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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.
Jayesh Sanghvi dwelled deeper and elaborated on positive amendments like Advance Pricing Agreements (APA) and transfer pricing. International tax 49 | Importance of transfer pricing documentation Vijay Iyer stresses on the need for a robust Transfer Pricing documentation in order to win TP controversies within time. 57 | Going back in time is no good Though retrospective amendments proposed in the Budget 2012 clouded much of the industry discussion. 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. 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. 60 | Pause before P-Notes Hiresh Wadhwani is of the view that uncertainties in tax positions could deter FIIs from issuing P-Notes. Vidya Nagarajan feels that the country has been under constant scrutiny by Indian tax authorities as a result of alleged abuse by investors. again In Budget 2012. which could adversely impact foreign fund inflow to the Indian capital market. except those in the negative list. 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. 40 | Burden of fiscal consolidation falls on tax system. would become taxable. 52 | Transfer Pricing and intangibles Ernst & Young report highlights the increased focus of audits to the transfer of intangibles. feels Satya Poddar.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. 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. the only measure which could be viewed as a significant stepping stone to the GST is the Goods and Service Tax Network (GSTN). thus clarity and certainty on the issue of P-Note taxation is the need of the hour. 46 | Pluses in the negative list Budget 2012 has proposed a paradigm shift in the way services are to be taxed in India and if the proposals are accepted then all kinds of activities. . Vijay Iyer outlines the key points from OECD scoping paper on the subject that can help resolve the issue. suggests Bipin Sapra.
Specials 101 | The path to globalisation compliance and reporting Rahul Kashikar draws that a more rationally organised. discusses recent steps taken by various countries. or black money. including India. if it was accompanied by in-built options. continues to occupy centre stage in the country. Sudhir Kapadia. efficient and controlled compliance and reporting function is required on a global front. 71 | The new M&A horizon Narendra Rohira feels that with the new Companies Bill 2011. but it could also have an adverse impact on investor sentiments and hamper future FDI flows into India. . Tax and regulatory policy 75 | Is grip tightening on black money? The issue of tax evasion. 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. while and on the other hand the intent is to regulate the domestic funds. broadening of their bases. Alternative Investment Funds (AIF) will be useful only if it enables them to compete with their global peers. 69 | Options that change investment status Amrish applauds DIPP on the revise of its earlier provision that sought to define equity investment as debt. Paresh Parekh briefs on the possible impact of the proposed change in FDI in retail. 84 | One-time amnesty for swiss stash Government often toy with the idea of introducing one-time amnesty to bring back the Swiss stash. 94 | The big push for big retail India’s retail market promises to be among the top retail destinations in the world. 78 | New regulatory framework for private investment vehicles The proposed framework by SEBI for private funds is restrictive as per Prakash Shah & Chaitrali Kamat. feels Amrish Shah as it is likely to change the landscape for M&As of listed Indian entities in the near future. say Sudhir Kapadia and Subramaniam Krishnan in their exclusive review.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. 82 | Alternative investment funds: hits and misses SEBI’s proposal to introduce. while also emphasize that the other regulators should follow suit. undoubtedly FDI in the sector garner much of interest. since its wide to cover offshore funds investing in India. and lowering of the statutory rates. which would help in combating regulatory risks and unexpected costs. 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. cross-border mergers will only be allowed with companies situated in jurisdictions notified by the Central Government. 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.
Corporate Communications Deepti Khatri.Editorial board Sudhir Kapadia Rajendra Nayak Prashant Khatore Bipin Sapra Assistant editors Rahul Kashikar Shalini Mathur Rahul Patni Subramaniam Krishnan Ashwin Vishwanathan Chaitrali Kamat Tejas Mody Cynthia Dalmeida Production team Jerin Verghese.com/in/BudgetPLUS2012 www.ey. Design Tripti Panda.com 6 . Logistics Visit us @: ey. Assistant Publisher Pushpanjali Singh.firstname.lastname@example.org/in/TaxServices ey.com/in/DBI2011 Please write to us @: Tax. Publisher Pooja Walke.
acknowledge that they are more committed than ever to enforcing existing tax law and creating new enforcement mechanisms. indirect tax. The pace of change may only accelerate as Governments and businesses reflect on lessons learned from the global economic crisis. recent macroeconomic data indicates that some clouds continue to linger. 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. transfer pricing. The publication contains a compilation of articles ranging from personal taxation. The next five years will likely be every bit as volatile and evolutionary as the last half-decade. Sudhir Kapadia National Tax Leader Ernst & Young. reforms and stepped up tax enforcement efforts. helps you prepare for the dynamic future ahead of us. 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. Managing growth and price stability are the major challenges of macroeconomic policymaking. In 2011-12. overshadowing longer-term tax trends. 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. From an Indian perspective. Tax executives.Foreword The world has changed dramatically in the space of just a few years. India 7 . The past year has witnessed a dizzying array of tax legislation. India found itself in the heart of these conflicting demands. To enable a deeper understanding of some noteworthy tax and regulatory developments in the year gone by. Tax authorities have become significantly more assertive in examining cross-border activities. taxation of cross-border transactions and M&A taxation. The effect on tax policy has been startling. under pressure to generate more revenue to balance debt-laden budgets and fund infrastructure and social programs. we are glad to bring forth to you Taxation in India 2011-12. we hope this publication stimulates your thoughts. Tax administrators and legislators. tax & regulatory policy. However. With the scale of the changes that are underway.
Thankfully. the start date for application of GAAR has been deferred by a year. 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. tax year 2013-14 onwards).e. that seeks to comprehensively replace the present tax law. some of which are introduced with retrospective effect have not gone well with various stakeholders. In this section 8 9 | An important step to revamp complex structure of DTC 11 | A “retrospective” play on words 14 | Ensure GAAR doesn’t cause hardship to taxpayers 16 | Budget 2012-2013 . This section analysis these as also the report of the Standing Committee on Finance on major aspects of the direct taxes code (DTC).An Analysis .Feature articles Corporate tax The Indian corporate tax arena has witnessed several developments in the last fiscal year. and would now apply from 1 April 2013 (i. The Budget also proposed to introduce a general anti-avoidance rule (GAAR) to address aggressive tax planning.
10 March 2012 T he Standing Committee has finally spoken on major aspects of the direct taxes code. Another welcome aspect of the Committee’s report is affirmation of the Corporate tax rate of 30% and a thumbs up to ‘investment linked’ incentives as opposed to ‘profit linked’ incentives. The 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 Committee has specifically recommended that the onus of proof of tax avoidance should rest with the tax authorities and not the tax payer. including a direct critique on its very structure.) 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 made a radical suggestion of taking disciplinary action against those Assessing Officers who have raised unreasonable tax demands 9 . 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. 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. the Committee has gone on to suggest provisions which are presently missing in the DTC for eg. (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. therefore. recommended a complete relook at the structure of the DTC to make it more user friendly. Interestingly. in relation to the General Avoidance Agreement Rules ( GAAR). The Committee notes. For instance. The Committee has.Corporate tax An important step to revamp complex structure of DTC Sudhir Kapadia Economic Times. or DTC.
In addition.. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation.com 10 .. as recommended by the Standing Committee.ey...Feature articles An important step to revamp complex structure of DTC based The Committee has made a radical suggestion of taking disciplinary action against those Assessing Officers who have raised unreasonable tax demands based on irrational tax assessments which is perhaps of the first of its kind ever in the history of parliamentary recommendations in India... Finally. at least of the rank of the Joint Secretary to the Government of India. You can write to Sudhir at: Sudhir. Sudhir Kapadia National Tax Leader Ernst & Young. 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.Kapadia@in. the primary onus of proving that the arrangement is an impermissible avoidance arrangement now vests with the tax authority and not the taxpayer.. 2012.. based on representations made by various stakeholders and the recommendations of the Standing Committee. This is a far reaching suggestion which should be duly incorporated in the DTC. The Finance Bill. Reprinted with the permission of Economic Times © 2012. 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.... India Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies.. He is based in our Mumbai office. the Committee has recommended setting up of special fast track courts comprising of experts to dispose of the plethora of pending cases.. All rights reserved throughout the world.. an amendment has been made to provide that the panel will also include an officer of the Indian legal service. had included provisions to introduce GAAR. 2012 had proposed that the GAAR Approving Panel will comprise not less than three members consisting of officers of Commissioner rank and above.. 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.. while the Finance Bill. . Further.. However. the GAAR provisions have been deferred by a year and will now apply from 1 April 2013.
transfer and scope of income with retrospective effect. Further.Corporate tax A “retrospective” play on words Rajiv Memani Mint. For instance. One of the provisions in the budget that has taken industry by surprise is the proposed change in the definition of capital asset. the expansion in the scope of royalty for right to use property is effective from 1976. Extensive GAAR (General AntiAvoidance Rules) provisions have been introduced. Being a retrospective change. its value substantially from the assets located in India. The scope of these provisions is even wider than that suggested in the direct taxes code. While the government’s intent to tax transactions similar to those in the Vodafone case involving indirect transfer of Indian assets is understandable. a plethora of retrospective changes has been proposed in the Bill. little did we realize that he would be so true to these words. if the share or interest derives. which shall result in declaring a transaction as “impermissible avoidance arrangement” where the transaction lacks commercial substance. it will have the effect of overruling many favourable judgements on software taxation. the definition of process has been modified to include transmission by satellite. As if this was not enough. directly or indirectly. Woefully. and hence. it puts a question mark on several other judicial pronouncements in tax cases. the finance Bill contains a validation clause that would operate irrespective of any judgement or decision on the matter. the pragmatic suggestions of the parliamentary standing committee have also been ignored. covered under royalty. where sale of standard software supplied by non-resident vendors has been considered as out of the ambit of royalty taxation. While the 11 . 17 March 2012 “I must be cruel only to be kind”— when finance minister Pranab Mukherjee quoted these words from Hamlet in his budget speech on Friday. whereby the right to use computer software has been covered (including granting of a licence). irrespective of the medium. 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. Further. This proposal will have an impact on attracting foreign investment into India.
fiscal consolidation was the most significant challenge that Mukherjee faced in preparing this budget. the finance Bill extends the profit-linked tax holiday for power sector projects starting before 31 March 2013. The proposal to remove the restriction on venture capital funds from investing in nine specified sectors is a very positive move. extension of 200% weighted deduction for investment in research and development and extension of the sunset clause for the power sector by one year. Further.125% to 0.1%. The Bill also provides a lower withholding tax of 5% on external commercial borrowings for three years in certain specified infrastructure sectors. additional depreciation of 20% for the power sector would provide a boost to the sector. classification of capital and revenue transactions and recharacterization of any expenditure. 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. compared with the normal rate of 20%. a hike in the rates was unavoidable. 2 lakh and the sale is in cash. providing enhanced investment-linked deduction of 150% for specified businesses. Though the tax rate hike may have an inflationary effect. His proposal to reduce the 12 . especially given that the latter would apply to the full retail price as against the factory gate price. 12% excise duty will still be in line with the anticipated goods and services tax rate. Moreover. 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. The budget provides a positive thrust to infrastructure by. broadly the provisions shall have impact on the classification of equity and debt. the move to a negative list of services and the rise in the central excise and service tax rates has been along expected lines. in view of the fiscal constraints. for instance. 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. The government has taken proactive steps to tackle the issue of unaccounted for funds parked abroad. the finance minister could have resisted increasing the lower rate of 1% to 2% at the current juncture. On indirect taxes. Finally. With a view to providing a thrust to infrastructure.Feature articles A “retrospective” play on words fine print of the provisions remains to be seen. A welcome feature has been the announcement related to the introduction of the advance pricing mechanism.
. the finance minister expects an ambitious revenue growth of more than 19%...Corporate tax A “retrospective” play on words fiscal deficit to 5. Rajiv Memani Country Managing Partner Ernst & Young. Since then.... given the tough economic conditions. valuations and restructuring. 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. The question mark on fiscal consolidation belies any hopes of the easing of monetary policy. Affiliated with prominent business and industry associations. His areas of expertise include M&A advisory. Rajiv is a member of the National Council of Confederation of Indian Industry (CII). He has been selected on the World Economic Forum’s New Asian Leaders. All rights reserved throughout the world.. Illustratively. 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. Reprinted with the permission of Mint © 2012.. This article was written based on Budget 2012 proposals announced in March 2012.... He has been with the firm for almost 20 years now.ey.Memani@in... Rajiv has successfully advised several leading multinational corporations on their entry in India and has worked with some of India’s largest companies. You can write to Rajiv at: Rajiv.. Further. both in the private and public sector.. there have been changes made to some of these proposals and clarifications provided on others. India Rajiv Memani took over as the Country Managing Partner of Ernst & Young in 2004. the proposal of imposing a withholding tax rate on transfer of immovable property has been withdrawn. .. a network of 100 young leaders in business and politics to develop programs for the development of Asia. GAAR provisions have been deferred by a year to apply from 1 April 2013.1% in 2012-13 raises questions about how realistic it would be. the 5% withholding tax on ECBs has been extended to other taxpayers as well. Moreover. the threshold limit for withholding tax in respect of cash sale of jewels has been enhanced to Rs 5 lakh.com 13 . A qualified Chartered Accountant. 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.
DNA Money. There are no restrictions to applying GAAR only to transactions with or between non-residents or where tax treaty benefit is sought. these provisions would extend to all classes of tax payers. The aim is to counter tax avoidance schemes and codify the concept of ‘substance over form’ in law. these provisions have created a furore and anxiety in corporate circles. 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. does not cause undue hardship to taxpayers.” 14 . where whole or part of the arrangement lacks or is considered to be lacking commercial substance. “Government must ensure that GAAR that is aimed to counter tax avoidance scheme and codify the concept of substance over form in law. the arrangement will be deemed to lack commercial substance. 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. Since the time of announcement. 28 March 2012 T he finance minister has introduced anti-abuse provisions called ‘General AntiAvoidance Rules’ (GAAR) in the Indian tax laws during the announcement of the Union Budget for the next fiscal.Feature articles Ensure GAAR doesn’t cause hardship to taxpayers Hitesh Sharma DNA . misuse or abuse of the Indian tax laws or is not for bona fide purpose. including individuals and partnership firms. 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.
.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.com 15 . India Hitesh with over 22 years of exeprience specialises in International Tax and Transfer Pricing. the proof will lie in implementation when the actual cases are placedfor scrutiny before income tax officers in next few months.. 2012 from structures implemented prior to that date... investment structuring assignments and crossborder structures. Given that the approvers will also be a part of the tax administration. including IPR/brand issues. Reprinted with the permission of DNA DNA Money © 2012. Considering that the Indian criminal law also presumes innocence until proven guilty. however. consisting of three CITs. Hitesh also leads the Life Science Industry for Ernst & Young in India and is based in our Mumbai office.. While the government has come out with some clarifications to appease foreign investors. Hitesh Sharma Partner & National Leader.. international taxation. While one can’t deny the need of having an anti-avoidance law in India. You can write to Hitesh at: Hitesh. 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....Sharma@in. the government must ensure such widely-scoped provision does not cause undue hardship to taxpayer and bona fide tax-planning is not challenged... this provision appears to be far too onerous. In order to safeguard the taxpayer from arbitrary invocation of GAAR provisions. International Tax Services Ernst & Young. ..ey. particularly transfer pricing and investment structuring. the tax officer will have to seek approval from the Commissioner of Income Tax (CIT) as well as Approval Panel... The implementation of GAAR provisions has been deferred to 1 April 2013. 2012. All rights reserved throughout the world. and has worked on several international acquisitions. there is no clarity on their applicability to consequences arising on or after April 1.. can one be optimistic about the objectivity in decisionmaking? The GAAR provisions will apply from April 1..
