NRI PROBLEMS

I am informed that employee benefit trusts have been prohibited from purchasing shares in the market while administering stock option schemes. Is there going to be a review of this decision as it is contrary to international practice?

P. Lakshman, Dubai

After the Securities and Exchange Board of India (Sebi) prohibited acquisition of shares in the secondary market by employee welfare trusts, representations have been received from different quarters to review the decision. Sebi, therefore, appointed a committee which has now suggested that acquisition of shares in the secondary market should be permitted because it will allow companies to grant stock options to employees without having to dilute their existing share capital. Sebi has yet to accept this recommendation and an announcement is expected shortly.

However, Sebi has permitted equity-settled Stock Appreciation Rights. Use of SARs will help employees as they will not be required to invest their money but only get the net appreciation. Sebi will continue to maintain regulations in respect of maximum holding, restriction on sale of shares, shareholder approvals, disclosures in annual report and classifying the employee trust as an insider.

An Indian company with which I am connected desired to make a public issue of shares. It incurred substantial expenditure. However, the issue did not materialise as it was not approved by Sebi. Would the expenditure incurred be deductible against the profits of the company?

S.L. Mitra, Sharjah

The Supreme Court of India has held in several cases that expenditure incurred on raising share capital cannot be allowed as a deduction because such expenditure is of a capital nature. Capital expenses are not deductible under section 37 of the Income-tax Act. However, expenditure incurred on monies borrowed or for taking loans would be allowable.

Therefore, in the case of your company, the expenditure would not be deductible. The fact that the share issue did not materialise is not relevant. Courts have also held that even if a share issue is made mandatory under a law, expenditure incurred for this purpose would not be of a revenue nature.

I want to go back to India and join my brother’s business of developing software. So far no exports have been made by his company. However, I would like to register under the Software Technology Parks of India scheme. Would the company be entitled to claim tax holiday benefit?

R.K. Sheikh, Doha

The benefit of tax holiday is no longer available under section 10-A of the Income-tax Act. The benefit of this provision is not available from the assessment year 2012-13. However, if the unit is set up in a Special Economic Zone, the exemption would be available under section 10-AA provided the conditions laid down in the Special Economic Zones Act, 2005 are fulfilled. The tax holiday under this provision is hundred percent of the profits derived from export of services.

The initial holiday period is five consecutive years commencing with the year in which the unit begins to provide services. For further period of five years, the deduction is fifty per cent of the profits from exports. For the next five years, so much of the profits which are transferred to a Special Economic Zone reinvestment reserve account would be eligible for the tax holiday. However, there is a cap of fifty per cent on the profits for this third period of five years. The amount set aside to the reserve account has to be utilised before the expiry of three years for acquiring new plant and machinery.

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