Taxation in India 2011-12

A compilation of our published thought leadership

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Corporate tax

Contents
Feature articles
Corporate tax
9 | An important step to revamp complex structure of DTC
Sudhir Kapadia looks forward to an efficient tax regime in India as he discusses the recommendation of the Standing Committee.

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A ‘retrospective’ play on words
The word ‘retrospective’ played ploy in the recent budget. Rajiv Memani elaborates on the proposed change in the definition of capital asset, transfer and scope of income with retrospective effect.

14 | Ensure GAAR doesn’t cause hardship to taxpayers
General Anti-Avoidance Rules (GAAR), though introduced with an aim to counter tax avoidance schemes and codify the concept of “substance over form” in law, Hitesh Sharma stresses that the government must ensure such widely-scoped provision does not cause undue hardship to taxpayer and bona fide tax-planning is not challenged.

16 | Budget 2012-2013: An analysis
According to Ganesh Raj, Budget 2012 though promises that reforms will be continued and fiscal numbers will be kept in check; still non-tax revenue can again fall short due to uncertainties around disinvestment and telecom spectrum sale.

Personal Tax
21 | Of death and taxes
Amitabh Singh gets into a conversation about the repercussions of inheritance taxes.

24 | DTC to widen wealth tax net
While looking forward to an efficient tax regime with DTC, Mayur Shah dwells into the fact how wider asset coverage for wealth tax, may eat up the savings.

26 | How much tax is payable on global income?
Liberalisation opened up a world of investment opportunities for Indians, but these are not tax-free luxuries writes Shalini Jain.

29 | Will court rulings on PF affect you?
Sonu Iyer analyses the change in calculation of PF and take home salary with Madhya Pradesh & Madras high court ruling to include conveyance allowance and special allowance to the basic wages.

32 | Weigh DTC provisions while choosing tax saving instruments
DTC has suggested some major changes in the way tax saving instruments are positioned, Amarpal Chadha lists down some of the key proposals under the DTC which could impact your investment decisions.

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thus clarity and certainty on the issue of P-Note taxation is the need of the hour. International tax 49 | Importance of transfer pricing documentation Vijay Iyer stresses on the need for a robust Transfer Pricing documentation in order to win TP controversies within time. Vidya Nagarajan feels that the country has been under constant scrutiny by Indian tax authorities as a result of alleged abuse by investors. except those in the negative list. 54 | Reducing cross-border tax disputes It has become crucial to effectively unlock the key to lengthened tax disputes and evolve new juristic standard for their speedy resolution says Prashant Khatore. 60 | Pause before P-Notes Hiresh Wadhwani is of the view that uncertainties in tax positions could deter FIIs from issuing P-Notes. feels Satya Poddar. 62 | Mauritius structures — gazing through a crystal ball The India-Mauritius Tax Treaty which had underpinned the emergence of Mauritius as the dominant channel for FDI into India. 57 | Going back in time is no good Though retrospective amendments proposed in the Budget 2012 clouded much of the industry discussion. again In Budget 2012. the only measure which could be viewed as a significant stepping stone to the GST is the Goods and Service Tax Network (GSTN).Indirect tax 35 | Advance ruling under indirect tax Saloni Roy emphasizes that the Central Government should reconsider aligning the provisions relating to advance ruling under indirect tax laws with the scheme prevailing under income tax. Jayesh Sanghvi dwelled deeper and elaborated on positive amendments like Advance Pricing Agreements (APA) and transfer pricing. 38 | A better goods and services tax Harishanker Subramaniam (Hari) elaborates on how negative list of services and place of supply rules are a precursor and an interim step towards implementing the GST in the near future. would become taxable. 46 | Pluses in the negative list Budget 2012 has proposed a paradigm shift in the way services are to be taxed in India and if the proposals are accepted then all kinds of activities. Vijay Iyer outlines the key points from OECD scoping paper on the subject that can help resolve the issue. . suggests Bipin Sapra. which could adversely impact foreign fund inflow to the Indian capital market. 43 | Budget takes India inc closer to GST Vivek Pachisia fears that the increase in tax rates and the widening the tax base through the negative list based taxation would increase the cost of living for the common man. 40 | Burden of fiscal consolidation falls on tax system. 52 | Transfer Pricing and intangibles Ernst & Young report highlights the increased focus of audits to the transfer of intangibles.

which would help in combating regulatory risks and unexpected costs. 78 | New regulatory framework for private investment vehicles The proposed framework by SEBI for private funds is restrictive as per Prakash Shah & Chaitrali Kamat. undoubtedly FDI in the sector garner much of interest. Sudhir Kapadia. . cross-border mergers will only be allowed with companies situated in jurisdictions notified by the Central Government. including India. discusses recent steps taken by various countries. 69 | Options that change investment status Amrish applauds DIPP on the revise of its earlier provision that sought to define equity investment as debt. Tax and regulatory policy 75 | Is grip tightening on black money? The issue of tax evasion. Paresh Parekh briefs on the possible impact of the proposed change in FDI in retail. feels Amrish Shah as it is likely to change the landscape for M&As of listed Indian entities in the near future. 82 | Alternative investment funds: hits and misses SEBI’s proposal to introduce. say Sudhir Kapadia and Subramaniam Krishnan in their exclusive review. and lowering of the statutory rates. but it could also have an adverse impact on investor sentiments and hamper future FDI flows into India. while and on the other hand the intent is to regulate the domestic funds.Transaction tax 65 | New ring to tax tale Amrish Shah debates that taxation of Cross-border transactions may result in a temporary spurt in revenue for the Government. continues to occupy centre stage in the country. while also emphasize that the other regulators should follow suit. 94 | The big push for big retail India’s retail market promises to be among the top retail destinations in the world. 71 | The new M&A horizon Narendra Rohira feels that with the new Companies Bill 2011. or black money. if it was accompanied by in-built options. broadening of their bases. to tackle tax evasion in general and offshore tax evasion in particular. Alternative Investment Funds (AIF) will be useful only if it enables them to compete with their global peers. 84 | One-time amnesty for swiss stash Government often toy with the idea of introducing one-time amnesty to bring back the Swiss stash. 90 | New SEBI takeover code finally notified The new takeover code notified is a revolutionary legislation. Specials 101 | The path to globalisation compliance and reporting Rahul Kashikar draws that a more rationally organised. since its wide to cover offshore funds investing in India. 97 | 3G of tax reforms Satya Poddar elaborates on the third-generation tax reforms that are rationalisation of the direct and indirect taxes levied by the Centre. Sudhir Kapadia dwells in if it would that be an effective idea to implement? 87 | Tax transparency is the new reality Pranav Sayta lists down the fine points of the amended protocol to the India-Swiss DTAA. efficient and controlled compliance and reporting function is required on a global front.

com/in/BudgetPLUS2012 www. Assistant Publisher Pushpanjali Singh.com/in/TaxServices ey.com/in/DBI2011 Please write to us @: Tax.update@in.ey. Design Tripti Panda. Corporate Communications Deepti Khatri.ey.com 6 .Editorial board Sudhir Kapadia Rajendra Nayak Prashant Khatore Bipin Sapra Assistant editors Rahul Kashikar Shalini Mathur Rahul Patni Subramaniam Krishnan Ashwin Vishwanathan Chaitrali Kamat Tejas Mody Cynthia Dalmeida Production team Jerin Verghese. Logistics Visit us @: ey. Publisher Pooja Walke.

India found itself in the heart of these conflicting demands. indirect tax. the fiscal year 2011-12 began with signs that indicated that the Indian economy has emerged with remarkable rapidity from the slowdown caused by the global financial crisis of 2007-09. we hope this publication stimulates your thoughts. Tax executives. To enable a deeper understanding of some noteworthy tax and regulatory developments in the year gone by. tax & regulatory policy. However. The publication contains a compilation of articles ranging from personal taxation. Sudhir Kapadia National Tax Leader Ernst & Young. we are glad to bring forth to you Taxation in India 2011-12. transfer pricing. With the scale of the changes that are underway. Managing growth and price stability are the major challenges of macroeconomic policymaking. The past year has witnessed a dizzying array of tax legislation.Foreword The world has changed dramatically in the space of just a few years. taxation of cross-border transactions and M&A taxation. India 7 . overshadowing longer-term tax trends. reforms and stepped up tax enforcement efforts. acknowledge that they are more committed than ever to enforcing existing tax law and creating new enforcement mechanisms. The next five years will likely be every bit as volatile and evolutionary as the last half-decade. In 2011-12. helps you prepare for the dynamic future ahead of us. The pace of change may only accelerate as Governments and businesses reflect on lessons learned from the global economic crisis. under pressure to generate more revenue to balance debt-laden budgets and fund infrastructure and social programs. From an Indian perspective. It is a select compilation of analysis that our thought leaders and experts shared with the market in some of the leading tax and business publications on the developments between July 2011 and May 2012. Tax administrators and legislators. The effect on tax policy has been startling. tax administrators and tax policy-makers have perhaps never been in such agreement: converging trends have created the riskiest environment for tax controversy the world has experienced in years. recent macroeconomic data indicates that some clouds continue to linger. Tax authorities have become significantly more assertive in examining cross-border activities.

The Budget also proposed to introduce a general anti-avoidance rule (GAAR) to address aggressive tax planning. and would now apply from 1 April 2013 (i. A plethora of amendments. tax year 2013-14 onwards). Thankfully. This section analysis these as also the report of the Standing Committee on Finance on major aspects of the direct taxes code (DTC). some of which are introduced with retrospective effect have not gone well with various stakeholders.e. the start date for application of GAAR has been deferred by a year.An Analysis . that seeks to comprehensively replace the present tax law. the highlight of which appears to be the significant changes brought in by the Finance Minister as part of the Union Budget 2012 (Budget) proposals. In this section 8 9 | An important step to revamp complex structure of DTC 11 | A “retrospective” play on words 14 | Ensure GAAR doesn’t cause hardship to taxpayers 16 | Budget 2012-2013 .Feature articles Corporate tax The Indian corporate tax arena has witnessed several developments in the last fiscal year.

(One wonders whether this recommendation alone would ensure that the duly revised DTC cannot see the light of the day in time for its immediate implementation. including a direct critique on its very structure. 10 March 2012 T he Standing Committee has finally spoken on major aspects of the direct taxes code. The Committee has made a radical suggestion of taking disciplinary action against those Assessing Officers who have raised unreasonable tax demands 9 . in relation to the General Avoidance Agreement Rules ( GAAR). the Committee has specifically recommended that the onus of proof of tax avoidance should rest with the tax authorities and not the tax payer. Interestingly. Another welcome aspect of the Committee’s report is affirmation of the Corporate tax rate of 30% and a thumbs up to ‘investment linked’ incentives as opposed to ‘profit linked’ incentives. the aspect of accountability of Assessing Officers and the exaggerated assessments and additional demands without sufficient grounds raised by the Assessing Officers has been noted by the Committee. or DTC. The Committee has recommended that suitable grandfathering provisions should be made to protect the interest of the taxpayers who have entered into structures and arrangements under the existing law.) The other heartening recommendation of the Committee is to note the unfettered discretion sought to be granted through the rule making provisions in the DTC to the Tax authorities.Corporate tax An important step to revamp complex structure of DTC Sudhir Kapadia Economic Times. therefore. The Committee has. The Committee notes. For instance. recommended a complete relook at the structure of the DTC to make it more user friendly. the Committee has gone on to suggest provisions which are presently missing in the DTC for eg. the overarching objectives of the DTC to make tax laws simple and comprehensible yet the structure of the DTC whereby large number of schedules containing detailed provisions are relegated at the end of the main body of the Bill would only create more confusion than clarity.

.com 10 . as recommended by the Standing Committee.. He is based in our Mumbai office.ey.. 2012 had proposed that the GAAR Approving Panel will comprise not less than three members consisting of officers of Commissioner rank and above. However.. at least of the rank of the Joint Secretary to the Government of India... Reprinted with the permission of Economic Times © 2012. All rights reserved throughout the world. 2012. Further.. Sudhir Kapadia National Tax Leader Ernst & Young. This is a far reaching suggestion which should be duly incorporated in the DTC. while the Finance Bill. Finally.. based on representations made by various stakeholders and the recommendations of the Standing Committee.. Sudhir also leads the client relationship management agenda for our tax practice and is the senior tax advisory partner for a number of firms’ leading clients.. an amendment has been made to provide that the panel will also include an officer of the Indian legal service.. .. India Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies. the Committee has recommended setting up of special fast track courts comprising of experts to dispose of the plethora of pending cases.Feature articles An important step to revamp complex structure of DTC based The Committee has made a radical suggestion of taking disciplinary action against those Assessing Officers who have raised unreasonable tax demands based on irrational tax assessments which is perhaps of the first of its kind ever in the history of parliamentary recommendations in India. the GAAR provisions have been deferred by a year and will now apply from 1 April 2013. You can write to Sudhir at: Sudhir. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation. Another important recommendation of the Committee is to allow for tax consolidation of group entities to eliminate multiple levels of taxation of income generated within the group and reduce compliance costs.. had included provisions to introduce GAAR.... The Finance Bill.Kapadia@in.. In addition. the primary onus of proving that the arrangement is an impermissible avoidance arrangement now vests with the tax authority and not the taxpayer. It is not clear as to whether this is to be a one-time mechanism or a sustainable solution to reduce the time taken in litigation.

the expansion in the scope of royalty for right to use property is effective from 1976. it will have the effect of overruling many favourable judgements on software taxation. irrespective of the medium. it puts a question mark on several other judicial pronouncements in tax cases. Further. One of the provisions in the budget that has taken industry by surprise is the proposed change in the definition of capital asset. As if this was not enough. the pragmatic suggestions of the parliamentary standing committee have also been ignored. where sale of standard software supplied by non-resident vendors has been considered as out of the ambit of royalty taxation. which shall result in declaring a transaction as “impermissible avoidance arrangement” where the transaction lacks commercial substance. little did we realize that he would be so true to these words. the finance Bill contains a validation clause that would operate irrespective of any judgement or decision on the matter. directly or indirectly. whereby the right to use computer software has been covered (including granting of a licence). and hence. Woefully. if the share or interest derives. The scope of these provisions is even wider than that suggested in the direct taxes code. This proposal will have an impact on attracting foreign investment into India. For instance. Further. the definition of process has been modified to include transmission by satellite. covered under royalty. a plethora of retrospective changes has been proposed in the Bill. While the 11 . While the government’s intent to tax transactions similar to those in the Vodafone case involving indirect transfer of Indian assets is understandable. The Bill clarifies that an asset or capital asset being any share or interest in a company or entity outside India shall be deemed to be and shall always be deemed to have been situated in India. Being a retrospective change. 17 March 2012 “I must be cruel only to be kind”— when finance minister Pranab Mukherjee quoted these words from Hamlet in his budget speech on Friday. transfer and scope of income with retrospective effect.Corporate tax A “retrospective” play on words Rajiv Memani Mint. its value substantially from the assets located in India. Extensive GAAR (General AntiAvoidance Rules) provisions have been introduced.

the finance minister could have resisted increasing the lower rate of 1% to 2% at the current juncture.1%. additional depreciation of 20% for the power sector would provide a boost to the sector. With a view to providing a thrust to infrastructure. especially given that the latter would apply to the full retail price as against the factory gate price. Further. the move to a negative list of services and the rise in the central excise and service tax rates has been along expected lines. Its resolve to curb black money is also reflected in the imposition of 1% tax deducted at source on the transfer of immovable property above a specified threshold and 1% tax on the sale of bullion and jewellery if the consideration exceeds Rs. classification of capital and revenue transactions and recharacterization of any expenditure. The government has taken proactive steps to tackle the issue of unaccounted for funds parked abroad. This has been a longstanding demand of the industry and would be conducive in providing greater certainty and unanimity of approach in the transfer pricing methodology. in view of the fiscal constraints. The Bill also provides a lower withholding tax of 5% on external commercial borrowings for three years in certain specified infrastructure sectors. a hike in the rates was unavoidable. for instance. broadly the provisions shall have impact on the classification of equity and debt. His proposal to reduce the 12 . the finance Bill extends the profit-linked tax holiday for power sector projects starting before 31 March 2013.Feature articles A “retrospective” play on words fine print of the provisions remains to be seen. extension of 200% weighted deduction for investment in research and development and extension of the sunset clause for the power sector by one year.125% to 0. Moreover. 2 lakh and the sale is in cash. The proposal to remove the restriction on venture capital funds from investing in nine specified sectors is a very positive move. Though the tax rate hike may have an inflationary effect. The budget provides a positive thrust to infrastructure by. 12% excise duty will still be in line with the anticipated goods and services tax rate. However. Two other positives offered by the Bill are the removal of the cascading effect of the dividend distribution tax and reduction in the securities transactions tax by 20% from 0. fiscal consolidation was the most significant challenge that Mukherjee faced in preparing this budget. compared with the normal rate of 20%. A welcome feature has been the announcement related to the introduction of the advance pricing mechanism. On indirect taxes. providing enhanced investment-linked deduction of 150% for specified businesses. Finally.

valuations and restructuring.. Illustratively.Corporate tax A “retrospective” play on words fiscal deficit to 5. What must also be considered is that the budget would be inflationary as the burden of garnering a larger chunk of revenue has been shifted onto indirect taxes.. All rights reserved throughout the world... a network of 100 young leaders in business and politics to develop programs for the development of Asia. GAAR provisions have been deferred by a year to apply from 1 April 2013.com 13 . the 5% withholding tax on ECBs has been extended to other taxpayers as well. His areas of expertise include M&A advisory. there have been changes made to some of these proposals and clarifications provided on others. the finance minister expects an ambitious revenue growth of more than 19%. Rajiv is a member of the National Council of Confederation of Indian Industry (CII). You can write to Rajiv at: Rajiv.. Rajiv Memani Country Managing Partner Ernst & Young. Affiliated with prominent business and industry associations.. India Rajiv Memani took over as the Country Managing Partner of Ernst & Young in 2004. Further. . the proposal of imposing a withholding tax rate on transfer of immovable property has been withdrawn. the threshold limit for withholding tax in respect of cash sale of jewels has been enhanced to Rs 5 lakh... the Indian administrative authority has also recently clarified that retrospective amendments would not be used to open new cases where a regular tax assessment has already been completed before 1 April 2012.Memani@in. Rajiv has successfully advised several leading multinational corporations on their entry in India and has worked with some of India’s largest companies. He has been with the firm for almost 20 years now. The question mark on fiscal consolidation belies any hopes of the easing of monetary policy.1% in 2012-13 raises questions about how realistic it would be.. Moreover... both in the private and public sector... with no expenditure reductions announced other than keeping subsidies to less than 2% of gross domestic product—a promise he may find difficult to deliver in the present political landscape. A qualified Chartered Accountant. He has been selected on the World Economic Forum’s New Asian Leaders. This article was written based on Budget 2012 proposals announced in March 2012.ey. Reprinted with the permission of Mint © 2012. Since then... given the tough economic conditions..

where whole or part of the arrangement lacks or is considered to be lacking commercial substance.” 14 .DNA Money. including individuals and partnership firms. these provisions have created a furore and anxiety in corporate circles. Since the time of announcement. these provisions would extend to all classes of tax payers. The aim is to counter tax avoidance schemes and codify the concept of ‘substance over form’ in law. does not cause undue hardship to taxpayers. misuse or abuse of the Indian tax laws or is not for bona fide purpose. There are no restrictions to applying GAAR only to transactions with or between non-residents or where tax treaty benefit is sought. “Government must ensure that GAAR that is aimed to counter tax avoidance scheme and codify the concept of substance over form in law. The primary reason is the wide ambit of transactions which can be considered as tax avoidance schemes and powers conferred on the tax authorities for invoking GAAR provisions. Where the substance or impact of individual step varies from that of the arrangement as a whole or the arrangement involves locating an asset or being tax resident of a place without any substantial commercial purpose. the arrangement will be deemed to lack commercial substance.Feature articles Ensure GAAR doesn’t cause hardship to taxpayers Hitesh Sharma DNA . GAAR provisions can be invoked if the main purpose of an arrangement is to obtain a tax benefit and one of the other conditions is satisfied — these are creation of rights or obligations which would not usually be created between independent third parties. 28 March 2012 T he finance minister has introduced anti-abuse provisions called ‘General AntiAvoidance Rules’ (GAAR) in the Indian tax laws during the announcement of the Union Budget for the next fiscal.

investment structuring assignments and crossborder structures. the tax officer will have to seek approval from the Commissioner of Income Tax (CIT) as well as Approval Panel.... particularly transfer pricing and investment structuring. You can write to Hitesh at: Hitesh. While the government has come out with some clarifications to appease foreign investors. including IPR/brand issues. and has worked on several international acquisitions.. 2012 from structures implemented prior to that date. however. In order to safeguard the taxpayer from arbitrary invocation of GAAR provisions. Reprinted with the permission of DNA DNA Money © 2012. Considering that the Indian criminal law also presumes innocence until proven guilty... the government must ensure such widely-scoped provision does not cause undue hardship to taxpayer and bona fide tax-planning is not challenged.. Hitesh Sharma Partner & National Leader.Sharma@in.. International Tax Services Ernst & Young.. there is no clarity on their applicability to consequences arising on or after April 1.. The Indian Government has stated that the burden of proof will lie on the tax authorities and that an independent member from the Law Ministry will form part of the Approval Panel. this provision appears to be far too onerous.. . consisting of three CITs. While one can’t deny the need of having an anti-avoidance law in India.ey..Corporate tax Ensure GAAR doesn’t cause hardship to taxpayers GAAR also places the burden of proof on the taxpayer to demonstrate that the intention of a transaction is not to obtain tax benefit. Given that the approvers will also be a part of the tax administration... Hitesh also leads the Life Science Industry for Ernst & Young in India and is based in our Mumbai office. 2012. the proof will lie in implementation when the actual cases are placedfor scrutiny before income tax officers in next few months. international taxation. India Hitesh with over 22 years of exeprience specialises in International Tax and Transfer Pricing. can one be optimistic about the objectivity in decisionmaking? The GAAR provisions will apply from April 1...com 15 . All rights reserved throughout the world. The implementation of GAAR provisions has been deferred to 1 April 2013.