The main concern arises on the expenditure front.4%. 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.000 crores for compensating these companies. given the uncertainties surrounding both disinvestment and telecom spectrum sale.1% next year and that the subsidies would be restricted to les than 2% of the GDP.000 crores through tax revenue and on non tax revenue front it has planned for disinvestment proceeds worth Rs 30. economic and fiscal fronts. the FM has provided only Rs 40. given the political pressures it continues to face. were well known to all.Feature articles Budget 2012-2013— An analysis Ganesh Raj CFO Connect. The revised estimates for fiscal deficit at 5. The subsidies burden for 2011-12 was as high as 2. despite the fact that payments to oil and fertilizer companies were deferred.9% of the GDP turned out to be even higher than what was being anticipated. 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. The FM is also hopeful of keeping the inflation rate down to 6.6% that could help deliver a tax revenue growth of about 19%. the losses of the oil marketing companies could be a whopping Rs 2. However. The government is obviously counting on an ambitious GDP growth rate of 7.4% of the GDP. Though the FM has assured that this would be brought down to 5. how he would deliver on these promises is the big question. 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. the non tax revenues could again fall short. a clear roadmap for how this would be done is missing.13 lakh crores. Reports indicate that at the current levels of global crude oil prices and the prevalent domestic retail prices of controlled products. The government seeks to raise additional Rs 40. 16 .000 crores from the sale of telecom spectrum. However. However.000 crores as also additional Rs 40. As against this. what the industry did look forward to was that the Budget would be bold on reforms and would deliver a clear roadmap for fiscal consolidation.
However. The scope of these provisions is even wider than that suggested in the DTC and even 17 . 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. Many of the provisions have been introduced with retrospective effect. have truly turned the Finance Bill to the Shakespearean tragedy that the FM referred to. 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. Not only this. some of the provisions introduced. For instance. bringing to rest the controversy on this issue.Corporate tax Budget 2012-2013 An analysis Given the above. it is disappointing that the concerns of the industry have not been considered and extensive GAAR provisions have been introduced. However. the Finance Bill contains a ‘validation’ clause that would operate irrespective of any judgement or decision on the matter. The taxation issues The Budget has many positives to offer for the individual and corporate taxpayers. This would be so whether or not the ‘process’ is secret. by making legislative provisions with retrospective effect since the inception of the Act. many other retrospective changes have been proposed in the Bill. Retrospective amendment of such nature will be prone to challenge on grounds of constitutional validity. It is noteworthy that many such similar offshore transactions are currently under the scanner of tax authorities. Consideration for transactions involving satellite transmission or lease of transponder capacity in the satellite will also be characterized as royalty. 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. Besides the above. The proposal to amend the provisions retrospectively is a cause of concern and results in substantial uncertainty. a step which goes against the principle of stability and certainty in taxation. It will also have to be seen whether the amendment in domestic law can impact the DTAA benefits available to taxpayers in this respect. the promise to reign in the fiscal deficit at 5. It was widely expected that pending the DTC. which shall result in declaring a transaction as ‘impermissible avoidance arrangement’ where the transaction lacks commercial substance.1% of GDP is not very convincing. particularly on international taxation. GAAR provisions would be brought in advance by the government with a view to check international tax avoidance. for the first time and going to the extreme level.
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.Feature articles Budget 2012-2013 An analysis the pragmatic suggestions of the Parliamentary Standing Committee have been ignored. The positive features of the Budget include the announcement about the introduction of the Advance Pricing Mechanism. 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. 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. additional depreciation of 20% for power sector would provide a boost to the sector. classification of capital and revenue transactions and recharacterization of any expenditure. 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. Reduction in the securities transactions tax by 20% from 0. With a view to provide a thrust to the infrastructure. broadly the provisions shall have impact on the classification of equity and debt. 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%. 2013.125% to 0. 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. This has been a long standing demand of the industry and would help provide greater certainty in the transfer pricing methodology. “Budget 2012 though promises that reforms will be continued and fiscal numbers will be kept in check. the government has finally accepted the industry’s suggestion of bringing rationality in these provisions. 18 . For the individual taxpayers. In removing the cascading effect of the dividend distribution tax. While the fine print of the provisions remains to be seen. extension of 200% weighted deduction for investment in R&D. Further. That the government continues to do its bit for the infrastructure is evident from the positive thrust given to the sector. the finance Bill extends the profit linked tax holiday for power sector projects starting till March 31.1% has also come as a relief for the taxpayers. Enhanced investment linked deduction of 150% for specified businesses.
. Reprinted with the permission of CFO Connect © 2012. in view of the fiscal constraints. However. 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.. 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... the FM could have resisted from increasing the lower rate of 1% to 2% at the current juncture. His functional experience includes corporate tax planning..Raj@in. Ganesh Raj Partner & National Leader — Policy Advisory Group Ernst & Young. The assurance about the GST Network....Corporate tax Budget 2012-2013 An analysis On the indirect taxes front.. a hike in the rates was unavoidable... The move to negative list of services and the rise in the central excise and service tax rates from 10% to 12% has been on expected lines. the government must provide an environment of trust. You can write to Ganesh at: Ganesh.. India Ganesh Heads the firm’s policy & advisory group as one of his multiple leadership roles.com 19 . . Most significantly. that would provide services through a common technology enabled portal for registration of dealers.. certainty and stability in taxation to make India an attractive destination for the investors. All rights reserved throughout the world.. Finally.ey. and joint venture negotiations. The introduction of the Settlement Commission and Revision Application Authority for service tax is a positive move. structuring cross-border investments and transactions. He is based in our Noida office.. Though the tax rate hike may have an inflationary effect.. the government’s proposal to harmonize Central Excise and Service Tax laws is commendable. 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.
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. how much tax is payable on global income. In this section 20 21 | Of death and taxes 24 | DTC to widen wealth tax net 26 | How much tax is payable on global income? 29 | Will court rulings on PF affect you? 32 | Weigh DTC provisions while choosing tax saving instruments . where income is taxed on the basis of residence of the taxpayer and source of income. income tax is levied on progressive tax rates for individuals. impact of the proposed DTC on future investment strategy. In this section you can read about the concept of inheritance tax and whether it applies in India. The Indian Government has endeavored to widen the tax base by aiming to push through important legislation in the form of the Direct Taxes Code.Feature articles Personal Tax In India.
I hastily hid the movie magazine I was reading and picked up the latest copy of the Wall Street Journal. Similarly.” she said. 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. 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.” I said. “Eeesh. Mrs Basu had a great regard for me as an “intellectual” and I did not want to break the truth to her just yet. “You see.” Saying so.P. 10 July 2011 A s I lazed around one late afternoon in Delhi’s intense summer. nobody talks about taxing agricultural income and even the richest farmers do not pay tax. There is no doubt that the Government is looking at ways to garner more revenues and it will continue to explore fresh sources. Strangely.” Then her eyes caught the WSJ and she said. “how nice to see you. my father has a lot of ancestral property that he has willed to me. “Mr Seengh.” wanted to settle our assets in such a manner that it gets distributed evenly to our children. were taxes on “You are so generous.” I said. the then Finance Minister. She continued. in some way. Is the Government now thinking of imposing tax on inheritance?” “There is no need to panic. 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. In his budget speech for 1985-86. Mr.” “India has taxed inheritance in the past by way of Estate Duty Act.” she said in her lilting Bengali accent. 1953.Singh. I have been reading it for the whole day and you indeed provide me with a welcome break. “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. He also felt that Wealth Tax and Estate Tax should not co-exist as both. Basu is again travelling and I wanted some urgent advice. “You know. we 21 .Personal tax Of death and taxes Amitabh Singh Hindu Business Line. I am so sorry to have disturbed you.
capital formation and entrepreneurship” 22 . UK.” “That will be so good for tax advisers like you. Australia. US. I continued. As a result. 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.” “My goodness.” Mrs. capital formation and entrepreneurship. Japan. “These taxes are not very popular in the countries where they are levied. “Estate taxes take away a large chunk of one’s wealth. “Many developed countries have had some form of “death duty” as it is often called since it gets triggered upon a person’s death. “but do you think this tax is advisable in the Indian context?” I replied. Emboldened by her remark. 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. it is often seen as a disincentive for wealth. as we stand today. it is often seen as a disincentive for wealth.Feature articles Of death and taxes a person’s wealth and property. it gave rise to many evasionary tactics. However. It also led to concealment of assets and income and probably sowed the seeds for the thriving parallel economy we see now. Basu said.wealth and estate being broken into smaller pieces and being held by proxy owners while the real owners continued to enjoy the benefits. we have wealth tax but no estate taxes.” “When Estate Duty was in force in India. the opposition against these taxes have been muted. I am so impressed!” said Mrs Basu. Malaysia and some other countries do not have estate taxes. Since estate taxes take away a large chunk of one’s wealth. 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. The most rampant was ‘benaami holdings’ . 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. I tried to look modest as I offered tulsi chai to her. France have very high rates of estate taxes with Japan tax rates going as high as 70per cent. since they aim to tax the very wealthy by keeping the exemption limit to a very high level. you know so much Mr Seengh.
Enacting a taxing law is the easiest part.... The tough part is enforcing it and punishing evaders. In the past he has served as the Chairman of Amcham’s Tax. there is also no doubt that the data gathering and enforcement mechanism is very weak and full of holes.. I sipped my tea in contentment for there could be no greater compliment from Mrs Basu than that.. Amitabh Singh Amitabh Singh Retired Partner... we have not done a good job with our good old Income Tax.ey. social security. your mind is as clear as Rabindra Nath Tagore!” Said Mrs Basu.... India Amitabh was a Tax Partner with Ernst & Young’s Human capital services. . our tax kitty would swell of its own without having to think of death duties etc. Reprinted with the permission of Hindu Business Line © 2012..update@in. His functional expertise included compensation structuring. stock based incentive plans. You can write to us on this article at: Tax. what great work we can do with Estate Tax? On the other hand.. payroll outsourcing...com 23 . All rights reserved throughout the world. Human Capital Services Ernst & Young. rooted out corruption in the ranks and started punishing the offenders. Tariff and Regulatory Affairs Committee..Personal tax Of death and taxes However. if we really beefed our current enforcement. As it is. Amitabh was associated with Ernst & Young since 1984 and was based at the Noida Office.” “Mr Seengh. personal income tax and immigration matters..
and also is in line with the five-fold strategy announced by the finance minister in the last Budget speech.Feature articles DTC to widen wealth tax net Mayur Shah Financial Express. jewellery. boats.000).000. helicopters. sculptures. hawala transactions. drawings. 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. any transfer of assets or gifting to your spouse. While the taxable wealth definition under DTC has been extended to specifically cover assets such as archeological collections. resulting in savings of R70. yachts. The most crucial inclusions are deposits in banks located outside India. minor children. 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. Similar to the present provisions. disproportionate asset cases. The critical point to be noted is the extended coverage of the ‘assets’ on which wealth tax is payable. paintings. could negate this saving. the tax rate continues to be 1%. aircraft. building. the threshold limit to trigger wealth tax has been raised significantly from R30 lakh to R1 crore. bullion. the DTC also continues with concept of “clubbing” and thus. Given the number of cross-border scams. Further. revocable trusts and own HUFs. daughter-inlaw. While. utensils or other articles made of precious metals continue to be considered wealth even under DTC. Another important implementation measure undertaken by the government already (ahead of the DTC) is the quick finalisation/ signing 24 . similar works of art. expensive watches (value more than R50. assets like land. furniture. 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). 9 August 2011 T he DTC Bill which was introduced in Parliament in 2009 and the revision last year has proposed to levy wealth tax on the specified unproductive assets of all taxpayers. except for non-profit organisations. will not help in getting away from wealth-tax. cars. unaccounted income/wealth and others.
. Human Capital. India Mayur heads the specialized practice discipline.... Therefore. He has over 10 years of work experience and has worked extensively in the area of human capital. He is based in our Mumbai office. it remains to be seen how effectively the tax authorities utilise the tools laid down by the finance ministry as a part of combating tax evasion..com 25 .ey.. and revision of existing tax treaties to specifically include information exchange clauses. All rights reserved throughout the world.. While implementation of DTC has been deferred to April 2013.. Thus. the time in your “expensive watch” will speak whether the DTC wealth-tax provisions achieves this objective. some of the changes brought in by Finance Act 2012 are in line with the directions of the draft DTC legislation.. You can write to Mayur at: Mayur. Mayur Shah Director. Global Mobility in Ernst & Young Mumbai. 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. ..Shah@in.. 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... Human Capital Practice Ernst & Young.. Reprinted with the permission of Financial Express © 2012. specializing in global mobility and employment taxation.Personal tax DTC to widen wealth tax net of various Tax Information Exchange Agreements (‘TIEAs’) with various countries...
bonds.Feature articles How much tax is payable on global income? Shalini Jain Economic Times . shares. These can be either short-term or long-term gains. 29 August 2011 W hen the RBI liberalised global investment norms. the tax implications in some cases can be quite complex. They could invest in immoveable property. property) outside India. depending on the period of holding. debentures. The new norms and the urge for geographical diversification has led many Indians to invest in foreign markets. and other financial instruments outside India.6% Rental income from property Added to income after 30% standard deduction and taxed at normal rate Added to income and taxed at normal rate 26 . funds Short-term capital gains Long-term capital gains 20. there are no tax-free luxuries from such investments for these may invite tax both in India and abroad. mutual funds. the income is treated as capital gains. listed and unlisted debt securities. deposits Dividend from stocks. it literally opened up a world of choices for wealthy Indians. If the transaction involves sale of shares listed on the overseas stock exchanges or other assets (gold. rental income and income from other sources. Types of incomes and tax liability Interest on bonds. If the holding period is shorter. the income is classified as a long-term capital gain. the gains are treated as short term. Tax on capital gains Under the Indian tax laws.Wealth. In addition. However. In fact. This includes capital gains. tax implications in the foreign country where the investment is to be made should also be analysed. If the asset is held for more than 12 months (in the case of shares or units) or 36 months (in any other case). a resident and ordinarily resident of India is taxed on his worldwide income.
