Powerpoint Presentation on Budget 2012

1. Direct Taxes
Indirect Transfer of Shares
General Anti Avoidance Rule
International Taxation
Transfer Pricing
Corporate Taxation
Other Amendments
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2. Indirect Transfer of Shares
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3. Indirect Transfer of Shares
Backdrop
• Presently no specific provision to tax
A Co indirect transfer of shares of an Indian
company
‒ Taxation of indirect transfer of shares
Transfer C Co presupposed in the DTC; exemption
granted in certain situations
• Recent landmark judgment of the
B Co Supreme Court in the Vodafone case
‒ Indirect transfer of shares not
taxable
Outside India • Indirect transfer of shares specifically
proposed to be brought to tax
India
‒ Proposed amendment nullifies the
judgment of the Supreme Court
Indian Co
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4. Indirect Transfer of Shares
Proposed amendments
• Proposed clarificatory amendments retrospectively from 1 April 1962:
‒ „through‟ includes „by means of‟, „in consequence of‟, or „by reason of‟
‒ Share or interest in a foreign company deemed to be situated in India if its
value derives, directly or indirectly, from assets located in India
‒ „property‟ includes any rights in or in relation to an Indian company, including
rights of management or control or any other rights
‒ „transfer‟ includes disposing of or parting with an asset or any interest, or
creating any interest in any asset
• directly or indirectly, absolutely or conditionally, voluntarily or involuntarily
• by way of an agreement (entered into in India or outside India) or otherwise
• notwithstanding that transfer of rights has been characterised as being effected
or dependent upon or flowing from the transfer of shares of a foreign company
• Validation clause to validate notices and taxes in respect of income accruing or
arising through indirect transfer of shares
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5. Indirect Transfer of Shares
Implications and key issues
Implications
• Targeting to tax overseas acquisitions having substantial value derived from
underlying Indian assets
• Negative impact on litigations pending at various levels
Key issues
• Is the amendment constitutionally valid
- Effect on Vodafone / other cases
- Validation clause
• Impact on transfers routed through favorable treaty jurisdictions
• Tax implications for intra-group restructurings / global acquisitions
• Holding company listed on a stock exchange outside of India
• “Substantial Value” ?
• Computation of the value ?
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6. General Anti Avoidance Rule
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7. GAAR
Backdrop
• Tax avoidance v. Tax evasion
‒ Avoidance: An attempt to reduce tax liability through legal means, i.e. to
regulate your affairs in such a way that you pay the minimum tax imposed
(as opposed to the maximum)
‒ Evasion: Use of illegal means to reduce tax liabilities, i.e. falsification of
books, suppression of income, overstatement of deductions, etc.
• Principle laid down by English Courts and accepted and reiterated by Indian
Courts: Within the framework of the law, a taxpayer has the right to arrange his
affairs in the most tax efficient manner
‒ Legal form of a transaction respected by judiciary
• Introduction of General Anti Avoidance Rule [GAAR] to provide for taxation
based on the „real nature‟ of a transaction
Principle of substance over legal form sought to be introduced
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8. GAAR
Proposed provisions (1)
Impermissible
arrangement
Objective of obtaining tax
Arrangement benefit (including
intangible benefits)
Creates rights and
Results in direct or indirect Lacks or is deemed to lack
obligations not normally
misuse or abuse of the commercial substance in Is not bonafide
created in arm’s length
provisions whole or part
transactions
Consequences
Disregarding, combining
Treating the arrangement Disregarding any party or
or re-characterising the Deeming connected
as if it has not been treating parties as one and
whole or part of the persons to be one
entered into the same person
arrangement
Reallocating any income / Determining the place of
Disregarding any Treatment of equity as
receipt and expenditure / residence or situs of asset
corporate structure debt and vice versa
deduction or transaction
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9. GAAR
Proposed provisions (2)
• Treaty will be overridden when GAAR is invoked
• Arrangement resulting in tax benefit shall be presumed to be for the main
purpose of obtaining a tax benefit, unless proved otherwise
‒ Burden of proof on the taxpayer
• Arrangement deemed to lack commercial substance if:
‒ Arrangement as a whole differs significantly from individual steps
‒ It involves round trip financing, an accommodating party, offsetting or
cancelling transactions, disguising the transaction
‒ Location of asset or transaction or place of residence is for obtaining a tax
benefit
• Reference by jurisdictional Commissioner to Approving Panel (of at least three
members of the rank of Commissioner or above) before invoking GAAR
‒ Taxpayer can file appeal to the Tribunal against order of Approving Panel;
tax authorities cannot challenge the order
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10. GAAR
Implications and key issues (1)
Implications
• Every „tax planning‟ measure potentially open to challenge by the Revenue
Key issues
• The cornerstone of GAAR is determining the motive of a taxpayer
‒ Determination of motive is highly subjective and open to diverse
interpretations
• Clear and unambiguous guidelines need to be prescribed in order to provide
protection against arbitrary application of the GAAR
• Guidelines will be critical on the following issues:
‒ Distinction between tax planning and tax avoidance
‒ Threshold limits?
