With the Government facing turbulent times, both politically and economically, everyone was waiting with bated breath to see if the Finance Minister would introduce a reformist Budget, which the country needs badly, or if he would prepone and come out with a populist one. The government has attempted to present a Budget which is aimed at bringing reformatory measures, which would help the country in the long term.

Introduction of advance pricing arrangement (APA) is indeed a welcome move, and will provide tax certainty and more clarity/stability not only to foreign investors, but also to Indian groups investing overseas.

Transfer pricing

It will reduce the unnecessary and long-drawn litigation in the Transfer Pricing cases, where there were additions of more than Rs 46,000 crore last year. If APA is implemented in its right spirit, it should not only boost foreign investment, but also comfort Indian multinational groups.

Liberalisation of the ECB policy for various sectors, and reduction in withholding tax rate from 20 per cent to 5 per cent on interest on ECB raised by specific infrastructure companies is a good move. This would indirectly benefit the borrower, as in some cases, he had to bear the tax cost burden. Further, benefit of dividend distribution tax (DDT) set-off at multiple layers, to mitigate the cascading effect, even if there is a foreign parent company, will help many corporates, especially in the infrastructure sector.

To boost the capital market, the Budget has provided certain capital gains exemption and other benefits such as a reduction in the Securities Transaction Tax (STT). However, that may not be enough to provide the required impetus to the capital market as the economy's fundamentals are weak.

As expected, it is proposed to tax overseas transfers of shares, where the shares derive their value substantially from assets located in India. Unlike, as clarified under the proposed Direct Taxes Code (more than 50 per cent assets situated in India), the term ‘substantially' isn't defined, which leads to ambiguity.

Although this amendment would help the government garner tax revenues for the short term, the long-term effect on the country is adverse. The retrospective amendment could have been avoided. The government could have accepted the recommendation of the Parliamentary Standing Committee on the proposed Direct Taxes Code and made the amendment prospectively.

The income-tax department has been increasingly looking at substance (over form) behind the transactions, especially in the case of cross-border transactions. In this light, the Government has introduced anti-abuse provisions in the form of General Anti-Avoidance Rules (GAAR) to garner revenues. In spite of explicit recommendations of the Parliamentary Standing Committee to the contrary, the Government has imposed on the taxpayer the responsibility of proving that the transaction isn't for the purposes of tax benefit.

DISPUTE RESOLUTION

Although the Finance Bill proposes to set up a discrete panel to guide on the applicability of GAAR provisions and provide safeguards against GAAR, one is sceptical, looking at the achievements of the presently functioning Dispute Resolution Panel (DRP). The success of this provision would depend on how the provision is actually implemented, but it is sure to attract a lot of litigation. In order to recover black money, the government has proposed to bring a white paper, which is a good step. The Government is also allowing the reopening of tax assessments for 16 years for foreign assets.

On the indirect tax front, the fate of the Goods and Service Tax (GST) continues to hang in the balance. While the date of implementation wasn't expected to be announced, the industry was, perhaps, expecting a stronger assertion on the direction, and possible steps that would be taken in a run-up to GST, such as reduction of central sales tax, which is a huge supply-chain bottleneck.

SERVICE TAX

The proposal to introduce taxation of services on the basis of the negative list, along with new exemptions, would bring a new dimension in service tax. The proposed negative list includes certain government services, school education, entertainment, public transport, etc. This is an important step, considering that service comprises of 59 per cent of GDP. The proposal for unification of Excise and Service Tax law is definitely a welcome step taken by the FM. As far as the increase in the rate of Service Tax and Excise duty is concerned, from 10 per cent to 12 per cent, it was on expected lines, as it had to garner revenue from indirect taxes only. Liberalisation of CENVAT credit regime is another welcome move aimed at reducing the cascading effect of taxes.

The other significant move is the proposed implementation of GST network from August 2012. This could integrate assessees / tax database of both the State and Centre, making transition to GST smoother. On similar lines, harmonisation between Central Excise and Service tax is sought to be made through the introduction of the common simplified registration form and returns for Central Excise and Service tax laws.

Apart from the amendment to target cases such as Vodafone, the Government has made some other retrospective amendments for overruling the Samsung decision on software payment, 5 per cent bandwidth in transfer pricing range and some others. Barring these retrospective amendments, the Budget is a progressive Budget, and lays down a path for inclusive growth.

(The author is Head, Tax, KPMG India.)

Related Topics