By Abhirup Ghosh, (gst@vinodkothari.com)
On the headway to GST, which is going to be introduced from 1st July, 2017, the Government of India is doing substantial amount of law making each day. In the past few days the Government has not only finalised the rules but has also notified the final rates for goods and services. Read more →
MCA vide public notice dated[1] June 28, 2017 has conveyed its intent of issuing a notification proposing amendments to the Companies (Specification of Definitions Details) Rules, 2014 containing the restriction on layers of subsidiaries beyond prescribed number and has invited suggestions on the draft notification. Comments/suggestions on the draft rules along with justifications in brief may be sent latest by 20th July, 2017 through email at csddar@mca.gov.in in the format prescribed.
Proviso to Section 2 (87) along with explanation (d) was proposed to be omitted in Companies (Amendment) Bill, 2016. However, in view of reports of misuse of multiple layers of companies, where companies create shell companies for diversion of funds or money laundering , MCA has decided to retain the provisions and commence the aforesaid proviso and explanation. Further, MCA has no intent to exempt private companies from the requirement as well. Similar restriction on number of layers of investment companies has already been in force under Section 186 (1).
It is important to note that even body corporate will get covered as the expression ‘company’ includes body corporate for the purpose of Section 2 (87).
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This write up initially discusses the proposed conditions and thereafter analyses the permitted combinations.
Provisions of the proposed rule 5 shall not apply to following classes of companies, namely:-
(a) a banking company;
(b) a non-banking financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) which is registered with the Reserve Bank of India and considered as systemically important non-banking financial company by the Reserve Bank of India; (Nothing specified in relation to housing finance companies/ NBFC CICs).
(c) an insurance company being a company which carries on the business of insurance in accordance with provisions of Insurance Act, 1938 and Insurance Regulatory Development Authority Act, 1999;
(d) a Government company referred to in clause (45) of section 2 of the Act.
It is necessary to extend to exemptions in cases of Housing Finance Companies, Core Investment Companies as well as Non-Operative Financial Holding Company .
The proposed Rule 5 (1) shall not apply to one layer of wholly owned subsidiary. Further, the provisions of this sub-rule shall not affect a holding company from acquiring a subsidiary incorporated in a country outside India if such subsidiary has subsidiaries as per the laws of such country.
Given the intent behind enforcing the provisions, it is necessary to exempt such subsidiaries where there is no fund infusion and mere control of management. Subsidiaries by virtue of Section 2 (87) (i) only and not by virtue of Section 2 (87) (ii) should also be exempted.
The exemption in case of acquiring of subsidiaries incorporated outside India should extend equally to subsidiaries incorporated outside India. There need not be a distinction in acquisition and incorporation of subsidiary outside India.
The holding companies, other than exempted companies, that breach the conditions of layers of subsidiaries as on the date of commencement of provision will be prohibited from incorporating additional layer of subsidiaries.
Such holding companies shall file return in Form SDD-1 with the Registrar within a period of three months from the date of its deployment as an electronic form on the Ministry’s MCA-21 portal. The proposed form requires specifying layer number of the subsidiary and percentage of shares held by holding company.
All the below mentioned structures are permitted and well in compliance
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Case 1:
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In the aforesaid structure, if we consider on as is basis, there exists more than 2 layers of subsidiaries. Therefore, an existing company cannot go beyond ‘D’. Once the provisions are enforced, an existing holding company A will not be able to float ‘D’ unless any exemptions/ relaxations become applicable.
Case 2 – ‘B’/’C’/ ‘D’[2] is a wholly owned subsidiary of ‘A’:
In that case, the structure is permissible.
Case 3 – ‘B’/’C’ is a subsidiary incorporated outside India:
Currently, the wording of draft rule prescribes ‘acquired’ subsidiaries to be exempted. However, the benefit should be extended to subsidiaries incorporated outside India.
Case 4 – ‘B” is a subsidiary acquired outside India while ‘C’ and ‘D’ and subsidiaries of ‘B’ incorporated in India
So ‘A’, ‘C’ and “D’ are companies incorporated in India while ‘B’ is a subsidiary outside India. The exemption cannot be extended to ‘C’ and ‘D’ merely because it’s immediately holding company is a subsidiary acquired outside India. Therefore, the limit is likely to be breached unless ‘B’ or ‘C’ or ‘D’ is a wholly owned subsidiary.
