Taxation in India 2011-12
A compilation of our published thought leadership
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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.
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.
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.
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. feels Satya Poddar. Vidya Nagarajan feels that the country has been under constant scrutiny by Indian tax authorities as a result of alleged abuse by investors.
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.
40 | Burden of fiscal consolidation falls on tax system. Vijay Iyer outlines the key points from OECD scoping paper on the subject that can help resolve the issue. which could adversely impact foreign fund inflow to the Indian capital market. thus clarity and certainty on the issue of P-Note taxation is the need of the hour. Jayesh Sanghvi dwelled deeper and elaborated on positive amendments like Advance Pricing Agreements (APA) and transfer pricing.
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.
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. except those in the negative list. would become taxable. the only measure which could be viewed as a significant stepping stone to the GST is the Goods and Service Tax Network (GSTN).
60 | Pause before P-Notes
Hiresh Wadhwani is of the view that uncertainties in tax positions could deter FIIs from issuing P-Notes.
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.
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.
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.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.
52 | Transfer Pricing and intangibles
Ernst & Young report highlights the increased focus of audits to the transfer of intangibles. suggests Bipin Sapra.
cross-border mergers will only be allowed with companies situated in jurisdictions notified by the Central Government.
69 | Options that change investment status
Amrish applauds DIPP on the revise of its earlier provision that sought to define equity investment as debt.
84 | One-time amnesty for swiss stash
Government often toy with the idea of introducing one-time amnesty to bring back the Swiss stash. Sudhir Kapadia. Paresh Parekh briefs on the possible impact of the proposed change in FDI in retail. discusses recent steps taken by various countries.
78 | New regulatory framework for private investment vehicles
The proposed framework by SEBI for private funds is restrictive as per Prakash Shah & Chaitrali Kamat.
82 | Alternative investment funds: hits and misses
SEBI’s proposal to introduce.
. which would help in combating regulatory risks and unexpected costs. since its wide to cover offshore funds investing in India. or black money.
101 | The path to globalisation compliance and reporting
Rahul Kashikar draws that a more rationally organised. say Sudhir Kapadia and Subramaniam Krishnan in their exclusive review. undoubtedly FDI in the sector garner much of interest. efficient and controlled compliance and reporting function is required on a global front. continues to occupy centre stage in the country.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.
94 | The big push for big retail
India’s retail market promises to be among the top retail destinations in the world.
90 | New SEBI takeover code finally notified
The new takeover code notified is a revolutionary legislation. to tackle tax evasion in general and offshore tax evasion in particular. but it could also have an adverse impact on investor sentiments and hamper future FDI flows into India. 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. feels Amrish Shah as it is likely to change the landscape for M&As of listed Indian entities in the near future.
Tax and regulatory policy
75 | Is grip tightening on black money?
The issue of tax evasion.
71 | The new M&A horizon
Narendra Rohira feels that with the new Companies Bill 2011. while also emphasize that the other regulators should follow suit. while and on the other hand the intent is to regulate the domestic funds.
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. including India. Alternative Investment Funds (AIF) will be useful only if it enables them to compete with their global peers. and lowering of the statutory rates. broadening of their bases. if it was accompanied by in-built options.
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Sudhir Kapadia Rajendra Nayak Prashant Khatore Bipin Sapra
Rahul Kashikar Shalini Mathur Rahul Patni Subramaniam Krishnan Ashwin Vishwanathan Chaitrali Kamat Tejas Mody Cynthia Dalmeida
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. With the scale of the changes that are underway. tax & regulatory policy. 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. The next five years will likely be every bit as volatile and evolutionary as the last half-decade. Tax authorities have become significantly more assertive in examining cross-border activities. overshadowing longer-term tax trends. taxation of cross-border transactions and M&A taxation. In 2011-12. However. recent macroeconomic data indicates that some clouds continue to linger. 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.
To enable a deeper understanding of some noteworthy tax and regulatory developments in the year gone by. Tax executives. transfer pricing. we are glad to bring forth to you Taxation in India 2011-12. India found itself in the heart of these conflicting demands. Tax administrators and legislators. The pace of change may only accelerate as Governments and businesses reflect on lessons learned from the global economic crisis. Managing growth and price stability are the major challenges of macroeconomic policymaking. indirect tax. acknowledge that they are more committed than ever to enforcing existing tax law and creating new enforcement mechanisms. reforms and stepped up tax enforcement efforts. under pressure to generate more revenue to balance debt-laden budgets and fund infrastructure and social programs. The past year has witnessed a dizzying array of tax legislation. From an Indian perspective. we hope this publication stimulates your thoughts. The effect on tax policy has been startling. helps you prepare for the dynamic future ahead of us.Foreword
The world has changed dramatically in the space of just a few years. The publication contains a compilation of articles ranging from personal taxation.
Sudhir Kapadia National Tax Leader Ernst & Young. India
In this section
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 . the start date for application of GAAR has been deferred by a year. some of which are introduced with retrospective effect have not gone well with various stakeholders.e. Thankfully.Feature articles
The Indian corporate tax arena has witnessed several developments in the last fiscal year. and would now apply from 1 April 2013 (i. tax year 2013-14 onwards). This section analysis these as also the report of the Standing Committee on Finance on major aspects of the direct taxes code (DTC). 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. A plethora of amendments. The Budget also proposed to introduce a general anti-avoidance rule (GAAR) to address aggressive tax planning.
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 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. The Committee has. 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. 10 March 2012
he Standing Committee has finally spoken on major aspects of the direct taxes code.Corporate tax
An important step to revamp complex structure of DTC
Economic Times. 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. Interestingly. therefore. including a direct critique on its very structure. 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. in relation to the General Avoidance Agreement Rules ( GAAR). The Committee has made a radical suggestion of taking disciplinary action against those Assessing Officers who have raised unreasonable tax demands
the Committee has specifically recommended that the onus of proof of tax avoidance should rest with the tax authorities and not the tax payer. (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. For instance. The Committee notes.
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..
Reprinted with the permission of Economic Times © 2012.. ... as recommended by the Standing Committee. the Committee has recommended setting up of special fast track courts comprising of experts to dispose of the plethora of pending cases... In addition.Kapadia@in.. 2012.. India
Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies. Further. 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. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation.. at least of the rank of the Joint Secretary to the Government of India. the GAAR provisions have been deferred by a year and will now apply from 1 April 2013. However. All rights reserved throughout the world. had included provisions to introduce GAAR.
National Tax Leader Ernst & Young.ey. He is based in our Mumbai office.
The Finance Bill. while the Finance Bill.. You can write to Sudhir at: Sudhir... 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. 2012 had proposed that the GAAR Approving Panel will comprise not less than three members consisting of officers of Commissioner rank and above. based on representations made by various stakeholders and the recommendations of the Standing Committee.com
. an amendment has been made to provide that the panel will also include an officer of the Indian legal service.. This is a far reaching suggestion which should be duly incorporated in the DTC... Finally.. 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.. the primary onus of proving that the arrangement is an impermissible avoidance arrangement now vests with the tax authority and not the taxpayer.
As if this was not enough.Corporate tax
A “retrospective” play on words
Mint. Woefully. a plethora of retrospective changes has been proposed in the Bill. Further. Further. where sale of standard software supplied by non-resident vendors has been considered as out of the ambit of royalty taxation. irrespective of the medium. One of the provisions in the budget that has taken industry by surprise is the proposed change in the definition of capital asset. While the
. This proposal will have an impact on attracting foreign investment into India. whereby the right to use computer software has been covered (including granting of a licence). the expansion in the scope of royalty for right to use property is effective from 1976. if the share or interest derives. Extensive GAAR (General AntiAvoidance Rules) provisions have been introduced. which shall result in declaring a transaction as “impermissible avoidance arrangement” where the transaction lacks commercial substance. the definition of process has been modified to include transmission by satellite. 17 March 2012
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. directly or indirectly. it will have the effect of overruling many favourable judgements on software taxation. little did we realize that he would be so true to these words. For instance. and hence. its value substantially from the assets located in India. 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. The scope of these provisions is even wider than that suggested in the direct taxes code. Being a retrospective change. covered under royalty. the pragmatic suggestions of the parliamentary standing committee have also been ignored. the finance Bill contains a validation clause that would operate irrespective of any judgement or decision on the matter. it puts a question mark on several other judicial pronouncements in tax cases.
extension of 200% weighted deduction for investment
in research and development and extension of the sunset clause for the power sector by one year. Though the tax rate hike may have an inflationary effect. A welcome feature has been the announcement related to the introduction of the advance pricing mechanism. a hike in the rates was unavoidable. However. 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. 2 lakh and the sale is in cash. His proposal to reduce the
.1%. the move to a negative list of services and the rise in the central excise and service tax rates has been along expected lines. The budget provides a positive thrust to infrastructure by. The Bill also provides a lower withholding tax of 5% on external commercial borrowings for three years in certain specified infrastructure sectors. the finance Bill extends the profit-linked tax holiday for power sector projects starting before 31 March 2013. 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. The government has taken proactive steps to tackle the issue of unaccounted for funds parked abroad. classification of capital and revenue transactions and recharacterization of any expenditure. On indirect taxes.Feature articles
A “retrospective” play on words
fine print of the provisions remains to be seen. The proposal to remove the restriction on venture capital funds from investing in nine specified sectors is a very positive move.125% to 0. additional depreciation of 20% for the power sector would provide a boost to the sector. Finally. 12% excise duty will still be in line with the anticipated goods and services tax rate. especially given that the latter would apply to the full retail price as against the factory gate price. providing enhanced investment-linked deduction of 150% for specified businesses. broadly the provisions shall have impact on the classification of equity and debt. Further. the finance minister could have resisted increasing the lower rate of 1% to 2% at the current juncture. compared with the normal rate of 20%. With a view to providing a thrust to infrastructure. in view of the fiscal constraints. for instance. 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. Moreover.
. Rajiv has successfully advised several leading multinational corporations on their entry in India and has worked with some of India’s largest companies. a network of 100 young leaders in business and politics to develop programs for the development of Asia.. Since then. Further. Rajiv is a member of the National Council of Confederation of Indian Industry (CII)... given the tough economic conditions. the threshold limit for withholding tax in respect of cash sale of jewels has been enhanced to Rs 5 lakh..
Reprinted with the permission of Mint © 2012. both in the private and public sector.. His areas of expertise include M&A advisory. You can write to Rajiv at: Rajiv. India
Rajiv Memani took over as the Country Managing Partner of Ernst & Young in 2004.. A qualified Chartered Accountant.
This article was written based on Budget 2012 proposals announced in March 2012..com
..Memani@in.. He has been selected on the World Economic Forum’s New Asian Leaders. All rights reserved throughout the world. The question mark on fiscal consolidation belies any hopes of the easing of monetary policy.. Moreover.
Country Managing Partner Ernst & Young... the proposal of imposing a withholding tax rate on transfer of immovable property has been withdrawn.. GAAR provisions have been deferred by a year to apply from 1 April 2013. Affiliated with prominent business and industry associations. there have been changes made to some of these proposals and clarifications provided on others.ey. He has been with the firm for almost 20 years now. 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. Illustratively... the finance minister expects an ambitious revenue growth of more than 19%. .1% in 2012-13 raises questions about how realistic it would be. 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. valuations and restructuring. the 5% withholding tax on ECBs has been extended to other taxpayers as well.Corporate tax
A “retrospective” play on words
fiscal deficit to 5. 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.
Ensure GAAR doesn’t cause hardship to taxpayers
DNA . these provisions have created a furore and anxiety in corporate circles.”
. 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. these provisions would extend to all classes of tax payers.
“Government must ensure that GAAR that is aimed to counter tax avoidance scheme and codify the concept of substance over form in law. where whole or part of the arrangement lacks or is considered to be lacking commercial substance. including individuals and partnership firms. the arrangement will be deemed to lack commercial substance. There are no restrictions to applying GAAR only to transactions with or between non-residents or where tax treaty benefit is sought.
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. 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
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. Since the time of announcement. 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.DNA Money. misuse or abuse of the Indian tax laws or is not for bona fide purpose.
and has worked on several international acquisitions. consisting of three CITs..com
.Sharma@in. Hitesh also leads the Life Science Industry for Ernst & Young in India and is based in our Mumbai office. particularly transfer pricing and investment structuring.. 2012 from structures implemented prior to that date.... including IPR/brand issues. India
Hitesh with over 22 years of exeprience specialises in International Tax and Transfer Pricing. All rights reserved throughout the world. You can write to Hitesh at: Hitesh. While one can’t deny the need of having an anti-avoidance law in India. the proof will lie in implementation when the actual cases are placedfor scrutiny before income tax officers in next few months. 2012. this provision appears to be far too onerous.. however.. the government must ensure such widely-scoped provision does not cause undue hardship to taxpayer and bona fide tax-planning is not challenged... .
Partner & National Leader. While the government has come out
with some clarifications to appease foreign investors. The implementation of GAAR provisions has been deferred to 1 April 2013. the tax officer will have to seek approval from the Commissioner of Income Tax (CIT) as well as Approval Panel. Considering that the Indian criminal law also presumes innocence until proven guilty.. investment structuring assignments and crossborder structures.
Reprinted with the permission of DNA DNA Money © 2012.
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. there is no clarity on their applicability to consequences arising on or after April 1..ey. In order to safeguard the taxpayer from arbitrary invocation of GAAR provisions.. International Tax Services Ernst & Young. international taxation. can one be optimistic about the objectivity in decisionmaking? The GAAR provisions will apply from April 1.. Given that the approvers will also be a part of the tax administration.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....
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.1% next year and that the subsidies would be restricted to les than 2% of the GDP. The FM is also hopeful of keeping the inflation rate down to 6.Feature articles
Budget 2012-2013— An analysis
CFO Connect. how he would deliver on these promises is the big question.4%. a clear roadmap for how this would be done is missing. The main concern arises on the expenditure front.
The government seeks to raise additional Rs 40. As against this. 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. were well known to all.
