Tax and Regulatory Updates for April 2023 to June 2023

Taxation Updates

Central Board of Direct Taxes (CBDT) modifies monetary limits for condonation applications for claiming a refund or carry forward of losses and set-off for application.

The CBDT notification¹ modifies the monetary limits² for addressing the condonation of delay in filing refund claims and claims of carry forward of losses, granting certain authorities the power to accept or reject applications/ claims based on the claim amount. Revised monetary limits along with a comparative view are tabulated below:

Authority for considering Condonation Application/Claim	Monetary Limit	Revised Monetary Limit #
Principal Commissioner of Income Tax (Pr. CIT)/ Commissioner of Income Tax (CIT)	Up to INR 1mn	Up to INR 5mn
Principal Chief Commissioner of Income Tax (Pr.CCIT)	More than INR 1mn but not more than INR 5mn	More than INR 5Mn but not more than INR 20mn
Chief Commissioner of Income Tax (CCIT)	More than INR 1mn but not more than INR 5mn	More than INR 20mn but not more than INR 30mn
CBDT	More than INR 5mn	More than INR 30mn

# Applicable for applications/ claims filed from 1 June 2023, while other guidelines³ remain unchanged

Exemption from application of Angel Tax Provisions

As per the provision⁴ of the Income-tax Act, 1961 (ITA), if a privately held company issues shares to an investor at a price higher than the fair market value of the shares, the excess amount is considered taxable income for the company. Such provisions are referred to as angel tax provisions.

CBDT vide Notification⁵ identifies certain classes of persons, who would be exempt from angel tax provisions. The angel tax shall not apply on the issuance of shares to:

• Government and Government-related investors regulated banks and insurance entities

• Specified entities registered as Category I FPI with the Securities and Exchange Board of India (SEBI), endowment funds associated with universities, hospitals, or charities, pension funds established under foreign law,

• Broad-based pooled investment vehicles or funds with more than fifty investors from specified countries. The specified countries include Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Korea, New Zealand, Norway, Russia, Spain, Sweden, the UK, and the US

Singapore-based FPIs allowed to claim exemption of Capital gains: Rejects invocation of Limitation of Benefits (LoB) when global income is taxed in Singapore

Limitation of Benefits is an anti-abuse measure which prevents the abuse of the benefits under Double Taxation Avoidance Agreements (DTAA). The Bombay High Court, in its recent ruling⁶, has held that in the cases where the entire global income of a taxpayer is taxed in the Resident country and the same has been confirmed/certified by the relevant tax authorities of the resident country, then LoB clause cannot be invoked.

The judgement validates the stand taken by the resident country in ensuring that the same income is not taxed twice and that the certification issued by the Resident Country's tax authority for granting the benefits of DTAA cannot be challenged.

Regulatory Updates

Consultation Paper: SEBI's Plan to Increase Transparency in FPI Disclosures

SEBI has released a consultation paper issued on 3 May 2023, seeking public comments on guidelines for additional public disclosures by FPIs with Asset under Management (AUM) exceeding INR 250bn in India equity. The purpose is to have stricter disclosures for FPIs regarding their ownership, control and economic interest. It also serves to safeguard the investors against possible circumvention of Minimum Public Shareholding (MPS) requirements and misuse of the FPI route to circumvent requirements of Press Note 3 (PN3).

SEBI suggests categorizing FPIs into low, moderate, and high-risk categories based on the risk profiles. The proposed additional disclosures will focus on the risk categories and address the concentration of investments and large AUM in India. Public comments on the consultation paper were to be submitted to SEBI until 20 June 2023. The consultation paper floated is a positive step towards transparency in High-risk FPIs.

