The word ‘litigation' is normally used interchangeably with ‘dispute' or ‘controversy'. ‘Resolution' is an act or process of resolving, determining or deciding something. However, the process of resolving a controversy in India is quite tardy and lengthy, and hence the use of ‘resolution' is more in the nature of a lip service than actually reflecting a positive attitude on the part of the Government. This is evident from the deluge of amendments, both quantitatively and qualitatively, proposed in the Finance Bill, 2012. In fact, it appears that the Government is not interested in resolving the controversies and, consequentially, the Government itself remains the biggest litigant in all judicial forums across the country. The eventful Budget has brought in rigorous tax proposals, quite a few being retrospective in nature, overturning landmark decisions pronounced by the iudiciary that are perceived to be against the Revenue's interests.

“Capital asset” and “transfer”

The proposed changes in the definition of “capital asset” and “transfer” have been broadened to include even indirect transfer of shares so as to nullify the impact of the Apex court's decision in the Vodafone case. Consequently, the term ‘capital asset' would now include rights in, or related to an Indian company, including rights of management or control or any other rights whatsoever. However, there is significant uncertainty on whether the agreements involving share options, non-compete rights, tag-along rights and so on would also result in capital gain exposure in India. Further, the amendment proposes that the situs of shares of a foreign company would be deemed to be in India, if its value is derived substantially from assets located in India. However, unlike DTC, no objective criterion is set out. It also fails to provide any exception for transfer to effect group restructuring or for listed shares, and hence potentially a large number of share transfers could come under the Tax department's scanner.

“Royalty”

The retrospective amendment relating to the definition of ‘royalty', which now includes even treating purchase of software and subscription to databases as royalty, would result in a lot of business communities defaulting in withholding tax obligations as they would have purchased software from overseas entities without deducting tax at source in line with past decisions by courts in India. Also, with the expanded scope of royalty under the IT Act differing from the definition under the tax treaties, there is likely to be controversial interpretations and further litigation.

GAAR and the taxman

The above rules have been introduced purportedly to thwart any attempt at tax avoidance. The inherent subjectivity of GAAR (General Anti-Avoidance Rules), which proposes to give ample power to tax commissioners, in tandem with the ambiguity on the various terms used in the proposed GAAR, could create a highly litigative environment, requiring judicial intervention.

Further, the perceived safeguard of referring the transaction to the GAAR panel for dispute resolution may not be as effective, as its composition provides for only departmental authorities without any scope for independent assessment.

Transfer Pricing

Extending the scope of transfer pricing provisions to domestic transactions would not only amplify tax uncertainty but also call for more compliances and disciplined documentation.

Further, as transfer pricing is an area with the maximum amount of tax disputes, with huge demands raised by the Revenue, extending its scope would result in large-scale litigation, diverting business synergies from operations.

Dispute Resolution

Tax officers with revenue collection targets may be compelled to make unscrupulous additions, ultimately burdening the higher forums for dispute resolution.

This may also be seconded by the Dispute Resolution Panel (DRP) being reinforced by providing the I-T department with the right to appeal against its directions. Further, the proposed Bill grants DRP the power to enhance the adjustment proposed by the tax officer.

To quote the Finance Minister: “As Hamlet, the Prince of Denmark, had said in Shakespeare's immortal words, ‘I must be cruel only to be kind. I have to be cruel to be kind'”.

It now remains to be seen whether the cruelties proposed benefit taxpayers or pulls them further into the shackles of compliances, voluminous documentations and unending litigation.

(With inputs from Pradeep Parikh, Senior Advisor, KPMG)

The author is Partner — KPMG — Tax Dispute Resolutions

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