C h a l l e n g e U s

BUDGET IMPLICATIONS FOR INDIA CANADA

INDO CANADIAN BUSINESS CHAMBER -MAY 11, 2012

Mukesh Butani

mukesh.butani@bmrlegal.in

BMR Legal

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CONTENTS

Policy Announcements

Amended Union Budget 2012 passed by Lok Sabha – key tax updates

Vodafone case

Other key updates

Tax reforms

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POLICY ANNOUNCEMENTS

Macro-economic scenario GDP growth 6.9% for FY 2011-12

Expected growth 7.6% (+/- 0.25%) in FY 2012-13

Fiscal deficit expected to decline from 5.9% to 5.1% next year

Inflation (expected) to stabilize

12th Five Year Plan aims ‘faster, sustainable and more inclusive growth’

Legislative amendments proposed to FRBM Act for expenditure management – subsidies to be capped at 2% of GDP

Foreign Direct Investment (FDI) Build consensus on 51% FDI in multi-brand retail

Proposal to allow 49% FDI in aviation

Silence on Insurance and Defence

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POLICY ANNOUNCEMENTS

Capital market reforms QFIs allowed access to the corporate bond market

Broad-basing and incentivising IPO participation

Disinvestment – INR 300 billion to be raised through disinvestment

Boost to infrastructure 12th Plan period investment in infrastructure estimated at USD 1 trillion – half

expected from private enterprise

Tax free Government bonds doubled to INR 600 billion – to finance infrastructure

Concessional tax withholding of 5% on specified infrastructure borrowings

Foreign debt (ECB) liberalization for infrastructure including: Part financing of rupee debt of existing power projects

Capex on maintenance and operation of toll systems for roads / highways

Low cost affordable housing

Working capital for airlines – capped at USD 1 billion

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AMENDED UNION BUDGET 2012 PASSED BY LOK SABHA - KEY DIRECT TAX UPDATES

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KEY CORPORATE TAX UPDATES

Tax rates Corporate Tax rate unchanged – 32.445%

Minimum Alternate Tax rate unchanged – 20%

Several retrospective amendments to negate court rulings However, no impact on closed assessment

Not to override tax treaty provisions

Some DTC proposals introduced – GAAR, APA provisions

Implementation of GAAR deferred by a year

Enhanced rigors for Domestic Transfer Pricing

Crackdown on tax evaders

Relaxation for venture capital funds

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Slab rates for individuals:

PERSONAL TAX – SLAB RATES

*Notes –

• Basic exemption limit for individual taxpayers, Hindu undivided family, association of persons and body of individuals raised to INR 200,000

• For female individuals the exemption limit is INR 200,000; senior citizens (60 to79 years) – INR 250,000, for senor citizens (80 years and above) – INR 500,000

Budget 2012 | 8

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VODAFONE CASE - FACTS

Hutch Telecommunication

International Ltd (“HTIL”)

Vodafone

CGP Investments Limited (“CGP”)

Hutchison Essar Limited (“HEL”)

India

12 intermediate holding companies

Mauritius / India

Netherlands

Cayman Islands

Share Purchase Agreement (“SPA”) for shares of CGP

100%

Direct and indirect shareholding in HEL - 52%

Other Indian entities

Indirect shareholding in HEL – 15%

Direct and indirect shareholding of 52%

+ Options over the indirect shareholding of 15% of Other Indian entities in HEL

= ‘Economic interest’ of 67 percent (approx) in HEL transferred to Vodafone

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Vodafone ruling – Budget rewrites legislation retrospectively

Source rule* redefined from April,1961 ‘Capital asset’ to include management and control rights

‘Transfer’ to include parting with or creation of right, notwithstanding that such transfer flows from transfer of shares of an offshore entity

Interest / Ownership in offshore entities deemed to be situated in India, if its value derived substantially from assets located in India

Scope of term ‘through’ clarified to include ‘by means of’, ‘in consequence of’, or ‘by reason of’

Withholding tax to apply to non-residents; presence in India not relevant

‘Validation clause’ to legitimize recovery of tax on indirect transfers

* Section 9(1) – Retrospective amendment

OFFSHORE TRANSFERS DEEMED TAXABLE

Rules of game overhauled – far reaching impact on cross-border business restructuring

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Proposed amendments retrospective from June 1, 1976

‘Royalty’ redefined and widened through explanations: To include payment for computer software, including granting of license and

irrespective of medium of transfer

To include use of ‘process’ to include transmission by satellite, cable, optic fibre or similar technology; need not be ‘secret’