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 employer can still take a position of limiting monthly contribution to the base of Rs6. 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. 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 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. On this topic. which is universally. Particularly. Subsequent to the high court rulings. if the employee so chooses. in respect of local employees. 30 . if both the employer’s and the employee’s share of additional contribution is deducted from the CTC. The concerns This has caused apprehension among the employer community. 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.Feature articles Will court rulings on PF affect you? Thus. 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. While there will be some tax saving on the employer’s portion of contribution as the same is non-taxable. Therefore. Also. there will be a major impact on the employee’s take-home salary. the Supreme Court of India has ruled that any payment. However. the deduction of the employee’s contribution under section 80C of the Income-tax Act will be limited to Rs1 lakh annually. the Provident Fund Scheme does provide a cap. In the current CTC structure which is generally followed in most companies. any payment by way of special incentive or work or which is based upon contingencies is excluded. he may opt to make an additional contribution.500.500 per month. Therefore. in case of local employees. it is fair to say that the high court rulings only serve to reinforce the above principles laid down by the Supreme Court earlier. The way out: But the situation does not seem to be so bleak.
All rights reserved throughout the world. ....... The EFPO has filed and the Supreme Court has admitted an appeal against the Punjab and Haryana High Court ruling. India Sonu has over 16 years of experience in the area of Human Capital — Global Mobility covering employee taxation and advisory with key focus on global mobility risk advisory services and Accidental Expatriates.ey. The argument that the earlier PF audits did not impose any requirement to contribute on such allowance may also be brought up.500 per month does not apply to them. 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.Personal tax Will court rulings on PF affect you? Still to be examined Also... 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. You can write to Sonu at: Sonu. M/s G4S Security Services (India) Ltd.. 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. Sonu Iyer Partner & National Leader. Human Capital Practice Ernst & Young. this needs to be examined differently as the limit of Rs6... She is based in our Delhi office.Iyer@in. Gurgaon vs. Also.com 31 .. For international workers. 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.. In its ruling. For international workers. 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. and another”. On 2 December 2011.... Reprinted with the permission of Mint © 2012.
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. and provident fund contributions etc. with the implementation of the Direct Tax Code (DTC). 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. five-year bank deposits. Investments made before the commencement of the DTC. unit-linked insurance plans (Ulips). tuition fees of children. repayment of housing loan principal amount and contribution to long-term infrastructure bonds will no longer yield tax saving under the DTC.Feature articles Weigh DTC provisions while choosing tax saving instruments Amarpal S Chadha Economic Times. would continue to be eligible for the EEE method of taxation for full duration of the instruments. you have to keep in mind that the existing tax laws will undergo a major change by April 2013. 3 January 2012 A s an investor. which enjoy EEE method of taxation under the existing tax laws. An additional deduction of 50.000 is restricted to Government Provident Fund. recognised provident funds and pension schemes. when you think about investments. National Saving Certificates.000 has been proposed to cover payments such as life insurance premium (annual premium shall not exceed 5% of capital sum assured). 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. 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.00.00.00.000. Also. Public Provident Fund. tuition fees for children and contribution to health insurance.000 is available as a deduction for a host of investments which includes payment of life insurance premium. The avenues available for tax saving investments are less under the DTC compared to the existing tax laws. which are currently under the limit of Rs 1. the deduction of Rs 1. Deductions: Under the existing tax laws. Capital gains: Listed equity shares or units of equity-oriented funds held for a year or less would be taxed after 32 . the umbrella limit of Rs 1. ELSS.
where as.. 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.. tuition fees for children and health insurance premium. negative and neutral proposals from a tax saving perspective under the DTC is given below: Positive: An additional deduction of 50. one could balance his/her portfolio and maintain a fair balance of investments in both government and private securities. India Amarpal S. A snapshot of some of the key positive. period of holding will be considered from the end of the financial year in which they are acquired. five-year bank fixed deposits. as the effective tax rate would be lesser in case of taxpayers falling under the lower tax rate. would be taxed after allowing 100% of capital gains as notional deduction. social security and other regulatory authorities. too. some of the changes brought in by Finance Act 2012 are in line with the directions of the draft DTC legislation.ey. The main object of the computation of adjusted capital gains is to benefit the lower and middle income group taxpayers... Reprinted with the permission of Economic Times. Amarpal S Chadha Partner.. the holding period is calculated from the date of purchase of investments under the existing tax laws... He possesses 15 years of experience and has done extensive work in the area of global mobility and employee taxation. © 2012.. from inbound as well as outbound perspective. So. You can write to Amarpal at: Amarpal.. In the case of non-equity shares or non equity-oriented mutual funds. with experience in dealing with tax. Listed equity shares or units of equity-oriented funds held for more than a year. post-office time-deposits.. national savings certificate. .. 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. period of holding will be considered from the end of the financial year in which they are acquired To conclude.com 33 .. principal component of home loan repayment. He is based in our Bangalore office..Personal tax Weigh DTC provisions while choosing tax saving instruments allowing 50% of capital gains as notional deduction.000 is available for life insurance.. Human Capital Practice Ernst & Young. Neutral: Contribution to employee provident fund. Chadha is a partner at Ernst & Young India in the Tax Human Capital practice. While implementation of DTC has been deferred to April 2013. The focus for investors will need to move towards investments that provide for a ‘real’ wealth accumulation and not only a tax savings play. PPF.. Senior Citizens’ Savings Scheme. superannuation fund. diversification always reduces risk and may increase returns.Chadha@in. contribution to long-term infrastructure bonds : a) In the case of non-equity shares or non equity-oriented mutual funds. All rights reserved throughout the world..
Given that the new tax system requires Central and State Governments to strip their constitutional powers and join hands for a common tax system.Feature articles Indirect tax The indirect tax system in India is currently undergoing a significant transition from a multiple tax regime to a common GST. The Government is rightly attempting to make the current laws GST friendly. among other developments that may impact your business. The negative list concept is a paradigm shift in manner of taxing services from a positive list to negative list and this is expected to help service providers for a smoother transition into the GST regime. This section provides a detailed analysis of the issues being deliberated in the purview of GST. and keep a close vigil on the likely structure to ensure a smooth shift to GST when it is implemented. 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. with the introduction of the Negative list concept in the Service tax law from 1 July 2012 being a step in this direction. Stakeholders understand the need to carefully implement changes in the current laws. implementation of GST regime is expected to throw economic and political challenges ahead of its implementation. again 43 | Budget takes India Inc closer to GST 46| Pluses in the negative list 34 . The Government had taken one important step by introducing Constitutional Amendment Bill last year in the Parliament.
and the categories of persons who can seek an advance ruling (as it stands today). is as follows. to offer a forum to nonresidents for resolving questions pertaining to proposed transactions. A resident in relation to a transaction with a non-resident iii. 12 December 2011 T he Central Government should reconsider aligning the provisions relating to advance ruling under indirect tax laws with the scheme prevailing under income tax. in a stable and predictable environment.Indirect tax Advance ruling under indirect tax Saloni Roy Hindu Business Line. Advance rulings lend transparency and predictability to the tax environment. While in many countries. as applicable to indirect taxes. A non-resident setting up a joint venture in India in collaboration with a non-resident or a resident 35 . has been widened with the years. under both the direct and indirect tax regimes. to Service Tax. where notified Categories under indirect tax regime: i. Authoritative and binding advance rulings allow traders and investors to make business decisions regarding taxes and duties. the idea was first pioneered in India in 1993. Public sector companies. It is clear that a far more expansive category of persons is eligible to seek advance rulings under direct tax vis-àvis indirect tax. A non-resident ii. in 2003. It was only in 1999. and was limited to direct taxes only. Residents notified by the Central Government iv. and. the ambit of advance rulings. and have thus emerged as a valuable tool for achieving certainty in tax positions. that the concept of advance rulings was extended to Central Excise and Customs. the concept of advance ruling has been introduced for existing tax payers. Categories under direct tax regime: i. Tax categories Since inception.
No specific provisions specifying the nature of questions that may be raised 2. admissibility of CenVAT credit. despite the fact that the category of eligible applicants for advance rulings has been expanded from time to time. since its inception till March this year. A joint venture in India v. Direct and indirect tax It is interesting to note that in complete contrast to the above. valuation. applicability of notifications. ‘lukewarm’. One of the biggest reasons for this disparity apart from the eligibility criteria is the difference of scope of Advance Rulings. 2. This is evident by the fact that the Authority for Advance Ruling set up for indirect tax matters has received only 146 applications. as available under direct tax vis-à-vis the indirect tax regime. A wholly-owned subsidiary Indian company. of which the holding company is a foreign company iv. 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. Public sector companies. to say the least. No other questions covered. the Authority for Advance Ruling set up to look into direct tax matters has been much more successful. 3. Can be sought only for transactions proposed to be undertaken. A resident setting up a joint venture in India in collaboration with a non-resident iii. in terms of the number of applications received and the general perception in the trade and industry. Residents notified by the Central Government vi. Can be sought only on questions relating to classification. Questions pertaining to direct tax: 1. Specific prohibitions in the case of questions already pending before other authorities Questions pertaining to indirect tax: 1. and determination of liability to pay tax. where notified However. “The Central Government should reconsider aligning the provisions relating to advance ruling under indirect tax laws with the scheme prevailing under income tax” 36 .Feature articles Advance ruling under indirect tax ii. the response of the trade and industry has been.
.. the Central Government. specifically under the service tax regulations.. Reprinted with the permission of Hindu Business Line © 2012. the Central Government introduces amendments to the various indirect tax laws in the annual budget. If the scope of the advance ruling mechanism included within its ambit applications in relation to ongoing transactions. India Saloni has over 17 years of experience in indirect tax consultancy. primarily due to the difference in interpretation by the tax payer and the revenue authorities.. should sincerely reconsider the recommendation of aligning the provisions relating to advance ruling under indirect tax laws.. This would go a long way in not only reviving the confidence of the taxpayers. applicability of notifications.ey. She is based in our Gurgaon office.. in the recent past. and have led to litigation at multiple levels. Saloni Roy Partner. but also in realising the full potential of the system. Given the increased litigation in indirect taxes. and issues pertaining to dual taxation under Service Tax..... in the coming budget..... Her areas of expertise are service tax. stirred huge debates. some of this litigation could have been limited. Some of these amendments have.com 37 .Roy@in. with the scheme prevailing under income tax. Indirect Tax Services Ernst & Young. as well as Value Added Tax.. VAT and excise duty.Indirect tax Advance ruling under indirect tax Every year.. You can write to Saloni at: Saloni. . customs and international trade. All rights reserved throughout the world. specifically in cases of classification of services.
Service tax law. This has led to plethora of litigation and uncertainty for the industry. paves the way for its possible introduction in the coming Budget. One only hopes that the concept is introduced as an interim step to GST. raise 38 . partly on account of lack of clarity in law making and understanding the business of intangibles. However. since its evolution. These include a clear definition of “service”. its timing has led to apprehensions over double taxation. 19 January 2012 T he Empowered Committee of State Finance Ministers’ endorsement to the concept of a negative list for services. the negative list will only compound the issue of double taxation.the Centre should refrain from taxing areas that are within states domain such as construction. place of supply rules and credit rules. The papers reckon that the concept of a negative list . harassment and uncertainty for the industry. an early implementation of GST seems to be the only solution. the Centre has released two concept papers. However.is a precursor and an interim step towards implementing the goods and services tax (GST) in the near future. but with a contentious rider -.services that would be exempt from tax . 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. signalling its intent to widen the service tax base. Going by the concept papers. construction and so on). States have endorsed the negative list. has been a victim of misinterpretation. This has led to many areas of double taxation (telecom. Although a negative list would enable a simplified GST design. The introduction of a negative list should also desirably bring along with it equitable changes in many other areas of service tax law. resulting in litigation. So. 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. it underlines the serious issue of overlap of taxation powers between the Centre and states. It will be interesting to see the Centre’s reaction when the concept is finally unveiled. With the widening fiscal deficit and the urgent need to generate revenues. entertainment.Feature articles A better goods and services tax Harishanker Subramaniam Economic Times. albeit with some riders. meals in air-conditioned restaurants and so on.
Conceptually. He is also currently involved in assisting companies for the impending introduction of Goods and Services Tax in India.Subramaniam@in. Some of the concerns of the empowered committee were addressed in the Negative list framework announced with Budget 2012 3.. far too much of tinkering has happened in this area. but its certainty and an expeditious resolution of refunds... This will provide some degree of certainty about taxes.. Reprinted with the permission of Economic Times © 2012. Indirect Tax Services Ernst & Young. It has led to unnecessary and prolonged litigation and also stalled service tax refunds. leading to double taxation and impacting the competitiveness of Indian industry in these uncertain times. We all are well aware of issues relating to export of service rules that the industry has faced in the recent past. 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. Some of it was welcome.. hurting cash flows of the industry.. Negative list has been announced to be implemented by 1 July 2012 2. You can write to Harishanker (Hari) at: Harishanker.. but several of them were highly debatable. and service tax. Efforts should be to provide a fair credit chain in the system to avoid the cascading of taxes and increasing cost of business. We still live in an indirect tax environment where the aggressive stance of Centre and State has created a serious issue of overlap. His areas of expertise are customs and international trade. He is based in our Gurgaon office. Over the last few years.ey. VAT and excise duty. but what is debatable is the timing of its introduction.. A negative list will increase the tax base. Place of supply rules is another key area of drafting.. India Hari is a qualified licenced customs broker and has over 25 years of experience in industry and consulting. . All rights reserved throughout the world.Indirect tax A better goods and services tax compliance cost for the taxpayer and the cost of doing business..com 39 . but it is equally important for policy makers to take a closer look at credit rules.. With the experience of over a decade. The negative list offers a chance for policy makers to have a holistic relook and provide more equitable Cenvat credit in the chain. a negative list is welcome. Here again. increasing areas of cascading of taxes. Draft place of Provision of Services rules have been notified Harishanker Subramaniam Partner & National Leader... 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... The issue generally is never about taxability. 1..
On the social and economic policy fronts. In the absence of a tangible reduction in international oil prices.Feature articles Burden of fiscal consolidation falls on tax system. No expenditure reductions were announced other than the policy objective of keeping subsidies within the cap of 2% of GDP. 40 . The achievement of these targets will thus depend entirely on market forces such as the prices of crude oil. which are being raised to provide an additional Rs 45. given the emerging divisions within the UPA coalition. the direct tax proposals are modest and populist. the fiscal woes will continue to compound in 2012-13. he has resisted the temptation to announce populist measures and shied away from a concrete roadmap for fiscal consolidation. again Satya Poddar Economic Times. begs the question whether it is realistic.500 crore. The burden of fiscal consolidation in the budget has fallen entirely on the tax system and there again on indirect taxes. His plan to reduce the fiscal deficit to 5. It is unlikely that the government will have the political strength to cut back on subsidies in the remaining two years of its mandate. 19 March 2012 T he finance minister went into the budget with his hands tied and came out with his hands tied. Leaving aside the significant and dramatic changes in international taxation arena. The fiscal deficit of 5.1% next fiscal. In these circumstances. while reasonable. he had little hope of getting the support needed for any major reform.9% of GDP turned out to be higher than anticipated.940 crore. On the fiscal side he had little elbow room to announce new spending initiatives or tax cuts. resulting in a revenue loss of Rs 4. Fiscal consolidation was the most significant challenge that the FM faced in preparing this budget.
