Q: A Mauritius-based company holds shares in an Indian company. The Mauritian company wishes to sell the shares of the Indian company to a resident of India. They are worried about the tax implications and the possible liability to pay tax in India on capital gains. Please advise.
– B.K. Mukherjee, Manama
A: Under Article 13(4) of the India-Mauritius Tax Treaty, capital gains are liable to tax in the country in which the seller is a resident. You will have to consider the residential status of the Mauritian company to decide whether the capital gains made on transfer of Indian shares will be taxable in Mauritius. If the Mauritian company has a tax residence certificate from the appropriate authorities in Mauritius, it would be prima facie evidence that such company is a resident of Mauritius and the tax on capital gains would be payable in that country.
However, the tax authorities in India will go into the issue of control and management of the company’s affairs. Therefore, the Mauritian company will have to show that decisions on administrative and financial matters, borrowing and lending decisions, etc., are all taken in that country. The statutory books of account and other records should have been maintained in Mauritius and, as far as possible, meetings of the key personnel should have been held in that country. Such facts will ensure that the capital gains will be taxed in Mauritius and not in India.
Q: Many developers of Indian residential projects have approached non-resident Indians who wish to buy properties in India. Is there any way to ensure that the interests of NRIs are protected and the developers are held accountable?
– D.C. Taneja, Dubai
A: A new law, the Real Estate (Regulation & Development) Act, 2016 has been recently enacted. This law will cover development projects of both residential and commercial nature. Each project will have to be registered with the authority under the Act, but the registration can be done only after the commencement certificate has been issued by the municipal authorities for starting construction.
The developer can advertise, market or sell the property only after such registration. Registration would require the builder to make all disclosures with regard to the legal title to the land, any encumbrances, completion time and set out all specifications. The construction will have to be completed in accordance with the approved plans, layout plans and all specifications. The project will have to be completed within the stipulated time.
Q: My brother and I have set up windmills in India as the government is keen on promoting renewable energy projects for generation of power. The company is eligible to claim depreciation on the windmills at a very attractive rate which substantially reduces the taxable profits. The company is now required to add some electrical items and a room for installing the equipment. I am not sure whether the company can claim the higher rate of depreciation on these assets. Please advise.
– L.R. Sanghavi, Muscat
A: The actual cost of the windmills is eligible for depreciation at the high rate provided in the Income-tax Rules. Courts have taken a very liberal view while granting depreciation at the higher rate by including in the cost of the windmill all the assets which are needed to bring the windmill to the stage of operation.
Therefore, the cost of all electrical equipment, civil works for the fortified foundation and buildings attached thereto have been treated as part of the actual cost of the windmill. Depreciation has, therefore, been granted on the cost of all the ancillary assets as well as the expenditure incurred in making the foundation. The Rajasthan High Court has upheld this view. Therefore, though there may be litigation with the tax department in the initial stages, in all probability, you are likely to succeed in the High Court and Supreme Court.
Author: H P Ranina is a practising lawyer specialising in tax and exchange management laws of India.
Credits Khaleej Times