• Can GAAR provisions be invoked against arrangements entered into prior to
the implementation, but resulting in a tax benefit after introduction of GAAR?
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11. GAAR
Implications and key issues (2)
Some case studies
• Investments into India through holding companies in intermediary
jurisdictions (Mauritius, Cyprus, etc.) likely to be subjected to detailed
scrutiny under GAAR
• Tax authorities may seek to re-characterise of buyback proceeds as
dividend
• Re-characterisation of debt into equity (dividend distribution tax ?)
• Split contracts in EPC industry – with overall responsibility of the foreign
entity
• Domestic structuring (amalgamation / demerger) approved by High Court
– tax authorities may seek to challenge the same also
• Changing business models, say from marketing service provider to low
risk distributor
Prolonged litigation and uncertainty for taxpayers
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12. International Taxation
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13. International Taxation
Scope of coverage of royalty widened
• Clarification that transfer of rights for use / right to use computer software
(including granting of a licence) is in the nature of royalty
‒ In line with judgment of the Karnataka High Court in the case of Samsung
‒ Not in line with international principles
• Clarification that royalty includes consideration in respect of right, property or
information, whether or not: (1) possession is with the payer; or (2) used
directly by the payer; or (3) location is in India
• Clarification that „process‟ includes transmission by satellite, cable, optic fibre
or by any other similar technology, whether or not such process is secret
• Retrospective amendment from 1 June 1976
‒ Attempt to overcome contrary judicial pronouncements of the Delhi High
Court in the cases of Ericsson and Asia Satellite and in other cases
Possible to argue that payments not taxable under the treaty?
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14. International Taxation
Other amendments (2)
• Meaning of terms notified by the government under tax treaties shall be
deemed to be effective from the date of the tax treaty
‒ Retrospective amendment from 1 October 2009
‒ Notification defining „may be taxed‟ issued on 28 August 2008 – impact of
amendment on this notification unclear
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15. International Taxation
Withholding tax provisions tightened
• Clarification that a non-resident is required to comply with the Indian
withholding tax provisions while making a payment to another non-resident
‒ Provision applies regardless of whether the non-resident payer has a
residence, place of business, business connection or any other presence in
India
‒ Retrospective amendment from 1 April 1962
Practical Difficulty – Indian address required for TAN
Impossibility of Performance – How to enforce compliance?
Impact on Indian withholding tax on payment by NR to R
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16. International Taxation
Withholding tax provisions tightened
• Requirement to make an application to the tax authorities to determine the
appropriate proportion of sum chargeable to tax on payments to non-residents
‒ Class of persons or cases to which provision will apply to be notified
‒ Provision deals with proportion of the sum chargeable to tax – rate of tax not
to be specified by the tax authorities
‒ Requirement applies whether or not the sum is chargeable to tax – unclear
why application required when payment not taxable
‒ Intention to overrule Supreme Court judgment in GE Technology‟s case?
Possibly to limit CA certification route for certain payments
Composite Contracts, Share Transfer, etc. may be notified
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17. International Taxation
Tax Residency Certificate
• Tax treaty benefits available only if tax residency certificate obtained from the
Government of the country of residence
‒ Certificate to contain prescribed particulars
‒ Necessary but not sufficient condition for claiming treaty benefits
‒ Implementation of treaty is left to the countries and hence domestic law can
provide for initial tax payment and then claim of refund through Return
‒ Wider (or widest?) scope of domestic tax (for royalties / FTS / Capital Gains
and even business connection) and cases of grossing-up to cause real
hardship
No PE – Fixed Base / Make Available / Professional services?
Impact for issuance of Certificate u/s. 195
Does appeal lie before CIT(A) u/s. 248 if TRC obtained later?
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18. Transfer Pricing
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19. Transfer Pricing
Specified Domestic Transactions
Specified Domestic Transactions have been brought under the purview of Transfer
Pricing Regulations with effect from 1st April 2013 [i.e. FY 2012-13]
• Threshold limit for the applicability of TP Provisions to Specified Domestic
Transaction is INR 5 Cr.