000 crores as also additional Rs 40. what the industry did look forward to was that the Budget would be bold on reforms and would deliver a clear roadmap for fiscal consolidation. However. Though the FM has assured that this would be brought down to 5. The FM’s proposals have attempted to combine pragmatism with the promise that reforms would be continued and fiscal numbers would be kept in check. were well known to all. Reports indicate that at the current levels of global crude oil prices and the prevalent domestic retail prices of controlled products. The revised estimates for fiscal deficit at 5. despite the fact that payments to oil and fertilizer companies were deferred.13 lakh crores. The subsidies burden for 2011-12 was as high as 2. the FM has provided only Rs 40.000 crores for compensating these companies. 16 . the non tax revenues could again fall short. the losses of the oil marketing companies could be a whopping Rs 2. However.9% of the GDP turned out to be even higher than what was being anticipated. However.4%.000 crores from the sale of telecom spectrum. The FM is also hopeful of keeping the inflation rate down to 6. given the uncertainties surrounding both disinvestment and telecom spectrum sale.1% next year and that the subsidies would be restricted to les than 2% of the GDP.Feature articles Budget 2012-2013— An analysis Ganesh Raj CFO Connect. Bringing the burden down to under 2% would clearly require a huge price increase in the petroleum and urea prices – a step that the government can ill afford. The main concern arises on the expenditure front. how he would deliver on these promises is the big question.6% that could help deliver a tax revenue growth of about 19%. economic and fiscal fronts. The government seeks to raise additional Rs 40.4% of the GDP.000 crores through tax revenue and on non tax revenue front it has planned for disinvestment proceeds worth Rs 30. a clear roadmap for how this would be done is missing. 1 April 2012 The industry did not really have high expectations from the Budget this year as the multiple challenges before the Finance Minister (FM) on political. given the political pressures it continues to face. The government is obviously counting on an ambitious GDP growth rate of 7. As against this.

It was widely expected that pending the DTC. many other retrospective changes have been proposed in the Bill. it is disappointing that the concerns of the industry have not been considered and extensive GAAR provisions have been introduced. particularly on international taxation. the Finance Bill contains a ‘validation’ clause that would operate irrespective of any judgement or decision on the matter. Many of the provisions have been introduced with retrospective effect. The euphoria over the Supreme Court judgement in the Vodafone case has rudely ended with the draconian provision introduced by the Finance Bill that seeks to capture transactions of indirect transfer of capital assets through offshore transfer of shares in a foreign company. Retrospective amendment of such nature will be prone to challenge on grounds of constitutional validity. Not only this. The taxation issues The Budget has many positives to offer for the individual and corporate taxpayers. by making legislative provisions with retrospective effect since the inception of the Act. Besides the above. which shall result in declaring a transaction as ‘impermissible avoidance arrangement’ where the transaction lacks commercial substance. for the first time and going to the extreme level. the promise to reign in the fiscal deficit at 5. The scope of these provisions is even wider than that suggested in the DTC and even 17 .1% of GDP is not very convincing. However. The proposal to amend the provisions retrospectively is a cause of concern and results in substantial uncertainty. Consideration for transactions involving satellite transmission or lease of transponder capacity in the satellite will also be characterized as royalty. However. have truly turned the Finance Bill to the Shakespearean tragedy that the FM referred to. It will also have to be seen whether the amendment in domestic law can impact the DTAA benefits available to taxpayers in this respect. GAAR provisions would be brought in advance by the government with a view to check international tax avoidance. This would be so whether or not the ‘process’ is secret. The proposed amendments would have serious negative impact on investor sentiment and taxpayer confidence and raise questions about the closure provided by judicial forums on tax issues. some of the provisions introduced.Corporate tax Budget 2012-2013 An analysis Given the above. It is noteworthy that many such similar offshore transactions are currently under the scanner of tax authorities. For instance. bringing to rest the controversy on this issue. a step which goes against the principle of stability and certainty in taxation. the expansion in the scope of Royalty for right to use property is effective from 1976 whereby the right for use or right to use the computer software will now be treated as royalty irrespective of the medium through which such right is transferred.

Further.1% has also come as a relief for the taxpayers. extension of 200% weighted deduction for investment in R&D. still non-tax revenue can again fall short due to uncertainties around disinvestment and telecom spectrum sale” The government has taken determined measures to tackle the issue of unaccounted funds parked abroad as also address the areas back home where black money transactions are most rampant. the FM has provided marginal relief by raising the exemption threshold to Rs 2 lakhs and enhancing the income tax slab from Rs 8 lakhs to Rs 10 lakhs. Reduction in the securities transactions tax by 20% from 0. 2013. 18 . classification of capital and revenue transactions and recharacterization of any expenditure. The Bill also provides a lower withholding tax of 5% on external commercial borrowings for 3 years in certain specified infrastructure sector in comparison to normal rate of 20%. the government has finally accepted the industry’s suggestion of bringing rationality in these provisions. In removing the cascading effect of the dividend distribution tax. The imposition of 1% TDS on transfer of immovable property above the prescribed threshold of Rs 50 lakhs and Rs 20 lakhs in urban agglomerations and other areas. For the individual taxpayers. extension of sunset clause for the power sector by one year and the proposal to remove restriction on venture capital funds to invest only in nine specified sectors is a very positive move. “Budget 2012 though promises that reforms will be continued and fiscal numbers will be kept in check.125% to 0. the finance Bill extends the profit linked tax holiday for power sector projects starting till March 31. additional depreciation of 20% for power sector would provide a boost to the sector. While the fine print of the provisions remains to be seen. and 1% tax on the sale of bullion and jewellery if the consideration exceeds Rs 2 lakh and the sale is in cash are welcome. The positive features of the Budget include the announcement about the introduction of the Advance Pricing Mechanism.Feature articles Budget 2012-2013 An analysis the pragmatic suggestions of the Parliamentary Standing Committee have been ignored. That the government continues to do its bit for the infrastructure is evident from the positive thrust given to the sector. Enhanced investment linked deduction of 150% for specified businesses. broadly the provisions shall have impact on the classification of equity and debt. This has been a long standing demand of the industry and would help provide greater certainty in the transfer pricing methodology. With a view to provide a thrust to the infrastructure.

Most significantly. India Ganesh Heads the firm’s policy & advisory group as one of his multiple leadership roles.Corporate tax Budget 2012-2013 An analysis On the indirect taxes front. Rampant litigation is a vexatious issue both for the industry and government and one can look forward to expeditious resolution of disputes in indirect taxes..com 19 . Though the tax rate hike may have an inflationary effect. a hike in the rates was unavoidable.Raj@in.. structuring cross-border investments and transactions. Reprinted with the permission of CFO Connect © 2012.. The assurance about the GST Network... certainty and stability in taxation to make India an attractive destination for the investors.. filing and processing of tax returns and payment of taxes to be operational by August 2012 provides hope that the GST may see the light of the day sooner than later. All rights reserved throughout the world. However.. the government’s proposal to harmonize Central Excise and Service Tax laws is commendable. the FM could have resisted from increasing the lower rate of 1% to 2% at the current juncture.. .. His functional experience includes corporate tax planning... Finally. The move to negative list of services and the rise in the central excise and service tax rates from 10% to 12% has been on expected lines. the government must provide an environment of trust. You can write to Ganesh at: Ganesh. the Finance Minister has tried to present a realistic budget in view of the limitations he was faced with industry hopes that the credibility of the budget is maintained by achieving the promised fiscal consolidation... He is based in our Noida office.. in view of the fiscal constraints. Ganesh Raj Partner & National Leader — Policy Advisory Group Ernst & Young.. The introduction of the Settlement Commission and Revision Application Authority for service tax is a positive move.ey. and joint venture negotiations.. that would provide services through a common technology enabled portal for registration of dealers.

income tax is levied on progressive tax rates for individuals. how much tax is payable on global income. which aims to generate additional tax revenue by introducing moderate levels of taxation and easing administrative burden by reducing cost on the one hand and ushering in a new tax regime of transparency by eliminating distortions in the tax structure and improving tax compliance through simplifying regulations on the other. In this section you can read about the concept of inheritance tax and whether it applies in India. where income is taxed on the basis of residence of the taxpayer and source of income. In this section 20 21 | Of death and taxes 24 | DTC to widen wealth tax net 26 | How much tax is payable on global income? 29 | Will court rulings on PF affect you? 32 | Weigh DTC provisions while choosing tax saving instruments .Feature articles Personal Tax In India. The Indian Government has endeavored to widen the tax base by aiming to push through important legislation in the form of the Direct Taxes Code. impact of recent decisions on computation of basic salary for provident fund purposes. impact of the proposed DTC on future investment strategy.

“Eeesh.” “India has taxed inheritance in the past by way of Estate Duty Act. “You know. my father has a lot of ancestral property that he has willed to me. He also felt that Wealth Tax and Estate Tax should not co-exist as both.” I said. the doorbell rang. Basu is again travelling and I wanted some urgent advice. were taxes on “You are so generous.” I said. I am so sorry to have disturbed you. Is the Government now thinking of imposing tax on inheritance?” “There is no need to panic. Mr.Personal tax Of death and taxes Amitabh Singh Hindu Business Line. she opened the newspaper she was carrying and pointed to a news item that talked about the Government considering the possibility of introducing inheritance tax as a means of raising more revenues. I hastily hid the movie magazine I was reading and picked up the latest copy of the Wall Street Journal. he alluded to the fact that the total tax collected by the Estate Duty Act was no more than Rs 20 crores and it had failed in both its objectives – neither did it reduce unequal distribution of wealth nor did it assist the states in financing their development schemes. 1953. the then Finance Minister. “What has been said in the newspaper is just a thought and a lot more needs to be done before it becomes reality. Similarly. Strangely. My maid opened the door and the sweet voice of Mrs Basu reached my ears. In his budget speech for 1985-86.” she said.” she said in her lilting Bengali accent. There is no doubt that the Government is looking at ways to garner more revenues and it will continue to explore fresh sources. This Act remained in force till 1985 when it was removed by Mr V.” wanted to settle our assets in such a manner that it gets distributed evenly to our children. 10 July 2011 A s I lazed around one late afternoon in Delhi’s intense summer. nobody talks about taxing agricultural income and even the richest farmers do not pay tax. in some way.” Saying so.P. “Mr Seengh.” Then her eyes caught the WSJ and she said.Singh. “You see. Mrs Basu had a great regard for me as an “intellectual” and I did not want to break the truth to her just yet. we 21 . She continued. I have been reading it for the whole day and you indeed provide me with a welcome break. “how nice to see you.” “Not at all.

“Many developed countries have had some form of “death duty” as it is often called since it gets triggered upon a person’s death. France have very high rates of estate taxes with Japan tax rates going as high as 70per cent. Many wealthy people have sought to shift their domiciles and nationality just to avoid these taxes but countries have followed with tighter laws as countermeasures.” “My goodness. it gave rise to many evasionary tactics. It also led to concealment of assets and income and probably sowed the seeds for the thriving parallel economy we see now. “but do you think this tax is advisable in the Indian context?” I replied. In some countries it is called “estate taxes” where the tax is levied on the estate of the deceased or “inheritance taxes” where it is levied on the beneficiaries though the distinctions have got blurred over time. US. Since estate taxes take away a large chunk of one’s wealth. Would you really save and scrounge to buy a house and other assets if the Government were to take half of it away on your death? There is no doubt that India has a large number of wealthy people and those numbers are growing each year. However.” Mrs. The presence of these taxes have spawned a very lucrative practice of estate tax planning that the rich and famous pay enormous sums of money for. it is often seen as a disincentive for wealth. As a result. it is often seen as a disincentive for wealth. UK. I tried to look modest as I offered tulsi chai to her.Feature articles Of death and taxes a person’s wealth and property. Emboldened by her remark. capital formation and entrepreneurship” 22 . “These taxes are not very popular in the countries where they are levied.” “When Estate Duty was in force in India. you know so much Mr Seengh. the opposition against these taxes have been muted. Japan. The most rampant was ‘benaami holdings’ . Basu said. “Estate taxes take away a large chunk of one’s wealth. I continued. Malaysia and some other countries do not have estate taxes. I am so impressed!” said Mrs Basu. Australia.wealth and estate being broken into smaller pieces and being held by proxy owners while the real owners continued to enjoy the benefits. since they aim to tax the very wealthy by keeping the exemption limit to a very high level. we have wealth tax but no estate taxes. capital formation and entrepreneurship. as we stand today.” “That will be so good for tax advisers like you.

. rooted out corruption in the ranks and started punishing the offenders. All rights reserved throughout the world. if we really beefed our current enforcement. payroll outsourcing. I sipped my tea in contentment for there could be no greater compliment from Mrs Basu than that. what great work we can do with Estate Tax? On the other hand.com 23 . . As it is. You can write to us on this article at: Tax.. India Amitabh was a Tax Partner with Ernst & Young’s Human capital services.. Amitabh Singh Amitabh Singh Retired Partner. His functional expertise included compensation structuring. our tax kitty would swell of its own without having to think of death duties etc. Enacting a taxing law is the easiest part. stock based incentive plans...” “Mr Seengh... Tariff and Regulatory Affairs Committee... The tough part is enforcing it and punishing evaders.. social security.. your mind is as clear as Rabindra Nath Tagore!” Said Mrs Basu. there is also no doubt that the data gathering and enforcement mechanism is very weak and full of holes. we have not done a good job with our good old Income Tax.. Reprinted with the permission of Hindu Business Line © 2012. Human Capital Services Ernst & Young. Amitabh was associated with Ernst & Young since 1984 and was based at the Noida Office.update@in..Personal tax Of death and taxes However. In the past he has served as the Chairman of Amcham’s Tax. personal income tax and immigration matters..ey...

drawings.Feature articles DTC to widen wealth tax net Mayur Shah Financial Express. daughter-inlaw. boats. the DTC also continues with concept of “clubbing” and thus. beneficial interest in foreign trust or other entities outside India and investments in equity or preference shares in a controlled foreign company (essentially foreign companies not engaged in active business activities). yachts. sculptures. The most crucial inclusions are deposits in banks located outside India. any transfer of assets or gifting to your spouse. Further. While the taxable wealth definition under DTC has been extended to specifically cover assets such as archeological collections. Another important implementation measure undertaken by the government already (ahead of the DTC) is the quick finalisation/ signing 24 . paintings. The critical point to be noted is the extended coverage of the ‘assets’ on which wealth tax is payable. Similar to the present provisions. unaccounted income/wealth and others. will not help in getting away from wealth-tax. assets like land. disproportionate asset cases. and also is in line with the five-fold strategy announced by the finance minister in the last Budget speech. the threshold limit to trigger wealth tax has been raised significantly from R30 lakh to R1 crore. resulting in savings of R70. Given the number of cross-border scams. similar works of art. building. expensive watches (value more than R50. jewellery. could negate this saving. aircraft. helicopters. utensils or other articles made of precious metals continue to be considered wealth even under DTC. the above inclusions clearly seem to further government’s concerted laudable intent to track down black money parked overseas and bring the culprits to justice. minor children. the tax rate continues to be 1%. 9 August 2011 T he DTC Bill which was introduced in Parliament in 2009 and the revision last year has proposed to levy wealth tax on the specified unproductive assets of all taxpayers. except for non-profit organisations. cars.000). revocable trusts and own HUFs.000. hawala transactions. These measures also seem to be an interim result of the study commissioned by the finance ministry on unaccounted income and wealth held within and outside the country. furniture. bullion. While.

the time in your “expensive watch” will speak whether the DTC wealth-tax provisions achieves this objective. India Mayur heads the specialized practice discipline...Shah@in. some of the changes brought in by Finance Act 2012 are in line with the directions of the draft DTC legislation. He has over 10 years of work experience and has worked extensively in the area of human capital....com 25 .. Reprinted with the permission of Financial Express © 2012.... It is also learnt that a dedicated cell for exchange of information is being set up in the CBDT to expedite the actual implementation and effective gather of information from other countries.. You can write to Mayur at: Mayur. Thus. specializing in global mobility and employment taxation. while the stage is set under the DTC regime to trap unreported overseas investments and drill out cases with disproportionate assets vis-à-vis income earned...ey. While implementation of DTC has been deferred to April 2013. .Personal tax DTC to widen wealth tax net of various Tax Information Exchange Agreements (‘TIEAs’) with various countries. Human Capital.. Therefore. All rights reserved throughout the world.. Global Mobility in Ernst & Young Mumbai.. Human Capital Practice Ernst & Young. Mayur Shah Director. and revision of existing tax treaties to specifically include information exchange clauses. He is based in our Mumbai office.. it remains to be seen how effectively the tax authorities utilise the tools laid down by the finance ministry as a part of combating tax evasion.

Tax on capital gains Under the Indian tax laws. shares. This includes capital gains. rental income and income from other sources. property) outside India. debentures. In fact. a resident and ordinarily resident of India is taxed on his worldwide income. mutual funds. If the transaction involves sale of shares listed on the overseas stock exchanges or other assets (gold.Feature articles How much tax is payable on global income? Shalini Jain Economic Times . However. it literally opened up a world of choices for wealthy Indians. the income is classified as a long-term capital gain. the gains are treated as short term. listed and unlisted debt securities. the income is treated as capital gains. The new norms and the urge for geographical diversification has led many Indians to invest in foreign markets. They could invest in immoveable property. Types of incomes and tax liability Interest on bonds.6% Rental income from property Added to income after 30% standard deduction and taxed at normal rate Added to income and taxed at normal rate 26 . the tax implications in some cases can be quite complex.Wealth. funds Short-term capital gains Long-term capital gains 20. In addition. If the holding period is shorter. deposits Dividend from stocks. bonds. tax implications in the foreign country where the investment is to be made should also be analysed. there are no tax-free luxuries from such investments for these may invite tax both in India and abroad. and other financial instruments outside India. depending on the period of holding. These can be either short-term or long-term gains. If the asset is held for more than 12 months (in the case of shares or units) or 36 months (in any other case). 29 August 2011 W hen the RBI liberalised global investment norms.

Personal tax
How much tax is payable on global income?

While most types of incomes from foreign investments are treated in the same way as those from domestic investments, the crucial difference is in the way long-term capital gains from stocks and equity funds are taxed. If an investor holds domestic equities for over a year, there is no tax on the capital gains if the stocks were bought through a recognised stock exchange. However, there is no exemption on profits from foreign equities and an investor will have to pay 20.6% tax on the gains. Carrying forward losses The good part is that these long-term capital gains from foreign equities can be adjusted against long-term capital losses. There’s a caveat here: long-term capital losses can be set off only against long-term capital gains. In case of short-term losses, they can be set off against both short-term and long-term gains. If the loss cannot be completely set off, it can be carried forward. The tax laws allow carrying forward of losses incurred in overseas investments, including long-term losses from equities, for up to eight consecutive years. What’s more, the cost of acquisition can also be adjusted for indexation to account for inflation during the period of holding. The same rules of indexation that govern domestic assets are applicable to foreign investments. Saving capital gains tax Global investments can also be a source of saving tax. Under Section 54, one can claim exemption from tax on capital gains earned from

the sale of a residential property by reinvesting the proceeds in another house within a specified period. This can be a house in a foreign country as well. Investors can deposit the proceeds in the capital gains account scheme before the due date of filing the income tax return for that year, provided the money is re-invested in another property within three years of the date of sale of the original property. Any money lying unutilised in the capital gains account at the end of three years would become taxable. Tax on rental income The rental income from overseas property gets the same treatment as that from domestic real estate. After a 30% standard deduction and municipal taxes paid for the property, the rental income is added to the income of the owner and taxed at the normal rate. Deduction can also be claimed for interest paid on housing loan during the financial year. The rules don’t change much when it comes to income from other sources as well. The dividends from mutual funds and stocks are also fully taxable, along with the interest income earned on bonds and deposits. These tax provisions in India are set for a big change with the Direct Taxes Code (DTC) likely to be introduced from 1 April 2012. The DTC proposes to remove the distinction between long-term and short-term assets and change the way the holding period is calculated for indexation benefits. The standard deduction for rental income will also be reduced from the present 30% to 20%.
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Feature articles
How much tax is payable on global income?