. given the uncertainties surrounding both disinvestment and telecom spectrum sale. The government is obviously counting on an ambitious GDP growth rate of 7. 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.000 crores as also additional Rs 40. the non tax revenues could again fall short. Reports indicate that at the current levels of global crude oil prices and the prevalent domestic retail prices of controlled products. the losses of the oil marketing companies could be a whopping Rs 2. However. economic and fiscal fronts. However.000 crores from the sale of telecom spectrum. the FM has provided only Rs 40. Though the FM has assured that this would be brought down to 5.000 crores through tax revenue and on non tax revenue front it has planned for disinvestment proceeds worth Rs 30. given the political pressures it continues to face. The revised estimates for fiscal deficit at 5. The subsidies burden for 2011-12 was as high as 2.000 crores for compensating these companies. despite the fact that payments to oil and fertilizer companies were deferred.4% of the GDP.9% of the GDP turned out to be even higher than what was being anticipated. However. 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.13 lakh crores.6% that could help deliver a tax revenue growth of about 19%.
the Finance Bill contains a ‘validation’ clause that would operate irrespective of any judgement or decision on the matter. It will also have to be seen whether the amendment in domestic law can impact the DTAA benefits available to taxpayers in this respect. However. 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. the promise to reign in the fiscal deficit at 5. have truly turned the Finance Bill to the Shakespearean tragedy that the FM referred to. It was widely expected that pending the DTC. However. Not only this. Retrospective amendment of
such nature will be prone to challenge on grounds of constitutional validity.1% of GDP is not very convincing. This would be so whether or not the ‘process’ is secret. 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. Many of the provisions have been introduced with retrospective effect. bringing to rest the controversy on this issue. The taxation issues The Budget has many positives to offer for the individual and corporate taxpayers. It is noteworthy that many such similar offshore transactions are currently under the scanner of tax authorities. which shall result in declaring a transaction as ‘impermissible avoidance arrangement’ where the transaction lacks commercial substance. The scope of these provisions is even wider than that suggested in the DTC and even
. Besides the above. GAAR provisions would be brought in advance by the government with a view to check international tax avoidance. 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. it is disappointing that the concerns of the industry have not been considered and extensive GAAR provisions have been introduced. For instance. by making legislative provisions with retrospective effect since the inception of the Act. The proposal to amend the provisions retrospectively is a cause of concern and results in substantial uncertainty. for the first time and going to the extreme level. Consideration for transactions involving satellite transmission or lease of transponder capacity in the satellite will also be characterized as royalty. a step which goes against the principle of stability and certainty in taxation. particularly on international taxation.Corporate tax
Budget 2012-2013 An analysis
Given the above. many other retrospective changes have been proposed in the Bill. some of the provisions introduced.
classification of capital and revenue transactions and recharacterization of any expenditure. broadly the provisions shall have impact on the classification of equity and debt.1% has also come as a relief for the taxpayers. That the government continues to do its bit for the infrastructure is evident from the positive thrust given to the
“Budget 2012 though promises that reforms will be continued and fiscal numbers will be kept in check. For the individual taxpayers. 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%. 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. With a view to provide a thrust to the infrastructure. the finance Bill extends the profit linked tax holiday for power sector projects starting till March 31.125% to 0. This has been a long standing demand of the industry and would help provide greater certainty in the transfer pricing methodology. The positive features of the Budget include the announcement about the introduction of the Advance Pricing Mechanism. 2013. While the fine print of the provisions remains to be seen. 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. extension of 200% weighted deduction for investment in R&D. 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. Further. 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.
. In removing the cascading effect of the dividend distribution tax. Enhanced investment linked deduction of 150% for specified businesses. additional depreciation of 20% for power sector would provide a boost to the sector. the government has finally accepted the industry’s suggestion of bringing rationality in these provisions.Feature articles
Budget 2012-2013 An analysis
the pragmatic suggestions of the Parliamentary Standing Committee have been ignored.
Finally... His functional experience includes corporate tax planning.. 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.com
. a hike in the rates was unavoidable.. All rights reserved throughout the world..Corporate tax
Budget 2012-2013 An analysis
On the indirect taxes front. You can write to Ganesh at: Ganesh. India
Ganesh Heads the firm’s policy & advisory group as one of his multiple leadership roles. structuring cross-border investments and transactions... 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.... that would provide services through a common technology enabled portal for registration of dealers.
Reprinted with the permission of CFO Connect © 2012. the government must provide an environment of trust.. 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. He is based in our Noida office.ey. in view of the fiscal constraints. The assurance about the GST Network.. Though the tax rate hike may have
an inflationary effect.
Partner & National Leader — Policy Advisory Group Ernst & Young. certainty and stability in taxation to make India an attractive destination for the investors. 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. The introduction of the Settlement Commission and Revision Application Authority for service tax is a positive move. and joint venture negotiations.. .Raj@in.. Most significantly. 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.. However.
income tax is levied on progressive tax rates for individuals.Feature articles
In this section
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
. In this section you can read about the concept of inheritance tax and whether it applies in India. 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. impact of recent decisions on computation of basic salary for provident fund purposes. 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. where income is taxed on the basis of residence of the taxpayer and source of income. impact of the proposed DTC on future investment strategy.
1953. I have been reading it for the whole day and you indeed provide me with a welcome break. Mr. Basu is again travelling and I wanted some urgent advice. Similarly. He also felt that Wealth Tax and Estate Tax should not co-exist as both. “Eeesh. In his budget speech for 1985-86. “What has been said in the newspaper is just a thought and a lot more needs to be done before it becomes reality.” “Not at all. the doorbell rang.” “India has taxed inheritance in the past by way of Estate Duty Act. my father has a lot of ancestral property that he has willed to me. in some way. “You know. were taxes on
“You are so generous. 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.” Then her eyes caught the WSJ and 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.” I said. Is the Government now thinking of imposing tax on inheritance?” “There is no need to panic. 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. we
. Strangely. “You see. the then Finance Minister. This Act remained in force till 1985 when it was removed by Mr V. My maid opened the door and the sweet voice of Mrs Basu reached my ears.” Saying so.”
wanted to settle our assets in such a manner that it gets distributed evenly to our children. “Mr Seengh.” I said. 10 July 2011
s I lazed around one late afternoon in Delhi’s intense summer.” she said. I hastily hid the movie magazine I was reading and picked up the latest copy of the Wall Street Journal. nobody talks about taxing agricultural income and even the richest farmers do not pay tax.Singh. “how nice to see you. She continued.P. I am so sorry to have disturbed you. Mrs Basu had a great regard for me as an “intellectual” and I did not want to break the truth to her just yet.Personal tax
Of death and taxes
Hindu Business Line.
UK. It also led to concealment of assets and income and probably sowed the seeds for the thriving parallel economy we see now. I continued. 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. as we stand today. capital formation and entrepreneurship”
“Estate taxes take away a large chunk of one’s wealth.Feature articles
Of death and taxes
a person’s wealth and property. “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. it is often seen as a disincentive for wealth. Australia.” “When Estate Duty was in force in India. 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. “Many developed countries have had some form of “death duty” as it is often called since it gets triggered upon a person’s death. As a result. Basu said. 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. France have very high rates of estate taxes with Japan tax rates going as high as 70per cent.” Mrs. US. Since estate taxes take away a large chunk of one’s wealth. capital formation and entrepreneurship. However. the opposition against these taxes have been muted. Emboldened by her remark. Malaysia and some other countries do not have estate taxes.”
“That will be so good for tax advisers like you. I tried to look modest as I offered tulsi chai to her. you know so much Mr Seengh. we have wealth tax but no estate taxes. it is often seen as a disincentive for wealth.” “My goodness. I am so impressed!” said Mrs Basu. Japan. it gave rise to many evasionary tactics. “These taxes are not very popular in the countries where they are levied.wealth and estate being broken into smaller pieces and being held by proxy owners while the real owners continued to enjoy the benefits. The most rampant was ‘benaami holdings’ . since they aim to tax the very wealthy by keeping the exemption limit to a very high level.
Enacting a taxing law is the easiest part. The tough part is enforcing it and punishing evaders. social security... His functional expertise included compensation structuring. personal income tax and immigration matters... there is also no doubt that the data gathering and enforcement mechanism is very weak and full of holes. Human Capital Services Ernst & Young.. what great work we can do with Estate Tax? On the other hand. we have not done a good job with our good old Income Tax. Amitabh was associated with Ernst & Young since 1984 and was based at the Noida Office.. Tariff and Regulatory Affairs Committee.. India
Amitabh was a Tax Partner with Ernst & Young’s Human capital services.
Amitabh Singh Retired Partner.. if we really beefed our current enforcement. stock based incentive plans.
I sipped my tea in contentment for there could be no greater compliment from Mrs Basu than that. our tax kitty would swell of its own without having to think of death duties etc.Personal tax
Of death and taxes
However... You can write to us on this article at: Tax..com
...email@example.com. All rights reserved throughout the world. In the past he has served as the Chairman of Amcham’s Tax. .
Reprinted with the permission of Hindu Business Line © 2012. As it is. rooted out corruption in the ranks and started punishing the offenders.. payroll outsourcing.” “Mr Seengh... your mind is as clear as Rabindra Nath Tagore!” Said Mrs Basu.
9 August 2011
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. While. Further. 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. expensive watches (value more than R50. will not help in getting away from wealth-tax.000). jewellery. except for non-profit organisations. daughter-inlaw. The critical point to be noted is the extended coverage of the ‘assets’ on which wealth tax is payable. While the taxable wealth definition under DTC has been extended to specifically cover assets such as archeological collections. furniture. resulting in savings of R70. assets like land. minor children. paintings. could negate this saving. 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. and also is in line with the five-fold strategy announced by the finance minister in the last Budget speech. helicopters. unaccounted income/wealth and others. the threshold limit to trigger wealth tax has been raised significantly from R30 lakh to R1 crore. boats. disproportionate asset cases. yachts. utensils or other articles made of precious metals continue to be considered wealth even under DTC. revocable trusts and own HUFs. similar works of art. any transfer of assets or gifting to your spouse. hawala transactions. building. bullion. drawings. sculptures.Feature articles
DTC to widen wealth tax net
Financial Express.000. aircraft. cars. the DTC also continues with concept of “clubbing” and thus. Another important implementation measure undertaken by the government already (ahead of the DTC) is the quick finalisation/ signing
. the tax rate continues to be 1%. The most crucial inclusions are deposits in banks located outside India. Similar to the present provisions. 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). Given the number of cross-border scams.
. He has over 10 years of work experience and has worked extensively in the area of human capital. 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. Therefore. the time in your “expensive watch” will speak whether the DTC wealth-tax provisions achieves this objective. specializing in global mobility and employment taxation. All rights reserved throughout the world.
Reprinted with the permission of Financial Express © 2012. 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. Global Mobility in Ernst & Young Mumbai. You can write to Mayur at: Mayur. India
Mayur heads the specialized practice discipline..ey. Human Capital...Shah@in. Thus. some of the changes brought in by Finance Act 2012 are in line with the directions of the draft DTC legislation...
Director... and revision of existing tax treaties to specifically include information exchange clauses....com
. . Human Capital Practice Ernst & Young.
While implementation of DTC has been deferred to April 2013. He is based in our Mumbai office....Personal tax
DTC to widen wealth tax net
of various Tax Information Exchange Agreements (‘TIEAs’) with various countries.. 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..
In addition.Feature articles
How much tax is payable on global income?
Economic Times .Wealth.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
. shares. deposits Dividend from stocks. tax implications in the foreign country where the investment is to be made should also be analysed. 29 August 2011
hen the RBI liberalised global investment norms. a resident and ordinarily resident of India is taxed on his worldwide income. This includes capital gains. However. The new norms and the urge for geographical diversification has led many Indians to invest in foreign markets. funds Short-term capital gains Long-term capital gains 20. it literally opened up a world of choices for wealthy Indians. the tax implications in some cases can be quite complex.
Types of incomes and tax liability
Interest on bonds. the income is classified as a long-term capital gain. If the asset is held for more than 12 months (in the case of shares or units) or 36 months (in any other case). and other financial instruments outside India. there are no tax-free luxuries from such investments for these may invite tax both in India and abroad. If the transaction involves sale of shares listed on the overseas stock exchanges or other assets (gold. rental income and income from other sources. They could invest in immoveable property. listed and unlisted debt securities. bonds. property) outside India. These can be either short-term or long-term gains. the gains are treated as short term. If the holding period is shorter.
Tax on capital gains Under the Indian tax laws. mutual funds. debentures. depending on the period of holding. the income is treated as capital gains. In fact.
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%.
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”.
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
Will court rulings on PF affect you?
Mint, 13 September 2011
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.
the deduction of the employee’s contribution under section 80C of the Income-tax Act will be limited to Rs1 lakh annually. 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. 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. In the current CTC structure which is generally followed in most companies. he may opt to make an additional contribution. there will be a major impact on the employee’s take-home salary. in respect of local employees. in case of local employees. The concerns This has caused apprehension among the employer community. 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. the Supreme Court of India has ruled that any payment. if both the employer’s and the employee’s share of additional contribution is deducted from the CTC. it is fair to say that the high court rulings only serve to reinforce the above principles laid down by the Supreme Court earlier. if the employee so chooses. Also.500 per month. Subsequent to the high court rulings.
. However.500. The way out: But the situation does not seem to be so bleak. 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. Therefore. While there will be some tax saving on the employer’s portion of contribution as the same is non-taxable. Therefore. which is universally.Feature articles
Will court rulings on PF affect you?
Thus. any payment by way of special incentive or work or which is based upon contingencies is excluded. 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. necessarily and ordinarily paid to all across the board is included in basic wages. the Provident Fund Scheme does provide a cap. the employer can still take a position of limiting monthly contribution to the base of Rs6. Particularly. On this topic.
For international workers. 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.Personal tax
Will court rulings on PF affect you?
Still to be examined Also. 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. For international workers.
On 2 December 2011.. 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. The argument that the earlier PF audits did not impose any requirement to contribute on such allowance may also be brought up... The EFPO has filed and the Supreme Court has admitted an appeal against the Punjab and Haryana High Court ruling. 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.
