INDIA Law and Practice Contributed by: Rishabh Shroff, Kunal Savani and Chirag Shah, Cyril Amarchand Mangaldas
The ITA also provides for certain tax exemptions in the case of trusts registered for charitable purposes. For taxation on trusts registered for charitable purposes under the ITA, see 10.1 Charitable Giving . India also recognises trusts governed by another juris - diction’s laws and which are created for foreign per - sons. Transfer of assets or income to such trusts must be aligned with India’s exchange control regulations. In recent years, promoter families and startup found - ers have increasingly deployed irrevocable discre - tionary trust structures for succession planning and governance purposes. The asset protection and suc - cession planning benefits of such structures are dis - cussed further in 4.1 Asset Protection and 4.2 Suc- cession Planning . 3.2 Recognition of Trusts Trusts are widely recognised, respected and used as an effective tool of succession and ring-fencing of assets in India. India recognises private as well as public trusts. Private trusts in India are governed by the Indian Trusts Act, 1882, (Trust Act) which primarily governs the rights and obligations of persons acting as settlor, trustees and beneficiaries of a private trust. Private trusts are a popularly chosen vehicle of succession and are established for holding joint family assets such as immovable property, shares of a family busi - ness, family jewels and so on. Members of the family are made beneficiaries of such family trusts in order to ensure a seamless inheritance of family-owned prop - erty and avoid the hassle of obtaining a probate. From a tax perspective, India has included provisions incorporating the GAAR under the ITA, with effect from 1 April 2017. As per the GAAR provisions, an arrangement is classified as an impermissible avoid - ance arrangement, if its main purpose is to obtain a tax benefit and the arrangement satisfies one of the following four conditions: • creates rights or obligations not ordinarily created between persons dealing at arm’s length; • results, directly or indirectly, in the misuse or abuse of the provisions of the ITA;
• lacks commercial substance or is deemed to lack commercial substance in whole or in part; or • is entered into, or carried out, by means, or in a manner, not ordinarily employed for bona fide purposes. Thus, if a trust has been set up for the purpose of avoiding taxes, then such a structure could attract the GAAR provisions and it may be disregarded to determine the ultimate tax effect. The statutes governing public trusts are set out in 10.1 Charitable Giving . Additionally, under FEMA, private trusts are typi - cally considered as pass-through structures. Assets held by the trust are subject to the same regulatory restrictions and permissions as would apply to the underlying parties in their individual capacity, and any cross-border transactions undertaken by the trust must comply with the foreign exchange regulations applicable to such persons. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions When an Indian resident is a beneficiary in a foreign trust then that person is required to furnish details of their foreign assets in Schedule FA in their Income Tax Return (ITR). Schedule FA pertains to the disclosure of scheduled foreign assets of Indian residents to avoid tax evasion. Further, such beneficiary being an Indian resident will be taxed on their global income which will include the income they receive from such trust as a part of their share as a beneficiary. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles There is no prohibition under the ITA on a benefi - ciary or settlor (donor) of a trust, foundation or simi - lar arrangement simultaneously acting in a fiduciary capacity (eg, as a trustee). However, where such an arrangement results in the settlor retaining or exer - cising powers over the trust’s assets or income, the trust may be regarded as a revocable trust. In such circumstances, the income of the trust would be liable to be clubbed with that of the settlor in accordance with the applicable provisions of the ITA.
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