Avoiding double taxation The taxability of foreign investment also depends on the tax laws of that country. There is some relief for the investor if there is a tax agreement between India and the other country. In the case of double taxation, the investor can seek relief under the Double Taxation Avoidance Agreement (DTAA) between India and the country concerned. However, this could vary and depends on the nature of income, tax laws in the overseas country and the provisions of the agreement between India and that country. India currently has DTAA with more than 80 countries, including the US, the UK, France, Greece, Brazil, Canada, Germany, Israel, Italy, Mauritius, Thailand, Spain, Malaysia, Russia, China, Bangladesh and Australia.

If one satisfies the conditions mentioned in the respective DTAA, credit can be claimed for the taxes paid overseas on such income against the Indian tax liability. The tax credits are calculated as being lower of the actual taxes paid overseas and the Indian tax liability, and should be claimed in the income tax return form under ‘Relief under Section 90.’ .................
Reprinted with the permission of Economic Times - Wealth © 2012. All rights reserved throughout the world.

“While implementation of DTC has been deferred to April 2013, some of the changes brought in by Finance Act 2012 are in line with the directions of the draft DTC legislation”.

Shalini Jain
Associate Director, Human Capital Practice Ernst & Young, India
Shalini has over 11 years of work experience and her specific competence areas are tax and regulatory issues relating to globally mobile individuals, structuring of assignments for globally mobile employees, compensation structuring, interpretation of double tax avoidance agreements, design and implementation of stock based incentive plans, tax litigation and social security advisory. She is based in our Delhi office. You can write to Shalini at: Shalini.Jain@in.ey.com

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Personal tax

Will court rulings on PF affect you?
Sonu Iyer
Mint, 13 September 2011

A

re you a member of the Indian Provident Fund (PF)? Do you contribute 12% of your basic salary every month into the PF? Is your CTC (cost to company) divided into basic salary and various allowances such as conveyance allowance, asset allowance, education allowance and special allowance? Are you an HR manager in a company where you handle the above set of employees? If your answer is yes for any of these questions, then you may find this article useful. After the specific inclusion of international workers in the Provident Fund Scheme in October 2008 and then further amendments in September 2010, the recent Madhya Pradesh and Madras high court rulings are the latest to add to the woes of employees and HR directors/ chief financial officers of many companies. Very briefly, the high courts have held that various allowances such as conveyance allowance and special allowance form part of basic wages for calculation of PF contribution.

Reinforcing existing law What needs to be considered here is whether the high court rulings have laid down some new principles or are these more a way of reinforcement the existing law. To understand this, let us discuss the concept of PF contribution and basic wages in greater detail. Under the Provident Fund Act, an employer is required to contribute 12% of the basic wages, dearness allowance and retaining allowance (if any) paid to the employees to the Provident Fund and Pension Scheme. The employee is required to match the contribution made by the employer. Basic wages are defined to mean all emoluments in accordance with the terms of the contract of employment and which are paid or payable in cash, but does not include cash value of any food concession, dearness allowance, house rent allowance, overtime allowance, bonus, commission or any other similar allowance and presents made by the employer.

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Feature articles Will court rulings on PF affect you? Thus. 30 . in case of local employees. the Supreme Court of India has ruled that any payment. Particularly. The way out: But the situation does not seem to be so bleak. the Provident Fund Scheme does provide a cap. Subsequent to the high court rulings. the PF head office has issued internal directions to regional offices (available in the public domain) that the rulings of high courts may be utilized by the regional offices as per the merits of the case as and when similar situations arise in the field offices. if both the employer’s and the employee’s share of additional contribution is deducted from the CTC. if the employee so chooses. it is fair to say that the high court rulings only serve to reinforce the above principles laid down by the Supreme Court earlier. In the current CTC structure which is generally followed in most companies. in respect of local employees. Therefore. Whether this would lead to increased PF audit activity? Whether employers would be asked to pay contribution on such allowances retrospectively? Whether this would lead to increased cost of PF in case of international workers and have an impact on their business plan? The major concern here is of the employees who are worried since this would reduce their take-home salary drastically. The Supreme Court has also mentioned that a payment that is specifically made to those who avail of an opportunity such as an overtime allowance is not to be included in basic wages. However. the definition of basic wages in the Provident Fund Act seems to suggest the intention of including all cash emoluments unless the same is specifically excluded. While there will be some tax saving on the employer’s portion of contribution as the same is non-taxable. Therefore.500. any payment by way of special incentive or work or which is based upon contingencies is excluded.500 per month. the deduction of the employee’s contribution under section 80C of the Income-tax Act will be limited to Rs1 lakh annually. there will be a major impact on the employee’s take-home salary. which is universally. Also. the employer can still take a position of limiting monthly contribution to the base of Rs6. he may opt to make an additional contribution. There is merit in saying that employer’s and employee’s contribution to the Provident Fund Scheme can be limited to the base of Rs6. On this topic. The concerns This has caused apprehension among the employer community. necessarily and ordinarily paid to all across the board is included in basic wages.

.... She is based in our Delhi office. M/s G4S Security Services (India) Ltd. The argument that the earlier PF audits did not impose any requirement to contribute on such allowance may also be brought up... Human Capital Practice Ernst & Young.. and another”. the Punjab & Haryana High Court has held that the exclusion of certain allowances while calculating PF contributions cannot be said to be “unjustified” unless such exclusion is in complete deviation of the concept of allowances sought to be under the ‘basic wages’ exclusion clause. the generally accepted principle of not contributing on special allowance and certain other allowance on the basis of certain old PF circulars may also be examined. Also.500 per month does not apply to them. For international workers. On 2 December 2011. All rights reserved throughout the world.. the Employees Provident Fund Organisation (‘EPFO’) has issued directions to its regional offices that its earlier circular dated 23 May 2011 regarding allowances to be considered for the purpose of PF contribution is to be kept in abeyance in view of the Punjab & Haryana High Court ruling in the matter of “Assistant Provident Fund Commissioner. Gurgaon vs. In its ruling.. India Sonu has over 16 years of experience in the area of Human Capital — Global Mobility covering employee taxation and advisory with key focus on global mobility risk advisory services and Accidental Expatriates... what needs an analysis is whether it can be argued that allowances paid to expatriate employees during the period of assignment can be considered as contingent as these are paid only while they are away from their home country and thus excluded from the scope of basic wages.ey.. this needs to be examined differently as the limit of Rs6.Iyer@in. The EFPO has filed and the Supreme Court has admitted an appeal against the Punjab and Haryana High Court ruling.. .com 31 . For international workers.. Sonu Iyer Partner & National Leader. Reprinted with the permission of Mint © 2012. what needs to be analysed is whether the test of universality needs to be applied for the company as a whole (including local employees) or for the international worker population only. You can write to Sonu at: Sonu...Personal tax Will court rulings on PF affect you? Still to be examined Also.

Investments made before the commencement of the DTC. Public Provident Fund. you have to keep in mind that the existing tax laws will undergo a major change by April 2013. when you think about investments. Also. Deductions: Under the existing tax laws.00. The avenues available for tax saving investments are less under the DTC compared to the existing tax laws.000 has been proposed to cover payments such as life insurance premium (annual premium shall not exceed 5% of capital sum assured). which are currently under the limit of Rs 1. would continue to be eligible for the EEE method of taxation for full duration of the instruments.000 is restricted to Government Provident Fund. ELSS. DTC has suggested some major changes in the way tax saving instruments are positioned. tuition fees of children. which enjoy EEE method of taxation under the existing tax laws. An additional deduction of 50. National Saving Certificates.00. The revised discussion paper on DTC has proposed to provide EEE (Exempt-Exempt-Exempt) method of taxation on the following investment instruments: • Government provident fund • Public provident fund • Recognised provident funds • Pension schemes (administered by the Pension Fund Regulatory and Development Authority) • Approved pure life insurance and annuity schemes Under the DTC. 3 January 2012 A s an investor. the umbrella limit of Rs 1. five-year bank deposits. repayment of housing loan principal amount and contribution to long-term infrastructure bonds will no longer yield tax saving under the DTC.Feature articles Weigh DTC provisions while choosing tax saving instruments Amarpal S Chadha Economic Times. with the implementation of the Direct Tax Code (DTC). Following are some of the key proposals under the DTC which could impact your investment decisions. five-year term deposits with banks or post offices or deposits in senior citizen savings scheme and non-pure life insurance premiums will no longer be a choice of tax saving investments under the DTC. tuition fees for children and contribution to health insurance.000 is available as a deduction for a host of investments which includes payment of life insurance premium. Capital gains: Listed equity shares or units of equity-oriented funds held for a year or less would be taxed after 32 . the deduction of Rs 1.00. recognised provident funds and pension schemes. unit-linked insurance plans (Ulips). One has to ensure that the investments which are eligible for ‘tax saving’ under the existing tax laws would also continue to reap benefits under the DTC.000. and provident fund contributions etc.

Human Capital Practice Ernst & Young.. PPF. would be taxed after allowing 100% of capital gains as notional deduction. A snapshot of some of the key positive. five-year bank fixed deposits. from inbound as well as outbound perspective.. India Amarpal S. social security and other regulatory authorities. He possesses 15 years of experience and has done extensive work in the area of global mobility and employee taxation. contribution to long-term infrastructure bonds : a) In the case of non-equity shares or non equity-oriented mutual funds.Personal tax Weigh DTC provisions while choosing tax saving instruments allowing 50% of capital gains as notional deduction.. Senior Citizens’ Savings Scheme.. some of the changes brought in by Finance Act 2012 are in line with the directions of the draft DTC legislation. one could balance his/her portfolio and maintain a fair balance of investments in both government and private securities.com 33 . principal component of home loan repayment... Let’s keep our fingers crossed for the DTC to be implemented by April 2012 as it will provide more clarity and a long-term view on the investment horizons.. negative and neutral proposals from a tax saving perspective under the DTC is given below: Positive: An additional deduction of 50. Neutral: Contribution to employee provident fund.. You can write to Amarpal at: Amarpal.. too.. Listed equity shares or units of equity-oriented funds held for more than a year. national savings certificate. the holding period is calculated from the date of purchase of investments under the existing tax laws. He is based in our Bangalore office.. tuition fees for children and health insurance premium.. where as. Amarpal S Chadha Partner. While implementation of DTC has been deferred to April 2013. as the effective tax rate would be lesser in case of taxpayers falling under the lower tax rate. pension schemes are subject to deduction with a maximum ceiling of 1 lakh: a) Continuance of NIL tax on capital gains from sale of equity shares/equity-oriented units held for more than a year b) Continuation of EEE method of taxation Negative: The following investments will not be eligible for tax saving ELSS. The main object of the computation of adjusted capital gains is to benefit the lower and middle income group taxpayers..Chadha@in. superannuation fund. Reprinted with the permission of Economic Times. In the case of non-equity shares or non equity-oriented mutual funds. The focus for investors will need to move towards investments that provide for a ‘real’ wealth accumulation and not only a tax savings play.000 is available for life insurance.. diversification always reduces risk and may increase returns. post-office time-deposits. period of holding will be considered from the end of the financial year in which they are acquired.. with experience in dealing with tax. . All rights reserved throughout the world. © 2012. period of holding will be considered from the end of the financial year in which they are acquired To conclude.ey. Chadha is a partner at Ernst & Young India in the Tax Human Capital practice.. So.

with the introduction of the Negative list concept in the Service tax law from 1 July 2012 being a step in this direction. among other developments that may impact your business. The negative list concept is a paradigm shift in manner of taxing services from a positive list to negative list and this is expected to help service providers for a smoother transition into the GST regime. Given that the new tax system requires Central and State Governments to strip their constitutional powers and join hands for a common tax system. The Government is rightly attempting to make the current laws GST friendly. The Government had taken one important step by introducing Constitutional Amendment Bill last year in the Parliament. 35| Advance ruling under Indirect tax In this section 38 | A better goods and Services Tax 40 | Burden of fiscal consolidation falls on tax system. and keep a close vigil on the likely structure to ensure a smooth shift to GST when it is implemented. This section provides a detailed analysis of the issues being deliberated in the purview of GST. implementation of GST regime is expected to throw economic and political challenges ahead of its implementation.Feature articles Indirect tax The indirect tax system in India is currently undergoing a significant transition from a multiple tax regime to a common GST. Stakeholders understand the need to carefully implement changes in the current laws. again 43 | Budget takes India Inc closer to GST 46| Pluses in the negative list 34 .

Categories under direct tax regime: i. and. in a stable and predictable environment. Tax categories Since inception. the concept of advance ruling has been introduced for existing tax payers. It was only in 1999. where notified Categories under indirect tax regime: i.Indirect tax Advance ruling under indirect tax Saloni Roy Hindu Business Line. and have thus emerged as a valuable tool for achieving certainty in tax positions. is as follows. to offer a forum to nonresidents for resolving questions pertaining to proposed transactions. It is clear that a far more expansive category of persons is eligible to seek advance rulings under direct tax vis-àvis indirect tax. the idea was first pioneered in India in 1993. A non-resident ii. 12 December 2011 T he Central Government should reconsider aligning the provisions relating to advance ruling under indirect tax laws with the scheme prevailing under income tax. A non-resident setting up a joint venture in India in collaboration with a non-resident or a resident 35 . has been widened with the years. and was limited to direct taxes only. A resident in relation to a transaction with a non-resident iii. the ambit of advance rulings. in 2003. Residents notified by the Central Government iv. under both the direct and indirect tax regimes. to Service Tax. While in many countries. Advance rulings lend transparency and predictability to the tax environment. that the concept of advance rulings was extended to Central Excise and Customs. and the categories of persons who can seek an advance ruling (as it stands today). Authoritative and binding advance rulings allow traders and investors to make business decisions regarding taxes and duties. Public sector companies. as applicable to indirect taxes.

Can be sought only on questions relating to classification.Feature articles Advance ruling under indirect tax ii. A joint venture in India v. No other questions covered. A wholly-owned subsidiary Indian company. One of the biggest reasons for this disparity apart from the eligibility criteria is the difference of scope of Advance Rulings. Public sector companies. Direct and indirect tax It is interesting to note that in complete contrast to the above. since its inception till March this year. 2. the Authority for Advance Ruling set up to look into direct tax matters has been much more successful. of which the holding company is a foreign company iv. ‘lukewarm’. where notified However. No specific provisions specifying the nature of questions that may be raised 2. to say the least. Advance ruling can be sought on a question of law or fact relating to a transaction which the applicant has undertaken or proposes to undertake 3. Residents notified by the Central Government vi. This is evident by the fact that the Authority for Advance Ruling set up for indirect tax matters has received only 146 applications. and determination of liability to pay tax. applicability of notifications. as available under direct tax vis-à-vis the indirect tax regime. “The Central Government should reconsider aligning the provisions relating to advance ruling under indirect tax laws with the scheme prevailing under income tax” 36 . A resident setting up a joint venture in India in collaboration with a non-resident iii. admissibility of CenVAT credit. Can be sought only for transactions proposed to be undertaken. in terms of the number of applications received and the general perception in the trade and industry. 3. valuation. Specific prohibitions in the case of questions already pending before other authorities Questions pertaining to indirect tax: 1. the response of the trade and industry has been. despite the fact that the category of eligible applicants for advance rulings has been expanded from time to time. Questions pertaining to direct tax: 1.

Roy@in... and issues pertaining to dual taxation under Service Tax.. the Central Government introduces amendments to the various indirect tax laws in the annual budget.. some of this litigation could have been limited. in the coming budget. You can write to Saloni at: Saloni. This would go a long way in not only reviving the confidence of the taxpayers.. applicability of notifications. Saloni Roy Partner. customs and international trade. but also in realising the full potential of the system. specifically in cases of classification of services. Reprinted with the permission of Hindu Business Line © 2012.. She is based in our Gurgaon office.ey. specifically under the service tax regulations.. Indirect Tax Services Ernst & Young.. stirred huge debates.Indirect tax Advance ruling under indirect tax Every year... the Central Government. If the scope of the advance ruling mechanism included within its ambit applications in relation to ongoing transactions. should sincerely reconsider the recommendation of aligning the provisions relating to advance ruling under indirect tax laws.com 37 . All rights reserved throughout the world.. VAT and excise duty.. Some of these amendments have.. with the scheme prevailing under income tax... in the recent past. and have led to litigation at multiple levels. as well as Value Added Tax. Given the increased litigation in indirect taxes.. Her areas of expertise are service tax. India Saloni has over 17 years of experience in indirect tax consultancy. . primarily due to the difference in interpretation by the tax payer and the revenue authorities.

is a precursor and an interim step towards implementing the goods and services tax (GST) in the near future. States have endorsed the negative list. meals in air-conditioned restaurants and so on. it underlines the serious issue of overlap of taxation powers between the Centre and states. It will be interesting to see the Centre’s reaction when the concept is finally unveiled. The papers reckon that the concept of a negative list . 19 January 2012 T he Empowered Committee of State Finance Ministers’ endorsement to the concept of a negative list for services. partly on account of lack of clarity in law making and understanding the business of intangibles. has been a victim of misinterpretation. albeit with some riders. Although a negative list would enable a simplified GST design. One only hopes that the concept is introduced as an interim step to GST. Going by the concept papers. the Centre has released two concept papers. With the widening fiscal deficit and the urgent need to generate revenues. its timing has led to apprehensions over double taxation. place of supply rules and credit rules. However. construction and so on). Service tax law. The introduction of a negative list should also desirably bring along with it equitable changes in many other areas of service tax law. This is one of the key reasons why industry believes that the concept of a negative list would be in order it is aligned with GST implementation. raise 38 . harassment and uncertainty for the industry. This has led to plethora of litigation and uncertainty for the industry. signalling its intent to widen the service tax base. an early implementation of GST seems to be the only solution.Feature articles A better goods and services tax Harishanker Subramaniam Economic Times. This has led to many areas of double taxation (telecom. entertainment. However. These include a clear definition of “service”. resulting in litigation.services that would be exempt from tax . paves the way for its possible introduction in the coming Budget. the negative list will only compound the issue of double taxation. but with a contentious rider -. So.the Centre should refrain from taxing areas that are within states domain such as construction. both the Centre and the state are equally responsible as their aggressive actions in the recent past have led to the vexed issue of double taxation. since its evolution.

A negative list will increase the tax base. Some of it was welcome. far too much of tinkering has happened in this area.. Indirect Tax Services Ernst & Young. hurting cash flows of the industry.Indirect tax A better goods and services tax compliance cost for the taxpayer and the cost of doing business..Subramaniam@in...com 39 . a negative list is welcome. but it is equally important for policy makers to take a closer look at credit rules. All rights reserved throughout the world.. Here again. We still live in an indirect tax environment where the aggressive stance of Centre and State has created a serious issue of overlap. He is based in our Gurgaon office. Conceptually. the hope is this time round is that policy and law makers come out with a concept that is fairly unambiguous in its intent and language. and service tax.ey.. Negative list has been announced to be implemented by 1 July 2012 2.... but several of them were highly debatable. Efforts should be to provide a fair credit chain in the system to avoid the cascading of taxes and increasing cost of business. VAT and excise duty.. With the experience of over a decade. Some of the concerns of the empowered committee were addressed in the Negative list framework announced with Budget 2012 3.. but what is debatable is the timing of its introduction. Draft place of Provision of Services rules have been notified Harishanker Subramaniam Partner & National Leader. . His areas of expertise are customs and international trade. but its certainty and an expeditious resolution of refunds. India Hari is a qualified licenced customs broker and has over 25 years of experience in industry and consulting. He is also currently involved in assisting companies for the impending introduction of Goods and Services Tax in India. leading to double taxation and impacting the competitiveness of Indian industry in these uncertain times.. Over the last few years. The issue generally is never about taxability. We all are well aware of issues relating to export of service rules that the industry has faced in the recent past. It has led to unnecessary and prolonged litigation and also stalled service tax refunds... Place of supply rules is another key area of drafting. The negative list offers a chance for policy makers to have a holistic relook and provide more equitable Cenvat credit in the chain. This will provide some degree of certainty about taxes. You can write to Harishanker (Hari) at: Harishanker. Reprinted with the permission of Economic Times © 2012. the hope is that policy makers use all their past experience to bring out clear and unambiguous rules that provide a fair degree of certainty.. 1.. increasing areas of cascading of taxes.

