High inflation’, ‘squat economic growth’, ‘falling currency’, ‘policy paralysis’, and ‘cash-strapped economy’ are commonly used to describe India’s growth story in recent times.

Last week, the Government opened up the FDI gates in 10 sectors in what is considered as a major effort to revive the investors’ sagging morale. According to the proposals, foreign investment in insurance has been increased from 26 per cent to 49 per cent under the automatic route — however, this will require approval from the Parliament. In telecom, the limit has been increased to 100 per cent, subject to approval. In sectors such as gas refinery, commodity exchange, and power trading, approval requirement up to 49 per cent have been done away with. It remains to be seen how much of these measures can bolster the economy, as well as the Government’s image, considering that the elections are less than a year away.

Passing the beneficial owner test

In a significant development, the Foreign Investment Promotion Board (FIPB) has rejected certain foreign direct investment (or FDI) proposals. It cited lack of clarity regarding the beneficial ownership and origin of funds as the reasons for such rejections. The applications were filed by MCX, Alliance Insurance Brokers, Highdell Investments, and SNAP Networks among others. These investments are proposed to be routed through Mauritius and other jurisdictions that have favourable tax treaties with India.

The concept of beneficial ownership has been articulated in tax treaties and domestic tax laws to grant beneficial status to taxpayers. However, the recent move signifies these as a prerequisite to foreign inflows as well. Also, the Finance Ministry has been involved in working out disclosure requirements on source of funds and beneficial ownership to eliminate ambiguity as early as the entry stage of investment.

OECD mantra to curb profit shifting

Gone are the days when taxpayers were worried about double taxation of cross-border income — governments are now concerned about ‘double non-taxation’. Multinationals are being accused of Base Erosion and Profit Shifting — as referred to by the Organisation for Economic Co-operation and Development (OECD) — wherein they lower their taxes by shifting revenues to low-tax jurisdictions, and expenses to where they are relieved at higher rates.

While the OECD’s initial report, released in February 2013, broadly discussed the issue, a report released last week presents a more comprehensive action plan to address the issue. From specific recommendations regarding digital economy, hybrid arrangements, interest deductions, and treaty abuse to general suggestions such as updating transfer pricing guidelines, revisiting disclosure requirements and dispute resolution mechanism, the report puts forth a number of proposals. The effectiveness of the suggestions would depend upon their acceptance, adoption, and implementation by various countries.

Taxman's blessing for ESOP discounts

In a significant judgement, the Special Bench of the Bangalore tax tribunal has cleared some doubts around tax deduction of discount offered on ESOPs by employers.

In the case of Biocon, the Bench upheld the deductibility of discount on ESOPs as an eligible business expense, considering the same to be an employee incentive. The Income Tax Appellate Tribunal held that the difference between the market price and exercise price of shares is allowable as deduction over the vesting period.

The detailed judgement, explained through illustrative examples, also lays down the mechanism of carrying out subsequent tax adjustments, after the stock option has been exercised by employees. The issue has attained significance owing to a large number of companies doling out ESOP incentives as part of employee retention strategy and the tax tribunals at various jurisdictions across the country holding divergent views on the deductibility aspect.

— Deloitte

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