And. again This is consistent with international trends. Having missed his targets before. while anticipated. 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 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). With major consumer services such as healthcare. Governments are increasingly constrained in increasing direct tax rates for fear of adverse impact on investment and economic growth. The amendments proposed close all the legislative gaps identified by the Supreme Court in the taxation of indirect transfers of property and go 41 . It will provide services through a common technology-enabled portal for registration of dealers. The only measure which could be viewed as a significant stepping stone to the GST is the Goods and Service Tax Network (GSTN). payment of taxes and refunds. 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. they are retroactive. filing and processing of tax returns. 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. notifications. as far back as 1962-63. there is no tangible broadening of the tax base. Other tax changes are largely in the nature of housekeeping. education. and taxpayer management including account management. “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).Indirect tax Burden of fiscal consolidation falls on tax system. information and status tracking. are draconian and vindictive. beyond. 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.
again In spite of dissension about the GST. You can write to Satya at: Satya.. Korea. India Satya has over three decades of experience in advising clients on tax policies.. It’s a win-win for both taxpayers and governments.com 42 . 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. Successful launch of the GSTN will constitute third generation of tax reforms... Reprinted with the permission of Economic Times © 2012. All rights reserved throughout the world. It will simplify tax processes. Policy Advisory Group Ernst & Young. and Gulf Cooperation Council. He is based in our Gurgaon office. Satya Poddar Partner...Feature articles Burden of fiscal consolidation falls on tax system.ey.. facilitate voluntary compliance and can yield significant fiscal dividends to governments. reduce leakages. . including Russia... VAT and international taxes.... after the first generation of reforms of the central direct and indirect taxes under the leadership of the then finance minister Manmohan Singh. and the second generation reform of state sales taxes in 2005. New Zealand.Poddar@in. He has also served as tax policy advisor to governments around the world... European Union.. 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. Syria.. China.
Any activity qualifying the characteristics of ‘service’ or the ‘ declared services’ would be taxable unless found in the negative list. 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. social and economic upheaval the country has been through in the previous year. among others. subject to exceptions and conditions. (ii) services provided by charities.Indirect tax Budget takes India Inc closer to GST Vivek Pachisia Hindu Business Line. • Services relating to agriculture. The declared services contain renting of immovable property. primarily includes services such as (i) health care. • Renting of residential dwellings. entertainment and amusement services. information technology software services etc. 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. 19 March 2012 T he Budget was expected to be of a different kind compared to the previous Budgets due to the political. The negative list comprises 17 services which broadly includes. • Manufacture. • Trading in goods. Exempted services The Budget has also proposed a list of exempted services in addition to the negative list of services. temporary transfer of intellectual property. subject to exceptions and conditions: • Services provided by the Government or local authorities. religious persons. Reserve Bank and foreign diplomatic missions. • Specified public transportation. The exemption list. service portion in a works contract. sportspersons 43 .
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. (iii) specific services provided to Government or local authorities. “ increase in rate of service tax and excise duty from the existing 10 per cent to 12 per cent. (iv) construction services relating to specified infrastructure. 2012’ which would identify the taxing jurisdiction of a service and will replace the existing export and import of service rules. irrigation works. The draft rules have been released for comments and feedback. the Budget also contains amendment to the Point of Taxable Rules. Further. the Budget has proposed to introduce the ‘Place of Provision of Services Rules. residential dwelling etc. The additional list of exemption provides relief from service tax to services that are essentially intended towards the larger benefit of the society. canals.Feature articles Budget takes India Inc closer to GST etc. 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. harmonisation of service tax and central excise by bringing about a common platform for registration and filing of returns. Further. for the time being. from the stakeholders. 2012 to bring in greater clarity on the subject. “The additional list of exemption provides relief from service tax to services that are essentially intended towards the larger benefit of the society. independent journalists. If implemented in its true spirit. eligible CENVAT credit would simply be entitled for refund in the ratio of the export turnover to total turnover. 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. To mitigate the hardship. and specific changes to rates of duties of customs and excise across different industry sectors. 44 . (iv) individual advocates providing services to non-business entities.
.Indirect tax Budget takes India Inc closer to GST However. to rationalise the existing indirect tax statues and prepare the ground for introduction of GST in the longer-term...... mitigating tax cascading.. be the biggest blockbuster reform in the history of indirect taxation.. project and EPC contract structuring. harmonisation of compliances... Vivek Pachisia Partner. business tax operations. Reprinted with the permission of Hindu Business Line © 2012.ey.com 45 . India Vivek is leading the Indirect Tax practice in Bangalore. 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. You can write to Vivek at: Vivek.. no doubt.. If the changes are effectively implemented and all irritants are removed. and so on. All rights reserved throughout the world. He possesses over 13 years of experience in advising clients on Indirect tax matters in the areas of supply chain structuring.... . litigation and tax controversy management.Pachisia@in. simplifying tax refund procedures. the dream of achieving the GST regime could soon be a reality which would.. mergers and acquisitions. Indirect Tax Services Ernst & Young.
Currently. have been included in the negative list. would become taxable. customisation and upgradation of information technology software. and other essential services such as funeral. Definition of ‘service’ But what exactly is ‘service’?. agricultural services. For example. they have been so declared in order to remove ambiguity and ensure uniform application of law all over the country. which are specified in the service tax legislation. Services provided by the Government and RBI. if you provide translation services for a consideration. 16 April 2012 N egative list of services. transportation of passengers in stage carriage and railways (other than first class or air-conditioned coach). Some important declared services include renting of immovable property. The Finance Bill broadly defines service as any activity carried out by one person for another for consideration. is finally seeing the light of day. Accordingly. except those in the negative list. economic and political relevance remain outside the ambit of service tax. your services would attract service tax. if the budget proposals are accepted then all kinds of activities. if you are an actor. However. magician or a non-classical musician. service provided by employee to employer in course of employment and fee taken by court or tribunal. educational services. burial and crematorium services. 46 . all services that were not taxable earlier have now been brought within the purview of service tax. With all services. The negative list has been drafted after ensuring that certain services that assume social. attracting service tax. transaction in money or actionable claim. it would now attract service tax. except those in the negative list. the list itself assumes great importance. service tax is levied only on a positive list of services. Although most of the declared services are taxable under the present positive-list regime. but does not include sale of goods or immovable property.Feature articles Pluses in the negative list Bipin Sapra Hindu Business Line. Similarly. which existed as a mere concept until sometime ago. and agreeing to refrain from an act or tolerating an act. The definition of service also includes certain declared services. Budget 2012 has proposed a paradigm shift in the way services are to be taxed in India.
. India Bipin anchors Indirect Tax for our technology. However. Ministry of Finance in India... it must be ensured that the new tax regime does not result in another complex tax structure that is difficult to interpret and implement. All rights reserved throughout the world.ey.. Indirect Tax Services Ernst & Young.. Bipin Sapra Partner. The option of including additional items in the positive list makes the tax structure even more complex. he has been part of various committees in the Indian Government for drafting legislations on Indirect tax policy in India. providing licence to use software may continue to suffer both service tax and VAT.. .. Similarly. the bundle shall be treated as provision of a single service that results in highest liability of service tax. Reprinted with the permission of Hindu Business Line © 2012.. the new regime still fails to address the issue of double taxation. as several VAT legislations treat the same as ‘goods’ subject to VAT.. where State taxes are also liable on some of the transactions. a long negative list and mega exemption list.. An ex. He is based in our Gurgaon office. Additional Commissioner with the Department of Revenue. In other cases.Indirect tax Pluses in the negative list Bundled services An interesting aspect of the negative list is the bundled services. communications and entertainment industry practice for the national capital region.. the shift to taxation of services based on negative list is certainly a positive development.. with an involved definition of services including declared services.. Further.com 47 . the bundle shall be treated as provision of a single service that gives the bundle its essential character.. Therefore. 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. 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..Sapra@in. You can write to Bipin at: Bipin..
valuation of intangibles. assumes a key challenge as the Indian tax authorities ramp up their enforcement efforts on the Transfer Pricing front. matters such as arriving at the correct arm’s length price on cross-border payments between associated enterprises.Feature articles International tax With economic growth and globalization. A welcome feature in the Budget has been the introduction of the advance pricing mechanism. TP and intangibles and reducing cross border disputes. Insights on taxability of P-Notes and the continuity of the Mauritius structure are also discussed here. In this section 49| Importance of Transfer Pricing Documentation 52 | Transfer pricing and intangibles 54 | Reducing cross-border tax disputes 57 | Going back in time is no good 60 | Pause before P-Notes 62 | Mauritius structures . This section on International Tax covers topics such as the importance of transfer pricing (TP) documentation.gazing through a crystal ball 48 .
Wherever the ITAT has eventually ruled in favour of the taxpayer. though only a decade old. There is a sustained increase in quantum of transfer pricing adjustments cutting across various industries. India is no exception insofar as the transfer pricing legislation. and adjustment for functional and risk differences. Cases have travelled through the appellate chain and are pending adjudication at various levels. Six rounds of transfer pricing audit examination by the Indian tax authorities have witnessed scrutiny of various inter-company transactions. the ITAT held that multiple year data cannot be used as a rule and the taxpayer has to make a case out for how prior year 49 . has seen considerable controversy. which is the ultimate fact finding authority in the Indian dispute resolution framework. However. 30. has repeatedly emphasized on the need for the taxpayer to possess documentation supporting the positions adopted in a transfer pricing analysis.000 crores is locked up in transfer pricing disputes alone in India. transfer pricing indeed dominates tax agendas around the world.International tax Importance of transfer pricing documentation Vijay Iyer CFO Connect. a common theme underlying the judicial precedence that is currently evolving in the country is the need for robust transfer pricing documentation. 1 July 2011 I n Ernst & Young’s Global Transfer Pricing Survey 2010. Many issues of divergence between the tax authorities and the taxpayers are still to be settled. It is estimated that approximately Rs. the case has been supported with extensive documentary proof. Commonly recognised as one of the most pressing issues. which dealt with issues relating to use of single year versus multiple year data. In allowing the tax authorities to use only data for the year under consideration. A cue can be taken from the recent case of Symantec Software Solutions Private Limited. Dispute resolution has been a time consuming process. application of turnover filters. The Income Tax Appellate Tribunal (ITAT). three quarters of the respondents considered transfer pricing documentation as being more important than it was two years ago.
A correlation of these trends to actual financial performance can often help in substantiating specific business strategies or defending against losses. Additionally. it was mentioned that the taxpayer did not demonstrate how turnover impacts the profitability thereby. the screens applied to filter companies. the basis of arriving at the service charge encompassing the cost elements of the service charge and the allocation keys was scrutinized. Documentation plays a very critical role in addressing these questions and enables the taxpayer to enter an audit situation from a position of strength. 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. On the turnover filter. 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.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. aids in spotting trends which have a bearing on profitability. These aspects then feed into the comparability analysis where description of the search methodology. Even in case of economic adjustments. The advantages of preparing and maintaining prescribed documentation are manifold. giving a better insight into the business. in many instances. We observe a trend towards the tax authorities requesting for a greater level of detail around related party transactions specifically intragroup services. 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. reasons necessitating economic adjustments and a quantification of such adjustments demonstrate the due diligence undertaken by the taxpayer. Last year. helps identify the functional attributes of the parties to transactions and the risks allocation entailed in such arrangements thereby. This ruling therefore underscores the importance which the ITAT attaches to documentation of facts and rationale. negating its application. 50 . 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. It captures the terms and conditions of inter-company arrangements. Indian taxpayers paying for management services availed from group companies suffered disallowances of these charges on the grounds that adequate documentation was not available to evidence actual availing of services or benefits received from them. the computation of financial ratios of comparable companies.
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. including outbound investment from India to overseas. India Vijay possesses over 15 years of experience in advising clients on transfer pricing and international tax. and competitiveness.. All rights reserved throughout the world. anticipating potential implications thereof and tackling them appropriately to stay ahead of the curve. Vijay Iyer Partner and National Leader. Suitable documentation facilitates penalty protection in case of a dispute and reduces the risk of additional financial costs to the company.. robust documentation is a key ingredient for success in controversy and will continue shaping the views of the judicial authorities in future transfer pricing judgments. The global economic crisis has triggered off a need to relook business operations to achieve efficiency. the tax department is seeking to levy penalties in almost all cases..ey. Reprinted with the permission of CFO Connect © 2012. The legislative and regulatory landscape is rapidly altering. He is based in our Delhi office..... streamlining global policies and reconfiguring functions and risks to derive maximum benefit. Transfer Pricing Practice Ernst & Young.. Contemporaneous documentation endows companies the benefit of taking into account these changes..International tax Importance of transfer pricing documentation With the sustained pressure on raising revenues.com 51 . synergy. Greater rigour in preparing and maintaining documentation will keep corporate taxpayers in good stead to face the challenges of the new world.. The transfer pricing documentation process provides a useful framework to discover opportunities for supply chain optimization. 45..000 crores.Iyer@in.. You can write to Vijay at: Vijay.. Heightened scrutiny by the tax department and the augmented levels of disclosure expected from taxpayers significantly inflates the transfer pricing risks confronting companies.. . The seventh round of TP audits got concluded in October 2011 and has resulted in proposed TP adjustments of approx Rs.. In the Indian context. Transfer pricing documentation globally is motivated by risk mitigation and audit defense factors..
details of the process. have tightened transfer pricing laws. 52 . that transfer pricing cases will be scrutinised by the Comptroller and Auditor General of India (CAG). issues pertaining to intangibles have been a significant bone of contention between taxpayers and tax administrations. and mobile. product. intangibles are subtle. where more than 74 per cent of the multi-national enterprises (MNEs). In this regard. They have also been challenging taxpayers on the cost-benefit analysis of the receipt / use of intangibles. one third of the MNEs surveyed identified transfer pricing as one of the most important tax challenges facing their group. improved vigilance. conducted by Ernst & Young. Further. covered by the intangible property. since they have revenue implications for the exchequer. information on the availability of such intangibles in the open market and prices and the cost of development of the intangibles. The Director General of Income Tax (DGIT) communicated at a public conference. Focus of audits Recent audits have seen increased focus on transactions pertaining to use or transfer of intangible property. its uniqueness. thereby complicating questions of pricing and ownership. enhanced enforcement and armed its tax officials with greater powers of investigation. simply put. tax authorities have sought detailed information on the description of intangible property received. As the name suggests. elusive. like several others. The increasing complexity in this area can be gauged from the 2010 Global Transfer Pricing Survey.Feature articles Transfer pricing and intangibles Vijay Iyer Hindu Business Line. refers to pricing of transactions between group companies in different countries. useful life of the intangible. believed that transfer pricing will be absolutely critical to their organisations during the next two years. In the absence of specific guidance on definition. Taxpayers may therefore brace themselves for greater audit activity in the coming days. 19 September 2011 T ransfer Pricing. quantification of the benefits and the comparison of profits before and after the use of the intangible. identification. Indian tax authorities. and valuation of intangibles for transfer pricing purpose. agreement rights to receive upgrades / modifications.
and legal standards. as opposed to legal ownership.. Transfer Pricing Practice Ernst & Young. the results of this project.... in the absence of any guidelines in the Indian regulations.. 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 recent transfer pricing audit proceedings. All rights reserved throughout the world. would serve as a useful paradigm while analysing various aspects of transfer pricing.. You can write to Vijay at: Vijay.. The notion of economic ownership.. The Working Party for the project intends to review specific categories of intangibles. the primary responsibility for ensuring appropriate transfer pricing analysis and documentation lies with the taxpayer only.com 53 ..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.. Reprinted with the permission of Hindu Business Line © 2012.Iyer@in. The project intends to address issues pertaining to definition of intangibles. will also be examined in the OECD Project. valuation. at least for the taxpayers.ey. including outbound investment from India to overseas. along with the valuation of the intangibles.. .. The OECD guidelines currently do not contain any universal definition of intangibles.. He is based in our Delhi office. and when a cost-plus method or a method other than costplus may be acceptable for pricing of R&D services. India Vijay possesses over 15 years of experience in advising clients on transfer pricing and international tax. On 6 June 2012. including the relevance of definitions of intangibles used in accounting. but are seen to have economic ownership. have raised the issue of ‘arm’s length return’ to entities that aren’t legal owners of intellectual property. Indian tax authorities.. the OECD has released an interim discussion draft on the revision of the special considerations for intangibles in Chapter VI of the OECD transfer pricing guidelines and related provisions Vijay Iyer Partner and National Leader. Useful paradigm Though the OECD Guidelines are not binding on the Indian tax administration (since India isn’t a part of the OECD). However. such as the pricing of R&D services. The scope of the above project will include work on a framework for analysis of intangible-related transfer pricing issues...
