Comments
As the cliché goes — the devil lies in the fineprint, this year's Budget is proving to be no exception. On closer scrutiny, one may find the industry embroiled in dispute with the department:
For claiming the benefit of export services, the proposed export rules specify that the place of provision of service should be outside India which, apart from few exceptions, would be the location of service receiver.
If the beneficiary of services provided is in India, an interpretation by the department to treat the beneficiary instead of the person outside India who has engaged to provide the services, as the service receiver, will jeopardise the claim for export of services.
Service tax is intended to be levied on lease transaction which does not involve transfer of right to use the asset. This has created doubts regarding inclusion of financial lease, since such lease involves transfer of right to use the asset.
Ambit of TP regulations widened
The Finance Minister introduced several amendments to the Transfer Pricing (TP) regulations in addition to introducing Advance Pricing Agreements in India.
The scope of TP provisions has been expanded to include ‘specified domestic transactions'.
With retrospective effect from April 1, 2002, the definition of ‘international transaction' has been widened to include guarantees; any debt arising during course of business; business reorganisations or restructuring irrespective of whether the same has an impact on current year's profits, income, losses or assets; intangible properties including marketing intangibles, human assets, technology-related intangibles, and so on.
Rate of variation to the arm's length price (ALP) to be notified by the Government not to exceed 3 per cent.
Retrospective clarification with effect from April 1, 2002 that the benefit of 5 per cent to the ALP is not a standard deduction.
Transfer Pricing Officer's powers have been expanded w.r.e.f. June 1, 2002 to permit examination of international transactions not reported in the Accountant's Report furnished and identified during assessment proceedings.
Additional penalties have been prescribed for not reporting international transactions or furnishing incorrect information.
Dreading GAAR
Aligning with the Direct Taxes Code and in the backdrop of the Vodafone ruling, Finance Bill, 2012 proposes to introduce General Anti-avoidance Rules (‘GAAR').
The proposed provisions intend to disregard any arrangement as impermissible if the main purpose of it is obtaining tax benefit and it satisfies prescribed conditions, namely, disproportionate rights/obligations, misuse of tax provisions, lack of commercial substance/bona fide business purpose.
The onus to demonstrate that the arrangement is not for purpose of tax benefit lies on the tax payer.
GAAR also provides that commercial substance would not depend on period of existence of arrangement, payment of taxes and provision of exit route under the arrangement.
GAAR empowers the tax authorities to deny tax treaty benefits, disregard/re-characterise steps or transactions, re-allocate income/expenses or revision of place of residence of any party/situs of asset in any transaction or looking through the corporate structure.
Taxing Vodafone to impact M&As
A landmark decision by the apex court that seemed to have set to rest the long-drawn battle in the Vodafone case is again in limelight with the proposed amendment to tax indirect transfers of an Indian asset, retrospectively.
The Court has, however, dismissed the review plea of the tax department in this regard.
The sanction of the Finance Bill, particularly Clause 113, which provides for validation of demand notices for tax arising out of indirect transfers, will hold key to further actions.
Amid the changing tax regime, the investors would need to relook at their entry and exit strategies for India.
The general anti-avoidance regulations, which are widely worded, will also be an important factor.
Further, the Budget provides for obtaining a Tax Residency Certificate containing specified particulars for availing of the treaty benefits.
All these changes will indelibly impact the mergers and acquisitions landscape in India.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.