General anti-avoidance rules could dampen M&As: Analysts

Deal-makers feel the Government proposal to tax offshore share transfers through introduction of general anti-avoidance rules (GAAR) could prove to be a deal-breaker. The cross-border mergers and acquisitions deals involving Indian assets/ companies, which have been growing rapidly, may slow down, at least, in the short run.

Mr Girish Vanvari, ED of KPMG told Business Line that even if GAAR was introduced and the treaty benefit went away or indirect transfers became taxable, it would cause temporary uncertainty. “But in the medium to long term, the India opportunity is too big. There is decades and decades of growth to come; no investor can ignore it even if their returns are taxable.”

Unanswered questions

But there remained several unanswered questions, he felt

“The moot points are whether there is certainty of tax treatments and on an equitable basis as also past transactions entered into based on certain tax assumptions can be taxed on a retrospective basis,” Mr Vanvari wondered. “This is an area where some thought has to given by the Government as to what messages they want to give to the investors. The investors are worried as to how and with what checks and balances will the GAAR provisions be implemented.”

Mr U.R. Bhat, MD of Dalton Capital Advisors, said: “I think no one will commit significant investments to India without a favourable advance ruling by a relevant authority under the I-T Act.”

Fear over scrutinisation

Under the heading: “Rationalisation of international tax provisions, income deemed to accrue or arise in India,” the FY 2012-13 Budget document seeks to clarify the legislative intent in covering incomes which are accruing directly or indirectly through the transfer of a capital asset situated in India. Accordingly, a set of amendments are being sought to be effected with retrospective effect from 1st April 1962.

“The retrospective amendments strike at the root of the principle of providing certainty about taxation and will create doubts in the minds of prospective investors planning to invest in India.

“The fact that the Budget envisages some Rs 30,000-40, crore of tax revenue from this amendment suggests that almost every large transaction over the past years will be scrutinised to garner tax revenues,” he felt.

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Another proposed amendment that is believed to strike at the root of entrepreneurship is the one relating to the proposed taxation of a capital receipt by way of share premium by an issuer of equity shares in excess of the ostensible fair market value

“Given that the fair market value is proposed to be determined by an assessing officer, the days of the Controller of Capital Issues have been brought back without much ado and the unintended consequence is that two decades of economic reform have been brought to naught in one swell swoop,” Mr Bhat said.

Contradicts Apex court

Mr Saurabh Mukherjea, Equity Head at Ambit Capital said: “A secondary concern is that it might reduce M&As by making non-Indian sellers of Indian assets worry about the tax hit. The primary concern with the stance taken by the FM in the Budget vis-a-vis GAAR is that it contradicts the apex Court's ruling in the Vodafone case.

“The proposal results in the piercing of typical offshore holding structures, and will make it nearly impossible for investors to plan cross-border M&As and group restructurings. This will also have a significant impact on fund investors,” Mr Nishith M Desai of Nishith Desai Associates.

By being subject to Indian tax on account of artificial deeming fictions, investors were also being exposed to the risk of double taxation without any credit for taxes paid in India, he felt.

For example, if a US shareholder transfers shares of a US company holding shares of an Indian company, the US investor will be subject to tax in India. At the same time, being a US resident, it would also be taxed in the US.

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