Budget 2012

©2012 Deloitte Touche Tohmatsu India Private Limited

Direct Taxes

Indirect Transfer of Shares

General Anti Avoidance Rule

International Taxation

Transfer Pricing

Corporate Taxation

Other Amendments

1


Indirect Transfer of Shares

2


Indirect Transfer of SharesBackdrop

• Presently no specific provision to tax indirect transfer of shares of an Indian company

‒ Taxation of indirect transfer of shares presupposed in the DTC; exemption granted in certain situations

• Recent landmark judgment of the Supreme Court in the Vodafone case

‒ Indirect transfer of shares not taxable

• Indirect transfer of shares specifically proposed to be brought to tax

‒ Proposed amendment nullifies the judgment of the Supreme Court

3

Indian Co

B Co

Outside India

India

A Co

Transfer C Co


Indirect Transfer of SharesProposed 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

4


Indirect Transfer of SharesImplications 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 ?

5


General Anti Avoidance Rule

6


GAARBackdrop• 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

7

Principle of substance over legal form sought to be introduced


GAARProposed provisions (1)

8

Impermissible arrangement

ArrangementObjective of obtaining tax

benefit (including intangible benefits)

Creates rights and obligations not normally created in arm’s length

transactions

Results in direct or indirect misuse or abuse of the

provisions

Lacks or is deemed to lack commercial substance in

whole or partIs not bonafide

Consequences

Disregarding, combining or re-characterising the

whole or part of the arrangement

Treating the arrangement as if it has not been

entered into

Disregarding any party or treating parties as one and

the same person

Deeming connected persons to be one

Reallocating any income / receipt and expenditure /

deduction

Determining the place of residence or situs of asset

or transaction

Disregarding any corporate structure

Treatment of equity as debt and vice versa


GAARProposed 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

9


GAARImplications 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?

10


GAARImplications 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

11

Prolonged litigation and uncertainty for taxpayers


International Taxation

12


International TaxationScope 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

13

Possible to argue that payments not taxable under the treaty?


International TaxationOther 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

14


International TaxationWithholding 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

15

Impact on Indian withholding tax on payment by NR to R

Impossibility of Performance – How to enforce compliance?

Practical Difficulty – Indian address required for TAN


International TaxationWithholding 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?

16

Composite Contracts, Share Transfer, etc. may be notified

Possibly to limit CA certification route for certain payments


International TaxationTax 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

17

Does appeal lie before CIT(A) u/s. 248 if TRC obtained later?

Impact for issuance of Certificate u/s. 195

No PE – Fixed Base / Make Available / Professional services?


Transfer Pricing

18


Transfer PricingSpecified 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.

19


Corporate Taxation

20


Corporate TaxationInitial 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

21

Does it effectively mean that these plant and machinery was not eligible earlier?


Corporate TaxationRationalising 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

22

Issue to claim benefit at the time of Filing of Return

Possibility to apply it retrospectively?


Corporate TaxationMinimum 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

23

Applicability to Nationalized Banks?

Applicability to Government Corporations, Boards?

Applicability to Foreign Companies?


Corporate TaxationShare 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

24

Provisions do not apply to consideration for issue of shares to non-residents and widely held companies


Other Amendments

25


Other AmendmentsAssets 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

26

Implications for expatriates?


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

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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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Budget 2012

Economy & Finance