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. The DRP’s directive is binding on the tax department. Tribunal.Feature articles Reducing cross-border tax disputes Prashant Khatore Hindu Business Line. High Court and Supreme Court . however the taxpayer may appeal before the 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. Under the traditional mechanism. 54 . 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. effectiveness of administrative processes. 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. The Given the above. 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. 13 February 2012 J ustice delayed is justice denied. manifold appellate layers. the with fundamentals of international taxation being tested on regular basis. and thereafter. international tax adjustments.
” 55 . 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. Safe harbour In addition to the introduction of the DRP. 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. circumstances in which the income-tax authorities shall accept transfer price declared by the taxpayer. the experience has not been cheering. the CBDT must exercise its discretion to establish additional benches. with fundamentals of international taxation being tested on a regular basis. Accordingly. to ensure effective functioning of the forum to its intent it is crucial to constitute an independent body to function as DRP. 63 per cent were rejected and only partial relief was provided in 21 per cent cases. The proposal of NTT was supposed to be followed by formation of 15 Tribunals with decision of NTT appealable only before the Supreme Court. However. 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.e.e. Work allocation: The panel members having an additional charge as DRP members have perceptibly divided attention.International tax Reducing crossborder tax disputes The highlight of the mechanism is the automatic stay of demand till the final decision by DRP. it is vital to address the challenges being faced by the forum. “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. A joint EY–CII report ‘India. The NTT needs to become operational at the earliest. Finance Act 2009 empowered the CBDT to formulate safe harbour rules i. The implementation of NTT would avoid conflicting decisions on the same issue thereby significantly reducing litigation. the forum is faced with the fundamental issue of independence leading to conflict of interest. The Union Budget 2005 proposed to replace the appeal to High Court by the NTT with the objective of speedy adjudication of disputes. Given the above. disposal of cases on fast-track i.
.ey.Khatore@in. He is based in our Noida office. All rights reserved throughout the world.com 56 ...” Prashant Khatore Partner.. These rules should be issued at the earliest. Introduction of APAs is a welcome measure and should provide a fair degree of certainty to the business transactions... Prashant has extensive experience in tax planning and structuring.. The Direct Tax Code had proposed the introduction of APAs which shall be valid up to 5 financial years. . He also actively contributes to thought leadership in the areas of direct taxation.. the rules are yet to see the light of the day. Conceptually. Reprinted with the permission of Hindu Business Line © 2012. 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. 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.... “APAs have been introduced in the Income tax law in the recent budget.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. India A corporate tax specialist.. Though the CBDT established a Committee to finalise the details of the provision..... You can write to Prashant at: Prashant. Tax & Regulatory Services Ernst & Young.
across various appellate levels. 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. transponder lease revenue streams of non-residents into the net of the tax authorities. One would ask — was the insignificant relief granted by the Finance Minister in personal taxation (pale in the backdrop of crippling inflation). The opening statement of the Finance Minister. “I need to be cruel at present to be kind in the future”. the tremors of the crisis continue to pose new and serious challenges. seeking to negate judicial precedents. The definition of the terms ‘international transaction’ and ‘intangible property’ have been amended for providing certainty in law.International tax Going back in time is no good Jayesh Sanghvi Hindu Business Line. which are proposed to be retrospective. was clearly meant to be more of a statement of intent than a headliner. It has also been 57 . which have provided some certainty. 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. Governments are increasing the focus on consolidating their public finances and designing tax structures that are growth-oriented. The definition of the term ‘Royalty’ has been suitably amended to restate the legislative intent and to subject software licence. 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. 19 March 2012 A cross the globe.
Applicable effective AY 2013-14 for transactions aggregating to Rs 5 crore. Penalties are now leviable for failure to (a) maintain prescribed documents or information. Again here. 80A. Therefore. that is. 10AA. Transfer pricing In contrast. 80IA. definition of ‘international transaction’ has been significantly expanded for clarification retrospectively. Such penalty is to be levied at two per cent of the value of the international transaction. 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. 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. TP regulations (procedure and penalty) extended to domestic related party transactions under Section 40A. respectively). 58 . provided the same was not reported in the Transfer Pricing Report (TPR). He may now wait to be visited with penal provisions? There are some provisions laid out to widen the tax base. as also tax collection at source on cash sale of bullion and jewellery in excess of Rs 2 lakh. 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. At a time when business houses and tax practitioners crave for certain and stable tax legislation.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. APA is very welcome in providing certainty and unanimity of approach. credit where it’s due. 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). Other transfer pricing related amendments. Transfer pricing remains the most litigated subject today and it is hoped that the APA mechanism would foster some certainty. a taxpayer. as mentioned earlier. or (b) report any international transaction which was required to be reported. 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 retrospective amendments throwing business strategies and plans into disarray are hardly welcome. or (c) maintain or furnish correct information or documents.
ey. It is only hoped that the GAAR will be invoked sparingly and to address issues of clear tax evasion.. 1. You can write to Jayesh at: Jayesh. transaction structuring. 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... the provisions are to be inserted w. enacted on 28 May 2012 2. at the prospect of being handed out a bigger tax bill. it is the honest tax payer who is most scared in this country. their impact has been deferred by a year. The Finance Act 2012 has provided relaxations to the proposed provisions by excluding coins and articles weighing less that 10 grams from “bullion” and enhancing the threshold limit for sale of jewelry to Rs.f.. In the end. challenged in the courts.. the FM has proposed to introduce GAAR in its most virulent “avatar”..e.Sanghvi@in. regulatory matters. Omitted in the Finance Act 2012. i.. Reprinted with the permission of Hindu Business Line © 2012. mergers and acquisitions. All rights reserved throughout the world.. only after due consideration of some very valid recommendations.. due diligence related tax and advisory support for a number of multinational and domestic clients across various industries..e.com 59 .. advising global companies on smooth and tax efficient exit and repatriation strategies from the Indian tax perspective. India Jayesh has over 19 years of experience in the field of corporate taxation.. 5 lacs 3. Law is truly blind. Certainty may be some distance away as some of the retrospective amendments will very likely be resisted in post-Budget parleys and. transfer pricing ..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). . Planning appropriate holding and financing structures for companies in case of reorganizations. While the GAAR provisions have been enacted vide the Finance Act 2012. Tax & Regulatory Services Ernst & Young. 1 April 2014 Jayesh Sanghvi Partner.. Unfortunately.. if legislated.. He is based in our Hyderabad Office.
They are meant for investors looking for exposure to the Indian capital market.Feature articles Pause before P-Notes Hiresh Wadhwani Hindu Business Line. the implications of the budget proposals are far-reaching and greater clarity is required. 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. the gains on transfer of P-Notes are not liable to be taxed in India. However. First. which are assets located in India and taxable here. the P-Note holder has no ownership rights in the specified security. it is on its own account and in accordance with its risk-taking ability. it gives them access to such superior returns that these Indian securities may generate. However. as Indian if the share or interest derives its value substantially from the assets located in India. Though the performance of the P-Note is linked to the performance of the specified security. Typically. certain amendments have been proposed to significantly widen the ‘source’ rule. 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. by the FII from hedging . Further. in some cases the return to the P-Note holder is net of taxes incurred. This raises worry as the return on P-Notes is linked to the performance of specified Indian securities. in an attempt to amend the Act retrospectively to tax Vodafone-like transactions. These inter alia include amendment of section 9 of the Act. deeming any asset or capital asset that forms a share or interest in a company or entity incorporated outside India. Taxing assets in India The understanding all along has been that as a foreign asset. 16 April 2012 T he post-budget uncertainty over taxation of participatory notes (P-Notes) remains unresolved. 60 . the FII issuing it is not obliged to hold the security. now an uncertainty has arisen due to the proposed amendments to the Incometax Act. if any. 1961 (Act) on two counts. The FII is contractually obliged to provide a return that is linked to the performance of 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. Where the FII holds the security.
. Hiresh Wadhwani Tax Partner & National Director. which typically creates a time lag..com 61 ..ey. pursuant to significant concerns raised by various stakeholders. the applicability would be determined only at the assessment stage.. ... 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. This results in uncertainty over the tax position for these instruments. You can write to Hiresh at: Hiresh. All rights reserved throughout the world.. 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. Financial Services Ernst & Young. 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. This leaves the application of GAAR to the judgment of the tax officers. brokerage houses.. GAAR proposes to override the tax treaties India has entered into with other sovereign nations. 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. India Hiresh’s experience in tax. 2013. Also. Even as emerging market economies are vying for a share of the same pie.. for instance. the burden of proof to show that an arrangement is not an impermissible avoidance arrangement is no longer that of the tax payer. and the Investor Identification regime in Korea. the Foreign Institutional Investor (FINI) regime in Taiwan. Further. He is based in our Mumbai office.Wadhwani@in. Further. clarity and certainty on the issue of P-Note taxation will go a long way in reassuring the FII community and prevent an exodus of foreign capital from India.. The proposed provisions are widely worded and onerous. including banks. He has worked with variety of international financial institutions. regulatory and inbound structuring projects spans over 20 years. 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. investment banks. Wary foreign funds Such uncertainties in tax positions could deter FIIs from issuing P-Notes and even lead to the unwinding of existing issuances.. asset management companies and PE funds... 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). the Qualified Foreign Institutional Investor (QFII) regime in China.
the Authority for Advance Rulings held that the buy-back of shares held by a Mauritius company was a tax avoidance device. However. The treaty. had provided a reasonable level of certainty to taxpayers. in a recent ruling. Relief in reverse? In the past. including one from the Authority for Advance Rulings (in the case of E*Trade Mauritius Ltd 324 ITR 1. as the buy-back by the Indian company was in lieu of distribution of dividends. recent developments indicate a renewed attempt by the tax authority to challenge the use of Mauritius structures. both under Indian tax law as well as the tax treaty. This popularity is due to several factors including the capital gains tax exemption available under the India-Mauritius Tax Treaty. The buyback was disregarded and treated as distribution of dividend chargeable to dividend distribution tax (DDT) in India. 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. documentation and conduct of the parties to question the legal/ beneficial ownership of the shares by the Mauritius company. The authority’s approach has been to make a detailed inquiry into the facts. where it was observed that the legal structure of the Mauritius company cannot be disregarded and legitimate tax planning was permissible). it seemed as if the status quo was restored on the use of the tax treaty. has been under constant scrutiny by Indian tax authorities as a result of alleged abuse by investors. 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 62 . which had underpinned the emergence of Mauritius as the dominant channel for foreign direct investment into India. and thereafter determine the availability of the benefits under the tax treaty. 14 May 2012 M auritius has been a popular location for intermediary holding companies for multinationals and others investing in India.Feature articles Mauritius structures — gazing through a crystal ball Vidya Nagarajan Hindu Business Line. Further. With a series of highprofile court rulings.
.. and they look forward to greater clarity and certainty on the issue. Tax authorities are hoping that Mauritius would stiffen the requirement for tax exemption under the treaty... foreign investment consulting. While one can only guess what lies ahead in the use of the IndiaMauritius tax treaty. Tax & Regulatory Services Ernst & Young. drawing from media reports. The India-Singapore tax treaty had additional clauses to check treaty abuse... India Vidhya is a part of our Business Tax Services practice.. These have collectively caused a lot of uncertainty.. joint ventures. it would appear that the treaty could be brought on par with the tax treaty with Singapore. Reprinted with the permission of Hindu Business Line © 2012.. The road ahead Over the last few years.. according to media reports.Nagarajan@in. Over the past 15 years.. All rights reserved throughout the world. It is interesting to note that the capital gains tax exemption available under the India-Singapore tax treaty is linked to the IndiaMauritius tax treaty... international and corporate tax. the Government has sought to review the tax treaty. You can write to Vidya at: Vidya.ey..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.. Interestingly. 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.. and is available only so long as the India-Mauritius tax treaty provides that exemption. Vidya Nagarajan Partner. divestments. . 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.com 63 . she has advised clients in the areas of corporate restructuring. She is based in our Chennai office.
situated in notified jurisdictions. Further.Feature articles Transaction tax This new phase of economic and corporate revival has arrived with a lot of changes in the regulations governing Mergers & Acquisitions. the target company and the minority shareholders. The Government has proposed to introduce the new Companies Bill 2011 which permits cross-border mergers and amalgamations between Indian and foreign companies. In this section 64 65 | New ring to tax tale 69 | Options that change investment status 71 | The new M&A horizon .the acquirer. the new SEBI Takeover Code reflects a fine balance of SEBI’s preference to take care of considerations of all the stakeholders . All this and more is discussed in the section on Transaction tax.
in turn. They provide exit flexibility to investors. If other countries also start adopting the same approach. India itself. It was generally understood that such transactions should not be taxed in India. it could also have an adverse impact on investor sentiments and hamper future FDI flows into India. In the past. Taxing such transactions on the basis of non-existing provisions would result in uncertainties amongst the existing investors. having farreaching implications on international transactions. This. therefore. 65 . 23 September 2011 T he territorial jurisdiction of Indian tax authorities to tax cross-border transactions involving indirect transfer of shares of an Indian company has been a matter of controversy. which appears to steer against the accepted jurisprudence and seeks to lift the corporate veil. including multi-tier structures put in place for commercial reasons. similar transactions have been left untouched. taking a cue from the arguments of Indian tax authorities.Transaction tax New ring to tax tale Amrish Shah Financial Express. would hinder the overall growth of Indian corporates and. recently. In the era of evolving financial markets. such as leveraged buyouts. Indian tax authorities have attempted to challenge this interpretation. However. since the situs of the shares sold are outside India and in the absence of any specific ‘look-through’ provisions. The ‘preferred investment destination’ image of India may take a beating in the case of such an approach being adopted by the tax authorities. Though such an approach might result in a temporary spurt in revenue for the Government. These structures should not be subjected to the lifting of the corporate veil merely because it results in tax savings. this would create a fair chance of affecting outbound structures of Indian corporates and hinder their global expansion plans. structures put in place to channel legitimate investments across borders are perfectly acceptable. Taxing similar transactions now would result in an unfair advantage to those past transactions.