Reprinted with the permission of Mint © 2012... and another”. Also.. She is based in our Delhi office. ..Iyer@in.. M/s G4S Security Services (India) Ltd.. 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.. All rights reserved throughout the world....
Partner & National Leader.. You can write to Sonu at: Sonu. 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.ey. Gurgaon vs. In its ruling. this needs to be examined differently as the limit of Rs6.com
..500 per month does not apply to them.. Human Capital Practice Ernst & Young.
000 is restricted to Government Provident Fund. The avenues available for tax saving investments are less under the DTC compared to the existing tax laws. Following are some of the key proposals under the DTC which could impact your investment decisions. DTC has suggested some major changes in the way tax saving instruments are positioned. unit-linked insurance plans (Ulips).000 is available as a deduction for a host of investments which includes payment of life insurance premium. five-year bank deposits. Deductions: Under the existing tax laws. when you think about investments. you have to keep in mind that the existing tax laws will undergo a major change by April 2013.00. 3 January 2012
s an investor. Investments made before the commencement of the DTC.000 has been proposed to cover payments such as life insurance premium (annual premium shall not exceed 5% of capital sum assured). 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 of children. the umbrella limit of Rs 1. Capital gains: Listed equity shares or units of equity-oriented funds held for a year or less would be taxed after
.000. 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. with the implementation of the Direct Tax Code (DTC). the deduction of Rs 1. An additional deduction of 50.00. Also. which are currently under the limit of Rs 1. and provident fund contributions etc. Public Provident Fund. ELSS. repayment of housing loan principal amount and contribution to long-term infrastructure bonds will no longer yield tax saving under the DTC. would continue to be eligible for the EEE method of taxation for full duration of the instruments. National Saving Certificates.00. which enjoy EEE method of taxation under the existing tax laws. tuition fees for children and contribution to health insurance. recognised provident funds and pension schemes.Feature articles
Weigh DTC provisions while choosing tax saving instruments
Amarpal S Chadha
Economic Times. 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.
too. one could balance his/her portfolio and maintain a fair balance of investments in both government and private securities. .Personal tax
Weigh DTC provisions while choosing tax saving instruments
allowing 50% of capital gains as notional deduction. contribution to long-term infrastructure bonds : a) In the case of non-equity shares or non equity-oriented mutual funds. the holding period is calculated from the date of purchase of investments under the existing tax laws... principal component of home loan repayment. India
Amarpal S. period of holding will be considered from the end of the financial year in which they are acquired.. would be taxed after allowing 100% of capital gains as notional deduction. © 2012. 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.
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. from inbound as well as outbound perspective.. period of holding will be considered from the end of the financial year in which they are acquired To conclude. tuition fees for children and health insurance premium. superannuation fund. Senior Citizens’ Savings Scheme.. post-office time-deposits..Chadha@in. some of the changes brought in by Finance Act 2012 are in line with the directions of the draft DTC legislation. Listed equity shares or units of equity-oriented funds held for more than a year. Chadha is a partner at Ernst & Young India in the Tax Human Capital practice. PPF. All rights reserved throughout the world. where as. So. A snapshot of some of the key positive... 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... The main object of the computation of adjusted capital gains is to benefit the lower and middle income group taxpayers.com
.. 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. You can write to Amarpal at: Amarpal.. national savings certificate.. Neutral: Contribution to employee provident fund.. with experience in dealing with tax..
Amarpal S Chadha
Partner. diversification always reduces risk and may increase returns.000 is available for life insurance. He is based in our Bangalore office.
Reprinted with the permission of Economic Times. The focus for investors will need to move towards investments that provide for a ‘real’ wealth accumulation and not only a tax savings play.
five-year bank fixed deposits. Human Capital Practice Ernst & Young. negative and neutral proposals from a tax saving perspective under the DTC is given below: Positive: An additional deduction of 50. In the case of non-equity shares or non equity-oriented mutual funds.ey.
Given that the new tax system requires Central and State Governments to strip their constitutional powers and join hands for a common tax system. This section provides a detailed analysis of the issues being deliberated in the purview of GST. 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. 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. among other developments that may impact your business. again 43 | Budget takes India Inc closer to GST 46| Pluses in the negative list
. 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. and keep a close vigil on the likely structure to ensure a smooth shift to GST when it is implemented. implementation of GST regime is expected to throw economic and political challenges ahead of its implementation. Stakeholders understand the need to carefully implement changes in the current laws. with the introduction of the Negative list concept in the Service tax law from 1 July 2012 being a step in this direction.Feature articles
The indirect tax system in India is currently undergoing a significant transition from a multiple tax regime to a common GST.
and was limited to direct taxes only. It was only in 1999. that the concept of advance rulings was extended to Central Excise and Customs. has been widened with the years. Advance rulings lend transparency and predictability to the tax environment. A non-resident setting up a joint venture in India in collaboration with a non-resident or a resident
. to offer a forum to nonresidents for resolving questions pertaining to proposed transactions. A non-resident ii. is as follows. Residents notified by the Central Government iv. in a stable and predictable environment. the idea was first pioneered in India in 1993. and the categories of persons who can seek an advance ruling (as it stands today). as applicable to indirect taxes. Categories under direct tax regime: i. the concept of advance ruling has been introduced for existing tax payers. Public sector companies. 12 December 2011
he Central Government should reconsider aligning the provisions relating to advance ruling under indirect tax laws with the scheme prevailing under income tax.Indirect tax
Advance ruling under indirect tax
Hindu Business Line. While in many countries. and have thus emerged as a valuable tool for achieving certainty in tax positions.
Tax categories Since inception. in 2003. to Service Tax. Authoritative and binding advance rulings allow traders and investors to make business decisions regarding taxes and duties. A resident in relation to a transaction with a non-resident iii. the ambit of advance rulings. under both the direct and indirect tax regimes. and. where notified Categories under indirect tax regime: i. It is clear that a far more expansive category of persons is eligible to seek advance rulings under direct tax vis-àvis indirect tax.
applicability of notifications. the response of the trade and industry has been. A wholly-owned subsidiary Indian company. 2. Specific prohibitions in the case of questions already pending before other authorities Questions pertaining to indirect tax: 1. 3. Can be sought only for transactions proposed to be undertaken. 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. One of the biggest reasons for this disparity apart from the eligibility criteria is the difference of scope of Advance Rulings. Public sector companies. No other questions covered. Residents notified by the Central Government vi. since its inception till March this year. the Authority for Advance Ruling set up to look into direct tax matters has been much more successful. No specific provisions specifying the nature of questions that may be raised 2. Can be sought only on questions relating to classification.
“The Central Government should reconsider aligning the provisions relating to advance ruling under indirect tax laws with the scheme prevailing under income tax”
. and determination of liability to pay tax. of which the holding company is a foreign company iv. This is evident by the fact that the Authority for Advance Ruling set up for indirect tax matters has received only 146 applications. Direct and indirect tax It is interesting to note that in complete contrast to the above. admissibility of CenVAT credit.Feature articles
Advance ruling under indirect tax
ii. as available under direct tax vis-à-vis the indirect tax regime.
Questions pertaining to direct tax: 1. where notified However. despite the fact that the category of eligible applicants for advance rulings has been expanded from time to time. A resident setting up a joint venture in India in collaboration with a non-resident iii. A joint venture in India v. in terms of the number of applications received and the general perception in the trade and industry. to say the least. valuation. ‘lukewarm’.
Given the increased litigation in indirect taxes.Roy@in. the Central Government introduces amendments to the various indirect tax laws in the annual budget. the Central Government. Her areas of expertise are service tax... VAT and excise duty.com
. primarily due to the difference in interpretation by the tax payer and the revenue authorities.... customs and international trade. some of this litigation could have been limited.. applicability of notifications..ey..Indirect tax
Advance ruling under indirect tax
Every year. Indirect Tax Services Ernst & Young. You can write to Saloni at: Saloni.
Saloni has over 17 years of experience in indirect tax consultancy.
Reprinted with the permission of Hindu Business Line © 2012. She is based in our Gurgaon office... as well as Value Added Tax. This would go a long way in not only reviving the confidence of the taxpayers.. Some of these amendments have. in the recent past. should sincerely reconsider the recommendation of aligning the provisions relating to advance ruling under indirect tax laws. All rights reserved throughout the world... specifically in cases of classification of services. and issues pertaining to dual taxation under Service Tax. specifically under the service tax regulations.. but also in realising the full potential of the system. in the coming budget. If the scope of the advance ruling mechanism included within its ambit applications in relation to ongoing transactions. with the scheme prevailing under income tax. and have led to litigation at multiple levels.. . stirred huge debates.
but with a contentious rider -.is a precursor and an interim step towards implementing the goods and services tax (GST) in the near future. meals in air-conditioned restaurants and so on. 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. signalling its intent to widen the service tax base. States have endorsed the negative list. the negative list will only compound the issue of double taxation. resulting in litigation. This has led to plethora of litigation and uncertainty for the industry. raise
. So. Service tax law.services that would be exempt from tax . However. The introduction of a negative list should also desirably bring along with it equitable changes in many other areas of service tax law. since its evolution. 19 January 2012
he Empowered Committee of State Finance Ministers’ endorsement to the concept of a negative list for services.Feature articles
A better goods and services tax
Economic Times. The papers reckon that the concept of a negative list . construction and so on). its timing has led to apprehensions over double taxation. entertainment. harassment and uncertainty for the industry. 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. These include a clear definition of “service”. place of supply rules and credit rules. it underlines the serious issue of overlap of taxation powers between the Centre and states. the Centre has released two concept papers. It will be interesting to see the Centre’s reaction when the concept is finally unveiled. Going by the concept papers. partly on account of lack of clarity in law making and understanding the business of intangibles. albeit with some riders.the Centre should refrain from taxing areas that are within states domain such as construction. has been a victim of misinterpretation. However. This
has led to many areas of double taxation (telecom. One only hopes that the concept is introduced as an interim step to GST. an early implementation of GST seems to be the only solution. Although a negative list would enable a simplified GST design. With the widening fiscal deficit and the urgent need to generate revenues. paves the way for its possible introduction in the coming Budget.
. leading to double taxation and impacting the competitiveness of Indian industry in these uncertain times.
Reprinted with the permission of Economic Times © 2012. A negative list will increase the tax base. but several of them were highly debatable... increasing areas of cascading of taxes. VAT and excise duty. Over the last few years. and service tax.. All rights reserved throughout the world. He is based in our Gurgaon office... hurting cash flows of the industry.. Efforts should be to provide a fair credit chain in the system to avoid the cascading of taxes and increasing cost of business.. but what is debatable is the timing of its introduction. Indirect Tax Services Ernst & Young. Draft place of Provision of Services rules have been notified
Partner & National Leader. Place of supply rules is another key area of drafting. The issue generally is never about taxability.
1.. but it is equally important for policy makers to take a closer look at credit rules. His areas of expertise are customs and international trade.. . Some of it was welcome. Conceptually.. This will provide some degree of certainty about taxes.. far too much of tinkering has happened in this area.. It has led to unnecessary and prolonged litigation and also stalled service tax refunds.Subramaniam@in. but its certainty and an expeditious resolution of refunds. With the experience of over a decade.ey. Here again.com
. 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. The negative list offers a chance for policy makers to have a holistic relook and provide more equitable Cenvat credit in the chain. 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. You can write to Harishanker (Hari) at: Harishanker.Indirect tax
A better goods and services tax
compliance cost for the taxpayer and the cost of doing business. a negative list is welcome.. We still live in an indirect tax environment where the aggressive stance of Centre and State has created a serious issue of overlap. Negative list has been announced to be implemented by 1 July 2012 2... We all are
well aware of issues relating to export of service rules that the industry has faced in the recent past. India
Hari is a qualified licenced customs broker and has over 25 years of experience in industry and consulting. Some of the concerns of the empowered committee were addressed in the Negative list framework announced with Budget 2012 3. He is also currently involved in assisting companies for the impending introduction of Goods and Services Tax in India.
Fiscal consolidation was the most significant challenge that the FM faced in preparing this budget.
. The burden of fiscal consolidation in the budget has fallen entirely on the tax system and there again on indirect taxes.940 crore. resulting in a revenue loss of Rs 4.9% of GDP turned out to be higher than anticipated. In the absence of a tangible reduction in international oil prices. It is unlikely that the government will have the political strength to cut back on subsidies in the remaining two years of its mandate. His plan to reduce the fiscal deficit to 5. On the social and economic policy fronts. In these circumstances. which are being raised to provide an additional Rs 45. the direct tax proposals are modest and populist. again
Economic Times.1% next fiscal. Leaving aside the significant and dramatic changes in international taxation arena. he has resisted the temptation to announce populist measures and shied away from a concrete roadmap for fiscal consolidation. 19 March 2012
he finance minister went into the budget with his hands tied and came out with his hands tied. the fiscal woes will continue to compound in 2012-13.
No expenditure reductions were announced other than the policy objective of keeping subsidies within the cap of 2% of GDP. The fiscal deficit of 5. On the fiscal side he had little elbow room to announce new spending initiatives or tax cuts. given the emerging divisions within the UPA coalition. The achievement of these targets will thus depend entirely on market forces such as the prices of crude oil.500 crore. while reasonable. he had little hope of getting the support needed for any major reform. begs the question whether it is realistic.Feature articles
Burden of fiscal consolidation falls on tax system.
Having missed his targets before.
beyond. as far back as 1962-63. education. there is no tangible broadening of the tax base. notifications. are draconian and vindictive. 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. 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. It will provide services through a common technology-enabled portal for registration of dealers. With major consumer services such as healthcare. residential rentals and public transportation either in the negative or exempt list. whereby most countries in need of fiscal consolidation have resorted to indirect tax increases.Indirect tax
Burden of fiscal consolidation falls on tax system. Other tax changes are largely in the nature of housekeeping.
