The rules for determining place of effective management of a company have been deferred till April 2017 so as to give corporates sufficient time to prepare accounts according to their place of residency under the new norms, Finance Ministry said today.
Place of Effective Management (PoEM) rules for determining the place of effective management of a company, with a view to assess its tax liability, was to come into effect in the current fiscal. However, the final guideline is yet to be put in place by the CBDT.
"Since this Finance Bill will get passed by middle of May, we should not ideally introduce PoEM on the date which is not beginning of the year. So that is why we are postponing PoEM," Revenue Secretary Hasmukh Adhia said at the IVCA event.
He said stakeholders have raised concerns that if PoEM is implemented in later part of any fiscal year, then certain tax payers would be found to have flouted rules of paying advance tax and TDS since the beginning of year.
"This was a fair point. So we have to make legislative changes this year in Finance Bill which says that if a company is considered resident under PoEM guideline, they will not have obligation of TDS and Advance Tax for that year. So this is the change we have brought out in the Finance Bill," Adhia said.
Finance Minister Arun Jaitley in his 2016-17 Budget has announced that both PoEM and General Anti Avoidance Rules (GAAR) will be implemented from April 2017.
"GAAR is definitely coming in from April 1, 2017. When we said in Budget we are postponing implementation of PoEM by one year we did not want you to get an impression that this government is also going to postpone GAAR," Adhia said.
Last year, the Finance Minister had deferred applicability of General Anti-Avoidance Act (GAAR) by two years.
The Government had earlier proposed imposing the GAAR from April 1, 2015, for those claiming tax benefit of over Rs 3 crore. The rules are aimed at minimising tax avoidance for investments made by entities based in tax havens.
"Now PoEM and GAAR are both set to come, our rules are already laid, if any guidance is required for offshore funds we will provide," Adhia added.
The Central Board of Direct Taxes (CBDT) had in December come out with draft POEM guidelines which suggested two-stage process for determining the place of effective management of a company, with a view to assess its tax liability.
According to the draft guidelines, the first stage would be identification of the persons who make the key management and commercial decision for the company and secondly the determination of the place where these decisions are made.
The modification of the existing norms, it said, is necessary as many companies skip tax liability by misusing the guidelines.
Under the existing norms, many companies "artificially escape" the residential status under these provisions by shifting insignificant or isolated events related with control and management outside India.
The draft norms say PoEM would mean a place where key management and commercial decisions that are necessary for the conduct of a business or an entity as a whole are in substance made.
The draft norms also distinguish between active business outside India and passive income for the purpose of determination of PoEM.
According to the guidelines, a company will be deemed to be engaged in active business outside India if the passive income (royalty, capital gains, dividend, interest, rental income) is not more than 50 per cent of its total income, less than 50 per cent of its total assets are situated in India, less than 50 per cent of the employees are situated in India and the pay roll expenses on such employees is less than 50 per cent of the total.
The draft guidelines also state that "the place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India."
Guidelines provide factors such as location where a company's board regularly meets and makes decisions, head office location, etc.