Salient Provision of Finance Bill 2014 affecting Kotak Group

INCOME TAX

DDT provisions for MFs and Companies

o Grossing up required for applying the DDT rate on Dividend distributed by both
companies and MF w.e.f. 1.10.2014

Old
Provisions
New
Provisions
Gross Dividend 100 100
Less: DDT @ 33.99% 25.37 33.99
Net Dividend to
investor
74.63 66.01
[Note: The DDT rate above is assumed to be 33.99% to illustrate the provision]

Provisions affecting debt Mutual Fund Units

o Units of debt oriented mutual funds - holding period increased from 12 months to 36
months, for qualifying as Long Term Capital Assets - w.e.f. 1.4.2014
o Consequently, indexation applies only after 36 months
o Such LTCG on debt MFs units taxable @ 20% after indexation (even the concessional
rate of 10% without indexation removed)
o All debt MF units especially FMPs maturing on and from 1.4.2014 within the period of 36
months would be Short Term Capital Gain and would suffer normal tax @ 33.99% or
applicable slab rate.
o However, equity oriented MF continued to have holding period of 12 months for
qualifying as LTC Assets and gains therefrom are exempt.

Provisions affecting REITS

o Listed units of REITs when traded on Stock Exchange would suffer STT - w.e.f. 1.10.2014
o Consequently LTCG (after 12 months) on sale of REIT units and suffering STT, would be
exempt and STCG taxable @ 15%
o At the initial transfer of the immovable property by the Sponsor to the REITs, for
exchange of units in the REIT for the shares in the SPV holding the property, the capital
gains on such exchange is deferred and taxed at the time of disposal of REIT units by
Sponsor.
o Capital gain arising on sale of units by Sponsor would be subjected to applicable capital
gains tax without any concession mentioned above.
o Taxability of various incomes would be as under:-

Nature of income To be taxed in the hands of Tax
Interest income - Investor.
Pass through in the hands of
the REIT.
No TDS on interest
paid by the SPV
No tax to be paid by
the REITs
TDS by REIT - @5% for
NR investors and @
10% for Resident
investors

Nature of income To be taxed in the hands of Tax
Dividend Income Exempt for REIT and the
Investor
DDT to be paid by the
SPV distributing the
Dividend
Capital Gains on sale of
assets by the REIT
- REIT.
Distribution relating to such
Capital Gains exempt in
investor hands.
As per applicable rates
for taxation of Capital
Gains.
Any other income - REIT. @ maximum Marginal
Rate i.e 30%

Income in case of FPI

o All income of FIIs, sub-accounts and QFIs will be only capital gains - w.e.f. 1.4.2014
o Consequently, the fear of a PE in India for fund management activity carried out of India
minimised. (concept of PE applies only to business income and not capital gains)
o This can encourage management of offshore funds also from India itself.

Holding period for shares in unlisted companies

o Equity and Preference shares of unlisted companies will now have a longer period of 36
months for qualifying as long term capital assets (it was earlier 12 months only) -
w.e.f.1.4.2014

Position relating to CSR

o Expenditure on CSR non tax deductible

Provision relating to taxation of speculative business

o Losses arising out of delivery based trading by Companies having principle business of
trading in shares and securities will not be considered as speculative in nature
o Controversies regarding what constitutes principle business will continue
o However, the controversy for set off of losses in delivery based trade in arbitrage
business now removed and set off of such losses against F&O transaction possible

Concessional TDS on overseas borrowings

o The concessional rate of TDS @ 5% has been extended to any foreign borrowings by
Indian Companies by issuance of any long term bonds after 1.10.2014 but before
1.7.2017. This was earlier restricted to long term infrastructure bonds.

o The requirement of approval by Central Government for such issuance continues.

Concessional tax rates for dividend received from foreign associates

o The 15% tax rates for receipt of dividend by an Indian company from its 26% off shore
associates continued without any sunset clause.





Withholding tax in the case of non-exempt policy under life insurance

o Any sum paid under life insurance policy including sum allocated by way of bonus which
is not exempt u/s 10(10D) will entail TDS @ 2% on such payments.
o No TDS would be made if the payment is < Rs.1 lakh in a financial year to a policy holder

Other Provisions (w.e.f. 1.4.2014)

o Basic income exemption limits increased as under:
For normal tax payers from Rs.2 lakhs to Rs.2.5 lakhs
For Sr. Citizen from Rs.2.5 lakhs to Rs.3 lakhs

o The limit for deduction u/s 80C for investments in insurance policies, PPF, PF, etc.,
increased from Rs.1 lakhs to Rs.1.5 lakhs. Correspondingly, the maximum amount which
can be deposited in the PPF a/c by a subscriber is also increased to Rs 1.50 lacs
o Deduction for Interest on loan taken for purchase of a self-occupied property
increased from Rs.1.5 lakhs to Rs.2 lakhs
o In case of any advance forfeited in respect of a proposed sale of a capital asset, hither to
it was reduced from the cost / depreciated value, thereby postponing the taxability of
such an amount. Now such forfeited advance would be taxed at normal rates
immediately.
o All mutual funds, venture capital funds and securitisation trusts will have to file return of
income.
o Advance ruling facility extended to resident tax payers.

SERVICE TAX (ST)

In respect of all commission and remuneration paid by banks, NBFCs & Financial Institutions to
recovery agents, the ST will now be payable by such institutions (reversed charge mechanism
basis)

In respect of invoices which attracted ST on reversed charge mechanism viz. lawyer fees, repairs
sponsorship fees, all foreign payments for fees etc., ST was to be paid by the Indian receiver of
service within 6 months from the date of the invoice. This period of 6 months have now been
reduced to 3 months to avail of the CENVAT input credit. Any payment of the invoice beyond 3
months will now attract interest @ 18%. All above mentioned service provider bills have to be
settled within 3 months of the invoice date.

Hitherto there was no ST on brokerage charged to FIIs where the trade settlements are usually
carried out by the custodian and not the broker. The amendment now seeks to levy ST on FII
trades as well.

ST is now payable on all advertisements other than print media.

Hitherto no ST pre-deposit was required in case of an adjudication of a matter at the appellate
level. For all appeals preferred before the Commissioner now a pre-deposit of ST @ 7.5% of the
ST demanded is mandatory and @ 10% of ST in case of appeals before Tribunal.

Advance ruling facility now available for domestic private companies.