“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. while anticipated. The amendments proposed close all the legislative gaps identified by the Supreme Court in the taxation of indirect transfers of property and go
This is consistent with international trends. 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). payment of taxes and refunds. The only measure which could be viewed as a significant stepping stone to the GST is the Goods and Service Tax Network (GSTN). Governments are increasingly constrained in increasing direct tax rates for fear of adverse impact on investment and economic growth. they are retroactive. information and status tracking. filing and processing of tax returns. and taxpayer management including account management. 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.
VAT and international taxes... reduce leakages.com
. and the second generation reform of state sales taxes in 2005. Syria.
It will simplify tax processes.. facilitate voluntary compliance and can yield significant fiscal dividends to governments. India
Satya has over three decades of experience in advising clients on tax policies. .
Reprinted with the permission of Economic Times © 2012. Successful launch of the GSTN will constitute third generation of tax reforms. 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. All rights reserved throughout the world. He has also served as tax policy advisor to governments around the world.ey. New Zealand.... You can write to Satya at: Satya.. European Union.Poddar@in.. He is based in our Gurgaon office. Policy Advisory Group Ernst & Young. again
In spite of dissension about the GST.Feature articles
Burden of fiscal consolidation falls on tax system. after the first generation of reforms of the central direct and indirect taxes under the leadership of the then finance minister Manmohan Singh.. Korea..... 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. China... and Gulf Cooperation Council. including Russia. It’s a win-win for both taxpayers and governments..
• Renting of residential dwellings. religious persons. • Services relating to agriculture. primarily includes services such as (i) health care. entertainment and amusement services. social and economic upheaval the country has been through in the previous year. Any activity qualifying the characteristics of ‘service’ or the ‘ declared services’ would be taxable unless found in the negative list. The exemption list. subject to exceptions and conditions: • Services provided by the Government or local authorities. service portion in a works contract. 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 declared services contain renting of immovable property. 19 March 2012
he Budget was expected to be of a different kind compared to the previous Budgets due to the political. 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. • Manufacture. • Trading in goods. among others. Reserve Bank and foreign diplomatic missions. sportspersons
. The negative list comprises 17 services which broadly includes. (ii) services provided by charities. temporary transfer of intellectual property. information technology software services etc. • Specified public transportation. Exempted services The Budget has also proposed a list of exempted services in addition to the negative list of services.Indirect tax
Budget takes India Inc closer to GST
Hindu Business Line. subject to exceptions and conditions.
To mitigate the hardship. harmonisation of service tax and central excise by bringing about a common platform for registration and filing of returns.
“The additional list of exemption provides relief from service tax to services that are essentially intended towards the larger benefit of the society. 2012’ which would identify the taxing jurisdiction of a service and will replace the existing export and import of service rules. 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 replaced the existing refund provision with a much simplified provision that intends to allow the benefit of refund based on a simple formulary approach. for the time being. If implemented in its true spirit. canals. The draft rules have been released for comments and feedback. The additional list of exemption provides relief from service tax to services that are essentially intended towards the larger benefit of the society. 2012 to bring in greater clarity on the subject. (iv) construction services relating to specified infrastructure. (iii) specific services provided to Government or local authorities. Further. from the stakeholders. the Budget has proposed to introduce the ‘Place of Provision of Services Rules. 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. residential dwelling etc. Further.
Budget takes India Inc closer to GST
etc. (iv) individual advocates providing services to non-business entities. independent journalists. eligible CENVAT credit would simply be entitled for refund in the ratio of the export turnover to total turnover. and specific changes to rates of duties of customs and excise across different industry sectors. the Budget also contains amendment to the Point of Taxable Rules. “
increase in rate of service tax and excise duty from the existing 10 per cent to 12 per cent. irrigation works.
Pachisia@in.. business tax operations.Indirect tax
Budget takes India Inc closer to GST
However.. 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.
Vivek is leading the Indirect Tax practice in Bangalore. . the dream of achieving the GST regime could soon be a reality which would....
Reprinted with the permission of Hindu Business Line © 2012... You can write to Vivek at: Vivek.. simplifying tax refund procedures... mitigating tax cascading. mergers and acquisitions. no doubt. Indirect Tax Services Ernst & Young. He possesses over 13 years of experience in advising clients on Indirect tax matters in the areas of supply chain structuring. harmonisation of compliances. project and EPC contract structuring.. litigation and tax controversy management..ey. to rationalise the existing indirect tax statues and prepare the ground for introduction of GST in the longer-term..... be the biggest blockbuster reform in the history of indirect taxation. and so on.com
If the changes are effectively implemented and all irritants are removed. All rights reserved throughout the world.
The definition of service also includes certain declared services. customisation and upgradation of information technology software. attracting service tax. economic and political relevance remain outside the ambit of service tax. if you provide translation services for a consideration. service tax is levied only on a positive list of services. all services that were not taxable earlier have now been brought within the purview of service tax. if you are an actor. magician or a non-classical musician.Feature articles
Pluses in the negative list
Hindu Business Line. Services provided by the Government and RBI. which existed as a mere concept until sometime ago. and other essential services such as funeral. Accordingly. Although most of the declared services are taxable under the present positive-list regime. Similarly. The Finance Bill broadly defines service as any activity carried out by one person for another for consideration. Budget 2012 has proposed a paradigm shift in the way services are to be taxed in India. educational services. With all services. it would now attract service tax.
. which are specified in the service tax legislation. burial and crematorium services. However. transaction in money or actionable claim. Currently. except those in the negative list. and agreeing to refrain from an act or tolerating an act. except those in the negative list. Definition of ‘service’ But what exactly is ‘service’?. For example. your services would attract service tax. The negative list has been drafted after ensuring that certain services that assume social. is finally seeing the light of day. service provided by employee to employer in course of employment and fee taken by court or tribunal. Some important declared services include renting of immovable property. they have been so declared in order to remove ambiguity and ensure uniform application of law all over the country. agricultural services. 16 April 2012
egative list of services. but does not include sale of goods or immovable property. if the budget proposals are accepted then all kinds of activities. transportation of passengers in stage carriage and railways (other than first class or air-conditioned coach). have been included in the negative list. the list itself assumes great importance. would become taxable.
the bundle shall be treated as provision of a single service that results in highest liability of service tax. a long negative list and mega exemption list. he has been part of various committees in the Indian Government for drafting legislations on Indirect tax policy in India. the new regime still fails to address the issue of double taxation. 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.....
Reprinted with the permission of Hindu Business Line © 2012. . Therefore. He is based in our Gurgaon office. Similarly. communications and entertainment industry practice for the national capital region. 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. There is no doubt that taxation of services under the existing positivelist regime has made the law lengthy and litigious. where State taxes are also liable on some of the transactions. providing licence to use software may continue to suffer both service tax and VAT.com
... the shift to taxation of services based on negative list is certainly a positive development... as several VAT legislations treat the same as ‘goods’ subject to VAT. An ex.
However. Ministry of Finance in India. You can write to Bipin at: Bipin..... Further.ey.
Bipin anchors Indirect Tax for our technology. Additional Commissioner with the Department of Revenue..Indirect tax
Pluses in the negative list
Bundled services An interesting aspect of the negative list is the bundled services. All rights reserved throughout the world. The option of including additional items in the positive list makes the tax structure even more complex. Indirect Tax Services Ernst & Young. it must be ensured that the new tax regime does not result in another complex tax structure that is difficult to interpret and implement. In other cases.Sapra@in. with an involved definition of services including declared services.. the bundle shall be treated as provision of a single service that gives the bundle its essential character...
assumes a key challenge as the Indian tax authorities ramp up their enforcement efforts on the Transfer Pricing front. TP and intangibles and reducing cross border disputes.Feature articles
With economic growth and globalization. valuation of intangibles. This section on International Tax covers topics such as the importance of transfer pricing (TP) documentation. matters such as arriving at the correct arm’s length price on cross-border payments between associated enterprises. Insights on taxability of P-Notes and the continuity of the Mauritius structure are also discussed here. A welcome feature in the Budget has been the introduction of the advance pricing mechanism.
In this section
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 .gazing through a crystal ball
A cue can be taken from the recent case of Symantec Software Solutions Private Limited. transfer pricing indeed dominates tax agendas around the world. though only a decade old. has seen considerable controversy. which dealt with issues relating to use of single year versus multiple year data. It is estimated that approximately Rs. 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
. However. a common theme underlying the judicial precedence that is currently evolving in the country is the need for robust transfer pricing documentation. which is the ultimate fact finding authority in the Indian dispute resolution framework. Six rounds of transfer pricing audit examination by the Indian tax authorities have witnessed scrutiny of various inter-company transactions. the case has been supported with extensive documentary proof. The Income Tax Appellate Tribunal (ITAT).International tax
Importance of transfer pricing documentation
CFO Connect. Many issues of divergence between the tax authorities and the taxpayers are still
to be settled. There is a sustained increase in quantum of transfer pricing adjustments cutting across various industries. and adjustment for functional and risk differences. In allowing the tax authorities to use only data for the year under consideration. Dispute resolution has been a time consuming process. Wherever the ITAT has eventually ruled in favour of the taxpayer. Cases have travelled through the appellate chain and are pending adjudication at various levels. three quarters of the respondents considered transfer pricing documentation as being more important than it was two years ago. Commonly recognised as one of the most pressing issues. India is no exception insofar as the transfer pricing legislation.000 crores is locked up in transfer pricing disputes alone in India. 30. has repeatedly emphasized on the need for the taxpayer to possess documentation supporting the positions adopted in a transfer pricing analysis. 1 July 2011
n Ernst & Young’s Global Transfer Pricing Survey 2010. application of turnover filters.
aids in spotting trends which have a bearing on profitability. Last year. Documentation plays a very critical role in addressing these questions and enables the taxpayer to enter an audit situation from a position of strength.Feature articles
Importance of transfer pricing documentation
data influences the prices of the year under review to justify its usage. A proper description of the industry in which the taxpayer operates. Additionally. 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. giving a better insight into the business. helps identify the functional attributes of the parties to transactions and the risks allocation entailed in such arrangements thereby. It captures the terms and conditions of inter-company arrangements. reasons necessitating economic adjustments and a
quantification of such adjustments demonstrate the due diligence undertaken by the taxpayer. The advantages of preparing and maintaining prescribed documentation are manifold. Even in case of economic adjustments. This ruling therefore underscores the importance which the ITAT attaches to documentation of facts and rationale. We observe a trend towards the tax authorities requesting for a greater level of detail around related party transactions specifically intragroup services. On the turnover filter.
. the computation of financial ratios of comparable companies. in many instances. A correlation of these trends to actual financial performance can often help in substantiating specific business strategies or defending against losses. 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. 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. 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. 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. These aspects then feed into the comparability analysis where description of the search methodology. it was mentioned that the taxpayer did not demonstrate how turnover impacts the profitability thereby. the basis of arriving at the service charge encompassing the cost elements of the service charge and the allocation keys was scrutinized. the screens applied to filter companies. negating its application.
Heightened scrutiny by the tax department and the augmented levels of disclosure expected from taxpayers significantly inflates the transfer pricing risks confronting companies. Contemporaneous documentation endows companies the benefit of taking into account these changes..
The seventh round of TP audits got concluded in October 2011 and has resulted in proposed TP adjustments of approx Rs. including outbound investment from India to overseas.. anticipating potential implications thereof and tackling them appropriately to stay ahead of the curve.. 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. streamlining global policies and reconfiguring functions and risks to derive maximum benefit.ey. 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.. synergy....000 crores. The global economic crisis has triggered off a need to relook business operations to achieve efficiency.
Reprinted with the permission of CFO Connect © 2012. .com
Importance of transfer pricing documentation
With the sustained pressure on raising revenues. Transfer Pricing Practice Ernst & Young... Suitable documentation facilitates penalty protection in case of a dispute and reduces the risk of additional financial costs to the company.
Partner and National Leader..Iyer@in. He is based in our Delhi office. and competitiveness... 45. the tax department is seeking to levy penalties in almost all cases. Transfer pricing documentation globally is motivated by risk mitigation and audit defense factors. 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.. In the Indian context. India
Vijay possesses over 15 years of experience in advising clients on transfer pricing and international tax. You can write to Vijay at: Vijay.. The legislative and regulatory landscape is rapidly altering. All rights reserved throughout the world.
. quantification of the benefits and the comparison of profits before and after the use of the intangible. product. useful life of the intangible.
Focus of audits Recent audits have seen increased focus on transactions pertaining to use or transfer of intangible property. In this regard. The Director General of Income Tax (DGIT) communicated at a public conference. improved vigilance. Indian tax authorities. Taxpayers may therefore brace themselves for greater audit activity in the coming days. 19 September 2011
ransfer Pricing. intangibles are subtle.Feature articles
Transfer pricing and intangibles
Hindu Business Line. The increasing complexity in this area can be gauged from the 2010 Global Transfer Pricing Survey. thereby complicating questions of pricing and ownership. Further. since they have revenue implications for the exchequer. where more than 74 per cent of the multi-national enterprises (MNEs). details of the process. identification. elusive. information on the availability of such intangibles in the open market and prices and the cost of development of the intangibles. conducted by Ernst & Young. They have also been challenging taxpayers on the cost-benefit analysis of the receipt / use of intangibles. like several others. covered by the intangible property. simply put. issues pertaining to intangibles have been a significant bone of contention between taxpayers and tax administrations. its uniqueness. 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. agreement rights to receive upgrades / modifications. that transfer pricing cases will be scrutinised by the Comptroller and Auditor General of India (CAG). and valuation of intangibles for transfer pricing purpose. refers to pricing of transactions between group companies in different countries. have tightened transfer pricing laws. enhanced enforcement and armed its tax officials with greater powers of investigation. and mobile. one third of the MNEs surveyed identified transfer pricing as one of the most important tax challenges facing their group. In the absence of specific guidance on definition. As the name suggests.
. in the absence of any guidelines in the Indian regulations. ....
Reprinted with the permission of Hindu Business Line © 2012. All rights reserved throughout the world. 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
Partner and National Leader. including outbound investment from India to overseas.. The notion of economic ownership. and legal standards. Transfer Pricing Practice Ernst & Young.com
. would serve as a useful paradigm while analysing various aspects of transfer pricing.. The scope of the above project will include work on a framework for analysis of intangible-related transfer pricing issues. in recent transfer pricing audit proceedings. have raised the issue of ‘arm’s length return’ to entities that aren’t legal
owners of intellectual property. as opposed to legal ownership.
