What NRIs should know about changes to India's bankruptcy code

Law aims to help creditors to recover their dues in the shortest possible time and also help to restructure the company

Photo for illustrative purposes only. - KT file

By H. P. Ranina

Published: Sat 4 Feb 2023, 4:16 PM

Last updated: Tue 21 Feb 2023, 4:30 PM

Question: Though the Insolvency & Bankruptcy Code has been in force for the past many years, the process is painfully slow and several matters are pending. Is anything being done to expedite the process?

ANSWER: The IBC, which came into force in 2016, provides for a time-bound resolution of bankruptcy proceedings pertaining to stressed assets. It is meant to help creditors to recover their dues in the shortest possible time and also help to restructure the company, where possible, to save the jobs and livelihood of employees. In order to strengthen the functioning of the IBC, changes to the law are being proposed by the Ministry of Corporate Affairs. These changes pertain to admission of corporate insolvency resolution applications, streamlining the process and recasting the liquidation proceedings. The Ministry has suggested developing a state-of-the-art electronic platform that can handle several processes under the code with minimum human interface. This e-platform will provide for a case management system, automated processes to file applications, storage of records of corporate debtors, and incentivising participation of other market players in the IBC ecosystem. It is also proposed to redesign the fast track corporate insolvency resolution process, which would allow financial creditors to seek remedy without going to the adjudicating authority. This out-of-court process will help small and medium enterprises to recover their dues faster from large debtors.

Question: I read in the press that under the new budget proposals announced on 1st February, non-resident Indians will be liable to pay tax in India on gifts received from resident Indians. Can you throw some light on this proposed amendment?

ANSWER: Currently, the law is that any gift received by a person, whether resident or non-resident, in excess of Rs50,000 in a financial year is deemed to be income taxable in the hands of the recipient. However, this provision would not apply where the gift in excess of Rs50,000 is received from relatives as defined in the law or if it is received on occasion of marriage or under a will made by a deceased person. The current provision is under section 9(1)(viii) of the Income-tax Act. In other words, at present the law taxes such gifts in excess of Rs50,000 in the hands of a non-resident. Persons who are resident but not ordinarily resident have not been covered by this deeming provision whereby the gifted amount is taxable. This loophole is now sought to be plugged by the Finance Bill, 2023, whereby a person who is resident but not ordinarily resident in India will also be liable to tax on gifts received from resident Indians on or after April 1, 2023. A person is resident but not ordinarily resident when he returns to India after being non-resident under the provisions of section 6(6) of the Income-tax Act. Generally, a person enjoys this status of being resident but not ordinarily resident for two years after he returns to India, provided he has fulfilled the conditions laid down in this sub-section. In short, after March 31, 2023, all persons whether resident, resident but not ordinarily resident, or non-resident will have to pay tax in India on gifts in excess of Rs50,000 provided they are received from non-relatives or on any occasion other than marriage.

Question: While several startups have been successful in India, some of them are laying off employees in large numbers. What is the cause for this unfortunate turn of events?

ANSWER: This unfortunate turn of events has cast a dark shadow on the success stories of many well known startups. The reason cited by these companies is the slowdown in online spending due to consumers increasingly moving back to physical options. At the same time, interest rates have risen, which has led to cost overruns. Recessionary fears have grown in the West, leading to venture capital and private equity funds turning cautious. This has adversely impacted the ability of startups to keep raising equity funds. In fact, funding for startups is estimated to have dropped by 31 per cent in 2022. The focus is now shifting on profitability and, therefore, internal generation of revenues. The rationalisation and reduction of costs, especially in marketing, has resulted in laying off employees. Many analysts believe that startups have resorted to laying off employees on account of unjustifiably high level of recruitment during the initial period when funds were readily available.

H. P. Ranina is a practising lawyer, specializing in tax and exchange management laws of India.

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