SEBI Board Meeting June 2023

SEBI, in its recent Board circular⁷, has announced changes to the regulations concerning FPIs. The amendments aim to prevent circumvention of regulations related to minimum public shareholding, substantial acquisition of shares and takeovers, and Press Note 3⁸, requirements. FPIs meeting certain criteria will now be required to provide additional disclosures on ownership, economic interest, and control. This applies to FPIs with more than 50% of their Indian equity assets under management in a single Indian corporate group or those holding over INR 25,000 crore of equity assets under management in the Indian markets. However, exemptions are available for certain government-related investors, pension funds, public retail funds, listed ETFs, and verified pooled investment vehicles. Additionally, applicants with investors contributing 25% or more from the UN Security Council's Sanctions List are ineligible for FPI registration. The identification of beneficial owners will also be aligned with the PML Rules, with varying thresholds for different types of entities.

Direct plan for schemes of Alternative Investment Funds (AIFs) and trail model for distribution commission in AIFs

In an effort to provide flexibility and maximise the availability of investors' capital for investments, SEBI vide its circular⁹ dated 10 April 2023, has specified the following:

1. AIF schemes shall have the option of a ‘Direct Plan’ for investors wherein the said plan will not include a placement or distribution fee. AIFs are obligated to make sure that investors who had approached them via a SEBI-registered intermediary and who are being separately billed for services (such as advisory fees or portfolio management fees) are only accepted into the Direct Plan.

2. It is mandated that for Category III AIFs, investors shall be charged placement/ distribution fees only on a trail basis only.  Any distribution/placement fee paid shall be paid solely from the management fee received by the managers of such Category III AIFs. Whereas in the case of a Category I/ II AIF, a portion (1/3rd) of the distribution fee may be paid upfront and the remaining fee shall be paid to the distributors on an equal trail basis over the tenure of the fund.

The aforesaid provisions shall be complied with for investors on-boarded in AIFs/ schemes of AIFs from 1 May 2023.

Guidelines with respect to excusing or excluding an investor from an investment of AIF

As per SEBI vide its circular¹⁰ dated 10 April 2023, AIFs to excuse its investor from investing in a particular investment. Under the following situations an AIF can excuse its investors from participating in investment:

1. If the investor confirms that participation in the investment offer would violate any relevant law or regulation, based on the opinion of a legal professional/legal adviser.

2. If the investor communicated to the management, as part of the contribution agreement or any other agreement executed with the AIF, that participation in such investment opportunity would be against the investor's internal policy. The manager shall ensure that the conditions of such an arrangement with the investor include reporting to the AIF of any change in the stated internal policy within 15 days of such change.

Further, an AIF may exclude an investor from participating in a specific investment opportunity if the AIF's manager is satisfied that the participation of the investor would violate applicable law or regulation or would have a material adverse effect on the AIF's scheme.

Furthermore, if an AIF's investor is also an AIF or another investment vehicle, such investor may be excused or excluded from participation in an investment opportunity to the extent of the contribution of the said fund's/ investment vehicle's underlying investors who are excused or excluded from such investment opportunity.

The management of AIFs must document the reason for such an excuse or exclusion, as well as any supporting documentation.

The Circular shall come into force with immediate effect.

Direct Market Access (DMA)to SEBI-registered FPIs for participating in Exchange Traded Commodity Derivatives (ETCDs)

In 2012, SEBI introduced DMA for institutional investors which facilitated the clients of a broker to directly access the exchange trading system through the broker’s infrastructure to execute orders without manual intervention by the broker. SEBI vide circular¹¹ dated 10 May 2023, has permitted FPIs to participate in ETCDs through DMA subject to certain conditions. This will enable FPIs to directly access the exchange trading system, thereby eliminating the need for manual intervention by their brokers.

Dematerialization of securities of Hold Cos and SPVs held by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)

SEBI on 22 May 2023 through a circular¹² has made asked REITS and InvITs to hold the shares of holding companies and special purpose vehicles (SPVs) in dematerialized form only to improve transparency and encourage ease of doing business. Further, the managers of REITs and InvITs are directed to dematerialise the existing physical securities held by REITs and InvITs in holding companies and special purpose vehicles (SPVs) by June 30.

Securities And Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2023

On 15 June 2023, SEBI released¹³ the SEBI (Alternative Investment Funds) (Amendment) Regulation, 2023. The said regulations have come up with the following key amendments:

1. Apart from the 3 categories of AIF under which an investor can seek registration, SEBI has introduced a new registration category known as Specified AIFs.