On 6 June 2012.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.. along with the valuation of the intangibles..Iyer@in. valuation. will also be examined in the OECD Project. The Working Party for the project intends to review specific categories of intangibles. at least for the taxpayers.. Indian tax authorities. the results of this project. He is based in our Delhi office. the primary responsibility for ensuring appropriate transfer pricing analysis and documentation lies with the taxpayer only...ey.. India
Vijay possesses over 15 years of experience in advising clients on transfer pricing and international tax.. including the relevance of definitions of intangibles used in accounting. The project intends to address issues pertaining to definition of intangibles. such as the pricing of R&D services.. and when a cost-plus method or a method other than costplus may be acceptable for pricing of R&D services. The OECD guidelines currently do not contain any universal definition of intangibles. You can write to Vijay at: Vijay. 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. Useful paradigm Though the OECD Guidelines are not binding on the Indian tax administration (since India isn’t a part of the OECD)... However. but are seen to have economic ownership.
The Given the above.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
ustice delayed is justice denied. 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. 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. The DRP’s directive is binding on the tax department.
. and thereafter.
Under the traditional mechanism. international tax adjustments. High Court and Supreme Court . manifold appellate layers. the with fundamentals of international taxation being tested on regular basis. however the taxpayer may appeal before the Tribunal. effectiveness of administrative processes.Feature articles
Reducing cross-border tax disputes
Hindu Business Line. Tribunal. an assessing officer’s order can Multinationals operating in India be appealed before Commissioner have to deal with complex issues (Appeals).
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. 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.
Accordingly. circumstances in which the income-tax authorities shall accept transfer price declared by the taxpayer. 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. 63 per cent were rejected and only partial relief was provided in 21 per cent cases. The Union Budget 2005 proposed to replace the appeal to High Court by the NTT with the objective of speedy adjudication of disputes. the experience has not been cheering.”
Work allocation: The panel members having an additional charge as DRP members have perceptibly divided attention. Safe harbour In addition to the introduction of the DRP. DRP panel is 2 years old and while the intent for speedy disposal is creditable. 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. The NTT needs to become operational at the earliest. it is vital to address the challenges being faced by the forum. A joint EY–CII report ‘India. the CBDT must exercise its discretion to establish additional benches. However. The implementation of NTT would avoid conflicting decisions on the same issue thereby significantly reducing litigation.International tax
Reducing crossborder tax disputes
The highlight of the mechanism is the automatic stay of demand till the final decision by DRP. Finance Act 2009 empowered the CBDT to formulate safe harbour rules i. to ensure effective functioning of the forum to its intent it is crucial to constitute an independent body to function as DRP. Given the above.e. disposal of cases on fast-track i. 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. with fundamentals of international taxation being tested on a regular basis.
“MNCs in India have to deal with complex issues. 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. 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.e.
Though the CBDT established a Committee to finalise the details of the provision...
Reprinted with the permission of Hindu Business Line © 2012. India
A corporate tax specialist. You can write to Prashant at: Prashant...com
. Conceptually... Tax & Regulatory Services Ernst & Young. All rights reserved throughout the world... the rules are yet to see the light of the day.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.. 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... Prashant has extensive experience in tax planning and structuring.. These rules should be issued at the earliest..”
“APAs have been introduced in the Income tax law in the recent budget. 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. ... Introduction of APAs is a welcome measure and should provide a fair degree of certainty to the business transactions. He is based in our Noida office. He also actively contributes to thought leadership in the areas of direct taxation. The Direct Tax Code had proposed the introduction of APAs which shall be valid up to 5 financial years.
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. the tremors of the crisis continue to pose new and serious challenges. The definition of the terms ‘international transaction’ and ‘intangible property’ have been amended for providing certainty in law. 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. which have provided some certainty. 19 March 2012
cross the globe. Governments are increasing the focus on consolidating their public finances and designing tax structures that are growth-oriented. was clearly meant to be more of a statement of intent than a headliner. across various appellate levels.International tax
Going back in time is no good
Hindu Business Line. seeking to negate judicial precedents. “I need to be cruel at present to be kind in the future”. It has also been
. One would ask — was the insignificant relief granted by the Finance Minister in personal taxation (pale in the backdrop of crippling inflation). which are proposed to be retrospective. 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. The opening statement of the Finance Minister. transponder lease revenue streams of non-residents into the net of the tax authorities.
Again here. respectively). 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. Penalties are now leviable for failure to (a) maintain prescribed documents or information. 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.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. 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. 80IA. He may now wait to be visited with penal provisions? There are some provisions laid out to widen the tax base. 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. a taxpayer. Transfer pricing remains the most litigated subject today and it is hoped that the APA mechanism would foster some certainty. that is. or (b)
report any international transaction which was required to be reported. such retrospective amendments throwing business strategies and plans into disarray are hardly welcome. 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). At a time when business houses and tax practitioners crave for certain and stable tax legislation. 80A. as mentioned earlier. Therefore. definition of ‘international transaction’ has been significantly expanded for clarification retrospectively. 10AA.
. TP regulations (procedure and penalty) extended to domestic related party transactions under Section 40A. Other transfer pricing related amendments. as also tax collection at source on cash sale of bullion and jewellery in excess of Rs 2 lakh. Applicable effective AY 2013-14 for transactions aggregating to Rs 5 crore. Transfer pricing In contrast. or (c) maintain or furnish correct information or documents. provided the same was not reported in the Transfer Pricing Report (TPR). credit where it’s due. APA is very welcome in providing certainty and unanimity of approach.
He is based in our Hyderabad Office.. enacted on 28 May 2012 2. their impact has been deferred by a year.e.
Law is truly blind. India
Jayesh has over 19 years of experience in the field of corporate taxation. regulatory matters. 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. the FM has proposed to introduce GAAR in its most virulent “avatar”. Planning appropriate holding and financing structures for companies in case of reorganizations. transaction structuring..f. the provisions are to be inserted w. In the end. transfer pricing . It is only hoped that the GAAR will be invoked sparingly and to address issues of clear tax evasion.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)... advising global companies on smooth and tax efficient exit and repatriation strategies from the Indian tax perspective..
Reprinted with the permission of Hindu Business Line © 2012. You can write to Jayesh at: Jayesh.com
. if legislated. 5 lacs 3. i.e. due diligence related tax and advisory support for a number of multinational and domestic clients across various industries..
1. mergers and acquisitions... Omitted in the Finance Act 2012. 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. All rights reserved throughout the world.. challenged in the courts. Certainty may be some distance away as some of the retrospective amendments will very likely be resisted in post-Budget parleys and. 1 April 2014
Partner...... it is the honest tax payer who is most scared in this country. .. at the prospect of being handed out a bigger tax bill. Unfortunately.ey. Tax & Regulatory Services Ernst & Young. only after due consideration of some very valid recommendations.Sanghvi@in.. While the GAAR provisions have been enacted vide the Finance Act 2012.
They are meant for investors looking for exposure to the Indian capital market. by the FII from hedging . 16 April 2012
he post-budget uncertainty over taxation of participatory notes (P-Notes) remains unresolved. now an uncertainty has arisen due to the proposed amendments to the Incometax Act. the FII issuing it is not obliged to hold the security. Typically. However. First. These inter alia include amendment of section 9 of the Act. Further. it is on its own account and in accordance with its risk-taking ability. However. 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. deeming any asset or capital asset that forms a share or interest in a company or entity incorporated outside India. the implications of the budget proposals are far-reaching and greater clarity is required. certain amendments have been proposed to significantly widen the ‘source’ rule.Feature articles
Pause before P-Notes
Hindu Business Line. Though the performance of the P-Note is linked to the
performance of the specified security. The FII is contractually obliged to provide a return that is linked to the performance of the specified security. 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. in an attempt to amend the Act retrospectively to tax Vodafone-like transactions. if any. the gains on transfer of P-Notes are not liable to be taxed in India. which are assets located in India and taxable here. 1961 (Act) on two counts. This raises worry as the return on P-Notes is linked to the performance of specified Indian securities. Taxing assets in India The understanding all along has been that as a foreign asset. as Indian if the share or interest derives its value substantially from the assets located in India.
. it gives them access to such superior returns that these Indian securities may generate. in some cases the return to the P-Note holder is net of taxes incurred. Where the FII holds the security. the P-Note holder has no ownership rights in the specified security. 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 proposed provisions are widely worded and onerous. Further... including banks. the burden of proof to show that an arrangement is not an impermissible avoidance arrangement is no longer that of the tax payer. brokerage houses.
The proposed introduction of GAAR has been deferred by one year and will now be effective for income earned after April 1. The P-Note holder may be affected.Wadhwani@in.ey. 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. Further.. He has worked with variety of international financial institutions.. regulatory and inbound structuring projects spans over 20 years.. Also. for instance.. Financial Services Ernst & Young. 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. . All rights reserved throughout the world. pursuant to significant concerns raised by various stakeholders.. the Qualified Foreign Institutional Investor (QFII) regime in China. He is based in our Mumbai office. asset management companies and PE funds. You can write to Hiresh at: Hiresh. which could adversely impact foreign capital inflow to the Indian capital market. the onus is on the taxpayer to prove that the provisions do not apply.. which typically creates a time lag... This leaves the application of GAAR to the judgment of the tax officers.
Reprinted with the permission of Hindu Business Line © 2012.International tax
Pause before P-Notes
‘Impermissible avoidance’ The second area of worry is the introduction of the General AntiAvoidance Rule (GAAR). India
Hiresh’s experience in tax.
Tax Partner & National Director.. GAAR proposes to override the tax treaties India has entered into with other sovereign nations. the Foreign Institutional Investor (FINI) regime in Taiwan. Even as emerging market economies are vying for a share of the same pie. 2013.... This results in uncertainty over the tax position for these instruments. Wary foreign funds Such uncertainties in tax positions could deter FIIs from issuing P-Notes
and even lead to the unwinding of existing issuances. 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. 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.. and the Investor Identification regime in Korea. investment banks..com
. the applicability would be determined only at the assessment stage.
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. Media reports on the possible renegotiation of the
. The treaty. as the buy-back by the Indian company was in lieu of distribution of dividends. has been under constant scrutiny by Indian tax authorities as a result of alleged abuse by investors. both under Indian tax law as well as the tax treaty. 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. had provided a reasonable level of certainty to taxpayers. which had underpinned the emergence of Mauritius as the dominant channel for foreign direct investment into India. The authority’s approach has been to make a detailed inquiry into the facts. With a series of highprofile court rulings. the Authority for Advance Rulings held that the buy-back of shares held by a Mauritius company was a tax avoidance device. recent developments indicate a renewed attempt by the tax authority to challenge the use of Mauritius structures. Further. The buyback was disregarded and treated as distribution of dividend chargeable to dividend distribution tax (DDT) in India. including one from the Authority for Advance Rulings (in the case of E*Trade Mauritius Ltd 324 ITR 1.Feature articles
Mauritius structures — gazing through a crystal ball
Hindu Business Line. However. 14 May 2012
auritius has been a popular location for intermediary holding companies for multinationals and others investing in India. Relief in reverse? In the past. This popularity is due to several factors including the capital gains tax exemption available under the India-Mauritius Tax Treaty. 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. where it
was observed that the legal structure of the Mauritius company cannot be disregarded and legitimate tax planning was permissible). and thereafter determine the availability of the benefits under the tax treaty.
Partner. 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... 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. foreign investment consulting. the Government has sought to review the tax treaty... drawing from media reports.Nagarajan@in. divestments.. Over the past 15 years.. according to media reports. All rights reserved throughout the world...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...
The India-Singapore tax treaty had additional clauses to check treaty abuse. international and corporate tax.
Reprinted with the permission of Hindu Business Line © 2012.. Interestingly... While one can only guess what lies ahead in the use of the IndiaMauritius tax treaty. she has advised clients in the areas of corporate restructuring.ey. These have collectively caused a lot of uncertainty. She is based in our Chennai office. India
Vidhya is a part of our Business Tax Services practice. The road ahead Over the last few years... You can write to Vidya at: Vidya. and is available only so long as the India-Mauritius tax treaty provides that exemption. and they look forward to greater clarity and certainty on the issue. it would appear that the treaty could be brought on par with the tax treaty with Singapore. 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. .. Tax & Regulatory Services Ernst & Young. joint ventures. Tax authorities are hoping that Mauritius would stiffen the requirement for tax exemption under the treaty.com
situated in notified jurisdictions.
In this section
65 | New ring to tax tale 69 | Options that change investment status 71 | The new M&A horizon
.the acquirer. the new SEBI Takeover Code reflects a fine balance of SEBI’s preference to take care of considerations of all the stakeholders . The Government has proposed to introduce the new Companies Bill 2011 which permits cross-border mergers and amalgamations between Indian and foreign companies. the target company and the minority shareholders.Feature articles
This new phase of economic and corporate revival has arrived with a lot of changes in the regulations governing Mergers & Acquisitions. All this and more is discussed in the section on Transaction tax. Further.
having farreaching implications on international transactions.Transaction tax
New ring to tax tale
Financial Express. in turn. This. structures put in place to channel legitimate investments across borders are perfectly acceptable. These structures should not be subjected to the lifting of the corporate veil merely
because it results in tax savings. However. Taxing similar transactions now would result in an unfair advantage to those past transactions. which appears to steer against the accepted jurisprudence and seeks to lift the corporate veil. In the era of evolving financial markets. India itself. It was generally understood that such transactions should not be taxed in India. this would create a fair chance of affecting outbound structures of Indian corporates and hinder their global expansion plans. They provide exit flexibility to investors. including multi-tier structures put in place for commercial reasons. taking a cue from the arguments of Indian tax authorities. similar transactions have been left untouched. therefore. such as leveraged buyouts. If other countries also start adopting the same approach. The ‘preferred investment destination’ image of India may take a beating in the case of such an approach being adopted by the tax authorities. it could also have an adverse impact on investor sentiments and hamper future FDI flows into India. since the situs of the shares sold are outside India and in the absence of any specific ‘look-through’ provisions. Though such an approach might result in a temporary spurt in revenue for the Government. recently. would hinder the overall growth of Indian corporates and.