• Provisions relating to determination of Arm‟s Length Price will be applicable to
the “Specified Domestic Transactions”
• Domestic transactions covered under new provision of 92 BA are :
‒ Which are not international transactions;
‒ Transactions covered under section 40A (2) (b)- Expenses/ Payment
transactions between related persons;
‒ Transfer of goods/ services/ business by the assessee covered under the
beneficial provisions of 80 IA or under Chapter VI A or 10 AA where the
provisions of 80IA is applicable.
• Specified Domestic Transactions described above will be subject to TP
Compliance requirements including TP Documentation, Certification and TP
Litigation/ Penalty provisions.
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20. Corporate Taxation
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21. Corporate Taxation
Initial Depreciation
• Benefit of initial depreciation @ 20% will be available to the power sector
‒ Earlier restricted to only taxpayers engaged in manufacturing activities
• Effect of amendment
‒ Does it imply that power plants were earlier not eligible for initial
depreciation?
‒ Manufacturing companies claiming initial depreciation on windmill and CPP
Does it effectively mean that these plant and machinery was not eligible
earlier?
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22. Corporate Taxation
Rationalising the disallowance provisions
• Payment of interest, commission, brokerage, professional fee, etc. to resident
payees is subject to TDS
‒ Non-deduction of tax results in disallowance of business expenditure
‒ Expenditure is allowed in the year in which tax is subsequently deducted
and paid
• No disallowance will be made for non-deduction of tax if the recipient has:
‒ Furnished its return of income
‒ Taken into account such sum for computing income in the return
‒ Paid the tax due on income declared in the return
• Payer will not be deemed to be an assessee in default
‒ Interest payable by the payer for default in complying with TDS provisions
• Payer has to submit a certificate from an accountant in the prescribed form
Possibility to apply it retrospectively?
Issue to claim benefit at the time of Filing of Return
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23. Corporate Taxation
Minimum Alternate Tax [MAT]
• Presently every company is required to prepare its account as per Schedule VI
of the Companies Act, 1956 for the purpose of MAT
‒ It is proposed that certain companies which are not required to prepare its
accounts as per Schedule VI shall take the accounts prepared in
accordance with their respective Acts as the basis for computing MAT
‒ Applicable for companies in insurance, banking and electricity
‒ Decision of Mumbai Tribunal in the case of Krung Thai Bank nullified
Applicability to Foreign Companies?
Applicability to Government Corporations, Boards?
Applicability to Nationalized Banks?
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24. Corporate Taxation
Share premium in excess of FMV to be taxed
• Consideration for issue of shares by a closely held company
‒ from a resident
‒ at a premium
‒ in excess of fair market value [FMV] of shares
will be chargeable to tax as Income from other sources
• FMV will be the higher of:
‒ Value as per the method to be prescribed
‒ Value as substantiated by the company to the satisfaction of the tax
authorities based on the value on the date of issues of shares, of its assets
(including intangible assets)
• Does not apply to VCU receiving consideration from VCC / VCF
Provisions do not apply to consideration for issue of shares to non-
residents and widely held companies
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25. Other Amendments
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26. Other Amendments
Assets located outside India
• Requirement of filing return in the case of a resident who has any asset
(including any financial interest in any entity) located outside India or signing
authority in any (bank?) account located outside India
‒ Compulsory requirement, even if otherwise not required to file return
• Time limit for issue of notice for reopening of assessments extended to 17
years from the end of the financial year if income in relation to any asset
(including financial interest) located outside India has escaped assessment
‒ Cases for assessment years 2012-13 or earlier will also be covered
• Income deemed to have escaped assessment if a person is found to have any
asset (including financial interest) located outside India
• Similar amendments made for wealth tax purposes
Implications for expatriates?
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27. Other Amendments
• For computing advance tax, “tax deductible” on income received by the
assessee not to be considered if the payer has paid such income without actual
deduction
• Weighted deduction @ 150% for expenditure incurred on skill development
projects
‒ To be notified by CBDT in accordance with prescribed guidelines
‒ Memorandum indicates that benefit will be restricted to the manufacturing
sector
• Status of Incentives expiring from April 1, 2012
Section Status
35(2AB) – In-house R&D Extended up to 2017
80IA(4) – Generation & Distribution of Power Extended up to 2013
80IB(4) – Industrial undertaking in J&K Not extended
80IB(9) – Refining mineral oil Not extended
80IC(2) – New industrial undertaking in HP & Uttaranchal Not extended
80CCF – Infrastructure Bonds Not extended
115BBD – Concessional tax on dividend from foreign company Extended up to 2013
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