In the absence of a tangible reduction in international oil prices. he has resisted the temptation to announce populist measures and shied away from a concrete roadmap for fiscal consolidation. the direct tax proposals are modest and populist. Leaving aside the significant and dramatic changes in international taxation arena. begs the question whether it is realistic. In these circumstances. Fiscal consolidation was the most significant challenge that the FM faced in preparing this budget. resulting in a revenue loss of Rs 4. The fiscal deficit of 5. The achievement of these targets will thus depend entirely on market forces such as the prices of crude oil.500 crore.1% next fiscal. It is unlikely that the government will have the political strength to cut back on subsidies in the remaining two years of its mandate. The burden of fiscal consolidation in the budget has fallen entirely on the tax system and there again on indirect taxes.Feature articles Burden of fiscal consolidation falls on tax system.9% of GDP turned out to be higher than anticipated. 19 March 2012 T he finance minister went into the budget with his hands tied and came out with his hands tied. On the social and economic policy fronts. again Satya Poddar Economic Times. which are being raised to provide an additional Rs 45. On the fiscal side he had little elbow room to announce new spending initiatives or tax cuts. No expenditure reductions were announced other than the policy objective of keeping subsidies within the cap of 2% of GDP. the fiscal woes will continue to compound in 2012-13. he had little hope of getting the support needed for any major reform. given the emerging divisions within the UPA coalition. while reasonable. 40 . His plan to reduce the fiscal deficit to 5.940 crore.

they are retroactive. while anticipated. again This is consistent with international trends. Governments are increasingly constrained in increasing direct tax rates for fear of adverse impact on investment and economic growth. The amendments proposed close all the legislative gaps identified by the Supreme Court in the taxation of indirect transfers of property and go 41 . The proposal to harmonise central excise and service tax laws may also not be worth the effort if the GST were to be implemented in the near future. Having missed his targets before. information and status tracking. beyond. notifications. there is no tangible broadening of the tax base. filing and processing of tax returns. Other tax changes are largely in the nature of housekeeping. education. “Goods & Services Tax Network is a significant stepping stone to the GST” The changes in the taxation of capital gains from indirect transfers of capital property (linked to the Vodafone transaction). and taxpayer management including account management. as far back as 1962-63. The move to change the approach to taxation of services from a positive list to a negative list appears to be too little too late. whereby most countries in need of fiscal consolidation have resorted to indirect tax increases. The only measure which could be viewed as a significant stepping stone to the GST is the Goods and Service Tax Network (GSTN). With major consumer services such as healthcare. residential rentals and public transportation either in the negative or exempt list. payment of taxes and refunds. It will provide services through a common technology-enabled portal for registration of dealers.Indirect tax Burden of fiscal consolidation falls on tax system. are draconian and vindictive. the FM was wise not to provide a concrete roadmap for major structural reforms such as the Direct Taxes Code and the Goods and Services Tax (GST). It remains to be seen whether the government will invoke these amendments to defend the assessments already raised for the transactions concluded prior to the budget. And.

VAT and international taxes. All rights reserved throughout the world. New Zealand. He is based in our Gurgaon office.. It will simplify tax processes. Reprinted with the permission of Economic Times © 2012. . Satya Poddar Partner. he has been the Advisor to the Gulf Cooperation Council on issues relating to tax policy matters and Director of the Tax Analysis and Commodity Tax Division in the Canadian Ministry of Finance.. and Gulf Cooperation Council. all state governments have agreed to the launch of the GSTN and pilot tests have already commenced for migration of some of the front-end processes to the common portal. He has also served as tax policy advisor to governments around the world.ey.com 42 . Successful launch of the GSTN will constitute third generation of tax reforms.. after the first generation of reforms of the central direct and indirect taxes under the leadership of the then finance minister Manmohan Singh. facilitate voluntary compliance and can yield significant fiscal dividends to governments. You can write to Satya at: Satya.. Policy Advisory Group Ernst & Young..Poddar@in. reduce leakages.. including Russia.. It’s a win-win for both taxpayers and governments.. and the second generation reform of state sales taxes in 2005. Syria.. again In spite of dissension about the GST.... India Satya has over three decades of experience in advising clients on tax policies.Feature articles Burden of fiscal consolidation falls on tax system. European Union.. Korea.. China...

• Trading in goods. 19 March 2012 T he Budget was expected to be of a different kind compared to the previous Budgets due to the political. (ii) services provided by charities. Any activity qualifying the characteristics of ‘service’ or the ‘ declared services’ would be taxable unless found in the negative list. social and economic upheaval the country has been through in the previous year. The declared services contain renting of immovable property. religious persons. subject to exceptions and conditions: • Services provided by the Government or local authorities. The highlight of this Budget is the introduction of ‘Negative List of Services’ which would bring about a paradigm shift in the manner in which provision and consumption of services would be taxed going forward. The negative list comprises 17 services which broadly includes.Indirect tax Budget takes India Inc closer to GST Vivek Pachisia Hindu Business Line. • Specified public transportation. The negative list approach would come into effect from the date which would be notified in due course of time and consequently the provisions pertaining to the positive list approach would cease to exist from such notified date. information technology software services etc. • Services relating to agriculture. temporary transfer of intellectual property. • Renting of residential dwellings. among others. Reserve Bank and foreign diplomatic missions. Exempted services The Budget has also proposed a list of exempted services in addition to the negative list of services. service portion in a works contract. The exemption list. subject to exceptions and conditions. entertainment and amusement services. primarily includes services such as (i) health care. sportspersons 43 . • Manufacture.

Place of provision of service rule is critical to determine the taxable jurisdiction on import and export of services and potentially provides guidance on taxability of inter-State exchange of services under GST. the Budget has proposed to introduce the ‘Place of Provision of Services Rules. The draft rules have been released for comments and feedback. canals. eligible CENVAT credit would simply be entitled for refund in the ratio of the export turnover to total turnover. from the stakeholders. residential dwelling etc. and specific changes to rates of duties of customs and excise across different industry sectors. 2012’ which would identify the taxing jurisdiction of a service and will replace the existing export and import of service rules. 44 . “The additional list of exemption provides relief from service tax to services that are essentially intended towards the larger benefit of the society. The additional list of exemption provides relief from service tax to services that are essentially intended towards the larger benefit of the society. the Budget also contains amendment to the Point of Taxable Rules. (iv) individual advocates providing services to non-business entities. To mitigate the hardship. harmonisation of service tax and central excise by bringing about a common platform for registration and filing of returns. Further. “ increase in rate of service tax and excise duty from the existing 10 per cent to 12 per cent. (iii) specific services provided to Government or local authorities. (iv) construction services relating to specified infrastructure. for the time being. Easy refund Refund of service tax has always been a subject matter of concern given the cumbersome procedure and voluminous documentation involved in the process. Further. If implemented in its true spirit. irrigation works. independent journalists.Feature articles Budget takes India Inc closer to GST etc. 2012 to bring in greater clarity on the subject. the Budget has replaced the existing refund provision with a much simplified provision that intends to allow the benefit of refund based on a simple formulary approach.

it is also evident from the proposals in the Budget that the Government has aimed at sweeping reforms on indirect taxation and has taken a wide variety of measures such as broadening of the tax base.. no doubt. mitigating tax cascading. .. He possesses over 13 years of experience in advising clients on Indirect tax matters in the areas of supply chain structuring.. business tax operations. the dream of achieving the GST regime could soon be a reality which would. mergers and acquisitions.. harmonisation of compliances. Reprinted with the permission of Hindu Business Line © 2012.... and so on... If the changes are effectively implemented and all irritants are removed.. Vivek Pachisia Partner. Indirect Tax Services Ernst & Young.. You can write to Vivek at: Vivek... simplifying tax refund procedures.. be the biggest blockbuster reform in the history of indirect taxation.ey. project and EPC contract structuring. All rights reserved throughout the world.com 45 . litigation and tax controversy management.. to rationalise the existing indirect tax statues and prepare the ground for introduction of GST in the longer-term. India Vivek is leading the Indirect Tax practice in Bangalore..Pachisia@in.Indirect tax Budget takes India Inc closer to GST However.

and agreeing to refrain from an act or tolerating an act. customisation and upgradation of information technology software. which existed as a mere concept until sometime ago. Definition of ‘service’ But what exactly is ‘service’?. all services that were not taxable earlier have now been brought within the purview of service tax. burial and crematorium services. agricultural services. attracting service tax. Although most of the declared services are taxable under the present positive-list regime. if you provide translation services for a consideration. The Finance Bill broadly defines service as any activity carried out by one person for another for consideration. but does not include sale of goods or immovable property. Accordingly. and other essential services such as funeral. However. would become taxable. With all services. For example. transaction in money or actionable claim. service tax is levied only on a positive list of services. transportation of passengers in stage carriage and railways (other than first class or air-conditioned coach). educational services. is finally seeing the light of day. Similarly. except those in the negative list. except those in the negative list. service provided by employee to employer in course of employment and fee taken by court or tribunal. if the budget proposals are accepted then all kinds of activities. Budget 2012 has proposed a paradigm shift in the way services are to be taxed in India. 46 . The definition of service also includes certain declared services. the list itself assumes great importance. Services provided by the Government and RBI. your services would attract service tax.Feature articles Pluses in the negative list Bipin Sapra Hindu Business Line. The negative list has been drafted after ensuring that certain services that assume social. which are specified in the service tax legislation. it would now attract service tax. Currently. 16 April 2012 N egative list of services. magician or a non-classical musician. economic and political relevance remain outside the ambit of service tax. Some important declared services include renting of immovable property. have been included in the negative list. if you are an actor. they have been so declared in order to remove ambiguity and ensure uniform application of law all over the country.

Indirect tax Pluses in the negative list Bundled services An interesting aspect of the negative list is the bundled services. he has been part of various committees in the Indian Government for drafting legislations on Indirect tax policy in India..ey. The inclusion of ‘temporary transfer or permitting the use or enjoyment of any intellectual property right’ within the definition of declared services could result in double taxation. Additional Commissioner with the Department of Revenue. as several VAT legislations treat the same as ‘goods’ subject to VAT. the new regime still fails to address the issue of double taxation.Sapra@in. the bundle shall be treated as provision of a single service that gives the bundle its essential character. An ex. He is based in our Gurgaon office. a long negative list and mega exemption list.... . Reprinted with the permission of Hindu Business Line © 2012. India Bipin anchors Indirect Tax for our technology. communications and entertainment industry practice for the national capital region. However. Therefore. Similarly.. the bundle shall be treated as provision of a single service that results in highest liability of service tax. In other cases.. What is the taxability of bundled services wherein some services are in the negative list while others are not? The Finance Bill states that where different services are naturally bundled in the ordinary course of business... providing licence to use software may continue to suffer both service tax and VAT.. it must be ensured that the new tax regime does not result in another complex tax structure that is difficult to interpret and implement.com 47 .. All rights reserved throughout the world.. with an involved definition of services including declared services. where State taxes are also liable on some of the transactions. The option of including additional items in the positive list makes the tax structure even more complex. the shift to taxation of services based on negative list is certainly a positive development. Further. Ministry of Finance in India.. Bipin Sapra Partner.. You can write to Bipin at: Bipin... Indirect Tax Services Ernst & Young.. There is no doubt that taxation of services under the existing positivelist regime has made the law lengthy and litigious.

In this section 49| Importance of Transfer Pricing Documentation 52 | Transfer pricing and intangibles 54 | Reducing cross-border tax disputes 57 | Going back in time is no good 60 | Pause before P-Notes 62 | Mauritius structures .Feature articles International tax With economic growth and globalization. matters such as arriving at the correct arm’s length price on cross-border payments between associated enterprises. TP and intangibles and reducing cross border disputes. assumes a key challenge as the Indian tax authorities ramp up their enforcement efforts on the Transfer Pricing front. valuation of intangibles. A welcome feature in the Budget has been the introduction of the advance pricing mechanism. This section on International Tax covers topics such as the importance of transfer pricing (TP) documentation.gazing through a crystal ball 48 . Insights on taxability of P-Notes and the continuity of the Mauritius structure are also discussed here.

the case has been supported with extensive documentary proof. India is no exception insofar as the transfer pricing legislation. and adjustment for functional and risk differences. Cases have travelled through the appellate chain and are pending adjudication at various levels. A cue can be taken from the recent case of Symantec Software Solutions Private Limited.International tax Importance of transfer pricing documentation Vijay Iyer CFO Connect. has seen considerable controversy. has repeatedly emphasized on the need for the taxpayer to possess documentation supporting the positions adopted in a transfer pricing analysis. which is the ultimate fact finding authority in the Indian dispute resolution framework. It is estimated that approximately Rs. Dispute resolution has been a time consuming process. though only a decade old. Commonly recognised as one of the most pressing issues. a common theme underlying the judicial precedence that is currently evolving in the country is the need for robust transfer pricing documentation. In allowing the tax authorities to use only data for the year under consideration. Wherever the ITAT has eventually ruled in favour of the taxpayer. The Income Tax Appellate Tribunal (ITAT). There is a sustained increase in quantum of transfer pricing adjustments cutting across various industries. which dealt with issues relating to use of single year versus multiple year data.000 crores is locked up in transfer pricing disputes alone in India. However. Many issues of divergence between the tax authorities and the taxpayers are still to be settled. transfer pricing indeed dominates tax agendas around the world. application of turnover filters. the ITAT held that multiple year data cannot be used as a rule and the taxpayer has to make a case out for how prior year 49 . three quarters of the respondents considered transfer pricing documentation as being more important than it was two years ago. 30. Six rounds of transfer pricing audit examination by the Indian tax authorities have witnessed scrutiny of various inter-company transactions. 1 July 2011 I n Ernst & Young’s Global Transfer Pricing Survey 2010.

the basis of arriving at the service charge encompassing the cost elements of the service charge and the allocation keys was scrutinized. This ruling therefore underscores the importance which the ITAT attaches to documentation of facts and rationale. in many instances. Detailed documentation also serves as a tool to explain the business purpose and economic substance of controlled transactions to protect against tax authority disregarding the form of the transaction and re-characterizing it during audits. giving a better insight into the business. Even in case of economic adjustments. Inadequate or inconsistent documentation opens the taxpayer to allegations of intangible creation and a demand for higher compensation or attribution of a portion of the global profits to tax in India. the screens applied to filter companies. it was mentioned that the taxpayer did not demonstrate how turnover impacts the profitability thereby. negating its application. aids in spotting trends which have a bearing on profitability. A correlation of these trends to actual financial performance can often help in substantiating specific business strategies or defending against losses. 50 . Documentation plays a very critical role in addressing these questions and enables the taxpayer to enter an audit situation from a position of strength. helps identify the functional attributes of the parties to transactions and the risks allocation entailed in such arrangements thereby. Last year. These aspects then feed into the comparability analysis where description of the search methodology.Feature articles Importance of transfer pricing documentation data influences the prices of the year under review to justify its usage. Additionally. The advantages of preparing and maintaining prescribed documentation are manifold. the computation of financial ratios of comparable companies. Tax authorities are increasingly investigating the value chain to understand the contribution of the Indian taxpayer to the overall product or service offering of the group. We observe a trend towards the tax authorities requesting for a greater level of detail around related party transactions specifically intragroup services. It captures the terms and conditions of inter-company arrangements. Indian taxpayers paying for management services availed from group companies suffered disallowances of these charges on the grounds that adequate documentation was not available to evidence actual availing of services or benefits received from them. On the turnover filter. A proper description of the industry in which the taxpayer operates. the ITAT cited the lack of documentation to prove how functional and risk differences affected the margins of comparable companies in order to be undertaken. reasons necessitating economic adjustments and a quantification of such adjustments demonstrate the due diligence undertaken by the taxpayer.

Iyer@in. Vijay has been rated as one of the World’s Leading Transfer Pricing Advisors for India by the Legal Media Group and by International Tax Review... Transfer Pricing Practice Ernst & Young.com 51 ..International tax Importance of transfer pricing documentation With the sustained pressure on raising revenues. The transfer pricing documentation process provides a useful framework to discover opportunities for supply chain optimization.. Greater rigour in preparing and maintaining documentation will keep corporate taxpayers in good stead to face the challenges of the new world. The seventh round of TP audits got concluded in October 2011 and has resulted in proposed TP adjustments of approx Rs.. ... Heightened scrutiny by the tax department and the augmented levels of disclosure expected from taxpayers significantly inflates the transfer pricing risks confronting companies. Suitable documentation facilitates penalty protection in case of a dispute and reduces the risk of additional financial costs to the company. Contemporaneous documentation endows companies the benefit of taking into account these changes.. He is based in our Delhi office.ey. streamlining global policies and reconfiguring functions and risks to derive maximum benefit. You can write to Vijay at: Vijay.. robust documentation is a key ingredient for success in controversy and will continue shaping the views of the judicial authorities in future transfer pricing judgments. The global economic crisis has triggered off a need to relook business operations to achieve efficiency. including outbound investment from India to overseas. All rights reserved throughout the world.000 crores.. 45. Transfer pricing documentation globally is motivated by risk mitigation and audit defense factors. The legislative and regulatory landscape is rapidly altering... synergy. anticipating potential implications thereof and tackling them appropriately to stay ahead of the curve. In the Indian context. and competitiveness. Vijay Iyer Partner and National Leader.. India Vijay possesses over 15 years of experience in advising clients on transfer pricing and international tax... the tax department is seeking to levy penalties in almost all cases.. Reprinted with the permission of CFO Connect © 2012.

its uniqueness. intangibles are subtle. information on the availability of such intangibles in the open market and prices and the cost of development of the intangibles. and mobile. The Director General of Income Tax (DGIT) communicated at a public conference. elusive. Taxpayers may therefore brace themselves for greater audit activity in the coming days.Feature articles Transfer pricing and intangibles Vijay Iyer Hindu Business Line. covered by the intangible property. thereby complicating questions of pricing and ownership. and valuation of intangibles for transfer pricing purpose. 19 September 2011 T ransfer Pricing. In this regard. that transfer pricing cases will be scrutinised by the Comptroller and Auditor General of India (CAG). product. agreement rights to receive upgrades / modifications. 52 . simply put. The increasing complexity in this area can be gauged from the 2010 Global Transfer Pricing Survey. As the name suggests. since they have revenue implications for the exchequer. conducted by Ernst & Young. Indian tax authorities. Focus of audits Recent audits have seen increased focus on transactions pertaining to use or transfer of intangible property. improved vigilance. tax authorities have sought detailed information on the description of intangible property received. believed that transfer pricing will be absolutely critical to their organisations during the next two years. have tightened transfer pricing laws. identification. They have also been challenging taxpayers on the cost-benefit analysis of the receipt / use of intangibles. refers to pricing of transactions between group companies in different countries. useful life of the intangible. quantification of the benefits and the comparison of profits before and after the use of the intangible. details of the process. like several others. Further. In the absence of specific guidance on definition. enhanced enforcement and armed its tax officials with greater powers of investigation. issues pertaining to intangibles have been a significant bone of contention between taxpayers and tax administrations. where more than 74 per cent of the multi-national enterprises (MNEs). one third of the MNEs surveyed identified transfer pricing as one of the most important tax challenges facing their group.

International tax Transfer pricing and intangibles OECD project The Organisation for Economic Cooperation and Development (OECD) is attempting to bridge this gap and has released a scoping paper for a project that will examine various issues related to transfer pricing for intangible property.. would serve as a useful paradigm while analysing various aspects of transfer pricing. valuation. such as the pricing of R&D services. Reprinted with the permission of Hindu Business Line © 2012. . in the absence of any guidelines in the Indian regulations. will also be examined in the OECD Project.. the OECD has released an interim discussion draft on the revision of the special considerations for intangibles in Chapter VI of the OECD transfer pricing guidelines and related provisions Vijay Iyer Partner and National Leader. On 6 June 2012.. but are seen to have economic ownership.. He is based in our Delhi office....... at least for the taxpayers. as opposed to legal ownership. The scope of the above project will include work on a framework for analysis of intangible-related transfer pricing issues. including the relevance of definitions of intangibles used in accounting... You can write to Vijay at: Vijay. The Working Party for the project intends to review specific categories of intangibles. All rights reserved throughout the world.com 53 . Useful paradigm Though the OECD Guidelines are not binding on the Indian tax administration (since India isn’t a part of the OECD). India Vijay possesses over 15 years of experience in advising clients on transfer pricing and international tax.ey. Vijay has been rated as one of the World’s Leading Transfer Pricing Advisors for India by the Legal Media Group and by International Tax Review. However. have raised the issue of ‘arm’s length return’ to entities that aren’t legal owners of intellectual property. and when a cost-plus method or a method other than costplus may be acceptable for pricing of R&D services.. the results of this project. and legal standards. The notion of economic ownership.Iyer@in.. including outbound investment from India to overseas. Transfer Pricing Practice Ernst & Young.. The OECD guidelines currently do not contain any universal definition of intangibles.. along with the valuation of the intangibles. Indian tax authorities. the primary responsibility for ensuring appropriate transfer pricing analysis and documentation lies with the taxpayer only. in recent transfer pricing audit proceedings. The project intends to address issues pertaining to definition of intangibles.