. 23 September 2011
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. Indian tax authorities have attempted to challenge this interpretation. In the past. Taxing such transactions on the basis of non-existing provisions would result in uncertainties amongst the existing investors.
if the foreign company whose shares are being sold also holds shares of companies other than Indian companies? Also. in order to provide prospective investors a better chance to plan their structures. in the case of a listed foreign entity having an Indian subsidiary. therefore. the case revolves around a complex catena of facts. which seems to be an absurd position. Also. How would they withhold taxes and deposit in India? For instance. If at all such transactions are to be taxed. through Hutchison Telecommunication International Ltd (HTIL) of Cayman Islands. The Hutchison Group of Hong Kong was controlling certain companies in India in joint ventures with others. Since there are various instances of pending litigations in Indian courts (including the apex court). The parties involved would be foreign entities unaware of Indian tax laws. the transaction documentation. warranties and indemnification clauses. a prospective amendment in the existing tax laws with a specific provision to tax such transactions
would be a reasonable path forward. Hutchison Essar Limited (HEL). It held a majority stake in an Indian company. there could be numerous transactions where withholding tax implications may arise to public shareholders. The right of a State to tax a nonresident arises from the existence of a nexus between him and that State. especially the representations. Actually. argued that Revenue is stretching the concept of nexus by bringing in the issue of the foreign company’s underlying Indian assets. Interestingly. How would the cost of the acquisition of such shares be computed and capital gains apportioned. 2012— specifically spells out conditions under which such indirect transfer will be subject to tax in India. Resolution of the issues may result in a delay in the closure of deals. as the transaction was entered between two foreign companies—outside India. 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. It is. a better picture and a clear view forward would be available only after such litigations are settled. 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. International law recognises a State’s right to tax income having its source in its jurisdiction. the Direct Taxes Code—which is likely to come into effect on April 1. if a similar transaction results in a capital loss. are likely to get a lot more complex and elaborate. HEL had
New ring to tax tale
Such a position would raise some practical issues as well. briefly stated here. and for shares of another foreign company. This lack of clarity would result in enhancing litigation and consequential uncertainties. 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.
The price of $11 billion factored in a panoply of rights and entitlements including control premium. 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. 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. right to the Hutch brand in India. Vodafone took approval of FIPB. in effect.”
paid the balance consideration and the share certificate of CGP was delivered to it in Cayman Islands. the value of non-voting preference shares and entitlement to acquire further 15% interest in HEL. 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. which was controlling the Indian interests of the Hutch group.
. It argued that the transaction gave rise to capital gains taxable in India. The transaction was accompanied with several other enabling agreements.
The Revenue contended that this was. resulting in Vodafone stepping into the shoes of HTIL. 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. a composite transaction for the transfer of all rights in HEL by HTIL. the controlling interest in the Indian assets of HEL got transferred. Thereafter. a non-compete agreement. In February 2007.Transaction tax
New ring to tax tale
interests in several telecom circles in India through a web of subsidiaries. in reality. this could effect outbound structures of Indian corporates and really hinder their global expansion plans. 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. Pursuant to this. as. 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. Vodafone
“If other countries take their cue from the arguments of Indian tax authorities. and Vodafone ought to have deducted tax.
. actually engage in a different transaction which serve no business purpose except avoidance of tax.ey. Amrish has over two decades of experience in the areas of mergers and acquisitions. He is based in our Mumbai office.. 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..Feature articles
New ring to tax tale
Relying on the doctrine of substance versus form. India
An all-India rank holder in Chartered Accountancy. can be disregarded. Revenue will be ill-advised in invoking it in genuine business cases... the Direct Taxes Code codifies the anti-avoidance Rules under which a transaction can be declared as lacking commercial substance.. the Court held that the label which parties ascribe to a transaction cannot be conclusive in determining its character. All rights reserved throughout the world.. corporate restructuring... and establishment of joint ventures. introduced retrospective provisions . This has to be ascertained from the covenants and surrounding circumstances... 1962.Shah@in. taxability can arise.effective from 1st April.”
Partner & National Leader — Transaction Tax Services Ernst & Young.com
. foreign investment consulting... their substantial value from assets located in India.
Reprinted with the permission of Financial Express © 2012. divestments..
“The Finance Act... while seeking to clothe the transaction with a legal form. 2012. Therefore. to tax indirect transfers of shares in situations where the shares derive. You can write to Amrish at: Amrish. directly or indirectly.. A colourable device in which parties.
The ruling has been given on the basis of facts indicating that the transaction was a colourable tax avoidance device.
obviously did not go down well with the industry. 2011 had inserted a specific provision. which stated that any equity instrument when issued or transferred to a non-resident. compliances.Transaction tax
Options that change investment status
Economic Times. In doing so. more particularly from private
equity investors. The hue and cry and the various representations made to the government authorities have borne fruit. will be deemed as ‘debt’ if it includes in-built options or is supported by third party options of any type. This inclusion saw vehement opposition from the industry. Such instruments would need to comply with extant External Commercial Borrowings (ECB) guidelines in respect of various caps. 2011. which was most affected by this directive. 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. the subsequent revision has come as a welcome shot in the arm. the DIPP has displayed a flexible approach and an ability to ensure that India’s attractiveness as an FDI destination remains intact. painting all FDI investors with the same brush and limiting their structuring options would have had a significant effect on FDI into India. The cardinal principle of any PE investment is to simultaneously think about the exit at the time of entry itself. 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. 4 November 2011
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. especially their exit options.
. restrictions and limitations. Limiting their options to structure their investment. For the private equity industry. But other regulatory bodies will need to follow suit if the current buoyancy in PE inflow into India is to continue. The Department of Industrial Policy and Promotion (DIPP) in its mid-year review of Foreign Direct Investment (FDI) policy on October 1.
All rights reserved throughout the world.. corporate restructuring. 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. mergers.. international/corporate tax and business reorganization.
Reprinted with the permission of Economic Times © 2012.Feature articles
Options that change investment status
While DIPP has taken the necessary amending steps... He is based in our Mumbai office. in certain cases. 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. re-organizations.. however. 1956. one can only hope that a similar approach would be adopted by the other Regulators as well. a blanket attack on all option structures even in case of genuine equity investments is something which is extremely undesirable. Over the past 18 years he has advised clients in the areas of acquisitions. which would curb debt masquerading as equity and other such abusive practices.. 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. or whether it was exercisable to the shareholder pursuant to a breach of a condition or upon failure to provide exit to the investor. even prior to introduction of the said provision by DIPP.. demergers.. India
Amrish Shah is a partner at Ernst & Young India and leads our Transaction Tax practice*.Shah@in. RBI has been questioning investment agreements which involved options and classifying them as an ECB. You can write to Amrish at: Amrish...
Partner & National Leader — Transaction Tax Services Ernst & Young.ey. foreign investment consulting. irrespective of whether such an option was exercisable by the Company or by its shareholders.. Considering that DIPP has given a green signal to use of Options. For example... divestments..com
. since they are exclusively entered between two parties independent of the stock exchange. and establishment of joint ventures. The industry is open to apt regulations. only spot delivery contracts or derivative contracts entered into through a stock exchange are legally enforceable.. .. it needs to be seen whether other regulators follow suit.
The inherent paperwork and lengthy timelines surrounding regulatory approval could prove practically onerous for Indian corporates. While the provisions do allow inbound and outbound cross-border mergers. greater discloser and greater accountability are also obvious keystones desired to be addressed by the legislature. this appears a bold and progressive move with the legislation finally opening up India’s borders to previously outlawed outbound mergers.Transaction tax
The new M&A horizon
Hindu Business Line. this qualification could actually result in a metaphorical step back as under the existing laws. 26 December 2011
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’). 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. the rights of the minority shareholder. such cross-border mergers
will only be allowed with companies situated in jurisdictions notified by the Central Government. Aiming to consolidate over 50 years of practical and legislative history is no easy task. and while it is evident that the new Bill has attempted to balance out the needs of the Indian corporate sector on one hand. should such a process be required for each and every cross-border transaction. 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. However. inbound mergers are not only permissible. At first. a closer inspection reveals a far fuzzier picture. but are permissible with foreign companies from any jurisdiction. Prior approval Another potentially unwishedfor-change is the requirement of seeking prior RBI approval for any and all cross-border M&A activity. 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.
holding treasury stock i.” In line with this spirit. significantly reduce the potential Treasury stock has historically been benefits for India Inc. Government. in or mandatory prior RBI approval might out of a trust structure. authorities’ The loss of such determination an option could to question “Under the new require many corporate bill. the new Bill provides that going forward. 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. advantage of loopholes in the notified by the Central existing laws. qualifications such as in the name of the issuing company Government notification and itself. However. 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. 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. 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. 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. In recent times.Feature articles
The new M&A horizon
However. 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.
. Under the provisions of the new Bill. is no longer permissible. pure investment holding companies may only make investments through a maximum of two layers.e. 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.
mergers involving such companies have been given the option of a simpler process involving only the relevant Registrar and the Official Liquidator.
Reprinted with the permission of Hindu Business Line © 2012. India
A partner with our Transaction Tax practice.ey...... funding and corporate tax optimization.. You can write to Narendra at: Narendra.Rohira@in.. He is based in our Mumbai office.. .Transaction tax
The new M&A horizon
Instead of the entire regulatory process involving the courts... Transaction Tax Services Ernst & Young. Narendra focusses on conceptualizing.com
. 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.
Amidst the heated debate on FDI limits and the glamorous morality of the Lokpal Bill. For mergers between wholly-owned subsidiaries and their parent companies.... only time will tell. 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.. the logic of a simpler process was upheld by the courts in cases such as Mahaamba Investments Ltd vs.. All rights reserved throughout the world. structuring and implementation of M&As.
Partner.. How well it manages its responsibilities. on whose shoulders has fallen the task of bringing Indian’s corporate laws into the 21st century.
Measures such as streamlining the FDI policy and reducing red-tape are expected to result in boosting investor confidence. 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. The Government needs to take measures to boost the business environment and keep the confidence of domestic and foreign investors intact. 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 articles in this section bring to the fore the significant dimensions of the regulatory policy environment in India.
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
In this section
. it appears that the Government dished out a safe budget that merely pledges reforms. Though inflation has momentarily stabilized. From a tax and regulatory policy perspective. While the Government appears cautious about permitting FDI in Retail and sensitive sectors like Defense & Civil aviation. it is still hovering above the tolerance level. black money play an important role in shaping the investment environment in India. Issues such as the sliding rupee.
to tackle tax evasion in general and offshore tax evasion in particular. 11 August 2011
he issue of tax evasion. and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting become effective. According to a 2006 report of the Swiss Banking Association. for taxpayers with undisclosed offshore accounts and assets to bring them into compliance with US tax laws. This information is available under tax treaties through submissions by whistle-blowers. and the risk of criminal prosecution. Voluntary disclosure also provides the opportunity to calculate. the total cost of resolving all offshore tax issues.Tax and regulatory policy
Is grip tightening on black money?
.456 billion in Swiss bank deposits.000. continues to occupy centre stage in the country. 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. HMRC is empowered to publish details of persons caught deliberately evading over ?25. interest and a penalty up to 100% of the tax lost. From April 2010. accurate and complete voluntary disclosures into account to decide whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. The US: The US Internal Revenue Service (IRS) has introduced the Offshore Voluntary Disclosure Initiative. including fraud penalty and foreign information return penalties. with a reasonable degree of certainty. Indian nationals hold $1. This article discusses recent steps taken by various countries.
The taxpayers are encouraged to make voluntary disclosures and become compliant to avoid substantial penalties. in addition to recovering due tax. The IRS ferrets out the identities of those with undisclosed foreign accounts. A Global Financial Integrity study estimates the flight of gross illicit assets from India during 1948-2008 at a staggering $462 billion. including India. 2011. Voluntary disclosure is a practice of the IRS criminal investigation whereby it takes timely. or black money.
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. 2011 .
. The legislation provides for enhanced penalties where the non-compliance arises in a jurisdiction that does not automatically share tax information with the UK. The Finance Act. Isle of Man. In April 2010. Guernsey. For example.were notified with the intent to enter into a TIEA. to tackle offshore non-compliance. 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. 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. British Virgin Islands (BVI). All parties to such international transaction would be deemed to be associated enterprises. 2010. Any sum received by a person located in an NJA on which tax is deductible would invite tax at ahigher punitive value.Feature articles
Is grip tightening on black money?
Besides this. etc. Isle of Man and Cayman Islands. 2011. 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. BVI. Till date. No deduction will be allowed for any expenditure or allowance (including depreciation) unless taxpayer maintains proper documentation and furnishes prescribed information. for territories in categories 2 (exchange of information on request) and 3 (no/insufficient information sharing).to curb round-tripping. effective from June 1.
Along the lines of OECD Model Article on ‘Exchange of Information’.section 94A. The government shall notify a country or territory with lack of effective exchange by it with India as a Notified Jurisdictional Area (NJA). India has signed TIEAs with Bahamas. the Finance Act. nine jurisdictions Bermuda. Jersey. Cayman Islands. the penalties will be up to 150% and 200% of tax respectively. Gibraltar. Hong Kong has been also notified as a specified territory for entering into a tax treaty by the government. Netherlands Antilles and Macau . introduced an anti-avoidance measure .
released a ‘White Paper on Black Money’... India
Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies.. 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. 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.Kapadia@in. As in everything else. . a high-level committee on black money has been constituted under the CBDT chairman. has introduced various measures to improve better disclosures and tackle the issue of black money.
National Tax Leader Ernst & Young... You can write to Sudhir at: Sudhir. these include: Land and Real Estate Transactions. All rights reserved throughout the world. 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. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation. the government has commissioned a study for estimating unaccounted income and wealth within and outside India and instituted the directorate of income tax.Tax and regulatory policy
Is grip tightening on black money?