as the transaction was entered between two foreign companies—outside India. warranties and indemnification clauses. Resolution of the issues may result in a delay in the closure of deals. Hutchison Essar Limited (HEL). and for shares of another foreign company. How would they withhold taxes and deposit in India? For instance. in the case of a listed foreign entity having an Indian subsidiary. especially the representations. It held a majority stake in an Indian company. How would the cost of the acquisition of such shares be computed and capital gains apportioned. the case revolves around a complex catena of facts. therefore. are likely to get a lot more complex and elaborate. If at all such transactions are to be taxed. the transaction documentation. 2012— specifically spells out conditions under which such indirect transfer will be subject to tax in India. This lack of clarity would result in enhancing litigation and consequential uncertainties. if the foreign company whose shares are being sold also holds shares of companies other than Indian companies? Also. The Hutchison Group of Hong Kong was controlling certain companies in India in joint ventures with others. briefly stated here. 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. in order to provide prospective investors a better chance to plan their structures. It is. Actually. which seems to be an absurd position. 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. there could be numerous transactions where withholding tax implications may arise to public shareholders. International law recognises a State’s right to tax income having its source in its jurisdiction.Feature articles New ring to tax tale Such a position would raise some practical issues as well. through Hutchison Telecommunication International Ltd (HTIL) of Cayman Islands. if a similar transaction results in a capital loss. The right of a State to tax a nonresident arises from the existence of a nexus between him and that State. HEL had 66 . Interestingly. 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. argued that Revenue is stretching the concept of nexus by bringing in the issue of the foreign company’s underlying Indian assets. Also. The parties involved would be foreign entities unaware of Indian tax laws. a prospective amendment in the existing tax laws with a specific provision to tax such transactions would be a reasonable path forward. Since there are various instances of pending litigations in Indian courts (including the apex court). the Direct Taxes Code—which is likely to come into effect on April 1. a better picture and a clear view forward would be available only after such litigations are settled.
this could effect outbound structures of Indian corporates and really hinder their global expansion plans. The price of $11 billion factored in a panoply of rights and entitlements including control premium. and Vodafone ought to have deducted tax. the controlling interest in the Indian assets of HEL got transferred. Thereafter. Vodafone took approval of FIPB. 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.” paid the balance consideration and the share certificate of CGP was delivered to it in Cayman Islands. 67 . Pursuant to this. 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. The Revenue contended that this was. in effect. It took the matter to the Bombay High Court in a writ against a Show Cause Notice issued by Revenue even before the tax liability was determined. the value of non-voting preference shares and entitlement to acquire further 15% interest in HEL. 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.Transaction tax New ring to tax tale interests in several telecom circles in India through a web of subsidiaries. It argued that the transaction gave rise to capital gains taxable in India. in reality. 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. a composite transaction for the transfer of all rights in HEL by HTIL. which was controlling the Indian interests of the Hutch group. In February 2007. The transaction was accompanied with several other enabling agreements. resulting in Vodafone stepping into the shoes of HTIL. 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. a non-compete agreement. Vodafone “If other countries take their cue from the arguments of Indian tax authorities. as. right to the Hutch brand in India.
. The ruling has been given on the basis of facts indicating that the transaction was a colourable tax avoidance device... You can write to Amrish at: Amrish.. Therefore.. All rights reserved throughout the world. Incidentally.com 68 . Revenue will be ill-advised in invoking it in genuine business cases..ey... He is based in our Mumbai office. directly or indirectly... the Direct Taxes Code codifies the anti-avoidance Rules under which a transaction can be declared as lacking commercial substance. India An all-India rank holder in Chartered Accountancy.. Amrish has over two decades of experience in the areas of mergers and acquisitions. corporate restructuring. Reprinted with the permission of Financial Express © 2012.. to tax indirect transfers of shares in situations where the shares derive. introduced retrospective provisions . This has to be ascertained from the covenants and surrounding circumstances.. the Court held that the label which parties ascribe to a transaction cannot be conclusive in determining its character. 1962. actually engage in a different transaction which serve no business purpose except avoidance of tax. 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.effective from 1st April. and establishment of joint ventures. “The Finance Act. can be disregarded... their substantial value from assets located in India.” Amrish Shah Partner & National Leader — Transaction Tax Services Ernst & Young. foreign investment consulting. . 2012.Shah@in.Feature articles New ring to tax tale Relying on the doctrine of substance versus form. while seeking to clothe the transaction with a legal form. divestments. A colourable device in which parties.. taxability can arise.
more particularly from private equity investors. The hue and cry and the various representations made to the government authorities have borne fruit. For the private equity industry. In doing so. The Department of Industrial Policy and Promotion (DIPP) in its mid-year review of Foreign Direct Investment (FDI) policy on October 1. restrictions and limitations. obviously did not go down well with the industry. 4 November 2011 I t took just a month for the Department of Industrial Policy and Promotion to revise its earlier provision that sought to define equity investment as debt if it was accompanied by in-built options. 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. 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. 2011 had inserted a specific provision. the subsequent revision has come as a welcome shot in the arm. painting all FDI investors with the same brush and limiting their structuring options would have had a significant effect on FDI into India. which was most affected by this directive.Transaction tax Options that change investment status Amrish Shah Economic Times. compliances. 69 . But other regulatory bodies will need to follow suit if the current buoyancy in PE inflow into India is to continue. which stated that any equity instrument when issued or transferred to a non-resident. the DIPP has displayed a flexible approach and an ability to ensure that India’s attractiveness as an FDI destination remains intact. 2011. Such instruments would need to comply with extant External Commercial Borrowings (ECB) guidelines in respect of various caps. The cardinal principle of any PE investment is to simultaneously think about the exit at the time of entry itself. will be deemed as ‘debt’ if it includes in-built options or is supported by third party options of any type. Limiting their options to structure their investment. especially their exit options. This inclusion saw vehement opposition from the industry.
He is based in our Mumbai office. 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. You can write to Amrish at: Amrish.. and establishment of joint ventures..... since they are exclusively entered between two parties independent of the stock exchange. in certain cases. foreign investment consulting. which would curb debt masquerading as equity and other such abusive practices. RBI has been questioning investment agreements which involved options and classifying them as an ECB. 1956. irrespective of whether such an option was exercisable by the Company or by its shareholders. only spot delivery contracts or derivative contracts entered into through a stock exchange are legally enforceable. one can only hope that a similar approach would be adopted by the other Regulators as well.. 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... India Amrish Shah is a partner at Ernst & Young India and leads our Transaction Tax practice*. Amrish Shah Partner & National Leader — Transaction Tax Services Ernst & Young. re-organizations. demergers.. mergers. however.ey. . divestments. Over the past 18 years he has advised clients in the areas of acquisitions. All rights reserved throughout the world.. even prior to introduction of the said provision by DIPP.com 70 . it needs to be seen whether other regulators follow suit. For example...Shah@in.. corporate restructuring. Reprinted with the permission of Economic Times © 2012.. a blanket attack on all option structures even in case of genuine equity investments is something which is extremely undesirable.Feature articles Options that change investment status While DIPP has taken the necessary amending steps. The industry is open to apt regulations. Considering that DIPP has given a green signal to use of Options.. or whether it was exercisable to the shareholder pursuant to a breach of a condition or upon failure to provide exit to the investor.. 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. international/corporate tax and business reorganization.
71 . the rights of the minority shareholder. Prior approval Another potentially unwishedfor-change is the requirement of seeking prior RBI approval for any and all cross-border M&A activity. inbound mergers are not only permissible. Aiming to consolidate over 50 years of practical and legislative history is no easy task.Transaction tax The new M&A horizon Narendra Rohira Hindu Business Line. greater discloser and greater accountability are also obvious keystones desired to be addressed by the legislature. At first. a closer inspection reveals a far fuzzier picture. However. While the provisions do allow inbound and outbound cross-border mergers. Given that the provisions governing cross-border mergers apply to both inbound and outbound mergers. should such a process be required for each and every cross-border transaction. but are permissible with foreign companies from any jurisdiction. 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. and while it is evident that the new Bill has attempted to balance out the needs of the Indian corporate sector on one hand. The inherent paperwork and lengthy timelines surrounding regulatory approval could prove practically onerous for Indian corporates. such cross-border mergers will only be allowed with companies situated in jurisdictions notified by the Central Government. this appears a bold and progressive move with the legislation finally opening up India’s borders to previously outlawed outbound mergers. this qualification could actually result in a metaphorical step back as under the existing laws. like the great impressionist paintings of Renoir and Van Gogh. 26 December 2011 L ast week saw the arrival of the latest product of the current spree of legislative reform directed at India Inc – the Companies Bill 2011 (‘the new Bill’). 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.
Government. holding treasury stock i. in or mandatory prior RBI approval might out of a trust structure. However. qualifications such as in the name of the issuing company Government notification and itself. is no longer permissible. 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. 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.e. 72 . advantage of loopholes in the notified by the Central existing laws. greater investment and capital infusion flexibility and alternative holding structures that are compliant with existing laws but still allow a promoter/majority shareholder to retain control – directly or indirectly. authorities’ The loss of such determination an option could to question “Under the new require many corporate bill. 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. while with the corporate sector has come still allowing the promoters/majority to the forefront with high profile shareholders to retain a controlling cases highlighting the regulatory stake over the company. significantly reduce the potential Treasury stock has historically been benefits for India Inc.Feature articles The new M&A horizon However. pure investment holding companies may only make investments through a maximum of two layers. the new Bill provides that going forward. Under the provisions of the new Bill.” In line with this spirit. 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. In recent times.
. the logic of a simpler process was upheld by the courts in cases such as Mahaamba Investments Ltd vs... the Companies Bill is a perhaps a quiet giant but a giant nonetheless. All rights reserved throughout the world. You can write to Narendra at: Narendra.... mergers involving such companies have been given the option of a simpler process involving only the relevant Registrar and the Official Liquidator. only time will tell. Narendra Rohira Partner...ey.Transaction tax The new M&A horizon Instead of the entire regulatory process involving the courts. He has assisted various Private Equity players with acquisitions in India involving cross border structuring. Narendra focusses on conceptualizing. Reprinted with the permission of Hindu Business Line © 2012.. 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. structuring and implementation of M&As. funding and corporate tax optimization.... Transaction Tax Services Ernst & Young.. Amidst the heated debate on FDI limits and the glamorous morality of the Lokpal Bill.Rohira@in. .com 73 . He is based in our Mumbai office. India A partner with our Transaction Tax practice. on whose shoulders has fallen the task of bringing Indian’s corporate laws into the 21st century... How well it manages its responsibilities.. For mergers between wholly-owned subsidiaries and their parent companies.
Though inflation has momentarily stabilized.Feature articles Tax & regulatory policy The current economic situation continues to be of concern. From a tax and regulatory policy perspective. Issues such as the sliding rupee. While the Government appears cautious about permitting FDI in Retail and sensitive sectors like Defense & Civil aviation. there have also been challenges on the introduction of GST. black money play an important role in shaping the investment environment in India. The articles in this section bring to the fore the significant dimensions of the regulatory policy environment in India. 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. 75 | Is grip tightening on black money? 78 | New regulatory framework for private investment vehicles 82 | Alternative investment funds: hits and misses 84 | One-time amnesty for swiss stash 87 | Tax transparency is the new reality 90 | New SEBI takeover code finally notified 94 | The Big Push for Big Retail 97 | 3G of Tax Reforms 74 In this section . The Government needs to take measures to boost the business environment and keep the confidence of domestic and foreign investors intact. it is still hovering above the tolerance level. Measures such as streamlining the FDI policy and reducing red-tape are expected to result in boosting investor confidence. it appears that the Government dished out a safe budget that merely pledges reforms.
Voluntary disclosure also provides the opportunity to calculate. interest and a penalty up to 100% of the tax lost. accurate and complete voluntary disclosures into account to decide whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. From April 2010. HMRC is empowered to publish details of persons caught deliberately evading over ?25. The taxpayers are encouraged to make voluntary disclosures and become compliant to avoid substantial penalties. The US: The US Internal Revenue Service (IRS) has introduced the Offshore Voluntary Disclosure Initiative. A Global Financial Integrity study estimates the flight of gross illicit assets from India during 1948-2008 at a staggering $462 billion. 75 . 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. This information is available under tax treaties through submissions by whistle-blowers.Tax and regulatory policy Is grip tightening on black money? Sudhir Kapadia Economic Times. continues to occupy centre stage in the country. Indian nationals hold $1. 2011. and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting become effective. including India. in addition to recovering due tax. and the risk of criminal prosecution. to tackle tax evasion in general and offshore tax evasion in particular. for taxpayers with undisclosed offshore accounts and assets to bring them into compliance with US tax laws.000. including fraud penalty and foreign information return penalties. This article discusses recent steps taken by various countries. 11 August 2011 T he issue of tax evasion. Voluntary disclosure is a practice of the IRS criminal investigation whereby it takes timely. the total cost of resolving all offshore tax issues. or black money. According to a 2006 report of the Swiss Banking Association. The IRS ferrets out the identities of those with undisclosed foreign accounts. with a reasonable degree of certainty.456 billion in Swiss bank deposits.
Netherlands Antilles and Macau . Any sum received by a person located in an NJA on which tax is deductible would invite tax at ahigher punitive value. The Finance Act. 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.to curb round-tripping. 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. The government shall notify a country or territory with lack of effective exchange by it with India as a Notified Jurisdictional Area (NJA). Jersey. Isle of Man and Cayman Islands. BVI. 2011 . nine jurisdictions Bermuda. British Virgin Islands (BVI). Isle of Man. Along the lines of OECD Model Article on ‘Exchange of Information’. All parties to such international transaction would be deemed to be associated enterprises.Feature articles Is grip tightening on black money? Besides this. No deduction will be allowed for any expenditure or allowance (including depreciation) unless taxpayer maintains proper documentation and furnishes prescribed information. the penalties will be up to 150% and 200% of tax respectively. 2011. to tackle offshore non-compliance. 76 . For example. effective from June 1. Gibraltar. Till date. the Finance Act. introduced an anti-avoidance measure . for territories in categories 2 (exchange of information on request) and 3 (no/insufficient information sharing). In April 2010. India has signed TIEAs with Bahamas. Cayman Islands. 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. etc. The legislation provides for enhanced penalties where the non-compliance arises in a jurisdiction that does not automatically share tax information with the UK.section 94A. 2010.were notified with the intent to enter into a TIEA. Guernsey. 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. Hong Kong has been also notified as a specified territory for entering into a tax treaty by the government.
