Taxing the entrepreneurial premium

Budget 2012 has proposed a new clause in section 56(2) of the Income-tax Act, whereby the excess consideration received by any private company over and above the fair market value for the issue of shares to a resident (excluding a venture capital undertaking receiving consideration from venture capital company/ fund) would be taxed as “Income from other sources”.

For an entrepreneur this would mean that when a private equity (PE) invests in the shares of a private company at a premium, the entrepreneur would be taxed on the premium. Even though the amendment seems aimed at curbing circulation of black money, it might result in drying up the early-stage investment avenues, with PE investors moving towards interest-linked investments.

India wary of OECD transfer pricing

The recent UN Model Convention Commentary on Article 9 states that all countries will follow the principles set out in the OECD Transfer Pricing Guidelines (TPG) because they represent internationally agreed principles.

In a letter to the UN, the Indian Government condemned the international body's use of OECD TPG. Instead, India wants the UN to develop a manual on transfer pricing that departs from OECD TPG to the benefit of developing countries.

If the proposal is adopted, OECD TPG may no longer be accepted by countries such as India, Brazil, Russia and China, which consider themselves developing countries in the context of the UN. This may result in the creation of an international tax system under the auspices of the UN that institutionalises double taxation rather than prevent it. Director of OECD's Centre for Tax Policy and Administration termed the letter as unfortunate and unfair.

AAR gets more pro-revenue?

Authority for Advance Ruling (AAR) is a forum for seeking conclusive rulings on Indian tax implications for a non-resident on transactions proposed or implemented.

Considering the ambiguous amendments proposed in Budget 2012, non-residents are certain to look to the AAR for guidance. But recently, AAR in contrast to its past attitude, has aggressively looked at the substance behind transactions. It re-characterised the capital gains on buyback of shares by a Mauritius holding company as dividend and invoked Dividend Distribution Tax provisions. AAR, disregarding the guidelines provided by the Supreme Court in Vodafone, lifted the corporate veil to tax the sale of Compulsory Convertible Debenture by a Mauritius company as interest income, thereby denying the benefit of the India-Mauritius treaty.

AAR has always been an alternative dispute resolution mechanism that is not “necessarily” pro-revenue. However, considering the recent rulings, this view may need to be revisited. Non-residents beware!

Taxman eyes your foreign assets

Budget 2012 has proposed that resident taxpayers holding foreign bank accounts (including signing authority) or asset outside India must furnish details of the foreign assets (including financial interest) in their tax return.

It additionally proposes that e-filing of return be mandatory for such residents, with retrospective effect from AY 2012-13. Return forms ITR 2, 3 and 4 are amended to include a schedule captioned ‘Foreign Assets' for resident taxpayers holding foreign assets/ accounts.

In a proposed parallel amendment, the time limit for reopening cases where income in relation to assets located outside India has escaped assessment has been increased from six years to 16 years. Such amendments aim to arm the authorities with power to tax black money parked illegally outside India.

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