To clarify that possession / control, direct usage or location of right, property or / information to not impact royalty classification

Adverse impact on characterization cases* before judicial authorities

Amendments at variance to OECD guidelines

* Court decisions sought to be reversed: DCIT v Pan AmSat International Systems Inc (ITAT Del) and Asia Satellite Telecommunications Co Ltd vs DIT (HC Del)

ROYALTY TAXATION REDEFINED

IT, Software, Telecom and Media sector impacted

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GAAR INTRODUCED

Based on DTC Bill without factoring Standing Committee recommendations Doctrine of ‘substance over form’ codified to deter ‘aggressive tax planning’

Revenue may declare an arrangement as ‘impermissible avoidance arrangement’ if the main purpose is to obtain ‘tax benefit’ and the arrangement

creates rights / obligations not ordinarily created between persons dealing at arm’s length; or

results in abuse of provisions of tax laws; or

lacks or is deemed to lack commercial substance; or

is carried out in a manner which is normally not employed for bonafide purpose

Standing Committee recommendations now incorporated Onus of proof shifted from taxpayer to Revenue

Independent member introduced in Approving Panel to ensure objectivity and transparency

Both Resident and non-resident allowed to approach Authority for Advance Ruling on applicability of GAAR provisions

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GAAR INTRODUCED

If GAAR invoked… Revenue empowered inter-alia to: ‘disregard’ or ‘combine’ any step in the arrangement

look through the arrangement by disregarding the corporate structure

‘re-allocate’ income/ expense, ‘re-characterise’ equity into debt

treat the place of residence of any party or situs of an asset or transaction other than place or location mentioned in the arrangement

Implementation of GAAR provisions deferred by a year to provide greater clarity and certainty in implementation and administration of

GAAR provisions

Committee constituted under chairmanship of Director General of Income Tax (International Taxation) for formulating rules / guidelines for GAAR implementation

Committee expected to submit its recommendations by May 31, 2012

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GAAR INTRODUCED

Other highlights Limited treaty override for effective application of GAAR in cross border

transactions

Assessment procedure for GAAR

Challenges Planning M&A and business restructuring transactions

Round trip financing specifically covered

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POTENTIAL ISSUES DUE TO GAAR

Applicability of GAAR – retroactive or prospective?

Grandfathering of existing structures not announced

Applicability of GAAR on pending audits

Impact of GAAR on tax treaties

Location preference purely for tax benefits open to challenge

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OTHER ANTI-ABUSE PROVISIONS

Tax Residency Certificates (TRCs) Necessary but not sufficient

Not a conclusive test

Format not yet prescribed

India-Mauritius tax treaty under strain - validity of circular 789 and Court decision

Sale consideration = FMV* Transfer of assets where value ‘not determinable’, FMV of asset to be deemed

as sale consideration

Failure of computation provision no longer a valid defence; Advance Rulings reversed**

Far reaching implications for complex business re-structuring cases

* Section 50D

** Dana Corporation [186 Taxman 187] and Amiantit International Holding Ltd [189 Taxman 149]

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OTHER ANTI-ABUSE PROVISIONS

Share subscription price > FMV of shares; excess taxable* Issue of shares (at premium) to residents in excess of FMV will be treated as

income

Not applicable to investment by Venture Capital Funds and angel investors

Others Unexplained cash credits, unaccounted investments** to be taxed at maximum

marginal rate of 30%; no allowance for expenditure

Tax return filing mandatory for residents and ordinarily resident in India:

Ownership of asset including financial interest outside India

Signing authority in an offshore bank account

Special trials for prosecuting tax defaulters

Bar of limitation extended from 6 to 16 years for offshore assets

* Section 56(2)

** Section 68

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OTHER RELEVANT AMENDMENTS

Tax incentive to foreign banks in India No capital gains tax on conversion of branch of a foreign bank to subsidiary as

per RBI scheme and Central Government notification

Certain provisions relating to unabsorbed depreciation, set off of losses etc to be applicable as notified in this regard

Non-compliance to result in denial of benefits granted to foreign bank / subsidiary

Rationalization of tax exemption available to Venture Capital enterprises: Eligibility of investee company – definition under SEBI regulations

Approved fund will retain tax free status

Investors to be taxed on ‘accrual’ basis

Life insurance business profits exempt from MAT provisions

Benefit of reduced long term capital gain tax of 10% on sale of unlisted securities extended to all non-residents