He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation.ey. the key will be effective implementation and relentless pursuit of tax offenders in specific cases.. He is based in our Mumbai office.. 373 crore in 2006 to INR 9.. 295 crore in 2010. 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. • The Ministry of Finance has in May 2012. (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. Reprinted with the permission of Economic Times © 2012.. .com 77 . now to be overseen by a special investigating team as per a Supreme Court directive. Further. under the CBDT to investigate criminal matters having financial implications punishable as an offence under any direct tax law. immovable properties or other assets held outside India.2 mn the seller needs to collect tax from the buyer at the rate of 1 per cent. has introduced various measures to improve better disclosures and tackle the issue of black money. India Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies. 2012. As in everything else. 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. criminal investigations. financial interests.. a high-level committee on black money has been constituted under the CBDT chairman.Kapadia@in.. the White Paper states that this figure has decline by 60% from INR 23.5 mn and 0... released a ‘White Paper on Black Money’.. In instances of cash sale of jewellery or bullion in excess of INR 0. All rights reserved throughout the world.. • The Finance Act. which identifies different kinds of manipulations of financial statements resulting in tax evasion and the generation of black money. (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. these include: Land and Real Estate Transactions..Tax and regulatory policy Is grip tightening on black money? Besides these.. similar to steps undertaken by the US and UK. You can write to Sudhir at: Sudhir.. 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. (iii) Introducing provisions of tax collection at source (TCS). Bullion and Jewellery Transactions and Financial Market Transactions... the government has commissioned a study for estimating unaccounted income and wealth within and outside India and instituted the directorate of income tax.. • Providing a perspective on black money held by Indians in Swiss Bank accounts. These include: (i) Production of a Tax Residency Certificate for availing the beneficial provisions of a tax treaty. Sudhir Kapadia National Tax Leader Ernst & Young.
The proposed structure is. private equity funds etc. 1 September 2011 T he Securities and Exchange Board of India (SEBI) has recently released a concept paper proposing introduction of SEBI (Alternative Investment Funds) Regulations. the SEBI (Venture Capital Fund) Regulations. 2011 (‘AIF Regulations’) and containing draft AIF Regulations. 100 million. The SEBI (Foreign Venture Capital Investor) Regulations. 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. 78 . the current regulation governing domestic venture capital funds will be repealed and the new AIF Regulations will then govern VCFs. 1996. The same is open for public comments up to 30 August 2011. While the language used in the concept paper is very wide to cover even offshore funds investing in India. 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. inter alia. the intent is to regulate the domestic funds. 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.Feature articles New regulatory framework for private investment vehicles Prakash Shah CFO Connect. 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. 1999. 2000. 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. social venture funds. Once the AIF Regulations come into effect. All AIFs would be required to obtain a certificate of registration under the proposed AFI Regulations. 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. 1996 or SEBI (Collective Investment Schemes) Regulations.
Tax and regulatory policy New regulatory framework for private investment vehicles The Funds could be formed as companies. size of the fund.12%) to invest in social ventures such as micro finance institutions (MFIs). past experience etc. Social venture fund – for investors willing to accept muted returns (10% . professional qualification of the managers. Unlike the current VCF Regulations where the trust secures a VCF registration and can then launch several schemes. Venture capital fund . This requirement could significantly increase the time and costs as for each scheme a separate registration would have to be sought. investment style or strategy.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. 79 . 1996 shall continue to be regulated by the said regulations till the existing fund or scheme managed by the fund is wound up. under the AIF regulations each scheme will require a separate registration. Infrastructure fund – for investments in infrastructure funds 6. 8. Private Equity fund – for making investments primarily in unlisted equity or unlisted debt securities of companies 4. the SEBI will take into account all matters relating to investment objective of the fund. Debt fund – for making investments primarily in debt instruments of unlisted companies 5. 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. 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). All funds already registered as VCF under SEBI (VCF) Regulations. Private Investment in Public Enterprises (PIPE fund) – for investments into small size listed companies 3. necessary infrastrustructure. The registration would be valid for the lower of three years or the tenure of fund. The application will be in one of the following categories: 1. SEBI should be considering the same under the current VCF regulations.
100 million. an AIF cannot invest more than 25% of the corpus of the fund in one investee company. As is currently the case for VCF. The AIF can invest only in instruments specified for each category of investments. These requirements should form part of the Private Placement Memorandum issued by the fund to its investors.1 per cent of the fund size or Rs. The minimum investment amount should be the higher of 0. 2. 200 million). the AIF Regulations also prohibit investment of AIF in Non Banking Financial Companies (NBFCs) (except in prescribed cases). Gold Financing. Similarly. The AIF Regulations require disclosure of the terms and conditions of subscription to the funds. Such Funds can operate as closed ended funds with a specified target size (not less than Rs. 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.5 80 . activities not permitted under the Industrial Policy of the Government of India or any other activity specified by SEBI. AIFs granted registration under one category is not permitted to change its category subsequent to the registration. The funds formed as companies or LLPs can at the maximum have 50 investors and the minimum size of the units issued is Rs. life cycle (minimum maturity of 5 years) and target investors under the proposed framework. Such investment of the investment manager/sponsor will not be transferable during the life of the fund.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. Further. the mechanism of payment to the investment manager as well as the method adopted while distribution of monies to the investors. The responsibility of the investment manager should be clearly defined. The AIF Regulations also lay additional restrictions on each of the categories of funds. 1 million. This requirement of mandatory contribution is onerous and is much higher than the standard international practice where the commitments range between1% to 2%. The investors would have a lock-in period of three years.
India Prakash Shah is an Associate Director at Ernst & Young India in the Financial Services . Tax & Regulatory Services Ernst & Young.. insurance companies.. 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... ‘SEBI has released the final guidelines on Alternative Investment Fund regulations in May..ey.Tax and regulatory policy New regulatory framework for private investment vehicles billion. Some of the conditions that are prescribed in the concept paper are quite restrictive and may hinder the participation by certain players for eg. investments by PIPE funds only into small sized listed companies etc. 2. 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.... the maximum size of VCF funds being Rs.. All rights reserved throughout the world. . private equity etc. You can write to Prakash at: Prakash.com 81 ....... 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. Prakash Shah Associate Director.tax and regulatory practice.Shah@in. the restriction on investment by VCF funds into companies promoted by top 500 listed companies by market capitalization.5 billion. 2012’. 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. Reprinted with the permission of CFO Connect © 2012. He is based in our Mumbai office.. securities broking.
real estate funds. 82 . 9 September 2011 M arket regulator SEBI is proposing a new set of regulations for all Alternative Investment Funds (AIF). 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. Sebi-registered VC funds and foreign VC investors cumulatively invested approximately $12 billion across several industries. However. which collect funds from institutional investors/ HNIs in India will also be bound by the Regulations and will be subject to Sebi’s oversight. As of September 2010. social sector. Viewed in the context of the prevailing Sebi VC Fund Regulations. Recognising the growing importance of this industry and with a view to maintaining the stability of the financial system.Feature articles Alternative investment funds: hits and misses Sudhir Kapadia Economic Times. It appears from the Regulations that foreign PE/VC funds. 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. If that is indeed Sebi’s intent. 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. debt funds. Sebi has proposed to introduce Alternative Investment Funds (AIF) Regulations. investment in infrastructure sector. PE funds. it certainly merits consideration whether industry must compartmentalise itself into nine distinct product offerings to gain concessions. say the authors in this exclusive review. Benefits can similarly be defined for an AIF making an early stage investment. social venture funds and strategy funds. Separately. this new framework will be useful only if it enables AIFs in India to compete with their global peers. this is a welcome move as funds can diversify product offerings based on investors’ risk appetite and investment objectives. However. etc without necessarily categorising the AIF under the Regulations. The Regulations categorises all AIFs into nine distinct categories including VC funds.
.ey... Reprinted with the permission of Economic Times © 2012. You can write to Sudhir at: Sudhir..Kapadia@in. 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. . 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. The domestic AIF industry is set to grow exponentially. All rights reserved throughout the world. 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. India Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies.. Lastly. He is based in our Mumbai office. National Tax Leader Ernst & Young. which the concept paper states is likely to be revised from Rs 5-25 lakh. 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. 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.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.com 83 ... 2012 incorporating substantial changes to the draft regulations originally circulated for public comments in August 2011...... Sebi could consider specifying a minimum investment threshold that is in line with that applicable to Portfolio Management Schemes.. a review of the taxation framework for AIFs would immensely benefit the industry.” Sudhir Kapadia Partner.. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation...
84 . and a simultaneous announcement of tax amnesty for US tax residents under which payment of evaded taxes and reduced penalty would ensure closure of all other proceedings against US tax residents. where the US government extracted the names of US tax residents illegally holding bank accounts in UBS. vis--vis the Swiss government in the light of the above international developments. this may not be the most optimal result as it goes against the grain of ensuring transparency and naming and shaming of tax evaders. vis-vis the US and the UK. The UK government is obviously motivated by the opportunity to shore up its treasury by the onetime payment. From an EU and tax policy perspective. was accompanied by a shrill campaign by the US Internal Revenue Service to warn the tax citizenry at large about more dire consequences. of course. 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. the tale of the elusive Swiss accounts has resurfaced with the proposed treaty between the UK and Swiss governments. a question arises for Indian policymakers to ponder over the approach that should be taken. in their Swiss bank accounts. including prosecution. This.Feature articles One-time amnesty for swiss stash Sudhir Kapadia Economic Times. where Switzerland has agreed to repatriate to the UK an anonymous tax amount calculated on the aggregate income of UK tax residents. This approach adopted by the UK government is in sharp contrast to the one favoured by the US government. and for the Swiss government. if US tax residents do not come forth to declare their secret deposits in offshore accounts. it may come as a pressure to avoid yet another instance of further diluting its muchvaunted banking secrecy. 29 September 2011 O f late. In the light of the continuous debate in India about the methodology by which the country should endeavour to recover the lost billions in tax revenues due to alleged siphoning of Indian money to offshore locations. for example.
to ask for the relevant information from the Swiss However. Against this. is easier said than done as it will be a long and arduous process that Indian authorities will have to go through. For forth and anonymously and sharpen the example. it can be argued that from this angle. hopefully. at the 85 . before they get to the much-coveted and highlyfancied offshore bank deposits and other wealth. collect much-needed revenue and. In want to consider may have other words. in specific instances.” of intermediary undisclosed wealth companies or outside India and trusts or other such entities. of course. immediately visible and the Swiss This. as of information. “The Indian take further action Indian based on that Government may government information.in authorities and this approach. 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.Tax and regulatory policy One-time amnesty for swiss stash India to Indian beneficiaries. Viewed At one level. 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. 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. 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. 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. where get its fair pound the final beneficiary may not be of flesh. make a clean slate Swiss banks should enable Indian going forward to deter tax evaders government. 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. there revenue knife declare their offshore may be a maze to cut into the accounts. from similar action in future.
that going forward... All rights reserved throughout the world. Sudhir Kapadia Partner.ey. .. Reprinted with the permission of Economic Times © 2012...Kapadia@in. 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.. 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. instill enough fear in the minds of US taxpayers.. on which taxes as well as penalties can be imposed as a one-time revenue-raising measure. National Tax Leader Ernst & Young.com 86 ... More importantly. any such initiative will have to be carefully planned and executed in a way that it remains legally tenable and practically implementable. therefore. On balance. Of course. 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.. and also to serve as a deterrent for potential future tax evaders. He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation... He is based in our Mumbai office. as well as a onetime window for Indian taxpayers to come forth and anonymously declare their offshore accounts. india Sudhir has functional specialization in International Tax and over 20 years of varied experience in advising companies. You can write to Sudhir at: Sudhir...Feature articles One-time amnesty for swiss stash same time. the Indian government may want to consider a combination of effectively utilising the recent agreement for exchange of information including bank accounts.
Tackling black money On the legislative front. 2011. According to OCED’s statistics. Several countries have pressurized Switzerland to be more tax transparent. negotiations/ renegotiations with 40 countries were completed. it has completed negotiation of Tax Information Exchange Agreements (TIEAs) with 16 tax havens. 1961. certain disallowances and also subject to transfer pricing regulations. transactions with residents of such territories are subject to higher withholding. This enables India to obtain information from Switzerland in specific cases. In simple terms. either by way of protocols to existing DTAAs or new DTAAs. As of September. India has adopted a three-pronged approach to tackle black money. for a period starting from April 1. as the government has realised the urgent need to tackle black money. Second. 2011. 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). The 100-day waiting period for ratification has recently ended. section 94-A of the Income-tax Act. Internationally. 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. as a notified jurisdictional area. First. 1 November 2011 T ax transparency is the new reality for India. Third. having regard to lack of effective exchange of information. 87 . Switzerland has signed 91 DTAAs providing for the exchange of information. The protocol amending the India-Swiss DTAA was signed on August 30 last year and approved by the Swiss Parliament on June 17.Tax and regulatory policy Tax transparency is the new reality Pranav Sayta Hindu Business Line. now empowers the Government to notify any territory outside India.
. the tax payer will first be informed of. .. 2009. “India-Swiss DTAA does not commit Switzerland to exchange information on an automatic or spontaneous basis.. 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. However. This decision permitted the exchange of information with other countries in individual cases. The Swiss domestic law also provides for procedural rights for protecting the interest of the tax payers. which include the name of the person/s under examination. While it is intended to provide for exchange of information 88 . The India-Swiss to the widest possible extent. India’s Competent Authority needs to provide various information to the Swiss competent authorities when making such requests. where a specific and justified request was made and Switzerland began negotiations on revising its DTAAs. All rights reserved throughout the world. Further the 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. Reprinted with the permission of Hindu Business Line © 2012.. but only after it has exhausted all normal procedures under its domestic law to obtain such information... the tax purpose for which the information is sought and also the name of any person believed to be in possession of such information...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. The India-Swiss DTAA expressly provides that the administrative procedure rules regarding taxpayers’ rights remain applicable before information is transmitted.. India can now approach Switzerland for information.. before any information can be exchanged. a statement of information sought including the nature and format in which it is sought. Thus. then has the right to be heard on and finally has the right to object to (and eventually appeal before the Swiss Federal Administrative Court) on the decision made by the Swiss Federal Tax Administration to exchange information.. the period for which the information is required.. made the historic announcement that Switzerland intends to adopt the OECD standard on administrative assistance in tax matters. international pressure and the need to upgrade to OECD’s G-20 white list led to a rethink. Its Federal Council on March 13.” DTAA now enables India to obtain information that is foreseeably relevant to the administration and enforcement of Indian Income taxes..
