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C h a l l e n g e U s
BUDGET IMPLICATIONS FOR INDIA CANADA
INDO CANADIAN BUSINESS CHAMBER -MAY 11, 2012
Mukesh Butani
BMR Legal
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CONTENTS
Policy Announcements
Amended Union Budget 2012 passed by Lok Sabha – key tax updates
Vodafone case
Other key updates
Tax reforms
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POLICY ANNOUNCEMENTS
Macro-economic scenario GDP growth 6.9% for FY 2011-12
Expected growth 7.6% (+/- 0.25%) in FY 2012-13
Fiscal deficit expected to decline from 5.9% to 5.1% next year
Inflation (expected) to stabilize
12th Five Year Plan aims ‘faster, sustainable and more inclusive growth’
Legislative amendments proposed to FRBM Act for expenditure management – subsidies to be capped at 2% of GDP
Foreign Direct Investment (FDI) Build consensus on 51% FDI in multi-brand retail
Proposal to allow 49% FDI in aviation
Silence on Insurance and Defence
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POLICY ANNOUNCEMENTS
Capital market reforms QFIs allowed access to the corporate bond market
Broad-basing and incentivising IPO participation
Disinvestment – INR 300 billion to be raised through disinvestment
Boost to infrastructure 12th Plan period investment in infrastructure estimated at USD 1 trillion – half
expected from private enterprise
Tax free Government bonds doubled to INR 600 billion – to finance infrastructure
Concessional tax withholding of 5% on specified infrastructure borrowings
Foreign debt (ECB) liberalization for infrastructure including: Part financing of rupee debt of existing power projects
Capex on maintenance and operation of toll systems for roads / highways
Low cost affordable housing
Working capital for airlines – capped at USD 1 billion
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AMENDED UNION BUDGET 2012 PASSED BY LOK SABHA - KEY DIRECT TAX UPDATES
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KEY CORPORATE TAX UPDATES
Tax rates Corporate Tax rate unchanged – 32.445%
Minimum Alternate Tax rate unchanged – 20%
Several retrospective amendments to negate court rulings However, no impact on closed assessment
Not to override tax treaty provisions
Some DTC proposals introduced – GAAR, APA provisions
Implementation of GAAR deferred by a year
Enhanced rigors for Domestic Transfer Pricing
Crackdown on tax evaders
Relaxation for venture capital funds
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Slab rates for individuals:
PERSONAL TAX – SLAB RATES
*Notes –
• Basic exemption limit for individual taxpayers, Hindu undivided family, association of persons and body of individuals raised to INR 200,000
• For female individuals the exemption limit is INR 200,000; senior citizens (60 to79 years) – INR 250,000, for senor citizens (80 years and above) – INR 500,000
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VODAFONE CASE - FACTS
Hutch Telecommunication
International Ltd (“HTIL”)
Vodafone
CGP Investments Limited (“CGP”)
Hutchison Essar Limited (“HEL”)
India
12 intermediate holding companies
Mauritius / India
Netherlands
Cayman Islands
Share Purchase Agreement (“SPA”) for shares of CGP
100%
Direct and indirect shareholding in HEL - 52%
Other Indian entities
Indirect shareholding in HEL – 15%
Direct and indirect shareholding of 52%
+ Options over the indirect shareholding of 15% of Other Indian entities in HEL
= ‘Economic interest’ of 67 percent (approx) in HEL transferred to Vodafone
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Vodafone ruling – Budget rewrites legislation retrospectively
Source rule* redefined from April,1961 ‘Capital asset’ to include management and control rights
‘Transfer’ to include parting with or creation of right, notwithstanding that such transfer flows from transfer of shares of an offshore entity
Interest / Ownership in offshore entities deemed to be situated in India, if its value derived substantially from assets located in India
Scope of term ‘through’ clarified to include ‘by means of’, ‘in consequence of’, or ‘by reason of’
Withholding tax to apply to non-residents; presence in India not relevant
‘Validation clause’ to legitimize recovery of tax on indirect transfers
* Section 9(1) – Retrospective amendment
OFFSHORE TRANSFERS DEEMED TAXABLE
Rules of game overhauled – far reaching impact on cross-border business restructuring
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Proposed amendments retrospective from June 1, 1976
‘Royalty’ redefined and widened through explanations: To include payment for computer software, including granting of license and
irrespective of medium of transfer
To include use of ‘process’ to include transmission by satellite, cable, optic fibre or similar technology; need not be ‘secret’
To clarify that possession / control, direct usage or location of right, property or / information to not impact royalty classification
Adverse impact on characterization cases* before judicial authorities
Amendments at variance to OECD guidelines
* Court decisions sought to be reversed: DCIT v Pan AmSat International Systems Inc (ITAT Del) and Asia Satellite Telecommunications Co Ltd vs DIT (HC Del)
