India Regulatory Brief: New Rules for Income Declaration Scheme 2016, India-Cyprus Tax Treaty, and Surrogacy Bill, 2016
Tax Department Makes It Easier to Admit Tax Evasion
New rules notified by the Central Board of Direct Taxes (CBDT) on August 17 amends the fair market value (FMV) determination rules for immovable property, as applicable to the Income Declaration Scheme (IDS) 2016. IDS was launched on June 1, offering a four month period to enable tax evaders to disclose their undeclared income and assets. Such declarants have to pay the applicable tax, cess, and penalty (amounting to 45 percent of the undisclosed income), to gain them immunity from further penalties or prosecution proceedings under the Income Tax Act, 1961, and the Wealth Tax Act, 1957.
As per the latest notification by the CBDT, declarants now have the option to determine the FMV of their undisclosed assets by inflating the cost of acquisition based on the cost inflation index (CII). Earlier, declarants could determine the FMV of immovable property as the higher of the cost of acquisition or the price that the property would raise if sold in the open market as on the valuation date, i.e., 1 June 2016. The new rules thus simplify the income declaration process and also reduce the tax liability of declarants. The move comes as the government is keen to incentivize persons with undisclosed income to regularize their wealth. However, in case the asset was acquired before April 1981 with undeclared income, the declarant will need a certified valuer to determine the FMV of the asset, as on April 1981, and then avail of the benefit of the CII. Towards this, the CBDT has issued an official list of valuers, for each type of asset, who can issue the required certification.
While the income declaration window will remain open till September 30, 2016, tax on such income can be paid in installments up to September 30, 2017.
India-Cyprus Tax Treaty Gets Union Cabinet Clearance
The Union cabinet approved of the revised India-Cyprus tax treaty on August 24, aiming to plug the legal loopholes used by investors to reduce their tax burden in India. The agreement is similar to the India-Mauritius tax treaty, and enables Indian authorities to tax capital gains on investments routed through Cyprus. The revised treaty removes Cyprus from the Indian government’s blacklist of countries that do not provide adequate financial information on tax evaders. India is currently negotiating an agreement with Singapore along similar lines.
As per the revised tax treaty, India gains the right to tax capital gains from sale of shares on investments made by Cyprus-based companies after April 1, 2017. This means that all investments made earlier will be protected (grandfathered), including those up to March 31, 2017, just as in the India-Mauritius agreement. However, while the treaty with Mauritius provides for 50 percent capital gains tax exemption for two years from April 1, 2017 to March 31, 2019, subject to fulfillment of certain conditions, this provision is absent in the revised Cyprus treaty. Furthermore, the India-Cyprus treaty permits the taxation of capital gains from transfer of shares of any company that has immovable property in the country. The treaty will also allow for source-based taxation of business income, expanding upon the existing scope of permanent establishment.
The renegotiated tax treaties are part of an ongoing effort by the present government to curb treaty abuse, tax evasion, and round-tripping of funds.
Modi Government Sets its Own Terms with the Surrogacy (Regulation) Bill
The Union cabinet has cleared the Surrogacy (Regulation) Bill, 2016, which will apply to the whole of India, except for the state of Jammu and Kashmir. The Bill effectively bans commercial surrogacy in the country, permitting only ‘altruistic’ surrogacy. Thus, the woman opting to be a surrogate cannot be paid – only her medical expenses may be covered by the commissioning parents. The Bill also prohibits single parents, homosexual couples, and live-in relationships couples from opting for surrogacy. This means that single men and women, heterosexual couples who choose not to opt for marriage, gay couples, queer women, and transgender persons are all be outside the scope of the new Bill, which will come into effect 10 months from now.
Consequently, critics have deemed the new Bill as protectionist (towards women opting to be surrogates) and discriminatory (by allowing only infertile heterosexual married couples to opt for surrogacy). Neither does it provide legal recourse to women who become surrogates in the event they suffer from cheating or exploitation, nor does it address the health security of surrogates through provisions for a good healthcare regimen. The Bill also refuses to acknowledge the option of surrogacy as a means of livelihood for underprivileged women, instead, merely policing their use of their own wombs.
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