Besides these.. 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. similar to steps undertaken by the US and UK. (iii) Introducing provisions of tax collection at source (TCS)..
Reprinted with the permission of Economic Times © 2012.. 295 crore in 2010..2 mn the seller needs to collect tax from the buyer at the rate of 1 per cent. the key will be effective implementation and relentless pursuit of tax offenders in specific cases. Further. (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. In instances of cash sale of jewellery or bullion in excess of INR 0. (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.
• The Ministry of Finance has in May 2012. 373 crore in 2006 to INR 9. immovable properties or other assets held outside India.ey.. He is based in our Mumbai office..5 mn and 0. Bullion and Jewellery Transactions and Financial Market Transactions. criminal investigations.. financial interests. which identifies different kinds of manipulations of financial statements resulting in tax evasion and the generation of black money.com
... • The Finance Act.. 2012. These include: (i) Production of a Tax Residency Certificate for availing the beneficial provisions of a tax treaty. the White Paper states that this figure has decline by 60% from INR 23..
. 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. 1996 or SEBI (Collective Investment Schemes) Regulations. 1999. 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.Feature articles
New regulatory framework for private investment vehicles
CFO Connect. 2000. 1996. 100 million. 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. the intent is to regulate the domestic funds. 2011 (‘AIF Regulations’) and containing draft AIF Regulations. While the language used in the concept paper is very wide to cover even offshore funds investing in India. 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 SEBI (Foreign Venture Capital Investor) Regulations. 1 September 2011
he Securities and Exchange Board of India (SEBI) has recently released a concept paper proposing introduction of SEBI (Alternative Investment Funds) Regulations. 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 proposed structure is. 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. 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. inter alia. The same is open for public comments up to 30 August 2011. the SEBI (Venture Capital Fund) Regulations. All AIFs would be required to obtain a certificate of registration under the proposed AFI Regulations. private equity funds etc. social venture funds.
Private Equity fund – for making investments primarily in unlisted equity or unlisted debt securities of companies 4. The registration would be valid for the lower of three years or the tenure of fund. 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.
. size of the fund. Private Investment in Public Enterprises (PIPE fund) – for investments into small size listed companies 3. Real estate fund – for investing in real estate projects or in special purpose vehicles investing in real estate projects 7. 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. trust or body corporate including Limited Liability Partnerships (LLPs). SEBI should be considering the same under the current VCF regulations. All funds already registered as VCF under SEBI (VCF) Regulations.Tax and regulatory policy
New regulatory framework for private investment vehicles
The Funds could be formed as companies. the SEBI will take into account all matters relating to investment objective of the fund. professional qualification of the managers. Unlike the current VCF Regulations where the trust secures a VCF registration and can then launch several schemes.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. 1996 shall continue to be regulated by the said regulations till the existing fund or scheme managed by the fund is wound up. The application will be in one of the following categories: 1. necessary infrastrustructure. Debt fund – for making investments primarily in debt instruments of unlisted companies 5. This requirement could significantly increase the time and costs as for each scheme a separate registration would have to be sought. Social venture fund – for investors willing to accept muted returns (10% . Infrastructure fund – for investments in infrastructure funds 6. past experience etc. investment style or strategy. Venture capital fund . under the AIF regulations each scheme will require a separate registration.
the mechanism of payment to the investment manager as well as the method adopted while distribution of monies to the investors. 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%. 1 million. AIFs granted registration under one category is not permitted to change its category subsequent to the registration. The AIF can invest only in instruments specified for each category of investments.5
. Such investment of the investment manager/sponsor will not be transferable during the life of the fund. Similarly. Such Funds can operate as closed ended funds with a specified target size (not less than Rs. The responsibility of the investment manager should be clearly defined. 100 million. As is currently the case for VCF. The AIF Regulations also lay additional restrictions on each of the categories of funds. These requirements should form part of the Private Placement Memorandum issued by the fund to its investors. 2. The investors would have a lock-in period of three years. 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.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.1 per cent of the fund size or Rs. Gold Financing. 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). an AIF cannot invest more than 25% of the corpus of the fund in one investee company. Further. 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. life cycle (minimum maturity of 5 years) and target investors under the proposed framework. The AIF Regulations require disclosure of the terms and conditions of subscription to the funds.
5 billion. securities broking.. . He is based in our Mumbai office. the maximum size of VCF funds being Rs. 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.Tax and regulatory policy
New regulatory framework for private investment vehicles
billion..Shah@in.... insurance companies.
Associate Director. Tax & Regulatory Services Ernst & Young. 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. the restriction on investment by VCF
funds into companies promoted by top 500 listed companies by market capitalization. 2.. India
Prakash Shah is an Associate Director at Ernst & Young India in the Financial Services . All rights reserved throughout the world.. Some of the conditions that are prescribed in the concept paper are quite restrictive and may hinder the participation by certain players for eg. private equity etc..... 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. investments by PIPE funds only into small sized listed companies etc...
Reprinted with the permission of CFO Connect © 2012.
‘SEBI has released the final guidelines on Alternative Investment Fund regulations in May. 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. 2012’.tax and regulatory practice.... You can write to Prakash at: Prakash.ey.com
PE funds. Separately. If that is indeed Sebi’s intent. However. The Regulations categorises all AIFs into nine distinct categories including VC funds. investment in infrastructure sector. However. 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. 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. this new framework will be useful only if it enables AIFs in India to compete with their global peers. debt funds. social sector.Feature articles
Alternative investment funds: hits and misses
Economic Times. Benefits can similarly be defined for an AIF making an early stage investment. Recognising the growing importance of this industry and with a view to maintaining the stability of the financial system. Viewed in the context of the prevailing Sebi VC Fund Regulations. Sebi-registered VC funds and foreign VC investors cumulatively invested approximately $12 billion across several industries. social venture funds and strategy funds.
. it certainly merits consideration whether industry must compartmentalise itself into nine distinct product offerings to gain concessions. Sebi has proposed to introduce Alternative Investment Funds (AIF) Regulations. etc without necessarily categorising the AIF under the Regulations. this is a welcome move as funds can diversify product offerings based on investors’ risk appetite and investment objectives. say the authors in this exclusive review. real estate funds. As of September 2010. 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. 9 September 2011
arket regulator SEBI is proposing a new set of regulations for all Alternative Investment Funds (AIF). which collect funds from institutional investors/
HNIs in India will also be bound by the Regulations and will be subject to Sebi’s oversight.
Reprinted with the permission of Economic Times © 2012.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..
Sebi could consider specifying a minimum investment threshold that is in line with that applicable to Portfolio Management Schemes. He is based in our Mumbai office. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation... India
Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies.. 2012 incorporating substantial changes to the draft regulations originally circulated for public comments in August 2011. 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. 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..
“The Securities and Exchange Board of India has on 21 May 2012 notified the SEBI (Alternative Investment Funds) Regulations. All rights reserved throughout the world.”
Partner. which the concept paper states is likely to be revised from Rs 5-25 lakh..ey. National Tax Leader Ernst & Young.. You can write to Sudhir at: Sudhir.... a review of the taxation framework for AIFs would immensely benefit the industry.... 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.com
..Kapadia@in. ... The domestic AIF industry is set to grow exponentially. 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. 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.
This. vis--vis the Swiss government in the light of the above international developments. the tale of the elusive Swiss accounts has resurfaced with the proposed treaty between the UK and Swiss governments. 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. a question arises for Indian policymakers to ponder over the approach that should be taken. 29 September 2011
f late. of course.Feature articles
One-time amnesty for swiss stash
Economic Times. in their Swiss bank accounts.
. This approach adopted by the UK government is in sharp contrast to the one favoured by the US government. From an EU and tax policy perspective. vis-vis the US and the UK. 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. where the US
government extracted the names of US tax residents illegally holding bank accounts in UBS. and for the Swiss government. including prosecution. it may come as a pressure to avoid yet another instance of further diluting its muchvaunted banking secrecy. if US tax residents do not come forth to declare their secret deposits in offshore accounts. where Switzerland has agreed to repatriate to the UK an anonymous tax amount calculated on the aggregate income of UK tax residents. was accompanied by a shrill campaign by the US Internal Revenue Service to warn the tax citizenry at large about more dire consequences. for example. this may not be the most optimal result as it goes against the grain of ensuring transparency and naming and shaming of tax evaders. The UK government is obviously motivated by the opportunity to shore up its treasury by the onetime payment. 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.
” of intermediary undisclosed wealth companies or outside India and trusts or other such entities. 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. 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. as of information. hopefully. collect much-needed revenue and. 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. In want to consider may have other words. in specific instances. 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. of course. where get its fair pound the final beneficiary may not be of flesh. there revenue knife declare their offshore may be a maze to cut into the accounts. 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. “The Indian take further action Indian based on that Government may government information. before they get to the much-coveted and highlyfancied offshore bank deposits and other wealth. For forth and anonymously and sharpen the example.in authorities and this approach. from similar action in future. thereby. 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. Against this. at the
. make a clean slate Swiss banks should enable Indian going forward to deter tax evaders government. immediately visible and the Swiss This. is easier said than done as it will be a long and arduous process that Indian authorities will have to go through. to ask for the relevant information from the Swiss However. it can be argued that from this angle. Viewed At one level.Tax and regulatory policy
One-time amnesty for swiss stash
India to Indian beneficiaries.
. therefore. instill enough fear in the minds of US taxpayers.. Of course.... He is based in our Mumbai office.
Reprinted with the permission of Economic Times © 2012.. on which taxes as well as penalties can be imposed as a one-time revenue-raising measure. All rights reserved throughout the world.Kapadia@in. National Tax Leader Ernst & Young... india
Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies. as well as a onetime window for Indian taxpayers to come forth and anonymously declare their offshore accounts.ey. that going forward. any such initiative will have to be carefully planned and executed in a way that it remains legally tenable and practically implementable. 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...Feature articles
One-time amnesty for swiss stash
same time. You can write to Sudhir at: Sudhir. More importantly. 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. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation.
and also to serve as a deterrent for potential future tax evaders. . the Indian government may want to consider a combination of effectively utilising the recent agreement for exchange of information including bank accounts..com
. On balance... 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..
1 November 2011
ax transparency is the new reality for India. Third. The protocol amending the India-Swiss DTAA was signed on August 30 last year and approved by the Swiss Parliament on June 17. In simple terms. Internationally. According to OCED’s statistics. either by way of protocols to existing DTAAs or new DTAAs. now empowers the Government to notify any territory outside India. it has completed negotiation of Tax Information Exchange Agreements (TIEAs) with 16 tax havens. transactions with residents of such territories are subject to higher withholding.
. 2011. having regard to lack of effective exchange of information. 2011. First. Several countries have pressurized Switzerland to be more tax transparent. for a period starting from April 1. certain disallowances and also subject to transfer pricing regulations. negotiations/ renegotiations with 40 countries were completed. This enables India to obtain information from Switzerland in specific cases. as the government has realised the urgent need to tackle black money. Switzerland has signed 91 DTAAs providing for the exchange of information. as a notified jurisdictional area. The 100-day waiting period for ratification has recently ended. 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).Tax and regulatory policy
Tax transparency is the new reality
Hindu Business Line. 1961. 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. section 94-A of the Income-tax Act. Tackling black money On the legislative front. Second.
As of September. India has adopted a three-pronged approach to tackle black money.
. the tax payer will first be informed of. 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.. international pressure and the need to upgrade to OECD’s G-20 white list led to a rethink. India can now approach Switzerland for information. The India-Swiss DTAA expressly provides that the administrative procedure rules regarding taxpayers’ rights remain applicable before information is transmitted. This decision permitted the exchange of information with other countries in individual cases. Further the India-Swiss DTAA does not commit Switzerland to exchange information on an automatic or spontaneous basis.... The Swiss domestic law also provides for procedural rights for protecting the interest of the tax payers. . All rights reserved throughout the world.”
DTAA now enables India to obtain information that is foreseeably relevant to the administration and enforcement of Indian Income taxes.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. However..
Reprinted with the permission of Hindu Business Line © 2012.. before any information can be exchanged. the period for which the information is required.. but only after it has exhausted all normal procedures under its domestic law to obtain such information. where a specific and justified request was made and Switzerland began negotiations on revising its DTAAs. a statement of information sought including the nature and format in which it is sought. 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.. India’s Competent Authority needs to provide various information to the Swiss competent authorities when making such requests. The India-Swiss
to the widest possible extent. While it is intended to provide for exchange of information
. Thus.. which include the name of the person/s under examination. the tax purpose for which the information is sought and also the name of any person believed to be in possession of such information. Its Federal Council on March 13. 2009.
“India-Swiss DTAA does not commit Switzerland to exchange information on an automatic or spontaneous basis... 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.. made the historic announcement that Switzerland intends to adopt the OECD standard on administrative assistance in tax matters..
295 crore in 2010. 2012. He is based in our Mumbai office. Communication & Entertainment Ernst & Young. Such a tax return is required to be filed even if the person does not have any taxable income. 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. Technology. group financial and corporate restructuring. Communication & Entertainment business unit for Tax service line.e.com
.ey. 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. inbound and outbound transactions.
In a bid to gather information. You can write to Pranav at: Pranav. Germany and Austria. In simple terms. financial interests.Tax and regulatory policy
Tax transparency is the new reality
The Ministry of Finance has in May 2012. India
Pranav leads the Technology. according to which black money in bank accounts in Switzerland has reduced from INR 23. has amended section 139 of the Income tax Act. 373 crore in 2006 to INR 9. 1961 (w. 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. he specializes in advising on various international tax matters. With over twenty years of experience in the practice of Direct Tax Laws.Sayta@in.f AY 2012-13). immovable properties or other assets outside India are required to be disclosed in the tax returns. released a ‘White Paper on Black Money’. Details of foreign bank accounts. The ‘White Paper ‘also refers to the revenue sharing agreements entered into by Switzerland with U.