ROYALTY TAXATION REDEFINED
IT, Software, Telecom and Media sector impacted
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GAAR INTRODUCED
Based on DTC Bill without factoring Standing Committee recommendations Doctrine of ‘substance over form’ codified to deter ‘aggressive tax planning’
Revenue may declare an arrangement as ‘impermissible avoidance arrangement’ if the main purpose is to obtain ‘tax benefit’ and the arrangement
creates rights / obligations not ordinarily created between persons dealing at arm’s length; or
results in abuse of provisions of tax laws; or
lacks or is deemed to lack commercial substance; or
is carried out in a manner which is normally not employed for bonafide purpose
Standing Committee recommendations now incorporated Onus of proof shifted from taxpayer to Revenue
Independent member introduced in Approving Panel to ensure objectivity and transparency
Both Resident and non-resident allowed to approach Authority for Advance Ruling on applicability of GAAR provisions
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GAAR INTRODUCED
If GAAR invoked… Revenue empowered inter-alia to: ‘disregard’ or ‘combine’ any step in the arrangement
look through the arrangement by disregarding the corporate structure
‘re-allocate’ income/ expense, ‘re-characterise’ equity into debt
treat the place of residence of any party or situs of an asset or transaction other than place or location mentioned in the arrangement
Implementation of GAAR provisions deferred by a year to provide greater clarity and certainty in implementation and administration of
GAAR provisions
Committee constituted under chairmanship of Director General of Income Tax (International Taxation) for formulating rules / guidelines for GAAR implementation
Committee expected to submit its recommendations by May 31, 2012
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GAAR INTRODUCED
Other highlights Limited treaty override for effective application of GAAR in cross border
transactions
Assessment procedure for GAAR
Challenges Planning M&A and business restructuring transactions
Round trip financing specifically covered
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POTENTIAL ISSUES DUE TO GAAR
Applicability of GAAR – retroactive or prospective?
Grandfathering of existing structures not announced
Applicability of GAAR on pending audits
Impact of GAAR on tax treaties
Location preference purely for tax benefits open to challenge
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OTHER ANTI-ABUSE PROVISIONS
Tax Residency Certificates (TRCs) Necessary but not sufficient
Not a conclusive test
Format not yet prescribed
India-Mauritius tax treaty under strain - validity of circular 789 and Court decision
Sale consideration = FMV* Transfer of assets where value ‘not determinable’, FMV of asset to be deemed
as sale consideration
Failure of computation provision no longer a valid defence; Advance Rulings reversed**
Far reaching implications for complex business re-structuring cases
* Section 50D
** Dana Corporation [186 Taxman 187] and Amiantit International Holding Ltd [189 Taxman 149]
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OTHER ANTI-ABUSE PROVISIONS
Share subscription price > FMV of shares; excess taxable* Issue of shares (at premium) to residents in excess of FMV will be treated as
income
Not applicable to investment by Venture Capital Funds and angel investors
Others Unexplained cash credits, unaccounted investments** to be taxed at maximum
marginal rate of 30%; no allowance for expenditure
Tax return filing mandatory for residents and ordinarily resident in India:
Ownership of asset including financial interest outside India
Signing authority in an offshore bank account
Special trials for prosecuting tax defaulters
Bar of limitation extended from 6 to 16 years for offshore assets
* Section 56(2)
** Section 68
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OTHER RELEVANT AMENDMENTS
Tax incentive to foreign banks in India No capital gains tax on conversion of branch of a foreign bank to subsidiary as
per RBI scheme and Central Government notification
Certain provisions relating to unabsorbed depreciation, set off of losses etc to be applicable as notified in this regard
Non-compliance to result in denial of benefits granted to foreign bank / subsidiary
Rationalization of tax exemption available to Venture Capital enterprises: Eligibility of investee company – definition under SEBI regulations
Approved fund will retain tax free status
Investors to be taxed on ‘accrual’ basis
Life insurance business profits exempt from MAT provisions
Benefit of reduced long term capital gain tax of 10% on sale of unlisted securities extended to all non-residents
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OTHER RELEVANT AMENDMENTS
Long term capital gains arising on sale of unlisted securities in an initial public offering exempt from tax STT payable on such transaction at the rate of 0.2%
Cascading effect of DDT in multi-tier holding structure removed by allowing credit for DDT paid by downstream subsidiary
Reduced tax withholding from 20% to 5% on interest payable on foreign exchange borrowing by Indian companies
