Going back in time is no good

Across the globe, the tremors of the crisis continue to pose new and serious challenges. Governments are increasing the focus on consolidating their public finances and designing tax structures that are growth-oriented.

The opening statement of the Finance Minister, “I need to be cruel at present to be kind in the future”, was clearly meant to be more of a statement of intent than a headliner. One would ask — was the insignificant relief granted by the Finance Minister in personal taxation (pale in the backdrop of crippling inflation), not cruelty enough?

Was it necessary to launch retrospective attack and annihilate credibility?

A passing glance on the proposed amendments of the Budget throw up a plethora of amendments, which are proposed to be retrospective, seeking to negate judicial precedents, across various appellate levels, 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.

The definition of the term ‘Royalty' has been suitably amended to restate the legislative intent and to subject software licence, transponder lease revenue streams of non-residents into the net of the tax authorities.

The definition of the terms ‘international transaction' and ‘intangible property' have been amended for providing certainty in law.

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. It has also been proposed that this amendment shall be applicable to all proceedings which were pending as on October 1, 2009.

At a time when business houses and tax practitioners crave for certain and stable tax legislation, such retrospective amendments throwing business strategies and plans into disarray are hardly welcome.

Transfer pricing

In contrast, credit where it's due, 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. APA is very welcome in providing certainty and unanimity of approach.

Transfer pricing remains the most litigated subject today and it is hoped that the APA mechanism would foster some certainty. Other transfer pricing related amendments, 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), provided the same was not reported in the Transfer Pricing Report (TPR).

Penalties are now leviable for failure to (a) maintain prescribed documents or information; or (b) report any international transaction which was required to be reported, or (c) maintain or furnish correct information or documents. Such penalty is to be levied at two per cent of the value of the international transaction.

TP regulations (procedure and penalty) extended to domestic related party transactions under Section 40A, 80IA, 10AA, 80A. Applicable effective AY 2013-14 for transactions aggregating to Rs 5 crore.

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.

Again here, as mentioned earlier, definition of ‘international transaction' has been significantly expanded for clarification retrospectively. Therefore, a taxpayer, 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. He may now wait to be visited with penal provisions?

There are some provisions laid out to widen the tax base, that is, 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, respectively), as also tax collection at source on cash sale of bullion and jewellery in excess of Rs 2 lakh.

New avatar

Despite the counsel of the Parliamentary Standing Committee on Finance to introduce General Anti-Avoidance Rules (GAAR), only after due consideration of some very valid recommendations, the FM has proposed to introduce GAAR in its most virulent “avatar”.

Unfortunately, it is the honest tax payer who is most scared in this country, at the prospect of being handed out a bigger tax bill. It is only hoped that the GAAR will be invoked sparingly and to address issues of clear tax evasion.

In the end, 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.

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, if legislated, challenged in the courts.

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