India Pranav leads the Technology. he specializes in advising on various international tax matters. 373 crore in 2006 to INR 9. financial interests. 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. The White Paper calls for further debate on whether entering into a similar agreement with Switzerland would be in India’s best national interest.Tax and regulatory policy Tax transparency is the new reality • The Ministry of Finance has in May 2012. Such a tax return is required to be filed even if the person does not have any taxable income.295 crore in 2010. With over twenty years of experience in the practice of Direct Tax Laws. The ‘White Paper ‘also refers to the revenue sharing agreements entered into by Switzerland with U. 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. released a ‘White Paper on Black Money’. Technology. has amended section 139 of the Income tax Act. acquisitions & joint ventures. Communication & Entertainment Ernst & Young. You can write to Pranav at: Pranav. 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. • • In a bid to gather information. Communication & Entertainment business unit for Tax service line.K. according to which black money in bank accounts in Switzerland has reduced from INR 23.f AY 2012-13). Details of foreign bank accounts. The Finance Act. group financial and corporate restructuring. 1961 (w. In simple terms. cross border and domestic mergers. inbound and outbound transactions. immovable properties or other assets outside India are required to be disclosed in the tax returns. 2012. Germany and Austria.com 89 .ey.Sayta@in. He is based in our Mumbai office. Pranav Sayta Tax Partner.e.
2011. 1 November 2011 T he Indian tax and regulatory laws are undergoing a period of change and one such change is the evolution of the new takeover code. At the same time. the target could automatically be delisted. without considering the new regulation. 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.which are effective from October 22.Feature articles New SEBI takeover code finally notified Amrish Shah CFO Connect. pursuant to open offer. On September 23. It is noticed that apart from 90 .e. 100% would have been sweeter for the MNCs as it would tantamount to automatic delisting of shares. 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. had suggested a proposal of “auto delisting” where. It is indeed a revolutionary legislation which is likely to change the landscape of M&A for listed Indian entities in the near future. the acquirer acquires stake in excess of the “delisting threshold”. i. 2011. SEBI had notified Substantial Acquisition of Shares and Takeover Regulations. due to an increased level of interest in their companies. the TRAC in its earlier proposal. 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. Delisting Coming to the delisting aspect. 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. 2011. resulting in the international buyers with better leveraging abilities getting an advantage.
To an acquirer. In today’s high interest era. which would propel the the promoter to drive the company as FDI numbers which have not been compared to the public shareholders. this helps bring stability by achieving a definite controlling stake instead of de facto control. 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”. This is a very bold shares or voting rights of the target step and would encourage larger company. requirements.Tax and regulatory policy New SEBI takeover code finally notified removing the possibility of automatic delisting. stake sale For the economy. 91 . Abolition of non-compete fees Inclusion of non-compete fees in the offer price is a fine balancing act as The initial threshold limit provided it would lead to an open offer being for open offer obligations has been made to all the public shareholders increased from 15% to 25% of the at a uniform price. limiting the open offer size to 26% seems to be a good balancing act and will help the M & A landscape significantly. significant offer. revolutionary without triggering At the the open offer legislation which is same time. Accordingly. encouraging in the recent past. 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. for a period of 12 months. 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. as we move forward. Increase in initial trigger limit From a strategic acquirer’s perspective. as compared to 35% (15% initial threshold plus 20% open offer) under the old regulations. 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. the new regulations actually make it impossible to launch a delisting offer where the promoter shareholding goes beyond the maximum permissible non-public shareholding.
Even these shareholders cannot make voluntary offers if they had purchased shares from the market in the preceding one year. while offering the benefit to the promoters to consolidate their holdings. The new takeover regulations impose an obligation on independent directors of the target company. 92 . then acquisition of such a company beyond thresholds automatically makes it a direct acquisition and the provisions of new regulations shall apply accordingly. from making an unsolicited open offer to public shareholders. Therefore. The aforesaid provision. It lays out specific tests that if company derives more than 80% of net worth. there is no distinct category as a voluntary open offer.Feature articles New SEBI takeover code finally notified Specific provision for voluntary open offer Under the old regulations. vis-à-vis 5% in the lifetime of the company in the old regulations. turnover or market cap from investment in listed company. so long as the maximum permissible non-public shareholding limit is not breached. except pursuant to another voluntary open offer. Further. 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 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. 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. Other significant amendments In an era of global acquisitions. subject to the total shareholding post open offer not exceeding the maximum permissible non-public shareholding. to give their recommendations to shareholders on the open offer. nothing prevented any non-promoter. 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. time and shareholding restrictions on such offers. puts in place. with or without a shareholding. 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. 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.
You can write to Amrish at: Amrish.the acquirer.ey. 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... and establishment of joint ventures.. Amrish Shah Partner & National Leader-Transaction Tax Services Ernst & Young.. and some new exemptions have been provided in the new regulations such as.com 93 . corporate restructuring...Tax and regulatory policy New SEBI takeover code finally notified Further.Shah@in. divestments.... foreign investment consulting. India An all-India rank holder in Chartered Accountancy.. 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.. Conclusion Overall. Reprinted with the permission of CFO Connect © 2012.. 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 . He is based in our Mumbai office. acquisition of preference shares carrying voting rights. and acquisition of shares of target company not involving change in control pursuant to a Corporate Debt Restructuring Scheme. Amrish has over two decades of experience in the areas of mergers and acquisitions. All rights reserved throughout the world.. the target company and the minority shareholders. .. increase in voting rights pursuant to buy-back.
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. 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. retail is growing at a fast clip. FDI in retail will pave the way for inflow of technical expertise and knowledge and this. The announcement is expected to generate 10 million jobs over three years. especially in greenfield and brownfield investments. International brands and retailers will gain access to a substantial market. Within retail. Our productivity in food and agriculture is among the lowest in the world and there is a significant opportunity to raise output. which was around $220 billion in 2005. with a CAGR of about 12%. or organised. can boost the overall growth of the industry.Feature articles The big push for big retail Paresh Parekh Economic Times. 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. cut wastage. This will improve efficiencies in the supply chain. Lack of retail expertise and experience has been the main reason for this subdued growth. farming community in India has shown one of the lowest efficiencies in terms of production. Indian retail market. thirdparty supply-chain companies and the government. The sophisticated front-end that international players are likely to bring will boost investment in infrastructure by retail players. Fact is. modern. with investment in better farming practices. 26 November 2011 I ndia’s retail market promises to be among the top retail destinations in the world. FDI in single-brand retail currently is 0. without impacting smaller and domestic retailers. 94 . the actual growth rate was much lower. is now expected to hit $700 billion by 2015. thanks to rising consumption. with CAGR of about 21%. increase efficiency and bring down consumer prices.03% of cumulative FDI of around $149 billion from April 2000 to September 2011. in turn.
now have an option to invest in Indian companies undertaking direct retailing. retailers would need to have a precise interpretation Single-brand foreign retail players. One may also potentially see present small and medium enterprises. Metro. would such a condition be too onerous for certain categories of multi-brand retailing such as sport goods. may now explore Indian presence. to comply with the norm of minimum 50% investment in backend infrastructure. In multi-brand retailing. or foreign retailers completely buying out the Indian licensee. the retailer would have to scout for an Indian partner to enter Indian multi-brand retail sector. Lawson and others may now explore Indian retail market. For existing Indian retail players. This will help bring capital as well as global best practices and retail expertise to the Indian businesses. Also. 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. This licensing. distributor or franchise could provide an impetus to the arrangements being converted to growth of the small-scale sector. Multi-brand foreign retailers that have already invested in India under cash-and-carry arrangements. may now want to retailers should source certain explore the Indian market. Tesco. such as Reliance. and Woolworths. Trent. Further. as they would be able to directly own stake in multibrand retailing. watches. Carrefour. who have so far restrained themselves from entering the country for reasons such as wanting the entire of the term back-end infrastructure. as the foreign retailer can own a maximum stake of 51%. apparel and electronics.” 95 . Foreign retailers such as Sainsbury’s. Shoppers Stop and the Future Group. stake or ownership in an Indian singleAnother key condition is that foreign brand retail entity. either joint ventures with respective “MNC retailers will assess market dynamics and select partners with suitable capabilities. foreign retailer or brands. such as Walmart. who did not want to enter India through cashand-carry route. In existing single-brand retail joint ventures.Tax and regulatory policy The big push for big retail Foreign multi-brand retailers. stationery. the foreign multinational joint-venture partner would have the flexibility to raise its stake in the venture beyond 51%. franchisee or distributor. Also. this could provide further options to raise long-term capital for expansion and to attract partnerships with some global players. minimum percentage from micro.
. They would also typically want to select a partner with complementing capabilities and cultural fitment. outbound investments and business reorganization.. Paresh is focusing on Retail. corporate restructuring. Reprinted with the permission of Economic Times © 2012.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” Paresh Parekh Partner. competition. You can write to Paresh at: Paresh... 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... All rights reserved throughout the world.. adapt products for the diverse Indian micro-markets. complex domestic and international tax matters. divestments. litigation. use appropriate sourcing models to manage costs and appeal to the Indian customer.com 96 . He is based in our Mumbai office. . cash repatriation... potential foreign retailers would assess customer dynamics. Over past 12 years he has advised clients in the areas of India entry.ey... and understand the tax and regulatory landscape in India.. Infrastructure and Industrial sector. infrastructure and import regulations. foreign direct investment regulations. While FDI in retail sector has been relaxed with conditions.. India Paresh Parekh is a Partner at Ernst & Young India in the Tax & Regulatory Services Practice. Consumer. supply chain.Parekh@in.. merger and acquisitions. “While the Indian Government has allowed up to 100% FDI in Single Brand retailing. Tax & Regulatory Services Ernst & Young.
they were limited to legislative changes and the rich dividends that could be reaped by having a modern. These would be reforms that modernise tax administration. Critical ingredients of a modern tax administration are automation and standardisation. Pending its implementation. The most pivotal reform among these is a more effective use of information technology. inefficient and ineffective tax administration. the government should focus on the third-generation (3G) tax reforms that can yield a fiscal bonanza similar to that from 3G spectrum auctions. avoidance of tax disputes and their quick resolution.Tax and regulatory policy 3G of tax reforms 3G of tax reforms Satya Poddar Economic Times. harmonisation and integration of laws and procedures across the country. broadening of their bases. and lowering of the statutory rates. Given the limited elbow room to raise revenues through higher tax rates. 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. infrastructure for tax administration. The GST. 97 . While India has made considerable progress in terms of computerisation. IT-savvy and taxpayer-friendly tax administration remain unrealised. governments should focus on archaic. quality taxpayers’ services. The second-generation reforms were the replacement of state sales taxes by the value-added tax (VAT). 1 March 2012 I n preparing his Budget 2012. could well be the 4G reform. While these reforms resulted in improvement in tax compliance and provided a significant boost to tax revenues. if based on the flawless design recommended by the 13th Finance Commission. 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. it is still very basic. A facilitative tax administration is dependent on simplicity of the tax laws.
This attitude must be replaced by a more cooperative and communicative approach. the Advance Agreement Unit comprising of a team of specialists work with businesses to provide some 98 .” of ‘customer’ and for monitoring satisfaction inter-state trade leaves a vast scope for improvement.based approach for taxpayers. So. As one senior official put it recently. has not been tapped in full measure. which can lead to protracted litigation for decades. In UK. These sums could be much lower if there was a more open and communicative environment. 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. which helps reduce litigation. India is sitting on a blocked amount of more than 3 lakh crore on account of tax litigation. communicative approach “revenues their governments collect towards taxpayers can be is not because of the effort by instrumental in bringing greater officials. 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’. While setting seeking behaviour organisational and reduces “The Government objectives. The decisions and actions of tax administrations are guided by the assumption that the taxpayer is naturally inclined to avoid paying taxes.Feature articles 3G of tax reforms The significant role that IT can play in comprehensive automation and integration of processes. of which 2. but in spite of it”. minimising discretion by officials. An open. which encourages rent. Modern tax jurisdictions like in the US and UK adopt a The current business processes. Investors lament aggressive interpretation of tax laws by assessing officers. improve quality of the emphasis is the use of IT in on parameters VAT administration taxpayer services. resolution of tax issues. data capturing and analysis for guiding policy decisions and for enhancing taxpayer services. customer-oriented and outcomesystems and facilities lack in transparency. the willingness establishing of taxpayers to must leverage IT targets and voluntarily pay to modernise tax evaluating taxes. At the stateadministration and performance. Studies in Australia show that reduced disputes lead to better compliance and more revenues. The resulting costs and uncertainty hinder business. along with business results. particularly. level.2 lakh crore is stuck at the Commissioner (Appeal) level.
. the revenue department and the economy. New Zealand. VAT and international taxes. He has also served as tax policy advisor to governments around the world. All rights reserved throughout the world.com 99 ... China. Syria. A stable and efficient tax administrative environment would also spur foreign investments. You can write to Satya at: Satya.a win-win situation for taxpayers.. Satya Poddar Partner. India too must lend absolute commitment to reengineering its administrative framework and implement it in the right earnest.. Policy Advisory Group Ernst & Young. including Russia.. The HMRC has established customer contact centres that focus on alleviating doubts of taxpayers and create an environment of customer friendliness.. and Gulf Cooperation Council. Also. He is based in our Gurgaon office.. 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... .Poddar@in. ‘working smarter’ has become a necessity for tax administrators. India Satya has over three decades of experience in advising clients on tax policies. 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. Reprinted with the permission of Economic Times © 2012. At a time when governments worldwide are grappling with the burgeoning debts and fiscal constraints due to the global financial crisis.... The multiplier effect of this 3G reform could have the potential to surpass the rich haul reaped from the 3G spectrum auctions . crucial for India’s economic growth..Tax and regulatory policy 3G of tax reforms certainty for future tax payments. Korea.ey.
Specials Special 100 In this section 101 | The path to globalisation compliance and reporting .
Due to this. Indian companies have rapidly globalised their operations and there seems to be an ever increasing appetite to grow overseas inorganically. which may not be resulting in the most optimal efficiency. 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. given its statutory nature. In the past 12 months. 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. efficient and controlled compliance and reporting function globally can help mitigate these risks and unexpected costs. control and value. One of the important responsibilities of the CFO is statutory compliance and reporting. 1 October 2011 O ver the last decade. which gave rise to some interesting findings. the role of the CFO at the Indian headquarter level has substantially evolved to oversee multi country finance operations. 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. percentage of companies from Fortune 500 experiencing: 101 . Many companies are currently distributing responsibility for compliance & reporting processes throughout their organisations.Specials The path to globalisation compliance and reporting Rahul Kashikar CFO Connect. focusing more intently on the collection of tax revenues and sharing more tax information across borders makes this even more important. The fact that local jurisdictions are rewriting regulations. We are at a tipping point for compliance and reporting: Almost two-thirds of the respondents say that changes in regulatory requirements will impose significant challenges on compliance and reporting processes. which could have inherent risks attached to it.
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. and more than 60% indicated no global governance over direct and indirect tax filings required by their companies. etc. 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.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. 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. 2. expertise. of service partner 72% 59% 56% 46% 43% Ensuring ﬂexibility and scalability of sourcing solution Reducing DiversifyReducing head ing and costs and increasing count and sharing of operational predictability full-time equivalents and of costs execution risk Note: Companies assessing outsourcing as an effective means of chieving business benefits 102 . Often. 3.. which traditionally supported local compliance and reporting processes. Local expertise is key to a successful GCR model: Compliance and reporting processes result in inherently local in-country filings and submissions. Between 64% and 78% of survey respondents indicated that localcountry resources are vital to successful compliance with tax and regulatory requirements. the level of start-up business activity doesn’t readily support investment in local finance teams.
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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