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  • Tag Archive: Indian tax

    1. Online Portal’s Hotel Booking Service Qualifies as Tour Operator Service

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      India tour operator service – Introduction

      In an important judgment, the CESTAT New Delhi has ruled in favor of a prominent online travel company, involved in facilitating hotel room bookings via its website and mobile application.

      This decision overturns the service tax demand raised by the Revenue Department, which had classified the service under ‘short-term accommodation’ rather than ‘tour operator’ service.

      Key highlights of the decision

      Service Classification as Tour Operator

      The Tribunal emphasised that the online portal acted as a facilitator, connecting hotels with customers.

      Scrutinising the ‘Privilege Partnership Agreement’ between the online portal and hotels, and the ‘User Agreement’ with customers, it was clear that the portal’s role was limited to providing an online booking platform.

      Consequently, it did not directly render hotel accommodation services.

      Eligibility for 90% Abatement

      Challenging the Department’s stance, the Tribunal clarified that the definition of a ‘tour operator’ extends beyond individual transactions.

      The portal, engaged in organizing tours including accommodation arrangements, rightfully fits into the ‘tour operator’ category.

      Therefore, it is eligible for a significant 90% abatement as per the relevant notifications.

      Rejection of Short-Term Accommodation Service Classification

      The Tribunal noted that for a service to be classified under short-term accommodation, it must be provided directly by the hotel.

      The online portal, lacking the necessary licenses and infrastructure, could not be equated with a hotel.

      This understanding further fortified the classification of the portal’s service as that of a tour operator.

      Implications of the Judgment

      This ruling sets a precedent for similar cases, impacting how online travel agencies are taxed.

      It underscores the distinction between being a service provider (hotel) and a service facilitator (online portal).

      Moreover, it provides clarity on the applicability of tax abatements in the travel and hospitality sector.

      Implications of the decision

      The CESTAT’s decision is a significant development in the tax position for online portals offering hotel booking services.

      It delineates the thin line between direct service provision and facilitation, a crucial distinction in the digital age where online platforms are ubiquitous.

      This ruling not only offers relief to the online travel company in question but also paves the way for similar businesses to understand their tax liabilities better.

      It is a testament to the evolving nature of tax laws and their interpretation in the context of modern, technology-driven services. 

      India tour operator service – Conclusion

      For businesses operating in this area, it’s crucial to stay abreast of such legal precedents and ensure compliance with the nuanced interpretations of tax laws.

      Final thoughts

      If you have any queries on this article on the India tour operator service, or Indian tax matters more generally, then please get in touch.

    2. Changes to the Angel Tax Valuation Rules

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      Changes to the Angel Tax Valuation Rules – Introduction

       

      The Central Board of Direct Taxes (CBDT) announced changes to the so-called Angel Tax provisions. 

       

      It did this through a notification dated 25 September 2023.

       

      The notice has made amendments to Rule 11UA of the Income-tax Rules, 1962, which outline the methodology for calculating the fair market value (FMV) of unlisted equity shares and compulsorily convertible preference shares (CCPS) under Section 56(2)(viib) of the Income-tax Act, 1961. 

       

      Section 56(2)(viib) is commonly known as the “Angel Tax” provision.

       

      What are the Angel tax provisions?

       

      The Angel Tax provisions apply when a company not substantially owned by the public (private or unlisted public company) issues shares at a premium that exceeding the FMV of the shares.

       

      The excess amount received is treated as income from other sources. 

       

      Changes from 1 April 2023

       

      Prior to April 1, 2023, Angel Tax applied only to shares issued to Indian tax residents but now extends to shares issued to non-residents.

       

      The amendments introduce flexibility in valuation methods and incentivize venture capital investments, with the following notable provisions:

       

      Types of Valuation Methods: The issuer company can choose from various valuation methods, including new methods for non-resident investors and venture capital investments

       

      Methods for Non-Resident Investors: Five new valuation methods (e.g., Comparable Company Multiple Method) have been introduced for shares issued to non-resident investors. These methods must be computed by a Category I merchant banker registered with the Securities and Exchange Board of India (SEBI).

       

      Methods for Venture Capital Undertakings: The FMV of equity shares issued to venture capital investors can be used as a benchmark for shares issued to other investors within a specific period.

       

      Methods for Notified Investors: The valuation method for unquoted equity shares issued to Notified Investors is used as a benchmark for shares issued to other investors within a set period. Notified Investors are specified in Notification No. 29/2023 dated May 24, 2023.

       

      Valuation of CCPS: The FMV of CCPS can be determined using the DCF method or new valuation methods based on the type of investor or FMV of unlisted equity shares.

       

      Valuation date

       

      The valuation date allows the use of a valuation report issued up to 90 days before the date of share issuance.

       

      Safe harbour

       

      A safe harbour  provision permits a tolerance limit of 10% between the issue price and FMV.

       

      If the difference does not exceed 10%, the issue price is considered the FMV.

       

      Start ups?

       

      The Angel Tax provisions also apply to startups receiving investments from non-residents, with exceptions based on specified conditions.

       

      Changes to the Angel Tax Valuation Rules – Conclusion

       

      While these measures are welcomed, Indian companies continue to face scrutiny regarding share premiums and valuation methods. 

       

      An observation is that Indian tax authorities often challenge valuation methodologies and assumptions, focusing on increasing the tax base by treating undervalued share issuances as income from other sources. 

       

      If you have any queries about the Changes to the Angel Tax Valuation Rules, Indian tax, or tax matters in general, then please get in touch.