Case 5 – ‘A’/‘B’/’C’ fall under exempted companies:
In that case, the restriction shall not apply.
Case 6 – ‘B’/’C’/ ‘D’ is an LLP:
The expression ‘company’ includes body corporate. Therefore, an existing company cannot go beyond ‘D’. Once the provisions are enforced, an existing holding company A will not be able to float ‘D’ unless any exemptions/ relaxations become applicable.
CS Vinita Nair, corplaw@vinodkothari.com
MCA vide public notice dated[1] June 28, 2017 has conveyed its intent of issuing a notification proposing amendments to the Companies (Specification of Definitions Details) Rules, 2014 containing the restriction on layers of subsidiaries beyond prescribed number and has invited suggestions on the draft notification. Comments/suggestions on the draft rules along with justifications in brief may be sent latest by 20th July, 2017 through email at csddar@mca.gov.in in the format prescribed.
Proviso to Section 2 (87) along with explanation (d) was proposed to be omitted in Companies (Amendment) Bill, 2016. However, in view of reports of misuse of multiple layers of companies, where companies create shell companies for diversion of funds or money laundering , MCA has decided to retain the provisions and commence the aforesaid proviso and explanation. Further, MCA has no intent to exempt private companies from the requirement as well. Similar restriction on number of layers of investment companies has already been in force under Section 186 (1).
It is important to note that even body corporate will get covered as the expression ‘company’ includes body corporate for the purpose of Section 2 (87).
|
This write up initially discusses the proposed conditions and thereafter analyses the permitted combinations.
Provisions of the proposed rule 5 shall not apply to following classes of companies, namely:-
(a) a banking company;
(b) a non-banking financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) which is registered with the Reserve Bank of India and considered as systemically important non-banking financial company by the Reserve Bank of India; (Nothing specified in relation to housing finance companies/ NBFC CICs).
(c) an insurance company being a company which carries on the business of insurance in accordance with provisions of Insurance Act, 1938 and Insurance Regulatory Development Authority Act, 1999;
(d) a Government company referred to in clause (45) of section 2 of the Act.
It is necessary to extend to exemptions in cases of Housing Finance Companies, Core Investment Companies as well as Non-Operative Financial Holding Company .
The proposed Rule 5 (1) shall not apply to one layer of wholly owned subsidiary. Further, the provisions of this sub-rule shall not affect a holding company from acquiring a subsidiary incorporated in a country outside India if such subsidiary has subsidiaries as per the laws of such country.
Given the intent behind enforcing the provisions, it is necessary to exempt such subsidiaries where there is no fund infusion and mere control of management. Subsidiaries by virtue of Section 2 (87) (i) only and not by virtue of Section 2 (87) (ii) should also be exempted.
The exemption in case of acquiring of subsidiaries incorporated outside India should extend equally to subsidiaries incorporated outside India. There need not be a distinction in acquisition and incorporation of subsidiary outside India.
The holding companies, other than exempted companies, that breach the conditions of layers of subsidiaries as on the date of commencement of provision will be prohibited from incorporating additional layer of subsidiaries.
Such holding companies shall file return in Form SDD-1 with the Registrar within a period of three months from the date of its deployment as an electronic form on the Ministry’s MCA-21 portal. The proposed form requires specifying layer number of the subsidiary and percentage of shares held by holding company.
All the below mentioned structures are permitted and well in compliance
|
|
Case 1:
|
In the aforesaid structure, if we consider on as is basis, there exists more than 2 layers of subsidiaries. Therefore, an existing company cannot go beyond ‘D’. Once the provisions are enforced, an existing holding company A will not be able to float ‘D’ unless any exemptions/ relaxations become applicable.
Case 2 – ‘B’/’C’/ ‘D’[2] is a wholly owned subsidiary of ‘A’:
In that case, the structure is permissible.
Case 3 – ‘B’/’C’ is a subsidiary incorporated outside India:
Currently, the wording of draft rule prescribes ‘acquired’ subsidiaries to be exempted. However, the benefit should be extended to subsidiaries incorporated outside India.
Case 4 – ‘B” is a subsidiary acquired outside India while ‘C’ and ‘D’ and subsidiaries of ‘B’ incorporated in India
So ‘A’, ‘C’ and “D’ are companies incorporated in India while ‘B’ is a subsidiary outside India. The exemption cannot be extended to ‘C’ and ‘D’ merely because it’s immediately holding company is a subsidiary acquired outside India. Therefore, the limit is likely to be breached unless ‘B’ or ‘C’ or ‘D’ is a wholly owned subsidiary.