Tribunal. international tax adjustments. it would not be an understatement to say that tax disputes have assumed the centre stage! It has become crucial to effectively unlock the key to lengthened tax disputes and evolve new juristic standard for their speedy resolution.Feature articles Reducing cross-border tax disputes Prashant Khatore Hindu Business Line.a process that can take a Phenomenal rise in cross border tax disputes leading to huge tax demands couple of decades to attain finality! and delay in their dispensation DRP serves as an alternate to the has given rise to concerns in Commissioner (Appeals) process in multinationals’ confidence and may cases involving transfer pricing or impact the future of investments. 13 February 2012 J ustice delayed is justice denied. High Court and Supreme Court . effectiveness of administrative processes. draft order passed by the assessing officer is litigated before the panel of three Commissioners (the DRP panel) which is required to adjudicate the matter within 9 months. manifold appellate layers. the with fundamentals of international taxation being tested on regular basis. however the taxpayer may appeal before the Tribunal. The Given the above. Dispute resolution panels Finance Act 2009 introduced DRP as an alternate dispute resolution mechanism to facilitate expeditious resolution of disputes on a fast-track basis. a proverb conceived in the realm of law has become the defiant voice of India Inc due to long pending tax disputes with portion of it attributable to complex tax regime. 54 . an assessing officer’s order can Multinationals operating in India be appealed before Commissioner have to deal with complex issues (Appeals). The DRP’s directive is binding on the tax department. Under the traditional mechanism. and thereafter.

the experience has not been cheering. The Union Budget 2005 proposed to replace the appeal to High Court by the NTT with the objective of speedy adjudication of disputes.e. the CBDT must exercise its discretion to establish additional benches. However.e. DRP panel is 2 years old and while the intent for speedy disposal is creditable. circumstances in which the income-tax authorities shall accept transfer price declared by the taxpayer.” 55 . Safe harbour In addition to the introduction of the DRP. Finance Act 2009 empowered the CBDT to formulate safe harbour rules i. 63 per cent were rejected and only partial relief was provided in 21 per cent cases.International tax Reducing crossborder tax disputes The highlight of the mechanism is the automatic stay of demand till the final decision by DRP. Given the above. in order to make it effective and enable it to meet its objectives: Independence: With the three commissioners on the DRP panel wearing dual hats of panel members as well as Commissioners. Work allocation: The panel members having an additional charge as DRP members have perceptibly divided attention. with fundamentals of international taxation being tested on a regular basis. The NTT needs to become operational at the earliest. A joint EY–CII report ‘India. The proposal of NTT was supposed to be followed by formation of 15 Tribunals with decision of NTT appealable only before the Supreme Court. the forum is faced with the fundamental issue of independence leading to conflict of interest. to ensure effective functioning of the forum to its intent it is crucial to constitute an independent body to function as DRP. a new dawn’ quoting a recent study by E&Y on the performance of DRPs for a period of two years notes that out of the total cases decided by the DRPs. Accordingly. “MNCs in India have to deal with complex issues. it is vital to address the challenges being faced by the forum. 9 months vis-à-vis Commissioner (Appeals) with no mandatory statutory limit disposal of cases and certainty that the tax department will not litigate further. The implementation of NTT would avoid conflicting decisions on the same issue thereby significantly reducing litigation. disposal of cases on fast-track i. Central Board of Direct Taxes (CBDT) decision that Commissioners associated with transfer pricing orders will not be a part of DRP collegium is indeed a right step towards reinforcing DRP’s independence.

..Khatore@in.” Prashant Khatore Partner.. He also actively contributes to thought leadership in the areas of direct taxation.. You can write to Prashant at: Prashant.... Introduction of APAs is a welcome measure and should provide a fair degree of certainty to the business transactions. It works as an assurance by the revenue authorities not to make any adjustments to the transfer price as long as the taxpayer adheres to the principles agreed in the arrangement.. . Tax & Regulatory Services Ernst & Young.com 56 . Conceptually. “APAs have been introduced in the Income tax law in the recent budget.. All rights reserved throughout the world. He is based in our Noida office... These rules should be issued at the earliest. Prashant has extensive experience in tax planning and structuring.. APA is a mechanism to provide an opportunity to the taxpayer to reach an agreement with the revenue authorities on the future application of the arm’s length principle in their international transactions... India A corporate tax specialist..ey.Feature articles Reducing cross-border tax disputes Introduction of safe harbour rules came as a cheer-up for the multinationals as the same intended to provide certainty on pricing of international transactions/ determination of arm’s length margins thereby resulting in significant reduction of transfer pricing litigation. Though the CBDT established a Committee to finalise the details of the provision.. the rules are yet to see the light of the day. Reprinted with the permission of Hindu Business Line © 2012. The Direct Tax Code had proposed the introduction of APAs which shall be valid up to 5 financial years.

International tax Going back in time is no good Jayesh Sanghvi Hindu Business Line. across various appellate levels. was clearly meant to be more of a statement of intent than a headliner. which are proposed to be retrospective. transponder lease revenue streams of non-residents into the net of the tax authorities. One would ask — was the insignificant relief granted by the Finance Minister in personal taxation (pale in the backdrop of crippling inflation). It has also been 57 . which have provided some certainty. Section 92C(2) has been amended to clarify that the tolerance band of five per cent is not taken to be a standard deduction while computing Arm’s Length Price and to ensure that due to such retrospective amendment already completed assessments or proceedings are not reopened only on this ground. Governments are increasing the focus on consolidating their public finances and designing tax structures that are growth-oriented. 19 March 2012 A cross the globe. seeking to negate judicial precedents. The opening statement of the Finance Minister. the tremors of the crisis continue to pose new and serious challenges. In this regard to highlight a few retrospective amendments: In direct negation of the Supreme Court judgment in Vodafone retrospective amendments have been proposed to provide that a share or interest in a foreign company which directly or indirectly derives its value substantially from assets located in India would be deemed to be an asset situated in India. The definition of the term ‘Royalty’ has been suitably amended to restate the legislative intent and to subject software licence. “I need to be cruel at present to be kind in the future”. not cruelty enough? Was it necessary to launch retrospective attack and annihilate credibility? A passing glance on the proposed amendments of the Budget throw up a plethora of amendments. The definition of the terms ‘international transaction’ and ‘intangible property’ have been amended for providing certainty in law.

APA is very welcome in providing certainty and unanimity of approach. 80A. Therefore. including but not exhaustive (as is generally in tax law!) Powers have been granted to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP) of an international transaction even if the said transaction was not referred to him by the Assessing Officer (AO). Transfer pricing remains the most litigated subject today and it is hoped that the APA mechanism would foster some certainty. who is not bestowed with the psychic powers of what an international transaction ‘always’ meant may have omitted including some transactions in its disclosure and documentation. Such penalty is to be levied at two per cent of the value of the international transaction. such retrospective amendments throwing business strategies and plans into disarray are hardly welcome. Again here. No range in lieu of five per cent was prescribed by the Government but the Budget has proposed an upper ceiling of three per cent for the same. Other transfer pricing related amendments. 10AA. Applicable effective AY 2013-14 for transactions aggregating to Rs 5 crore. a taxpayer. it is to be noted that the Finance Minister’s proposed amendments also include the introduction of the highly anticipated Advance Pricing Agreements (APA) and other transfer pricing related amendments. Penalties are now leviable for failure to (a) maintain prescribed documents or information. or (b) report any international transaction which was required to be reported. provided the same was not reported in the Transfer Pricing Report (TPR). 80IA. introducing tax deduction at source to immovable property transactions between residents (other than agricultural land at one per cent on urban land or other land exceeding Rs 50 lakh or Rs 25 lakh. credit where it’s due. Transfer pricing In contrast. definition of ‘international transaction’ has been significantly expanded for clarification retrospectively. He may now wait to be visited with penal provisions? There are some provisions laid out to widen the tax base. or (c) maintain or furnish correct information or documents. TP regulations (procedure and penalty) extended to domestic related party transactions under Section 40A. At a time when business houses and tax practitioners crave for certain and stable tax legislation. 58 . respectively). as mentioned earlier. as also tax collection at source on cash sale of bullion and jewellery in excess of Rs 2 lakh. that is.Feature articles Going back in time is no good proposed that this amendment shall be applicable to all proceedings which were pending as on 1 October 2009.

transfer pricing . 1 April 2014 Jayesh Sanghvi Partner. . Certainty may be some distance away as some of the retrospective amendments will very likely be resisted in post-Budget parleys and. Tax & Regulatory Services Ernst & Young. it is the honest tax payer who is most scared in this country.International tax Going back in time is no good New avatar Despite the counsel of the Parliamentary Standing Committee on Finance to introduce General Anti-Avoidance Rules (GAAR).com 59 . It is only hoped that the GAAR will be invoked sparingly and to address issues of clear tax evasion. All rights reserved throughout the world. the provisions are to be inserted w. Law is truly blind.. the FM has proposed to introduce GAAR in its most virulent “avatar”..... challenged in the courts. 5 lacs 3. only after due consideration of some very valid recommendations.f. He is based in our Hyderabad Office... Unfortunately. enacted on 28 May 2012 2. Reprinted with the permission of Hindu Business Line © 2012. regulatory matters. advising global companies on smooth and tax efficient exit and repatriation strategies from the Indian tax perspective.Sanghvi@in.e. mergers and acquisitions.. You can write to Jayesh at: Jayesh. transaction structuring.... due diligence related tax and advisory support for a number of multinational and domestic clients across various industries.ey. 1.. While the GAAR provisions have been enacted vide the Finance Act 2012.. i. if legislated..e. one is bewildered at how the present day legislature so vividly knows the intentions behind the legislation framed in 1962! It seems that our current legislature is gifted with superhuman prowess which the Judiciary is incapable of. Omitted in the Finance Act 2012.. their impact has been deferred by a year.. The Finance Act 2012 has provided relaxations to the proposed provisions by excluding coins and articles weighing less that 10 grams from “bullion” and enhancing the threshold limit for sale of jewelry to Rs. In the end. at the prospect of being handed out a bigger tax bill. Planning appropriate holding and financing structures for companies in case of reorganizations. India Jayesh has over 19 years of experience in the field of corporate taxation.

This financial instrument is especially useful for a significant number of investors who are not registered as FIIs with the Securities and Exchange Board of India. Though the performance of the P-Note is linked to the performance of the specified security. as Indian if the share or interest derives its value substantially from the assets located in India. An offshore contract P-Notes are ‘offshore derivative instruments’ that signify a contractual arrangement executed outside India between the P-Note holder and the FII issuing it. the FII issuing it is not obliged to hold the security. In the past few days the market may have breathed a bit easier after the Finance Minister told the media that there could be no question of tax liability in India for the P-Note holder. They are meant for investors looking for exposure to the Indian capital market. These inter alia include amendment of section 9 of the Act. deeming any asset or capital asset that forms a share or interest in a company or entity incorporated outside India. which are assets located in India and taxable here. the P-Note holder has no ownership rights in the specified security. the gains on transfer of P-Notes are not liable to be taxed in India. now an uncertainty has arisen due to the proposed amendments to the Incometax Act. certain amendments have been proposed to significantly widen the ‘source’ rule. it is on its own account and in accordance with its risk-taking ability. in some cases the return to the P-Note holder is net of taxes incurred. This raises worry as the return on P-Notes is linked to the performance of specified Indian securities. 16 April 2012 T he post-budget uncertainty over taxation of participatory notes (P-Notes) remains unresolved. 1961 (Act) on two counts. Where the FII holds the security. the implications of the budget proposals are far-reaching and greater clarity is required. by the FII from hedging . Typically. First. Taxing assets in India The understanding all along has been that as a foreign asset. 60 . it gives them access to such superior returns that these Indian securities may generate. The FII is contractually obliged to provide a return that is linked to the performance of the specified security. if any. However. in an attempt to amend the Act retrospectively to tax Vodafone-like transactions. Further. However.Feature articles Pause before P-Notes Hiresh Wadhwani Hindu Business Line.

Further. including banks. He has worked with variety of international financial institutions. regulatory and inbound structuring projects spans over 20 years..... and the Investor Identification regime in Korea.... This leaves the application of GAAR to the judgment of the tax officers. brokerage houses. Hiresh Wadhwani Tax Partner & National Director. This results in uncertainty over the tax position for these instruments. the Foreign Institutional Investor (FINI) regime in Taiwan. which empowers the tax officer to declare as “impermissible avoidance arrangement” any arrangement whose main purpose is to obtain tax benefit and inter alia lacking in commercial substance. Financial Services Ernst & Young. It is worth noting that P-Notes are not unique to India and are prevalent in economies where direct access to the market is restricted. the onus is on the taxpayer to prove that the provisions do not apply. 2013. especially where the hedging entity of the issuing FII is located in a jurisdiction that has a favourable tax treaty with India for capital gains. clarity and certainty on the issue of P-Note taxation will go a long way in reassuring the FII community and prevent an exodus of foreign capital from India.. The P-Note holder may be affected.. .International tax Pause before P-Notes ‘Impermissible avoidance’ The second area of worry is the introduction of the General AntiAvoidance Rule (GAAR).ey. asset management companies and PE funds. Reprinted with the permission of Hindu Business Line © 2012. the burden of proof to show that an arrangement is not an impermissible avoidance arrangement is no longer that of the tax payer. which could adversely impact foreign capital inflow to the Indian capital market.. the Qualified Foreign Institutional Investor (QFII) regime in China. Further. which typically creates a time lag...com 61 .. the applicability would be determined only at the assessment stage.. pursuant to significant concerns raised by various stakeholders. Even as emerging market economies are vying for a share of the same pie. All rights reserved throughout the world..Wadhwani@in. India Hiresh’s experience in tax. for instance. You can write to Hiresh at: Hiresh. GAAR proposes to override the tax treaties India has entered into with other sovereign nations. Also. The proposed introduction of GAAR has been deferred by one year and will now be effective for income earned after April 1.. investment banks. The proposed provisions are widely worded and onerous. Wary foreign funds Such uncertainties in tax positions could deter FIIs from issuing P-Notes and even lead to the unwinding of existing issuances. He is based in our Mumbai office.

where it was observed that the legal structure of the Mauritius company cannot be disregarded and legitimate tax planning was permissible). which had underpinned the emergence of Mauritius as the dominant channel for foreign direct investment into India. Relief in reverse? In the past. and thereafter determine the availability of the benefits under the tax treaty. the Authority for Advance Rulings held that the buy-back of shares held by a Mauritius company was a tax avoidance device. This popularity is due to several factors including the capital gains tax exemption available under the India-Mauritius Tax Treaty. recent developments indicate a renewed attempt by the tax authority to challenge the use of Mauritius structures. a circular issued by the Central Board of Direct Taxes that allows tax treaty benefits based on a valid Tax Residency Certificate (TRC) of Mauritius. Further. as the buy-back by the Indian company was in lieu of distribution of dividends. documentation and conduct of the parties to question the legal/ beneficial ownership of the shares by the Mauritius company. it seemed as if the status quo was restored on the use of the tax treaty. The treaty. both under Indian tax law as well as the tax treaty.Feature articles Mauritius structures — gazing through a crystal ball Vidya Nagarajan Hindu Business Line. The buyback was disregarded and treated as distribution of dividend chargeable to dividend distribution tax (DDT) in India. had provided a reasonable level of certainty to taxpayers. including one from the Authority for Advance Rulings (in the case of E*Trade Mauritius Ltd 324 ITR 1. Media reports on the possible renegotiation of the 62 . With a series of highprofile court rulings. in a recent ruling. and the Supreme Court ruling (in the case of Azadi Bachao Andolan 263 ITR 706) upholding the validity of the circular. has been under constant scrutiny by Indian tax authorities as a result of alleged abuse by investors. 14 May 2012 M auritius has been a popular location for intermediary holding companies for multinationals and others investing in India. The authority’s approach has been to make a detailed inquiry into the facts. However.

. While one can only guess what lies ahead in the use of the IndiaMauritius tax treaty. You can write to Vidya at: Vidya. The India-Singapore tax treaty had additional clauses to check treaty abuse.. Tax & Regulatory Services Ernst & Young. Interestingly.. Tax authorities are hoping that Mauritius would stiffen the requirement for tax exemption under the treaty.... joint ventures. Mauritius had added to its treaty with China a protocol (in force from January 2007) under which capital gains arising in Mauritius on the sale of Chinese assets are subject to tax in China in some circumstances..Nagarajan@in. All rights reserved throughout the world.ey. Vidya Nagarajan Partner. Over the past 15 years... it would appear that the treaty could be brought on par with the tax treaty with Singapore. It is interesting to note that the capital gains tax exemption available under the India-Singapore tax treaty is linked to the IndiaMauritius tax treaty..International tax Mauritius structures — gazing through a crystal ball tax treaty and the introduction of a General Anti-Avoidance Rule (GAAR) have aggravated the challenges and risks. international and corporate tax.. . She is based in our Chennai office. It almost appears as if tax professionals and taxpayers will have to gaze into a crystal ball to make predictions on the future of Mauritius structures in India! Here many find themselves in deeper waters.. divestments.... according to media reports. The road ahead Over the last few years. drawing from media reports. foreign investment consulting. and is available only so long as the India-Mauritius tax treaty provides that exemption. These have collectively caused a lot of uncertainty. Reprinted with the permission of Hindu Business Line © 2012.com 63 . and they look forward to greater clarity and certainty on the issue.. India Vidhya is a part of our Business Tax Services practice. the Government has sought to review the tax treaty. she has advised clients in the areas of corporate restructuring.

In this section 64 65 | New ring to tax tale 69 | Options that change investment status 71 | The new M&A horizon .the acquirer. The Government has proposed to introduce the new Companies Bill 2011 which permits cross-border mergers and amalgamations between Indian and foreign companies. the new SEBI Takeover Code reflects a fine balance of SEBI’s preference to take care of considerations of all the stakeholders .Feature articles Transaction tax This new phase of economic and corporate revival has arrived with a lot of changes in the regulations governing Mergers & Acquisitions. situated in notified jurisdictions. Further. the target company and the minority shareholders. All this and more is discussed in the section on Transaction tax.

would hinder the overall growth of Indian corporates and. Taxing such transactions on the basis of non-existing provisions would result in uncertainties amongst the existing investors. structures put in place to channel legitimate investments across borders are perfectly acceptable. such as leveraged buyouts. it could also have an adverse impact on investor sentiments and hamper future FDI flows into India. It was generally understood that such transactions should not be taxed in India. Taxing similar transactions now would result in an unfair advantage to those past transactions. However. Though such an approach might result in a temporary spurt in revenue for the Government. The ‘preferred investment destination’ image of India may take a beating in the case of such an approach being adopted by the tax authorities. These structures should not be subjected to the lifting of the corporate veil merely because it results in tax savings. having farreaching implications on international transactions. in turn. In the past. which appears to steer against the accepted jurisprudence and seeks to lift the corporate veil. 23 September 2011 T he territorial jurisdiction of Indian tax authorities to tax cross-border transactions involving indirect transfer of shares of an Indian company has been a matter of controversy. They provide exit flexibility to investors. this would create a fair chance of affecting outbound structures of Indian corporates and hinder their global expansion plans. If other countries also start adopting the same approach.Transaction tax New ring to tax tale Amrish Shah Financial Express. therefore. 65 . In the era of evolving financial markets. recently. since the situs of the shares sold are outside India and in the absence of any specific ‘look-through’ provisions. similar transactions have been left untouched. India itself. taking a cue from the arguments of Indian tax authorities. This. including multi-tier structures put in place for commercial reasons. Indian tax authorities have attempted to challenge this interpretation.

Resolution of the issues may result in a delay in the closure of deals.Feature articles New ring to tax tale Such a position would raise some practical issues as well. would the tax authorities be willing to allow a set-off of such a capital loss? In the case of a multi-layered structure involving multiple countries. therefore. Hutchison Essar Limited (HEL). through Hutchison Telecommunication International Ltd (HTIL) of Cayman Islands. If at all such transactions are to be taxed. there could be numerous transactions where withholding tax implications may arise to public shareholders. if the foreign company whose shares are being sold also holds shares of companies other than Indian companies? Also. as the transaction was entered between two foreign companies—outside India. 2012— specifically spells out conditions under which such indirect transfer will be subject to tax in India. warranties and indemnification clauses. The parties involved would be foreign entities unaware of Indian tax laws. How would the cost of the acquisition of such shares be computed and capital gains apportioned. especially the representations. The Hutchison Group of Hong Kong was controlling certain companies in India in joint ventures with others. in order to provide prospective investors a better chance to plan their structures. argued that Revenue is stretching the concept of nexus by bringing in the issue of the foreign company’s underlying Indian assets. the Direct Taxes Code—which is likely to come into effect on April 1. in the case of a listed foreign entity having an Indian subsidiary. How would they withhold taxes and deposit in India? For instance. Actually. and for shares of another foreign company. the tax impact would need to be examined in each country in the structure and the transaction could be subject to tax in multiple countries. HEL had 66 . This lack of clarity would result in enhancing litigation and consequential uncertainties. briefly stated here. which seems to be an absurd position. a better picture and a clear view forward would be available only after such litigations are settled. The right of a State to tax a nonresident arises from the existence of a nexus between him and that State. a prospective amendment in the existing tax laws with a specific provision to tax such transactions would be a reasonable path forward. International law recognises a State’s right to tax income having its source in its jurisdiction. are likely to get a lot more complex and elaborate. the transaction documentation. It is. if a similar transaction results in a capital loss. the case revolves around a complex catena of facts. Interestingly. Since there are various instances of pending litigations in Indian courts (including the apex court). Also. The Bombay High Court’s ruling in the Vodafone case has stirred a hornet’s nest mainly on account of the perception that there was no such nexus. It held a majority stake in an Indian company.