1 year extension for reduced 15% withholding on dividends from foreign subsidiary / JV
STT levy reduced by 20% [from 0.125% to 0.1%]
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TRANSFER PRICING
APAs introduced from July 1, 2012, in line with DTC
Specified domestic transactions covered from April 1, 2012 Transactions between Indian entities belonging to the same group
Compliances at par with international transactions
Applicable if aggregate value is greater than INR 50 million
Definitions altered retrospectively from April 1, 2001 to expand coverage ‘International transaction’ to include business restructuring, capital financing,
guarantees, inter-company receivables/payables
‘Intangibles’ to include marketing, human, location, business etc
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AMENDED UNION BUDGET 2012 PASSED BY LOK SABHA - KEY INDIRECT TAX UPDATES
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KEY INDIRECT TAX UPDATES
Increase in peak rate of excise duty and service tax from 10 to 12 percent
Lower rates of excise duty have also increased from 5 percent to 6 percent
and from 1 percent to 2 percent, with certain exceptions
No change in the peak rate of customs duty
No change in CST rate
Comprehensive overhaul of the service tax law
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New category of CBU cars introduced for customs duty purpose with
FOB value of more than USD 40,000 and
engine capacity of 3,000 cc for petrol and 2,500 cc for diesel
BCD rate for such cars increased from 60 percent to 75 percent
Customs duty incentive for MRO (Maintenance Repair Overhaul) –
exemption to parts and testing equipments
Duty reductions announced for fertilizer, coal mining, infrastructure & roads
sector
CUSTOMS
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Large automobiles (of length exceeding 4m) would attract duty on the basis
of engine capacity:
Below 1500 cc – Rate hike from 22 percent ad valorem to 24 percent ad valorem
Above 1500 cc – Rate hike from 22 percent ad valorem plus INR 15000 per unit
to 27 percent ad valorem
Duty incentive for MRO – exemption to parts and testing equipments
EXCISE
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Comprehensive taxation of all service activities
Specific exclusions covered under negative list and exempt list
Existing concepts relating to taxability of various revenue streams,
classification, valuation, rebates & exemptions, exports & imports, credits
scheme would change
Services defined to mean ‘any activity carried out by a person for another
person for consideration’. Key exclusions are activities involving:
transfer of title in goods and immovable property
which qualify as ‘deemed sale’ under the Constitution
money and actionable claim transactions
SERVICE TAX
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Taxability of services on ‘provision’ of services in the ‘taxable territory’
Draft rules laying down principles for determination of place of provision of
services issued
These rules would replace the existing export and import of services rules
Negative list, inter alia, includes
government services with specified exceptions
access to amusement facilities or admission to events
agricultural services
trading, manufacturing & production
transmission & distribution of electricity
public transport with specified exceptions
SERVICE TAX (CONT)
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specified education services
Exempted services include health care services and select public
infrastructure
Illustrative list of services which may now be liable to service tax:
Non-compete, right of first refusal
Services by members to unincorporated association of persons
Loyalty programme
Cancellation of contract
International lease lines
SERVICE TAX (CONT)
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Settlement Commission provisions introduced
Non-issuance of invoice no longer a trigger for prosecution
SERVICE TAX (CONT)
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Condition of receipt of inputs and capital goods into premises of service
provider for claim of CENVAT credit relaxed
Provisions for refund of CENVAT credit on export of goods and services
rationalized
Wrong availment of CENVAT credit without utilization would no longer
trigger an interest liability
Excess ACD credit can be transferred to others factories of the same
manufacturer
Under the proposed comprehensive regime of service tax, CENVAT Credit
availed by the companies engaged in banking and financial sector would
need to be reversed on actual basis
CENVAT CREDIT
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Comprehensive overhaul of the service tax law will necessitate relook at
current tax positions
Analyze impact of change in regime for respective businesses
Review planning measures implemented by the businesses
Identify structuring options
Prepare for the changes – revised compliance requirements, realignment of
IT systems
Assess the impact of law and examine need for dialogue; obtain clarification
from the Government
ACTION STEPS FOR BUSINESSES
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C h a l l e n g e U s