Case 5 – ‘A’/‘B’/’C’ fall under exempted companies:
In that case, the restriction shall not apply.
Case 6 – ‘B’/’C’/ ‘D’ is an LLP:
The expression ‘company’ includes body corporate. Therefore, an existing company cannot go beyond ‘D’. Once the provisions are enforced, an existing holding company A will not be able to float ‘D’ unless any exemptions/ relaxations become applicable.
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[1] http://www.mca.gov.in/Ministry/pdf/Notice_29062017.pdf
[2] Either of ‘B’ or ‘C’ or ‘D’
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[1] http://www.mca.gov.in/Ministry/pdf/Notice_29062017.pdf
[2] Either of ‘B’ or ‘C’ or ‘D’
MCA vide notification dated 22nd June, 2017[1] issued Companies (Audit and Auditors) Second Amendment Rules, 2017, effective immediately from the above date. The Rules are meant to further amend the Companies (Audit and Auditors) Rules, 2014. The amendment pertains to corresponding rule for Section 139(2), regarding rotation of auditors in the Company. Read more →
Come midnight of 30th June, 2017, with the hitting of the gong, India will have its tryst begin with GST. The GST implementation and digging deeper into the provisions seemingly will go hand-in-hand. This article intends to discuss small proviso to the input credit availability provision in the Central GST Act (CGST Act) and its implications on trade financing. The nuances are worth the consideration and mulling. Read more →
The Income Tax Act, 1961[1] does not contain specific provisions relating to Housing Finance Companies (HFCs). Thus, all the general provisions for computation of income shall apply to HFCs. It can also be established that as the main source of income of HFCs is interest, income will be computed under section 28 to 43 of the Income Tax Act, 1961 pertaining to “Profits and gains from Profession and Business”
However, looking at the business HFCs conduct some sections become specifically applicable. These provisions are mentioned hereunder:-
Tax Provisions applicable to HFC
Section-36(1)(vii)
This section pertains to the debt which is written off as irrecoverable loans advanced by banking or money-lending concerns. Under this section deduction is allowed in respect of the bad debts of the business which have become irrecoverable in the previous year. The deduction will be allowed only if:-
Section-36(1)(vii a)
While computing business income of the HFC, deduction is allowable in respect of any provision for bad and doubtful debts made by such entities up to a maximum of 5% of total income (computed before allowing this deduction and deductions u/s 80). Deduction u/s 36(1)(vii) will be limited to the excess of such debt over the credit balance in the provision for bad and doubtful debts account.
For Example:-
An HFC has a total bad debt of INR 100. It has also INR 80 in the bad debt provision account.
When the debt is considered as irrecoverable only INR 20 will be deductible under section 36(1)(vii). The remaining INR 80 will not be deductible as it has already been deducted from the company’s income when the amount was transferred to the bad debt provision account in that particular year.
Section-36(1)(viii)
As per this provision of the Income Tax Act, 1961 any money transferred to a special reserve created by any specified entity (which includes housing finance company) is allowed as deduction.
The deduction will be allowed only if:-
Section 41(4)
If the amount subsequently recovered is higher than the difference between the debt and the amount so allowed, the excess amount so recovered shall be chargeable to income tax as income of the previous year in which the amount has been recovered.
Section 41(4A)
Where deduction has been allowed in respect of any special reserve created and maintained under Section 36 (1) (viii), any amount subsequently withdrawn shall be deemed to be profits and gains of the business and shall be chargeable to income tax in the year in which such amount is withdrawn.
Section 43D
With regards to NHB guidelines it has been prescribed in the Income Tax Act, 1961 that any interest on bad or doubtful debts of the HFC shall be chargeable to tax in the year in which it is credited to statement of profit & loss or the year in which it is actually received by them, whichever is earlier.
Conclusion
In the recent years HFC have become an integral part of the Indian economic system, and hence, special focus need to be given on this sector. There are several HFCs entering the market and the housing agenda is important to the present government. There are several tax provisions/ schemes/ subventions/ subsidies offered to the sector, the article is a mere attempt to talk about the tax provisions from HFCs’ perspective.
[1] http://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx
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by Soumesh Lund (somesh@vinodkothari.com)