The Court held that it will be simplistic to assume that the transaction was only for the transfer of one share of CGP Cayman Islands. The price of $11 billion factored in a panoply of rights and entitlements including control premium. a composite transaction for the transfer of all rights in HEL by HTIL. 67 . The transaction was accompanied with several other enabling agreements. which was controlling the Indian interests of the Hutch group. In February 2007. in reality. resulting in Vodafone stepping into the shoes of HTIL.Transaction tax New ring to tax tale interests in several telecom circles in India through a web of subsidiaries. right to the Hutch brand in India. The central argument on behalf of Vodafone remained that as the transaction was of a share of CGP Cayman Islands—situated outside India—no income can be deemed to have accrued or arisen in India. Pursuant to this. this could effect outbound structures of Indian corporates and really hinder their global expansion plans. the value of non-voting preference shares and entitlement to acquire further 15% interest in HEL. Vodafone took approval of FIPB. The transaction prima facie amounts to a transfer of a capital assets and not merely a transfer simplicitor of controlling interest—especially as it confers a right to enter the telecom business in India with a control premium. Thereafter. a non-compete agreement.” paid the balance consideration and the share certificate of CGP was delivered to it in Cayman Islands. in effect. and Vodafone ought to have deducted tax. It also entered into a covenant with HTIL indemnifying it for certain tax liabilities and allowing it to retain $352 million out of the sale consideration. Vodafone “If other countries take their cue from the arguments of Indian tax authorities. It took the matter to the Bombay High Court in a writ against a Show Cause Notice issued by Revenue even before the tax liability was determined. The Revenue contended that this was. HTIL agreed to procure and transfer to Vodafone International Holdings BV the entire share capital of an investment company in Cayman Islands called CGP Investments Holdings Ltd. It argued that the transaction gave rise to capital gains taxable in India. as. the controlling interest in the Indian assets of HEL got transferred.

Therefore. The ruling has been given on the basis of facts indicating that the transaction was a colourable tax avoidance device. This has to be ascertained from the covenants and surrounding circumstances. It held that once the nexus between a non-resident and the country seeking to tax him is shown to exist based on a business connection or situs of assets within the State. Incidentally.. corporate restructuring.... directly or indirectly.. while seeking to clothe the transaction with a legal form.. introduced retrospective provisions . Reprinted with the permission of Financial Express © 2012. 2012.com 68 . the Court held that the label which parties ascribe to a transaction cannot be conclusive in determining its character. India An all-India rank holder in Chartered Accountancy. All rights reserved throughout the world. the Direct Taxes Code codifies the anti-avoidance Rules under which a transaction can be declared as lacking commercial substance..ey. can be disregarded. “The Finance Act. foreign investment consulting..effective from 1st April. You can write to Amrish at: Amrish. 1962. and establishment of joint ventures.. He is based in our Mumbai office. A colourable device in which parties.. .. actually engage in a different transaction which serve no business purpose except avoidance of tax. their substantial value from assets located in India.. taxability can arise..Shah@in... to tax indirect transfers of shares in situations where the shares derive.” Amrish Shah Partner & National Leader — Transaction Tax Services Ernst & Young. divestments.. Revenue will be ill-advised in invoking it in genuine business cases.Feature articles New ring to tax tale Relying on the doctrine of substance versus form. Amrish has over two decades of experience in the areas of mergers and acquisitions.

which stated that any equity instrument when issued or transferred to a non-resident. will be deemed as ‘debt’ if it includes in-built options or is supported by third party options of any type. 4 November 2011 I t took just a month for the Department of Industrial Policy and Promotion to revise its earlier provision that sought to define equity investment as debt if it was accompanied by in-built options. Even if the provisions were introduced by DIPP to curb investments made by foreign players (especially in real estate sector) who acting as lenders brought in money under the garb of FDI compliant instruments. especially their exit options. 69 . Limiting their options to structure their investment. The Department of Industrial Policy and Promotion (DIPP) in its mid-year review of Foreign Direct Investment (FDI) policy on October 1. For the private equity industry. obviously did not go down well with the industry. But other regulatory bodies will need to follow suit if the current buoyancy in PE inflow into India is to continue. restrictions and limitations. The hue and cry and the various representations made to the government authorities have borne fruit. In doing so. more particularly from private equity investors. which was most affected by this directive. the DIPP has displayed a flexible approach and an ability to ensure that India’s attractiveness as an FDI destination remains intact. the subsequent revision has come as a welcome shot in the arm. The cardinal principle of any PE investment is to simultaneously think about the exit at the time of entry itself. 2011 had inserted a specific provision. This inclusion saw vehement opposition from the industry. 2011. painting all FDI investors with the same brush and limiting their structuring options would have had a significant effect on FDI into India. compliances. Such instruments would need to comply with extant External Commercial Borrowings (ECB) guidelines in respect of various caps. The DIPP has reacted swiftly and within one month of introduction of the said regulation has withdrawn the entire provision by issuing a clarificatory circular dated October 31.Transaction tax Options that change investment status Amrish Shah Economic Times.

He is based in our Mumbai office. divestments. and establishment of joint ventures.Feature articles Options that change investment status While DIPP has taken the necessary amending steps. it needs to be seen whether other regulators follow suit. You can write to Amrish at: Amrish. mergers. demergers. Over the past 18 years he has advised clients in the areas of acquisitions.. 1956. The options being exercisable on a future date can neither be regarded as spot delivery contracts nor be considered as a legal/ valid derivative contract entered on a stock exchange.... The other regulatory authorities should take a clue from DIPP and come out with clear clarifications so that there is no negative impact on FDI investments. The industry is open to apt regulations... since they are exclusively entered between two parties independent of the stock exchange.. . which would curb debt masquerading as equity and other such abusive practices.. RBI has been questioning investment agreements which involved options and classifying them as an ECB... international/corporate tax and business reorganization. even prior to introduction of the said provision by DIPP.. irrespective of whether such an option was exercisable by the Company or by its shareholders.ey.. a blanket attack on all option structures even in case of genuine equity investments is something which is extremely undesirable.Shah@in. All rights reserved throughout the world. Considering that DIPP has given a green signal to use of Options. however.com 70 . For example.. India Amrish Shah is a partner at Ernst & Young India and leads our Transaction Tax practice*. re-organizations. Similarly even Sebi in the recent past has held that Put/ Call Options in private agreement amongst shareholders is invalid since as per the provisions of Securities Contracts (Regulation) Act. Reprinted with the permission of Economic Times © 2012. or whether it was exercisable to the shareholder pursuant to a breach of a condition or upon failure to provide exit to the investor. corporate restructuring. in certain cases.. Amrish Shah Partner & National Leader — Transaction Tax Services Ernst & Young. foreign investment consulting. one can only hope that a similar approach would be adopted by the other Regulators as well... only spot delivery contracts or derivative contracts entered into through a stock exchange are legally enforceable.

the rights of the minority shareholder. but are permissible with foreign companies from any jurisdiction. Aiming to consolidate over 50 years of practical and legislative history is no easy task. 71 . greater discloser and greater accountability are also obvious keystones desired to be addressed by the legislature. While the provisions do allow inbound and outbound cross-border mergers. The provisions could therefore result in India Inc finding their hands tied as they would be only able to merge with companies in specific countries instead of being able to play in the entire global market as they do now. Cross-border mergers Leading the charge of iconic changes attempted by the new Bill are the provisions governing cross-border mergers and amalgamations between Indian and foreign companies. Given that the provisions governing cross-border mergers apply to both inbound and outbound mergers. like the great impressionist paintings of Renoir and Van Gogh. The inherent paperwork and lengthy timelines surrounding regulatory approval could prove practically onerous for Indian corporates. 26 December 2011 L ast week saw the arrival of the latest product of the current spree of legislative reform directed at India Inc – the Companies Bill 2011 (‘the new Bill’). this qualification could actually result in a metaphorical step back as under the existing laws. Prior approval Another potentially unwishedfor-change is the requirement of seeking prior RBI approval for any and all cross-border M&A activity. However.Transaction tax The new M&A horizon Narendra Rohira Hindu Business Line. and while it is evident that the new Bill has attempted to balance out the needs of the Indian corporate sector on one hand. this appears a bold and progressive move with the legislation finally opening up India’s borders to previously outlawed outbound mergers. a closer inspection reveals a far fuzzier picture. inbound mergers are not only permissible. should such a process be required for each and every cross-border transaction. At first. such cross-border mergers will only be allowed with companies situated in jurisdictions notified by the Central Government.

authorities’ The loss of such determination an option could to question “Under the new require many corporate bill. cross-border Indian corporate structures and houses to look transactions that mergers will only for alternative seem to have be allowed with funding and been put in place companies situated retention of solely to take in jurisdictions control options. is no longer permissible.Feature articles The new M&A horizon However. Government. A testament to this desire is the new Bill’s provisions with regard to mergers and/or amalgamations between small companies and those between parent companies and their subsidiaries. advantage of loopholes in the notified by the Central existing laws. greater investment and capital infusion flexibility and alternative holding structures that are compliant with existing laws but still allow a promoter/majority shareholder to retain control – directly or indirectly. stock held Balancing needs The new Bill’s desire to balance out the needs of all its stakeholders is evident in its attempt to provide procedural simplicity and clarity in situations that were only dealt with in practical jurisprudence until now. In recent times. in or mandatory prior RBI approval might out of a trust structure. this could prove rather unfriendly for India Inc as existing multiple investment layers have most often been put in place to allow efficient tax planning. the new Bill provides that going forward. 72 .e. pure investment holding companies may only make investments through a maximum of two layers. holding treasury stock i. qualifications such as in the name of the issuing company Government notification and itself. held as an instrument that could the government’s focus on disclosure provide access to liquidity should the and transparency when dealing company require it in the future. while with the corporate sector has come still allowing the promoters/majority to the forefront with high profile shareholders to retain a controlling cases highlighting the regulatory stake over the company. significantly reduce the potential Treasury stock has historically been benefits for India Inc. Under the provisions of the new Bill.” In line with this spirit. However.

.. Narendra Rohira Partner. the logic of a simpler process was upheld by the courts in cases such as Mahaamba Investments Ltd vs. Narendra focusses on conceptualizing.. only time will tell.Rohira@in.. India A partner with our Transaction Tax practice. All rights reserved throughout the world.. funding and corporate tax optimization. How well it manages its responsibilities. mergers involving such companies have been given the option of a simpler process involving only the relevant Registrar and the Official Liquidator. ..Transaction tax The new M&A horizon Instead of the entire regulatory process involving the courts... on whose shoulders has fallen the task of bringing Indian’s corporate laws into the 21st century. structuring and implementation of M&As..com 73 .. You can write to Narendra at: Narendra.. Reprinted with the permission of Hindu Business Line © 2012. the Companies Bill is a perhaps a quiet giant but a giant nonetheless. He has assisted various Private Equity players with acquisitions in India involving cross border structuring. For mergers between wholly-owned subsidiaries and their parent companies. He is based in our Mumbai office. Transaction Tax Services Ernst & Young.. Amidst the heated debate on FDI limits and the glamorous morality of the Lokpal Bill..ey.... IDI Limited and the codification of this principle by the new Bill will provide welcome certainty to companies who until now were sure of successfully applying this principle in selected courts only.

The articles in this section bring to the fore the significant dimensions of the regulatory policy environment in India. it appears that the Government dished out a safe budget that merely pledges reforms. 75 | Is grip tightening on black money? 78 | New regulatory framework for private investment vehicles 82 | Alternative investment funds: hits and misses 84 | One-time amnesty for swiss stash 87 | Tax transparency is the new reality 90 | New SEBI takeover code finally notified 94 | The Big Push for Big Retail 97 | 3G of Tax Reforms 74 In this section . it is still hovering above the tolerance level. While the Government appears cautious about permitting FDI in Retail and sensitive sectors like Defense & Civil aviation. A dynamic environment like this demands a sharp analytical focus on the policies and concrete shape must be given at the earliest to control the ballooning fiscal deficit. black money play an important role in shaping the investment environment in India. From a tax and regulatory policy perspective. Issues such as the sliding rupee. The Government needs to take measures to boost the business environment and keep the confidence of domestic and foreign investors intact. Measures such as streamlining the FDI policy and reducing red-tape are expected to result in boosting investor confidence. Though inflation has momentarily stabilized. there have also been challenges on the introduction of GST.Feature articles Tax & regulatory policy The current economic situation continues to be of concern.

The UK: Her Majesty’s Revenue & Customs (HMRC) deals seriously with cases of tax defaults using civil or criminal powers to penalise or prosecute evaders. and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting become effective. This information is available under tax treaties through submissions by whistle-blowers. The IRS ferrets out the identities of those with undisclosed foreign accounts. 11 August 2011 T he issue of tax evasion.456 billion in Swiss bank deposits.Tax and regulatory policy Is grip tightening on black money? Sudhir Kapadia Economic Times. with a reasonable degree of certainty. continues to occupy centre stage in the country. or black money. in addition to recovering due tax. From April 2010. to tackle tax evasion in general and offshore tax evasion in particular. Indian nationals hold $1. Voluntary disclosure also provides the opportunity to calculate. Voluntary disclosure is a practice of the IRS criminal investigation whereby it takes timely. for taxpayers with undisclosed offshore accounts and assets to bring them into compliance with US tax laws. 2011. and the risk of criminal prosecution. The US: The US Internal Revenue Service (IRS) has introduced the Offshore Voluntary Disclosure Initiative. According to a 2006 report of the Swiss Banking Association. The taxpayers are encouraged to make voluntary disclosures and become compliant to avoid substantial penalties. the total cost of resolving all offshore tax issues. HMRC is empowered to publish details of persons caught deliberately evading over ?25. interest and a penalty up to 100% of the tax lost. A Global Financial Integrity study estimates the flight of gross illicit assets from India during 1948-2008 at a staggering $462 billion. 75 . This article discusses recent steps taken by various countries. accurate and complete voluntary disclosures into account to decide whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. including fraud penalty and foreign information return penalties. including India.000.

India: The government has notified ‘specified territories’ to be able to initiate and negotiate Tax Information Exchange Agreements (TIEA) for prevention of tax evasion or avoidance and assistance in collection of income tax. the penalties will be up to 150% and 200% of tax respectively. All parties to such international transaction would be deemed to be associated enterprises. No deduction will be allowed for any expenditure or allowance (including depreciation) unless taxpayer maintains proper documentation and furnishes prescribed information. the Finance Act. 2010. etc. 2011 .to curb round-tripping.were notified with the intent to enter into a TIEA. effective from June 1. BVI. 2011. Along the lines of OECD Model Article on ‘Exchange of Information’. Isle of Man. Gibraltar. for territories in categories 2 (exchange of information on request) and 3 (no/insufficient information sharing). Guernsey. British Virgin Islands (BVI). Jersey.Feature articles Is grip tightening on black money? Besides this. The legislation provides for enhanced penalties where the non-compliance arises in a jurisdiction that does not automatically share tax information with the UK. to tackle offshore non-compliance. Any sum received by a person located in an NJA on which tax is deductible would invite tax at ahigher punitive value. the government has signed a protocol amending its treaty with Singapore to add standards on exchange of information on request in tax matters for the administration and enforcement of domestic tax law. nine jurisdictions Bermuda. introduced a new penalty framework applicable to income tax and capital gains tax for failure to notify or inaccuracy on a return or failure to file a return on time.section 94A. Till date. 76 . For example. introduced an anti-avoidance measure . Isle of Man and Cayman Islands. The government shall notify a country or territory with lack of effective exchange by it with India as a Notified Jurisdictional Area (NJA). Cayman Islands. In April 2010. Hong Kong has been also notified as a specified territory for entering into a tax treaty by the government. India has signed TIEAs with Bahamas. The Finance Act. A transaction between the taxpayer and a person located in an NJA will be deemed to be an international transaction subject to transfer pricing provisions. Netherlands Antilles and Macau .

. • The Ministry of Finance has in May 2012.Kapadia@in. All rights reserved throughout the world.. criminal investigations. Sudhir also leads the client relationship management agenda for our tax practice and is the senior tax advisory partner for a number of firms’ leading clients. these include: Land and Real Estate Transactions.2 mn the seller needs to collect tax from the buyer at the rate of 1 per cent. immovable properties or other assets held outside India. similar to steps undertaken by the US and UK. has introduced various measures to improve better disclosures and tackle the issue of black money. 373 crore in 2006 to INR 9.. released a ‘White Paper on Black Money’.. He is based in our Mumbai office. You can write to Sudhir at: Sudhir.. Reprinted with the permission of Economic Times © 2012.. financial interests.. the White Paper states that this figure has decline by 60% from INR 23. Sudhir Kapadia National Tax Leader Ernst & Young.. (iii) Introducing provisions of tax collection at source (TCS).. the government has commissioned a study for estimating unaccounted income and wealth within and outside India and instituted the directorate of income tax.. The White Paper also outlines various policy options that could be pursued by the Central and State Governments to tackle the menace of black money.com 77 . Bringing those offenders to book will be critical to the future direction of India’s efforts of tackling this cancerous menace in the Indian economy. As in everything else. the key will be effective implementation and relentless pursuit of tax offenders in specific cases. (iv) The time limit for reopening of assessments where income in relation to any asset located outside India has escaped assessment has been extended from six to sixteen years. .. • Providing a perspective on black money held by Indians in Swiss Bank accounts.ey. India Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies. now to be overseen by a special investigating team as per a Supreme Court directive. under the CBDT to investigate criminal matters having financial implications punishable as an offence under any direct tax law. 2012. a high-level committee on black money has been constituted under the CBDT chairman. In instances of cash sale of jewellery or bullion in excess of INR 0. 295 crore in 2010. Further... • The Finance Act.. Bullion and Jewellery Transactions and Financial Market Transactions. (ii) Strengthening reporting mechanism wherein every resident (other than not ordinarily resident) having any asset (including including financial interest in any entity) located outside India or signing authority in any account located outside India has to file a tax return containing the required disclosures such as details of foreign bank accounts.5 mn and 0. which identifies different kinds of manipulations of financial statements resulting in tax evasion and the generation of black money..Tax and regulatory policy Is grip tightening on black money? Besides these. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation. These include: (i) Production of a Tax Residency Certificate for availing the beneficial provisions of a tax treaty..

A HNI is defined to mean an individual or corporate or any other legal entity located in India or overseas who invests in AIFs for a value of not less than Rs. private equity funds etc. 2011 (‘AIF Regulations’) and containing draft AIF Regulations. 1996 or SEBI (Collective Investment Schemes) Regulations. The proposed structure is. 2000. and includes one of the prescribed categories of funds indicated below and such other funds which are not covered under the SEBI (Mutual Funds) Regulation. social venture funds. 78 . inter alia. 1996. All AIFs would be required to obtain a certificate of registration under the proposed AFI Regulations. The SEBI (Foreign Venture Capital Investor) Regulations. aimed at providing a regulatory framework for all types of private pool of capital or investment vehicles so that such funds are channelised in the desired space in a regulated manner without posing a systemic risk. the current regulation governing domestic venture capital funds will be repealed and the new AIF Regulations will then govern VCFs. Once the AIF Regulations come into effect. The proposed framework also classifies the funds into separate categories such that concessions/ relaxations can be tied to investment restrictions for special kind of funds such as venture capital funds. 1999.Feature articles New regulatory framework for private investment vehicles Prakash Shah CFO Connect. the intent is to regulate the domestic funds. the SEBI (Venture Capital Fund) Regulations. 1 September 2011 T he Securities and Exchange Board of India (SEBI) has recently released a concept paper proposing introduction of SEBI (Alternative Investment Funds) Regulations. Registration An Alternative Investment Fund means pooling or raising of private capital from institutional or High Net Worth Investors (HNI) with a view to investing in accordance with a defined investment policy for the benefit of the investors. While the language used in the concept paper is very wide to cover even offshore funds investing in India. under which a SEBI registered FVCI can invest in venture capital undertakings (VCUs) in India without the pricing restrictions for making investments in India (that are applicable to investments made under the Foreign Direct Investment route) will continue. The same is open for public comments up to 30 August 2011. 100 million.

size of the fund. Social venture fund – for investors willing to accept muted returns (10% . The application will be in one of the following categories: 1.12%) to invest in social ventures such as micro finance institutions (MFIs).for providing equity seed capital to unlisted start-up or new ventures or early-stage or emerging companies primarily involved in new or unproven technology 2. Unlike the current VCF Regulations where the trust secures a VCF registration and can then launch several schemes. This requirement could significantly increase the time and costs as for each scheme a separate registration would have to be sought. the SEBI will take into account all matters relating to investment objective of the fund. The registration would be valid for the lower of three years or the tenure of fund. Real estate fund – for investing in real estate projects or in special purpose vehicles investing in real estate projects 7. Debt fund – for making investments primarily in debt instruments of unlisted companies 5. 8. the target investors. An AIF acting as such before the commencement of these regulations may continue to do so Any applications made as of date. necessary infrastrustructure. professional qualification of the managers. under the AIF regulations each scheme will require a separate registration.Tax and regulatory policy New regulatory framework for private investment vehicles The Funds could be formed as companies. Infrastructure fund – for investments in infrastructure funds 6. Private Investment in Public Enterprises (PIPE fund) – for investments into small size listed companies 3. Private Equity fund – for making investments primarily in unlisted equity or unlisted debt securities of companies 4. 79 . investment style or strategy. SEBI should be considering the same under the current VCF regulations. Small and Medium Enterprises (SMEs) fund – for investors willing to invest in unlisted equity of companies in manufacturing and services sector and companies providing infrastructure support While considering the application for registration of an AIF. 1996 shall continue to be regulated by the said regulations till the existing fund or scheme managed by the fund is wound up. All funds already registered as VCF under SEBI (VCF) Regulations. past experience etc. Venture capital fund . trust or body corporate including Limited Liability Partnerships (LLPs).

