amount. The draft rules also clarify that the credit cannot be claimed on a sum that is payable by way of interest, fee, or penalty. Foreign tax that is under dispute will also not be entitled to make credit claims.

The CBDT has opened the new rules to feedback from stakeholders till May 2. Thus, while the FTC rules are welcome, they may be still be subject to changes.

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RBI Issues Directives on the Merger of Private Banks and Financial Entities

The central Reserve Bank of India (RBI) issued its master direction on April 21, guiding mergers between private sector banks as well as those between Non-Banking Financial Companies (NBFCs) and private banks. This is in addition to another master direction, which provided the framework for the issue and pricing of shares by private banks. The latter document also serves as a compilation of all the instructions on the rules and regulations framed by the RBI under various Acts covering banking issues and foreign exchange transactions, among others.

Mergers between private banks and NBFCs may be voluntary but will need the RBI’s approval to become effective. The decision of amalgamation needs also to be approved by the boards and stakeholders of the respective parties via two-third majorities. In the case of a bank’s merger with an NBFC, the RBI’s master direction states that all accounts of the NBFC must be verified as Know-Your-Customer (KYC) compliant. This is to avoid financial risks as the NBFC accounts will become that of the banks’ after the merger. For allotment of shares to investors, prior approval of the RBI must be specifically secured if the proposed amalgamation results in an aggregate holding of 5 percent or more of the paid-up capital of the bank.

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New Minimum Wage Soon for Contract Workers

The minimum wage for contract workers in India will be set at U.S. $150,246 (Rs 10,000) after an executive order is passed by the central government. Implementation of the order will follow changes made to Rule 25 of the Contract Labour (Regulation and Abolition) Central Rules. The Union Minister of State for Labor and Employment, Bandaru Dattatreya announced the change on April 17. 

This decision comes after a series of economic reforms were blocked in the upper house of parliament where the ruling Bharatiya Janata Party (BJP) party does not hold a majority. The use of contract labor has significantly increased in both the formal and informal sectors. This is why a directive was issued by the Supreme Court to fix the minimum wage according to the Consumer Price Index (CPI) and variations in dearness allowance (DA).

Once the Law Ministry approves the changes, an executive order will be passed directing state governments to implement the decision. After securing a minimum wage for contract workers, the government aims to establish a universal minimum wage. This is important as it will close the widening gap between employed persons in the informal sector and permanent and contracted employees. The central government also seeks to move India’s multiple labor laws into five comprehensive bills, which will make much it easier to navigate the labor market.

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