Tax Partner. cross border and domestic mergers. The White Paper calls for further debate on whether entering into a similar agreement with Switzerland would be in India’s best national interest.K. The Finance Act. acquisitions & joint ventures.
resulting in the international buyers with better leveraging abilities getting an advantage. At the same time. Delisting Coming to the delisting aspect. On September 23. 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. i. SEBI had notified Substantial Acquisition of Shares and Takeover Regulations. the acquirer acquires stake in excess of the “delisting threshold”. without considering the new regulation. It is noticed that apart from
. It is indeed a revolutionary legislation which is likely to change the landscape of M&A for listed Indian entities in the near future. 2011. the TRAC in its earlier proposal. 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. 2011. due to an increased level of interest in their companies. the target could automatically be delisted.e. 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. had suggested a proposal of “auto delisting” where.Feature articles
New SEBI takeover code finally notified
CFO Connect. pursuant to open offer. 2011. 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.which are effective from October 22. 1 November 2011
he Indian tax and regulatory laws are undergoing a period of change and one such change is the evolution of the new takeover code. 100% would have been sweeter for the MNCs as it would tantamount to automatic delisting of shares.
as compared to 35% (15% initial threshold plus 20% open offer) under the old regulations. To an acquirer.Tax and regulatory policy
New SEBI takeover code finally notified
removing the possibility of automatic delisting. revolutionary without triggering At the the open offer legislation which is same time.
. for a period of 12 months. significant offer. 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. limiting the open offer size to 26% seems to be a good balancing act and will help the M & A landscape significantly. which would propel the the promoter to drive the company as FDI numbers which have not been compared to the public shareholders. the new regulations actually make it impossible to launch a delisting offer where the promoter shareholding goes beyond the maximum permissible non-public shareholding. as we move forward. 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. This is a very bold shares or voting rights of the target step and would encourage larger company. 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. this helps bring stability by achieving a definite controlling stake instead of de facto control. Accordingly. requirements. 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. 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”. Increase in initial trigger limit
From a strategic acquirer’s perspective. In today’s high interest era. stake sale For the economy. encouraging in the recent past.
Therefore. 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.
. time and shareholding restrictions on such offers. while offering the benefit to the promoters to consolidate their holdings. nothing prevented any non-promoter. then acquisition of such a company beyond thresholds automatically makes it a direct acquisition and the provisions of new regulations shall apply accordingly. except pursuant to another voluntary 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. Further. Other significant amendments In an era of global acquisitions. 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. vis-à-vis 5% in the lifetime of the company in the old regulations. to give their recommendations to shareholders on the open offer. The aforesaid provision. from making an unsolicited open offer to public shareholders. there is no distinct category as a voluntary open offer. 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.Feature articles
New SEBI takeover code finally notified
Specific provision for voluntary open offer Under the old regulations. It lays out specific tests that if company derives more than 80% of net worth. 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. so long as the maximum permissible non-public shareholding limit is not breached. turnover or market cap from investment in listed company. subject to the total shareholding post open offer not exceeding the maximum permissible non-public shareholding.
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. puts in place. 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. The new takeover regulations impose an obligation on independent directors of the target company.
. He is based in our Mumbai office.. ..
Reprinted with the permission of CFO Connect © 2012. the target company and the minority shareholders.Tax and regulatory policy
New SEBI takeover code finally notified
An all-India rank holder in Chartered Accountancy.ey.com
. 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 . corporate restructuring.Shah@in. and some new exemptions have been provided in the new regulations such as. Amrish has over two decades of experience in the areas of mergers and acquisitions. All rights reserved throughout the world.. 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. and establishment of joint ventures.... acquisition of preference shares carrying voting rights. You can write to Amrish at: Amrish. foreign investment consulting.the acquirer. and acquisition of shares of target company not involving change in control pursuant to a Corporate Debt Restructuring Scheme.......
Partner & National Leader-Transaction Tax Services Ernst & Young. divestments. increase in voting rights pursuant to buy-back. 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..
FDI in retail will pave the way for inflow of technical expertise and knowledge and this. with a CAGR of about 12%. 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. the actual growth rate was much lower. can boost the overall growth of the industry. is now expected to hit $700 billion by 2015. in turn. The announcement is expected to generate 10 million jobs over three years. International brands and retailers will gain access to a substantial market. 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. especially in greenfield and brownfield investments. Within retail. Our productivity in food and agriculture is among the lowest in the world and there is a significant opportunity to raise output.Feature articles
The big push for big retail
Economic Times. The sophisticated front-end that international players are likely to bring will boost investment in infrastructure by retail players.
. without impacting smaller and domestic retailers. with CAGR of about 21%. 26 November 2011
ndia’s retail market promises to be among the top retail destinations in the world. modern. Lack of retail expertise and experience has been the main reason for this subdued growth. FDI in single-brand retail currently is 0. This will improve efficiencies in the supply chain. which was around $220 billion in 2005. or organised. Indian retail market. The relaxation is likely to result in an increase in FDI in retail sector. Though the industry was expected to grow at a much faster rate 5-7 years ago. retail is growing at a fast clip. increase efficiency and bring down consumer prices. Fact is. cut wastage.03% of cumulative FDI of around $149 billion from April 2000 to September 2011. farming community in India has shown one of the lowest efficiencies in terms of production. with investment in better farming practices. thanks to rising consumption. thirdparty supply-chain companies and the government.
would such a condition be too onerous for certain categories of multi-brand retailing such as sport goods. apparel and electronics. who did not want to enter India through cashand-carry route. Shoppers Stop and the Future Group. Metro. 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. the retailer would have to scout for an Indian partner to enter Indian multi-brand retail sector. Further. Tesco. franchisee or distributor. to comply with the norm of minimum 50% investment in backend infrastructure. distributor or franchise could provide an impetus to the arrangements being converted to growth of the small-scale sector. One may also potentially see present small and medium enterprises. This licensing. retailers would need to have a precise interpretation
Single-brand foreign retail players. who have so far restrained themselves from entering the country for reasons such as wanting the entire of the term back-end infrastructure. and Woolworths. stake or ownership in an Indian singleAnother key condition is that foreign brand retail entity. or foreign retailers completely buying out the Indian licensee. For existing Indian retail players. This will help bring capital as well as global best practices and retail expertise to the Indian businesses. as they would be able to directly own stake in multibrand retailing. Carrefour. may now want to retailers should source certain explore the Indian market. Foreign retailers such as Sainsbury’s. Also. In existing single-brand retail joint ventures. watches. this could provide further options to raise long-term capital for expansion and to attract partnerships with some global players.”
. In multi-brand retailing. may now explore Indian presence. Multi-brand foreign retailers that have already invested in India under cash-and-carry arrangements. the foreign multinational joint-venture partner would have the flexibility to raise its stake in the venture beyond 51%. such as Reliance. as the foreign retailer can own a maximum stake of 51%.
foreign retailer or brands. either joint ventures with respective
“MNC retailers will assess market dynamics and select partners with suitable capabilities. such as Walmart. minimum percentage from micro. now have an option to invest in Indian companies undertaking direct retailing. Trent. Lawson and others may now explore Indian retail market. Also.Tax and regulatory policy
The big push for big retail
Foreign multi-brand retailers. stationery.
. competition.. .. potential foreign retailers would assess customer dynamics. He is based in our Mumbai office. cash repatriation. 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.. Consumer. All rights reserved throughout the world.com
Paresh Parekh is a Partner at Ernst & Young India in the Tax & Regulatory Services Practice. use appropriate sourcing models to manage costs and appeal to the Indian customer. They would also typically want to select a partner with complementing capabilities and cultural fitment. and understand the tax and regulatory landscape in India.... foreign direct investment regulations. litigation. adapt products for the diverse Indian
micro-markets. Infrastructure and Industrial sector. While FDI in retail sector has been relaxed with conditions.
“While the Indian Government has allowed up to 100% FDI in Single Brand retailing. corporate restructuring. Tax & Regulatory Services Ernst & Young.Parekh@in. outbound investments and business reorganization..ey. Paresh is focusing on Retail. complex domestic and international tax matters. divestments..Feature articles
The big push for big retail
With this relaxation of FDI in multibrand retailing.. post this article the Indian Government has kept the decision to allow 51% FDI in Multi Brand retailing on hold for further deliberations”
Partner. merger and acquisitions. infrastructure and import regulations.
Reprinted with the permission of Economic Times © 2012.... supply chain. You can write to Paresh at: Paresh. Over past 12 years he has advised clients in the areas of India entry..
it is still very basic. the finance minister faces a difficult challenge of fiscal consolidation without stifling investment and economic growth. The first-generation reforms consisted of rationalisation of the direct and indirect taxes levied by the Centre. infrastructure for tax administration. The second-generation reforms were the replacement of state sales taxes by the value-added tax (VAT). avoidance of tax disputes and their quick resolution. quality taxpayers’ services.
. broadening of their bases. the government should focus on the third-generation (3G) tax reforms that can yield a fiscal bonanza similar to that from 3G spectrum auctions. and lowering of the statutory rates.Tax and regulatory policy
3G of tax reforms
3G of tax reforms
Economic Times. inefficient and ineffective tax administration. While these reforms resulted in improvement in tax compliance and provided a significant boost to tax revenues. These would be reforms that modernise tax administration. The GST. The most pivotal reform among these is a more effective use of information technology. governments should focus on archaic. 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. 1 March 2012
n preparing his Budget 2012. they were limited to legislative changes and the rich dividends that could be reaped by having a modern. if based on the flawless design recommended by the 13th Finance Commission. While India has made considerable progress in terms of computerisation. harmonisation and integration of laws and procedures across the country. could well be the 4G reform.
A facilitative tax administration is dependent on simplicity of the tax laws. Pending its implementation. IT-savvy and taxpayer-friendly tax administration remain unrealised. Given the limited elbow room to raise revenues through higher tax rates. Critical ingredients of a modern tax administration are automation and standardisation.
This attitude must be replaced by a more cooperative and communicative approach. 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. The resulting costs and uncertainty hinder business. data capturing and analysis for guiding policy decisions and for enhancing taxpayer services. resolution of tax issues. In UK. of which 2. India is sitting on a blocked amount of more than 3 lakh crore on account of tax litigation. An open. the Advance Agreement Unit comprising of a team of specialists work with businesses to provide some
.2 lakh crore is stuck at the Commissioner (Appeal) level. Studies in Australia show that reduced disputes lead to better compliance and more revenues. 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’. particularly. While setting seeking behaviour organisational and reduces “The Government objectives. has not been tapped in full measure.based approach for taxpayers. At the stateadministration and performance. Investors lament aggressive interpretation of tax laws by assessing officers. minimising discretion by officials. the willingness establishing of taxpayers to must leverage IT targets and voluntarily pay to modernise tax evaluating taxes. These sums could be much lower if there was a more open and communicative environment. which can lead to protracted litigation for decades. along with business results.
The decisions and actions of tax administrations are guided by the assumption that the taxpayer is naturally inclined to avoid paying taxes. customer-oriented and outcomesystems and facilities lack in transparency. which encourages rent. As one senior official put it recently.” of ‘customer’ and for monitoring satisfaction inter-state trade leaves a vast scope for improvement. but in spite of it”. which helps reduce litigation. improve quality of the emphasis is the use of IT in on parameters VAT administration taxpayer services.Feature articles
3G of tax reforms
The significant role that IT can play in comprehensive automation and integration of processes. So. communicative approach “revenues their governments collect towards taxpayers can be is not because of the effort by instrumental in bringing greater officials. Modern tax jurisdictions like in the US and UK adopt a The current business processes. level.
Reprinted with the permission of Economic Times © 2012. and Gulf Cooperation Council.Poddar@in. The multiplier effect of this 3G reform could have the potential to surpass the rich haul reaped from
the 3G spectrum auctions .. All rights reserved throughout the world. India too must lend absolute commitment to reengineering its administrative framework and implement it in the right earnest. He is based in our Gurgaon office. the revenue department and the economy... The HMRC has established customer contact centres that focus on alleviating doubts of taxpayers and create an environment of customer friendliness.. Syria. crucial for India’s economic growth.
.. including Russia. You can write to Satya at: Satya... ‘working smarter’ has become a necessity for tax administrators.... India
Satya has over three decades of experience in advising clients on tax policies. New Zealand. 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. Also. Korea.Tax and regulatory policy
3G of tax reforms
certainty for future tax payments. At a time when governments worldwide are grappling with the burgeoning debts and fiscal constraints due to the global financial crisis.ey.. A stable and efficient tax administrative environment would also spur foreign investments. Policy Advisory Group Ernst & Young.a win-win situation for taxpayers... China.. He has also served as tax policy advisor to governments around the world. 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. European Union. VAT and international taxes.
In this section
101 | The path to globalisation compliance and reporting
Indian companies have rapidly globalised their operations and there seems to be an ever increasing appetite to grow overseas inorganically. Due to this. which may not be resulting in the most optimal efficiency. 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. Many companies are currently distributing responsibility for compliance & reporting processes throughout their organisations. efficient and controlled compliance and reporting function globally can help mitigate these risks and unexpected costs. The fact that local jurisdictions are rewriting regulations. 1 October 2011
ver the last decade. In the past 12 months.Specials
The path to globalisation compliance and reporting
CFO Connect. 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. A more rationally organised. 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. One of the important responsibilities of the CFO is statutory compliance and reporting. which gave rise to some interesting findings. given its statutory nature. 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. control and value. focusing more intently on the collection of tax revenues and sharing more tax information across borders makes this even more important. which could have inherent risks attached to it. percentage of companies from Fortune 500 experiencing:
Often. 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
. expertise. 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. Local expertise is key to a successful GCR model: Compliance and reporting processes result in inherently local in-country filings and submissions.
2. the level of start-up business activity doesn’t readily support investment in local finance teams.. 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. 3. etc.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. Between 64% and 78% of survey respondents indicated that localcountry resources are vital to successful compliance with tax and regulatory requirements. and more than 60% indicated no global governance over direct and indirect tax filings required by their companies. 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.
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.
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.
The path to globalisation compliance and reporting
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.
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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