5 80 . the mechanism of payment to the investment manager as well as the method adopted while distribution of monies to the investors. Further. life cycle (minimum maturity of 5 years) and target investors under the proposed framework. Gold Financing. 200 million). This requirement of mandatory contribution is onerous and is much higher than the standard international practice where the commitments range between1% to 2%. an AIF cannot invest more than 25% of the corpus of the fund in one investee company. The AIF Regulations require disclosure of the terms and conditions of subscription to the funds. Such Funds can operate as closed ended funds with a specified target size (not less than Rs. 2. These requirements should form part of the Private Placement Memorandum issued by the fund to its investors. The AIF can invest only in instruments specified for each category of investments. Similarly. The funds formed as companies or LLPs can at the maximum have 50 investors and the minimum size of the units issued is Rs. the AIF Regulations also prohibit investment of AIF in Non Banking Financial Companies (NBFCs) (except in prescribed cases).1 per cent of the fund size or Rs. AIFs granted registration under one category is not permitted to change its category subsequent to the registration. It may be noteworthy that the venture capital fund registration currently used for registration of all funds that adhere to the investment restrictions/ conditions prescribed under the SEBI VCF Regulations would under the AIF Regulations be available to only funds which have the objective to promote new ventures using new technology or with innovative business ideas at early / start up stage and where the fund size is not more than Rs. As is currently the case for VCF. 100 million. The AIF Regulations also lay additional restrictions on each of the categories of funds. 1 million. The minimum investment amount should be the higher of 0. activities not permitted under the Industrial Policy of the Government of India or any other activity specified by SEBI. The responsibility of the investment manager should be clearly defined.Feature articles New regulatory framework for private investment vehicles Key conditions The investment manager /sponsor of the fund is required to have a minimum interest of 5% of the fund which should not be contributed through waiver of management fees. Such investment of the investment manager/sponsor will not be transferable during the life of the fund. The investors would have a lock-in period of three years.

com 81 . Reprinted with the permission of CFO Connect © 2012. the restriction on investment by VCF funds into companies promoted by top 500 listed companies by market capitalization. All rights reserved throughout the world..Tax and regulatory policy New regulatory framework for private investment vehicles billion. ‘SEBI has released the final guidelines on Alternative Investment Fund regulations in May. 2..... Tax & Regulatory Services Ernst & Young..Shah@in. investments by PIPE funds only into small sized listed companies etc. Some of the conditions that are prescribed in the concept paper are quite restrictive and may hinder the participation by certain players for eg. ..5 billion. securities broking. Further such funds would be precluded from investing in any company that is promoted directly or indirectly by any of the top 500 listed companies by market capital capitalization or by their promoter.. 2012’....tax and regulatory practice. Prakash Shah Associate Director.. He possesses over 13 years of experience and has done extensive work in the area of tax and regulatory matters of financial services entities such as banks.ey. private equity etc. It would be advisable that some of these restrictions are eliminated in the final regulations as the same would go a long way in the efficacy of the guidelines and its implementation.. He is based in our Mumbai office. India Prakash Shah is an Associate Director at Ernst & Young India in the Financial Services . You can write to Prakash at: Prakash. insurance companies. the maximum size of VCF funds being Rs.... The introduction of the AIF Regulations is a step in the right direction and should go a long way in steering the growth of the industry while at the same time balancing the need for managing risks to the investors and the stability of the financial system.

The Regulations categorises all AIFs into nine distinct categories including VC funds. debt funds. social sector. which collect funds from institutional investors/ HNIs in India will also be bound by the Regulations and will be subject to Sebi’s oversight. etc without necessarily categorising the AIF under the Regulations. Venture capital (VC) and private equity (PE) funds play a crucial role in India’s economic development by filling the gaps in availability of capital. real estate funds. it certainly merits consideration whether industry must compartmentalise itself into nine distinct product offerings to gain concessions. it may be more prudent to frame specific regulations for such funds given that it may be commercially impractical for a foreign PE/VC fund to design its product in accordance with the Regulations. say the authors in this exclusive review. Benefits can similarly be defined for an AIF making an early stage investment. Sebi-registered VC funds and foreign VC investors cumulatively invested approximately $12 billion across several industries.Feature articles Alternative investment funds: hits and misses Sudhir Kapadia Economic Times. However. investment in infrastructure sector. PE funds. Separately. As of September 2010. this new framework will be useful only if it enables AIFs in India to compete with their global peers. However. It appears from the Regulations that foreign PE/VC funds. public data indicates that PE funds as an investor class (including both Sebi-registered and other overseas funds) have invested more than $45 billion in the last five years. this is a welcome move as funds can diversify product offerings based on investors’ risk appetite and investment objectives. If that is indeed Sebi’s intent. Recognising the growing importance of this industry and with a view to maintaining the stability of the financial system. Sebi has proposed to introduce Alternative Investment Funds (AIF) Regulations. Viewed in the context of the prevailing Sebi VC Fund Regulations. 82 . social venture funds and strategy funds. 9 September 2011 M arket regulator SEBI is proposing a new set of regulations for all Alternative Investment Funds (AIF).

This would also be consistent with the recent approach of most developed market regulators that now require (or are in the process of mandatorily requiring) most AIF Managers to register and comply with significant reporting and record keeping obligations to facilitate the management of systemic risk by the country’s securities market regulator. which the concept paper states is likely to be revised from Rs 5-25 lakh. a review of the taxation framework for AIFs would immensely benefit the industry.com 83 . .. Reprinted with the permission of Economic Times © 2012.... Other concerns that the industry would have from the Regulations is the high threshold of Rs 1 crore that has been prescribed for minimum investment in an AIF.. He is based in our Mumbai office.. All rights reserved throughout the world. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation.. It is now upto Sebi and the Government to decide whether to let them flourish by providing them a platform to compete with their global peers... Lastly. India Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies. “The Securities and Exchange Board of India has on 21 May 2012 notified the SEBI (Alternative Investment Funds) Regulations. Sudhir also leads the client relationship management agenda for our tax practice and is the senior tax advisory partner for a number of firms’ leading clients. This represents a significant increase from the present minimum investment amount of Rs 5 lakhs that applies to investment in a registered VC fund and is likely to have a significant impact on fund raising by AIFs.Tax and regulatory policy Alternative investment funds: hits and misses Sebi’s objectives would be equally achieved by prescribing a framework for mandatory registration and oversight of AIF Managers coupled with a system of reporting particulars of the various AIFs launched by registered AIF Managers. You can write to Sudhir at: Sudhir...” Sudhir Kapadia Partner.. 2012 incorporating substantial changes to the draft regulations originally circulated for public comments in August 2011. Sebi could consider specifying a minimum investment threshold that is in line with that applicable to Portfolio Management Schemes.. National Tax Leader Ernst & Young. The domestic AIF industry is set to grow exponentially....ey.Kapadia@in.

Feature articles One-time amnesty for swiss stash Sudhir Kapadia Economic Times. From an EU and tax policy perspective. 84 . was accompanied by a shrill campaign by the US Internal Revenue Service to warn the tax citizenry at large about more dire consequences. the tale of the elusive Swiss accounts has resurfaced with the proposed treaty between the UK and Swiss governments. including prosecution. The tradeoff is that the names of the individual UK taxpayers shall not be revealed by the Swiss government in return for this lump sum munificence. This. if US tax residents do not come forth to declare their secret deposits in offshore accounts. 29 September 2011 O f late. where Switzerland has agreed to repatriate to the UK an anonymous tax amount calculated on the aggregate income of UK tax residents. In the light of the continuous debate in India about the methodology by which the country should endeavour to recover the lost billions in tax revenues due to alleged siphoning of Indian money to offshore locations. for example. and for the Swiss government. it may come as a pressure to avoid yet another instance of further diluting its muchvaunted banking secrecy. this may not be the most optimal result as it goes against the grain of ensuring transparency and naming and shaming of tax evaders. a question arises for Indian policymakers to ponder over the approach that should be taken. of course. vis-vis the US and the UK. vis--vis the Swiss government in the light of the above international developments. in their Swiss bank accounts. and a simultaneous announcement of tax amnesty for US tax residents under which payment of evaded taxes and reduced penalty would ensure closure of all other proceedings against US tax residents. where the US government extracted the names of US tax residents illegally holding bank accounts in UBS. This approach adopted by the UK government is in sharp contrast to the one favoured by the US government. The UK government is obviously motivated by the opportunity to shore up its treasury by the onetime payment.

the pact like the one there is no need for any incentive UK has entered into with Switzerland mechanism to coax reluctant Indian taxpayers to declare their undisclosed would look attractive. hopefully. collect much-needed revenue and. in specific instances. at the 85 . before they get to the much-coveted and highlyfancied offshore bank deposits and other wealth. of course. it can to rely on a combination of be argued that the Swiss effectively utilising time has come governments for the Indian the recent agreement definition government to for exchange of of money start utilising tools belonging information including such as exchange to Indian tax bank accounts. “The Indian take further action Indian based on that Government may government information.Tax and regulatory policy One-time amnesty for swiss stash India to Indian beneficiaries. Viewed At one level. to ask for the relevant information from the Swiss However. from similar action in future. It immediately garners an entire one-time revenue income as recent initiatives such payment that can fund the societal as sharing of information including obligations for the Indian government on bank accounts maintained with and. For forth and anonymously and sharpen the example. residents based agreements that well as a onetime on which they have been entered window for Indian will calculate into with various India’s share taxpayers to come offshore countries of taxes. make a clean slate Swiss banks should enable Indian going forward to deter tax evaders government. where get its fair pound the final beneficiary may not be of flesh. It is also a moot point how legally successful Indian tax authorities will emerge in tracing the alleged undisclosed wealth outside government may choose to keep out of this formula of any interest paid to such account holders from Swiss bank accounts. is easier said than done as it will be a long and arduous process that Indian authorities will have to go through.” of intermediary undisclosed wealth companies or outside India and trusts or other such entities. Against this. there revenue knife declare their offshore may be a maze to cut into the accounts.in authorities and this approach. immediately visible and the Swiss This. as of information. thereby. the US approach seems superior in as much as it compels US tax residents to come forth and declare their undisclosed offshore income under the amnesty and. In want to consider may have other words. it can be argued that from this angle.

india Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies.Feature articles One-time amnesty for swiss stash same time.. on which taxes as well as penalties can be imposed as a one-time revenue-raising measure.. . He is based in our Mumbai office. Reprinted with the permission of Economic Times © 2012.Kapadia@in. appropriate communication strategy should be adopted to make taxpayers aware about the serious repercussions that will befall them for any such tax evasive action by them in future... He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation.. All rights reserved throughout the world. instill enough fear in the minds of US taxpayers. Of course. and also to serve as a deterrent for potential future tax evaders. that going forward. You can write to Sudhir at: Sudhir.. More importantly... any such initiative will have to be carefully planned and executed in a way that it remains legally tenable and practically implementable. as well as a onetime window for Indian taxpayers to come forth and anonymously declare their offshore accounts.... the Indian government may want to consider a combination of effectively utilising the recent agreement for exchange of information including bank accounts.com 86 .ey. National Tax Leader Ernst & Young.. On balance. the deterrent measures will be so strong against tax evaders that they would be ill-advised to continue the practice of non-disclosure of offshore income. Sudhir also leads the client relationship management agenda for our tax practice and is the senior tax advisory partner for a number of firms’ leading clients. therefore. Sudhir Kapadia Partner...

This enables India to obtain information from Switzerland in specific cases. now empowers the Government to notify any territory outside India. either by way of protocols to existing DTAAs or new DTAAs. 1 November 2011 T ax transparency is the new reality for India. as a notified jurisdictional area.Tax and regulatory policy Tax transparency is the new reality Pranav Sayta Hindu Business Line. The protocol amending the India-Swiss DTAA was signed on August 30 last year and approved by the Swiss Parliament on June 17. having regard to lack of effective exchange of information. 87 . First. India has adopted a three-pronged approach to tackle black money. it has initiated the process of negotiation with 75 countries to broaden the scope of the ‘Exchange of Information’ Article in Double Tax Avoidance Agreements (DTAAs). Internationally. transactions with residents of such territories are subject to higher withholding. section 94-A of the Income-tax Act. 2011. Second. According to OCED’s statistics. the move towards tax transparency began in early 2000 and OECD’s Global Forum Working Group on Effective Exchange of Information released an ‘Agreement on exchange of information on tax matters’ in April 2002. Tackling black money On the legislative front. 2011. The 100-day waiting period for ratification has recently ended. Third. it has completed negotiation of Tax Information Exchange Agreements (TIEAs) with 16 tax havens. Several countries have pressurized Switzerland to be more tax transparent. 1961. certain disallowances and also subject to transfer pricing regulations. as the government has realised the urgent need to tackle black money. Switzerland has signed 91 DTAAs providing for the exchange of information. As of September. negotiations/ renegotiations with 40 countries were completed. for a period starting from April 1. In simple terms.

This decision permitted the exchange of information with other countries in individual cases. Protocol to the DTAA The amending protocol to the IndiaSwiss DTAA has replaced Article 26 and has introduced a new paragraph 10 to the protocol. Reprinted with the permission of Hindu Business Line © 2012. “India-Swiss DTAA does not commit Switzerland to exchange information on an automatic or spontaneous basis.. However. the period for which the information is required. The India-Swiss DTAA expressly provides that the administrative procedure rules regarding taxpayers’ rights remain applicable before information is transmitted.. made the historic announcement that Switzerland intends to adopt the OECD standard on administrative assistance in tax matters. 2009... which include the name of the person/s under examination. where a specific and justified request was made and Switzerland began negotiations on revising its DTAAs..Feature articles Tax transparency is the new reality Overview in the Swiss context For long Switzerland did not accept a full exchange of information clause. international pressure and the need to upgrade to OECD’s G-20 white list led to a rethink.” DTAA now enables India to obtain information that is foreseeably relevant to the administration and enforcement of Indian Income taxes.. All rights reserved throughout the world.. Its Federal Council on March 13.. the tax payer will first be informed of. The India-Swiss to the widest possible extent... Further the India-Swiss DTAA does not commit Switzerland to exchange information on an automatic or spontaneous basis. the tax purpose for which the information is sought and also the name of any person believed to be in possession of such information.. before any information can be exchanged. While it is intended to provide for exchange of information 88 . it does not allow fishing expeditions or request for information that is unlikely to be relevant to the tax affairs of a given tax payer. Thus. a statement of information sought including the nature and format in which it is sought. India can now approach Switzerland for information... India’s Competent Authority needs to provide various information to the Swiss competent authorities when making such requests.. . but only after it has exhausted all normal procedures under its domestic law to obtain such information. then has the right to be heard on and finally has the right to object to (and eventually appeal before the Swiss Federal Administrative Court) on the decision made by the Swiss Federal Tax Administration to exchange information. The Swiss domestic law also provides for procedural rights for protecting the interest of the tax payers.

Communication & Entertainment business unit for Tax service line.K. 2012. according to which black money in bank accounts in Switzerland has reduced from INR 23. Pranav has been consistently rated as one of the leading tax advisors in India by International Tax Review & by the Legal Media Group Guide to the World’s Leading Tax Advisers. The White Paper calls for further debate on whether entering into a similar agreement with Switzerland would be in India’s best national interest. Such a tax return is required to be filed even if the person does not have any taxable income.ey. Technology.Sayta@in.e. immovable properties or other assets outside India are required to be disclosed in the tax returns. Germany and Austria. cross border and domestic mergers.295 crore in 2010. • • In a bid to gather information. group financial and corporate restructuring. has amended section 139 of the Income tax Act. The Finance Act. acquisitions & joint ventures.Tax and regulatory policy Tax transparency is the new reality • The Ministry of Finance has in May 2012. 373 crore in 2006 to INR 9.com 89 . financial interests. Details of foreign bank accounts. India Pranav leads the Technology.f AY 2012-13). He is based in our Mumbai office. Switzerland protects the identity of the bank account holder but withholds tax at source (a onetime tax and a tax on future income) and remits such tax withheld to the treasury of the other country. 1961 (w. inbound and outbound transactions. he specializes in advising on various international tax matters. Communication & Entertainment Ernst & Young. You can write to Pranav at: Pranav. The ‘White Paper ‘also refers to the revenue sharing agreements entered into by Switzerland with U. In simple terms. With over twenty years of experience in the practice of Direct Tax Laws. to provide for mandatory filing of tax return by every resident (other than not ordinarily resident) having any asset (including including financial interest in any entity) located outside India or signing authority in any account located outside India. released a ‘White Paper on Black Money’. Pranav Sayta Tax Partner.

Delisting Coming to the delisting aspect. had suggested a proposal of “auto delisting” where. The new regulations clarify that all the transactions where public announcement had already been made under the old regulations shall continue to be governed by that regulation. 2011. At the same time. 2011. the TRAC in its earlier proposal. 1 November 2011 T he Indian tax and regulatory laws are undergoing a period of change and one such change is the evolution of the new takeover code. due to an increased level of interest in their companies.Feature articles New SEBI takeover code finally notified Amrish Shah CFO Connect. the target could automatically be delisted. without considering the new regulation. Takeover Regulations Advisory Committee’s (TRAC) recommendation to increase the open offer size to 100% of remaining shareholders was not accepted primarily due to the lack of proper bank funding options available in India. 100% would have been sweeter for the MNCs as it would tantamount to automatic delisting of shares.which are effective from October 22. pursuant to open offer. i. This would have also reduced the overall size of the M&A market due to lack of Indian acquirer’s ability to raise resources and lead to public investor not being able to get benefits of higher price. resulting in the international buyers with better leveraging abilities getting an advantage. It is noticed that apart from 90 . 2011. SEBI had notified Substantial Acquisition of Shares and Takeover Regulations. Some of the key amendments in the new code are as under: Increase in open offer size One of the most significant amendments in the new regulations is increase in statutory open offer size from 20% to 26% of the total shareholding of the target company.e. the acquirer acquires stake in excess of the “delisting threshold”. On September 23. It is indeed a revolutionary legislation which is likely to change the landscape of M&A for listed Indian entities in the near future.