2. The requirement of having a minimum of 5 years of experience by the key management personnel of the key investment team of the AIF Manager has been amended and now, the key management personnel shall have relevant certification as may be specified by the Board from time to time.

3. In order to enhance transparency and maintain ease of operation, AIFs are required to issue their units in dematerialised form.

4. Changes are being made in the winding up process of the AIF

5. A new chapter III-C has been notified i.e. ‘Corporate Debt Market Development Fund’ which will boost the corporate bond market and thereby will be led to a pump in the secondary market liquidity.

Sovereign Gold Bond (SGB) Scheme 2023-24

Government of India vide notification¹⁴ declared Sovereign Gold Bond (SGB) Scheme (starting from series I). Bond details are as below:

S. No.	Tranche	Date of Subscription	Date of Issuance
1.	2023-24 Series I	19 – 23 June 2023	27 June 2023
2.	2023-24 Series II	11 – 15 September 2023	2 September 2023

Subscription shall be open on the specified dates above and the applicant may apply for it in the prescribed application form accompanied by other requisite details.

SEBI intends to strengthen Investors' Service Centers of Stock Exchanges

SEBI circular¹⁵, vide 26 June 2023, has reviewed and revised the provisions related to Investor Service Centres (ISCs) of the recognized stock exchanges. The circular mandates recognized stock exchanges, including BSE India, NSE India, and others¹⁶, to provide certain facilities and services at their ISCs to enhance investor support and protection. The key provisions outlined in the circular include:

• Provision of basic facilities such as financial daily newspapers, internet-connected desktop/ laptop, and a library with relevant laws.

• Establishment of a system to receive complaints in physical and electronic form, along with dedicated staff to assist investors in registering their complaints and providing updated status of all complaints electronically.

• Assistance to investors in making applications to Investor Grievance Redressal Panels and filing arbitration applications, including appellate arbitration. The facilities should include video-calling for online arbitration and Grievance Redressal meetings.

• Training of ISC officials on securities market operations, resolution of investor grievances, promotion of investor education and awareness, and enhancing securities market literacy. Relevant certification from the National Institute of Securities Markets (NISM) would also be required for ISC officials.#

The circular will be effective from the 90th day of its issuance. However, # will be implemented within 6 to 12 months in a phased manner.

International Financial Service Centre (IFSC)

Guidance to the International Financial Services Centres Authority(IFSCA) (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022

The IFSCA has released a circular¹⁷ on the IFSCA (Anti-Money Laundering, Counter-Terrorist Financing, and Know Your Customer) Guidelines, 2022.

It adds that the said guidelines will be updated in conformity with the amendments as specified in the said circular.

Further, the Ministry of Finance has also issued a notification dated 3 May 2023 which says that the financial transactions carried out by a relevant person on behalf of his client, in the course of his or her profession, in relation to the activities mentioned in the notification have primarily been covered under clause 10.5 (Additional measures) of the Guidelines and now the same shall be read with the notification.

Furthermore, on 9 May 2023, the Central Government through a notification provided a list of activities when carried out in the course of business on behalf of or for another person, as the case may be.

Reporting Norms for Fund Management Entities (FME) under IFSCA (Fund Management) Regulations, 2022

IFSCA through its circular¹⁸ dated 31 May 2023, has specified reporting norms for FME wherein they are required to provide information on a half-yearly basis. This information shall include quantitative information about the fund management operations of the FME and a ‘Compliance Report’, the signed copy of which shall be submitted. The first report corresponding to the period 1 October 2022 to 31 March 2023, shall be submitted latest by 21 June 2023.  The subsequent reports for each half-year period shall be submitted within 21 calendar days from the end of the half-year.

Remittances to IFSC under the Liberalised Remittance Scheme (LRS)

As per RBI’s its circular¹⁹ Dated 22 June 2023, it has permitted authorised persons to facilitate payment of a fee of foreign universities in IFSC by resident individuals under the LRS scheme unlike the earlier permission to only invest in securities via the LRS scheme.