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OTHER RELEVANT AMENDMENTS

Long term capital gains arising on sale of unlisted securities in an initial public offering exempt from tax STT payable on such transaction at the rate of 0.2%

Cascading effect of DDT in multi-tier holding structure removed by allowing credit for DDT paid by downstream subsidiary

Reduced tax withholding from 20% to 5% on interest payable on foreign exchange borrowing by Indian companies

1 year extension for reduced 15% withholding on dividends from foreign subsidiary / JV

STT levy reduced by 20% [from 0.125% to 0.1%]

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TRANSFER PRICING

APAs introduced from July 1, 2012, in line with DTC

Specified domestic transactions covered from April 1, 2012 Transactions between Indian entities belonging to the same group

Compliances at par with international transactions

Applicable if aggregate value is greater than INR 50 million

Definitions altered retrospectively from April 1, 2001 to expand coverage ‘International transaction’ to include business restructuring, capital financing,

guarantees, inter-company receivables/payables

‘Intangibles’ to include marketing, human, location, business etc

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AMENDED UNION BUDGET 2012 PASSED BY LOK SABHA - KEY INDIRECT TAX UPDATES

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KEY INDIRECT TAX UPDATES

Increase in peak rate of excise duty and service tax from 10 to 12 percent

Lower rates of excise duty have also increased from 5 percent to 6 percent

and from 1 percent to 2 percent, with certain exceptions 

No change in the peak rate of customs duty

No change in CST rate  

Comprehensive overhaul of the service tax law

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New category of CBU cars introduced for customs duty purpose with

FOB value of more than USD 40,000 and

engine capacity of 3,000 cc for petrol and 2,500 cc for diesel

BCD rate for such cars increased from 60 percent to 75 percent

Customs duty incentive for MRO (Maintenance Repair Overhaul) –

exemption to parts and testing equipments

Duty reductions announced for fertilizer, coal mining, infrastructure & roads

sector

CUSTOMS

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Large automobiles (of length exceeding 4m) would attract duty on the basis

of engine capacity:

Below 1500 cc – Rate hike from 22 percent ad valorem to 24 percent ad valorem

Above 1500 cc – Rate hike from 22 percent ad valorem plus INR 15000 per unit

to 27 percent ad valorem

Duty incentive for MRO – exemption to parts and testing equipments

EXCISE

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Comprehensive taxation of all service activities

Specific exclusions covered under negative list and exempt list

Existing concepts relating to taxability of various revenue streams,

classification, valuation, rebates & exemptions, exports & imports, credits

scheme would change

Services defined to mean ‘any activity carried out by a person for another

person for consideration’. Key exclusions are activities involving:

transfer of title in goods and immovable property

which qualify as ‘deemed sale’ under the Constitution

money and actionable claim transactions

SERVICE TAX

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Taxability of services on ‘provision’ of services in the ‘taxable territory’

Draft rules laying down principles for determination of place of provision of

services issued

These rules would replace the existing export and import of services rules

Negative list, inter alia, includes

government services with specified exceptions

access to amusement facilities or admission to events

agricultural services

trading, manufacturing & production

transmission & distribution of electricity

public transport with specified exceptions

SERVICE TAX (CONT)

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specified education services

Exempted services include health care services and select public

infrastructure

Illustrative list of services which may now be liable to service tax:

Non-compete, right of first refusal

Services by members to unincorporated association of persons

Loyalty programme

Cancellation of contract

International lease lines

SERVICE TAX (CONT)

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Settlement Commission provisions introduced

Non-issuance of invoice no longer a trigger for prosecution

SERVICE TAX (CONT)

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Condition of receipt of inputs and capital goods into premises of service

provider for claim of CENVAT credit relaxed

Provisions for refund of CENVAT credit on export of goods and services

rationalized

Wrong availment of CENVAT credit without utilization would no longer

trigger an interest liability

Excess ACD credit can be transferred to others factories of the same

manufacturer

Under the proposed comprehensive regime of service tax, CENVAT Credit

availed by the companies engaged in banking and financial sector would

need to be reversed on actual basis

CENVAT CREDIT

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Comprehensive overhaul of the service tax law will necessitate relook at

current tax positions

Analyze impact of change in regime for respective businesses

Review planning measures implemented by the businesses

Identify structuring options

Prepare for the changes – revised compliance requirements, realignment of

IT systems

Assess the impact of law and examine need for dialogue; obtain clarification

from the Government

ACTION STEPS FOR BUSINESSES

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C h a l l e n g e U s