91 . for a period of 12 months.Tax and regulatory policy New SEBI takeover code finally notified removing the possibility of automatic delisting. the new regulations actually make it impossible to launch a delisting offer where the promoter shareholding goes beyond the maximum permissible non-public shareholding. one by promoter can expect more investment from would ordinarily carry a control PE or foreign partners in the coming premium for the additional efforts of months. revolutionary without triggering At the the open offer legislation which is same time. Abolition of non-compete fees Inclusion of non-compete fees in the offer price is a fine balancing act as The initial threshold limit provided it would lead to an open offer being for open offer obligations has been made to all the public shareholders increased from 15% to 25% of the at a uniform price. limiting the open offer size to 26% seems to be a good balancing act and will help the M & A landscape significantly. participation of retail investors and the higher threshold would greatly it does remove any advantage the enhance the ability of Indian listed promoters companies to raise of target equity capital from “It is indeed a companies financial investors may have. stake sale For the economy. as we move forward. Accordingly. To an acquirer. In today’s high interest era. This is a very bold shares or voting rights of the target step and would encourage larger company. encouraging in the recent past. as compared to 35% (15% initial threshold plus 20% open offer) under the old regulations. Increase in initial trigger limit From a strategic acquirer’s perspective. requirements. this helps bring stability by achieving a definite controlling stake instead of de facto control. which would propel the the promoter to drive the company as FDI numbers which have not been compared to the public shareholders. the above changes would enable an acquirer to potentially acquire a minimum 51% stake (25% initial threshold plus 26% open offer) of the target company. It will likely to change the promoters also benefit private landscape of may feel equity investors who aggrieved M&A for listed Indian can go up much higher given the without shelling out entities in the near fact that a money for an open future”. significant offer.

subject to the total shareholding post open offer not exceeding the maximum permissible non-public shareholding. It lays out specific tests that if company derives more than 80% of net worth. except pursuant to another voluntary open offer. The aforesaid provision. and enabling the promoters to shore up their stake to levels that can ward off attempts from any unwarranted investors acquiring substantial stake in the company. from making an unsolicited open offer to public shareholders. Other significant amendments In an era of global acquisitions. The new takeover regulations impose an obligation on independent directors of the target company. Therefore. puts in place. Further. the provisions under the new regulations with respect to compliance with the takeover regulations in case of indirect acquisitions are a welcome step instead of the materiality and intention based criteria laid down in past cases. This is a welcome change for promoters holding more than 55% but less than 75% shareholding in the target company as it provides them a window of increasing their stake by 5% per financial year. so long as the maximum permissible non-public shareholding limit is not breached. nothing prevented any non-promoter. vis-à-vis 5% in the lifetime of the company in the old regulations. 92 . while offering the benefit to the promoters to consolidate their holdings. to give their recommendations to shareholders on the open offer. Even these shareholders cannot make voluntary offers if they had purchased shares from the market in the preceding one year. with or without a shareholding. time and shareholding restrictions on such offers. turnover or market cap from investment in listed company. Creeping acquisitions Creeping acquisitions of 5% can be made per financial year by acquirers holding more than 25% of voting capital of the target company without triggering the mandatory open offer. such shareholders shall not be entitled to acquire any shares of the target company for a period of six months after completion of the open offer. The new regulations provide for voluntary open offer for an acquirer holding 25% or more voting rights in a target company to consolidate their shareholding with a minimum offer size of 10% of voting rights. there is no distinct category as a voluntary open offer.Feature articles New SEBI takeover code finally notified Specific provision for voluntary open offer Under the old regulations. then acquisition of such a company beyond thresholds automatically makes it a direct acquisition and the provisions of new regulations shall apply accordingly.

.Shah@in. acquisition of preference shares carrying voting rights. foreign investment consulting. and establishment of joint ventures. The changes highlighted in the new takeover code reflect a fine balance of SEBI’s preference to take care of considerations of all the stakeholders . . You can write to Amrish at: Amrish.. and some new exemptions have been provided in the new regulations such as.... divestments. and acquisition of shares of target company not involving change in control pursuant to a Corporate Debt Restructuring Scheme. the target company and the minority shareholders. certain exemptions from making a public offer pertaining to change in control with a shareholders resolution and exemption requiring disclosing the names forming part of the “group” in the annual report has been withdrawn..Tax and regulatory policy New SEBI takeover code finally notified Further....ey.. Amrish Shah Partner & National Leader-Transaction Tax Services Ernst & Young.. corporate restructuring. He is based in our Mumbai office. Conclusion Overall.. increase in voting rights pursuant to buy-back.. Reprinted with the permission of CFO Connect © 2012..com 93 . All rights reserved throughout the world.the acquirer. the new takeover regulations appear to be tuned towards today’s overall corporate standards of a big developing economy and should have a positive impact on capital markets activities. Amrish has over two decades of experience in the areas of mergers and acquisitions. India An all-India rank holder in Chartered Accountancy.

following Cabinet’s decision to allow up to 51% foreign direct investment (FDI) in multi-brand retail sector and 100% FDI in single-brand retail. or organised. Our productivity in food and agriculture is among the lowest in the world and there is a significant opportunity to raise output. Within retail. Though the industry was expected to grow at a much faster rate 5-7 years ago. retail is growing at a fast clip. which was around $220 billion in 2005. Indian retail market. cut wastage. The sophisticated front-end that international players are likely to bring will boost investment in infrastructure by retail players. This will improve efficiencies in the supply chain. with CAGR of about 21%. thanks to rising consumption. in turn. can boost the overall growth of the industry. with investment in better farming practices. thirdparty supply-chain companies and the government. the actual growth rate was much lower. The announcement is expected to generate 10 million jobs over three years.03% of cumulative FDI of around $149 billion from April 2000 to September 2011. especially in greenfield and brownfield investments. is now expected to hit $700 billion by 2015. International brands and retailers will gain access to a substantial market. Fact is. FDI in retail will pave the way for inflow of technical expertise and knowledge and this. modern. The relaxation is likely to result in an increase in FDI in retail sector. without impacting smaller and domestic retailers. FDI in retail will provide the farming community a new support group with a common interest that is expected to give a big push to productivity. Lack of retail expertise and experience has been the main reason for this subdued growth. with a CAGR of about 12%. farming community in India has shown one of the lowest efficiencies in terms of production. 94 . FDI in single-brand retail currently is 0. 26 November 2011 I ndia’s retail market promises to be among the top retail destinations in the world. increase efficiency and bring down consumer prices.Feature articles The big push for big retail Paresh Parekh Economic Times.

This licensing. retailers would need to have a precise interpretation Single-brand foreign retail players. Multi-brand foreign retailers that have already invested in India under cash-and-carry arrangements. stationery. would such a condition be too onerous for certain categories of multi-brand retailing such as sport goods. This will help bring capital as well as global best practices and retail expertise to the Indian businesses. minimum percentage from micro. In existing single-brand retail joint ventures. may now want to retailers should source certain explore the Indian market. and Woolworths. now have an option to invest in Indian companies undertaking direct retailing. one will have to wait for clarification on whether the entire amount of minimum capitalization of $100 million is to be invested upfront or over a period of time. as they would be able to directly own stake in multibrand retailing. foreign retailer or brands. For existing Indian retail players. Foreign retailers such as Sainsbury’s.Tax and regulatory policy The big push for big retail Foreign multi-brand retailers. as the foreign retailer can own a maximum stake of 51%. the foreign multinational joint-venture partner would have the flexibility to raise its stake in the venture beyond 51%. watches. Trent. such as Walmart. either joint ventures with respective “MNC retailers will assess market dynamics and select partners with suitable capabilities. this could provide further options to raise long-term capital for expansion and to attract partnerships with some global players. to comply with the norm of minimum 50% investment in backend infrastructure. In multi-brand retailing. Also. such as Reliance. Carrefour. may now explore Indian presence. stake or ownership in an Indian singleAnother key condition is that foreign brand retail entity. Further.” 95 . who have so far restrained themselves from entering the country for reasons such as wanting the entire of the term back-end infrastructure. the retailer would have to scout for an Indian partner to enter Indian multi-brand retail sector. Shoppers Stop and the Future Group. One may also potentially see present small and medium enterprises. or foreign retailers completely buying out the Indian licensee. distributor or franchise could provide an impetus to the arrangements being converted to growth of the small-scale sector. Metro. Also. apparel and electronics. Tesco. who did not want to enter India through cashand-carry route. franchisee or distributor. Lawson and others may now explore Indian retail market.

... it remains to be seen whether the government will also relax the restriction on cash-andcarry companies that are barred from supplying more than 25% of their turnover to group companies. adapt products for the diverse Indian micro-markets. Over past 12 years he has advised clients in the areas of India entry.. supply chain. post this article the Indian Government has kept the decision to allow 51% FDI in Multi Brand retailing on hold for further deliberations” Paresh Parekh Partner. You can write to Paresh at: Paresh.. While FDI in retail sector has been relaxed with conditions.ey. India Paresh Parekh is a Partner at Ernst & Young India in the Tax & Regulatory Services Practice. complex domestic and international tax matters.. Paresh is focusing on Retail.. outbound investments and business reorganization. potential foreign retailers would assess customer dynamics. All rights reserved throughout the world.Feature articles The big push for big retail With this relaxation of FDI in multibrand retailing... Consumer. cash repatriation.. foreign direct investment regulations. merger and acquisitions. He is based in our Mumbai office.. divestments. They would also typically want to select a partner with complementing capabilities and cultural fitment. Tax & Regulatory Services Ernst & Young.Parekh@in. corporate restructuring. litigation. use appropriate sourcing models to manage costs and appeal to the Indian customer. infrastructure and import regulations.. Infrastructure and Industrial sector.. Reprinted with the permission of Economic Times © 2012... and understand the tax and regulatory landscape in India. “While the Indian Government has allowed up to 100% FDI in Single Brand retailing.com 96 . competition.

A facilitative tax administration is dependent on simplicity of the tax laws. it is still very basic. avoidance of tax disputes and their quick resolution. they were limited to legislative changes and the rich dividends that could be reaped by having a modern. quality taxpayers’ services. The first-generation reforms consisted of rationalisation of the direct and indirect taxes levied by the Centre. 1 March 2012 I n preparing his Budget 2012. harmonisation and integration of laws and procedures across the country. 97 . Critical ingredients of a modern tax administration are automation and standardisation. The most pivotal reform among these is a more effective use of information technology. the government should focus on the third-generation (3G) tax reforms that can yield a fiscal bonanza similar to that from 3G spectrum auctions. if based on the flawless design recommended by the 13th Finance Commission. IT-savvy and taxpayer-friendly tax administration remain unrealised. broadening of their bases. These would be reforms that modernise tax administration. infrastructure for tax administration. could well be the 4G reform. the finance minister faces a difficult challenge of fiscal consolidation without stifling investment and economic growth.Tax and regulatory policy 3G of tax reforms 3G of tax reforms Satya Poddar Economic Times. and lowering of the statutory rates. While these reforms resulted in improvement in tax compliance and provided a significant boost to tax revenues. The GST. The reforms for achieving simplicity in tax laws and their harmonisation are an ongoing process and the goods and services tax (GST) is aimed at addressing this objective. While India has made considerable progress in terms of computerisation. inefficient and ineffective tax administration. The second-generation reforms were the replacement of state sales taxes by the value-added tax (VAT). Pending its implementation. governments should focus on archaic. Given the limited elbow room to raise revenues through higher tax rates.

In UK.” of ‘customer’ and for monitoring satisfaction inter-state trade leaves a vast scope for improvement. resolution of tax issues. the Advance Agreement Unit comprising of a team of specialists work with businesses to provide some 98 . along with business results. improve quality of the emphasis is the use of IT in on parameters VAT administration taxpayer services. This attitude must be replaced by a more cooperative and communicative approach. which helps reduce litigation. but in spite of it”. the willingness establishing of taxpayers to must leverage IT targets and voluntarily pay to modernise tax evaluating taxes. At the stateadministration and performance.2 lakh crore is stuck at the Commissioner (Appeal) level. particularly. the finance minister’s recent statement that the government aims to provide citizen-centric governance to improve taxpayer services and redressal of public grievances could not have been more timely. certainty in tax liability and quicker The latest World Bank study on Doing Business ranks India at a dismal low of 147 out of 183 countries in terms of ‘ease of paying taxes’. which encourages rent. data capturing and analysis for guiding policy decisions and for enhancing taxpayer services. customer-oriented and outcomesystems and facilities lack in transparency. These sums could be much lower if there was a more open and communicative environment.based approach for taxpayers. India is sitting on a blocked amount of more than 3 lakh crore on account of tax litigation. As one senior official put it recently. The decisions and actions of tax administrations are guided by the assumption that the taxpayer is naturally inclined to avoid paying taxes.Feature articles 3G of tax reforms The significant role that IT can play in comprehensive automation and integration of processes. minimising discretion by officials. has not been tapped in full measure. of which 2. level. Modern tax jurisdictions like in the US and UK adopt a The current business processes. which can lead to protracted litigation for decades. Investors lament aggressive interpretation of tax laws by assessing officers. communicative approach “revenues their governments collect towards taxpayers can be is not because of the effort by instrumental in bringing greater officials. So. The resulting costs and uncertainty hinder business. Studies in Australia show that reduced disputes lead to better compliance and more revenues. While setting seeking behaviour organisational and reduces “The Government objectives. An open.

.. Also.com 99 .. customer relations managers provide a single-point contact and take a lead role in engaging companies on open cases and draw up an action plan for case resolution... The multiplier effect of this 3G reform could have the potential to surpass the rich haul reaped from the 3G spectrum auctions .Tax and regulatory policy 3G of tax reforms certainty for future tax payments. Korea.. New Zealand. India too must lend absolute commitment to reengineering its administrative framework and implement it in the right earnest. China..Poddar@in. VAT and international taxes.. At a time when governments worldwide are grappling with the burgeoning debts and fiscal constraints due to the global financial crisis. the revenue department and the economy. Syria. .a win-win situation for taxpayers.. Policy Advisory Group Ernst & Young. he has been the Advisor to the Gulf Cooperation Council on issues relating to tax policy matters and Director of the Tax Analysis and Commodity Tax Division in the Canadian Ministry of Finance. Reprinted with the permission of Economic Times © 2012. ‘working smarter’ has become a necessity for tax administrators. A stable and efficient tax administrative environment would also spur foreign investments. European Union. You can write to Satya at: Satya. including Russia. Satya Poddar Partner. All rights reserved throughout the world. He has also served as tax policy advisor to governments around the world.ey.. He is based in our Gurgaon office. crucial for India’s economic growth.. The HMRC has established customer contact centres that focus on alleviating doubts of taxpayers and create an environment of customer friendliness.. India Satya has over three decades of experience in advising clients on tax policies.. and Gulf Cooperation Council..

Specials Special 100 In this section 101 | The path to globalisation compliance and reporting .

focusing more intently on the collection of tax revenues and sharing more tax information across borders makes this even more important. percentage of companies from Fortune 500 experiencing: 101 . efficient and controlled compliance and reporting function globally can help mitigate these risks and unexpected costs. The key elements of compliance and reporting that the survey pertains to is statutory financial and tax filings as required in countries around the world.Specials The path to globalisation compliance and reporting Rahul Kashikar CFO Connect. Many companies are currently distributing responsibility for compliance & reporting processes throughout their organisations. Ernst & Young Survey on compliance and reporting Recently Ernst & Young conducted a survey on more than 200 finance and tax executives from Fortune Global 500 and Forbes Global 2000 companies. the role of the CFO at the Indian headquarter level has substantially evolved to oversee multi country finance operations. which could have inherent risks attached to it. One of the important responsibilities of the CFO is statutory compliance and reporting. given its statutory nature. which gave rise to some interesting findings. 1 October 2011 O ver the last decade. Indian companies have rapidly globalised their operations and there seems to be an ever increasing appetite to grow overseas inorganically. A more rationally organised. Due to this. control and value. The fact that local jurisdictions are rewriting regulations. These include: • • • • Income tax compliance Indirect tax compliance Statutory accounting and reporting Tax accounting and provisions Some of the findings of the survey are very insightful: 1. We are at a tipping point for compliance and reporting: Almost two-thirds of the respondents say that changes in regulatory requirements will impose significant challenges on compliance and reporting processes. which may not be resulting in the most optimal efficiency. In the past 12 months.

etc. the level of start-up business activity doesn’t readily support investment in local finance teams. 2. Yet the trend in finance has been to reduce or redeploy to 100% 83% 80% Percentage 60% 40% 20% 0% Ability to employ people with appropriate level of local expertise Leveraging methodologies. Local expertise is key to a successful GCR model: Compliance and reporting processes result in inherently local in-country filings and submissions. which traditionally supported local compliance and reporting processes. Effective compliance and reporting models require a strong governance structure: More than 40% of respondents indicated a lack of global governance over statutory financial filings. Between 64% and 78% of survey respondents indicated that localcountry resources are vital to successful compliance with tax and regulatory requirements. expertise. and more than 60% indicated no global governance over direct and indirect tax filings required by their companies. Often.. Leading companies blend internal resources and external providers to optimise compliance and reporting: More than 80% of respondents that use outside providers consider it an effective means of accessing local expertise 4. of service partner 72% 59% 56% 46% 43% Ensuring flexibility and scalability of sourcing solution Reducing DiversifyReducing head ing and costs and increasing count and sharing of operational predictability full-time equivalents and of costs execution risk Note: Companies assessing outsourcing as an effective means of chieving business benefits 102 .Specials The path to globalisation compliance and reporting 64% 45% 42% 17% Unplanned tax audits Unexpected tax assessments Penalties Business interruption due to lack of compliance global or regional centers the in-country finance resources. 3.

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The path to globalisation compliance and reporting

These survey results point to a need for a greater level of control, visibility and accountability within compliance and reporting. Strong corporate governance reduces the likelihood of unplanned audits and is a prerequisite for simplification, standardisation, automation and centralisation of key processes. It is also a vital ingredient for most successful transformations. How are leading global companies dealing with compliance and reporting across borders? Leading global companies today are increasingly procuring some or all of their compliance and reporting services on a regional or global basis. Just as companies are finding benefit in regionalising and standardising their in-house finance functions, they are taking a similar approach to the procurement of compliance and reporting service providers. Requiring the service provider to include a governance framework to manage the centrally procured compliance and reporting processes provides such companies a robust infrastructure to monitor and gain visibility of the compliance process. Often, this means replacing a patchwork of local service providers with a globally or regionally engaged provider, who has cutting edge technical capabilities in a multicountry environment with a robust technology infrastructure to manage the process.

Our experience indicates that companies are increasingly leveraging in-house procurement experts to achieve a greater level of quality and consistency in the service they receive from such global service providers. This is often done through the adoption of contracts that cover multiple countries and through the adoption of global SLAs (service level agreements). Such an approach, when aligned with standardisation, can help a company achieve an improved balance of efficiency, control and value throughout the compliance and reporting processes. Need for Indian companies to adapt global compliance and reporting (GCR) methodologies Given the rapid pace at which Indian companies are multiplying its operations overseas, it is all the more reason that they must transform GCR processes to deliver greater efficiency, control and value; and to mitigate risk in an increasingly global and sometimes hostile tax and regulatory environment. The benefits are clear. There is no longer any question that GCR processes must change. The only questions are when and how.

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The path to globalisation compliance and reporting

Following are some of the key benefits of adapting to GCR methodologies • Rapid overseas expansion – ► Manage compliance and reporting risks Reduced resource deployment ► overseas Enhance visibility and control over ► processes Centralise global compliance and ► reporting governance Deal with developments such as ► IFRS Management can focus on core ► business

Key factors in GCR transformation Transforming the GCR model presents many challenges. Companies are reducing the number of experienced finance and tax resources available in-country. Yet, local authorities are becoming more focused on increasing revenues through enhanced enforcement. Access to skilled and experienced local resources is vital. Leading companies mustrecognise that by having the right core skills internally, along with standardised processes and information, they can take maximum advantage by using external providers that operate globally. New GCR models incorporate clear global accountability, transparency and control. This is very different from the historical patchwork of GCR responsibilities spread across different departments and geographies. The new GCR model ushers in an era where processes are optimised to deliver efficiency, control and value. Structured, standardised, reliable, scalable, sustainable and value-focused GCR models will soon transcend the patchwork upon which most Indian companies rely today. Successful results will require effort. But as the Ernst &Young report demonstrates, the benefits and risks demand that companies begin the journey. With regard to GCR requirements, finance executives must define, inventorise and rationalise the filings or submissions that are required.

• • • • •

“A more rationally organised and controlled compliance and reporting function globally, can help mitigate regulatory risks and unexpected costs.”
Companies that have addressed GCR opportunities within their finance transformations are reaping the benefits. For others, whether their transformation is completed or contemplated, now is the time to make a change. Companies need to assess the gaps in their current approach along with the benefits available from a new GCR model.

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The requirements definition should include responsibility and accountability, timing and key metrics for the related activities. Also, finance and tax executives should ensure that their model anticipates and manages accelerating changes — regulatory, legal entity, finance and business — that affect GCR requirements. The importance of having a governance framework developed and implemented to manage GCR processes on a global basis cannot be undermined. This will ensure control

and stakeholder confidence and set a foundation for sustainable cost advantages through standardisation, automation and centralisation. ...............
Reprinted with the permission of CFO Connect © 2012. All rights reserved throughout the world.

Rahul Kashikar
Associate Director, Tax & Regulatory Services Ernst & Young, India
Rahul Kashikar is an Associate Director at Ernst & Young India. Rahul is focussing on the Global Compliance Reporting initiative in India. With over 15 years of exeprience is closely working with the Indian telecom and advertising industry sector clients advising on tax and regulatory matters. He is based in our Mumbai office. You can write to Rahul at: Rahul.Kashikar@in.ey.com

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www.ey.com/India/Services Sector focus Centers of excellence for key sectors Our sector practices ensure our work with you is tuned in to the realities of your industry Read about our sector knowledge at ey. Any time.com/India/industries Stay connected Easy access to our knowledge publications.com/thoughtcenter/ Follow us @EY_India Join the Business network from Ernst & Young Fore more information.ey. Tax.com/India .ey. Advisory A comprehensive range of high-quality services to help you navigate your next phase of growth Read more on www.com/subscription-form Webcasts and podcasts http://webcast.ey. Transactions. visit www.Connect with us Our services Assurance.

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