indirect tax - overview

Report
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DIRECT TAX PROPOSALS
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KEY CORPORATE TAX PROPOSALS
No change in corporate tax rates
FM to table bill on Direct Taxes Code (“DTC”) – expected to be implemented
from April 2013
Several retrospective amendments to negate court rulings
Some DTC proposals fast forwarded – GAAR, APA introduced
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Enhanced rigors for domestic Transfer Pricing
Crackdown on tax evaders
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OFFSHORE TRANSFERS DEEMED TAXABLE
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
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 Scope of term ‘through’ clarified to include ‘by means of’, ‘in consequence of’, or
‘by reason of’
Withholding tax to apply to non-residents; whether or not it has presence in
India
‘Validation clause’ to legitimize recovery of tax on indirect transfers
Rules of game overhauled – far reaching impact on
cross-border business restructuring
* Section 9(1) – Retrospective amendment
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ROYALTY TAXATION REDEFINED
Proposed amendments retrospective from June, 1976
Definition of ‘royalty’ widened to include payment for computer software
(including granting of license)
Use of ‘process’ to include transmission by satellite , cable or similar
technology; need not be ‘secret’
Adverse impact on characterization cases* before judicial authorities
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Amendments at variance to OECD guidelines
IT, Software, Telecom and Media sector
impacted
* Court decisions sought to be reversed
• DCIT v Pan AmSat International Systems Inc (ITAT Del)
• Asia Satellite Telecommunications Co Ltd vs DIT (HC Del)
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GAAR FAST FORWARDED
Based on DTC Bill without factoring Standing Committee recommendations
 Doctrine of ‘substance over form’ codified to deter ‘aggressive tax planning’
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 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 normally 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
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
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GAAR FAST FORWARDED
Onus of proof on the taxpayer – Contrary to Standing Committee’s
recommendations
Limited treaty override for effective application of GAAR in cross border
transactions
Board to frame guidelines for conditions
Assessment procedure for GAAR – Annexure 1
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Challenges
Onus to prove ‘commercial substance’ in holding structure
Planning M&A and business restructuring transactions
Obtaining tax benefit – key trigger
Round trip financing specifically covered
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OTHER ANTI-ABUSE PROVISIONS
TRC – necessary but not sufficient
Tax Residency Certificate (“TRC”) not a conclusive test
India-Mauritius tax treaty under strain - validity of circular 789 and Court
decision
Sale consideration = Fair Market Value*
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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]
Amiantit International Holding Ltd [189 Taxman 149]
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OTHER ANTI-ABUSE PROVISIONS
Share subscription > 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
Others
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Unexplained cash credits, unaccounted investments** to be taxed at
maximum marginal rate of 30%; no allowance for expenditure
Tax return filing mandatory for residents :
 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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TRANSFER PRICING
Unilateral APAs introduced from July, 2012, in line with DTC

Flexibility to use unspecified methods under APA

Limited clarity on bilateral APA

Detailed guidelines awaited
Specified domestic transactions covered from April, 2012

Transactions between Indian entities belonging to the same group covered

Compliances at par with international transactions
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Definitions altered retrospectively from April, 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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TRANSFER PRICING
5 percent standard deduction taken away retrospectively from April, 2001
Tolerance range capped at 3 percent from April, 2012
Revenue can appeal against DRP orders from July, 2012
TPO empowered to review international transactions not reported
retrospectively from June, 2002 (other than cases where proceedings are
completed before July, 2012)
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Stringent penalties for failure to report transactions from July, 2012
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MISCELLANEOUS AMENDMENTS
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 specified companies in infrastructure sector
STT levy reduced by 20% [from 0.125% to 0.1%]
Alternate Minimum Tax [18.5%] applicable to all category of non-corporate
taxpayers, subject to specified conditions
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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
1 year extension for reduced 15% withholding on dividends from foreign
subsidiary /JV
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INDIRECT TAX PROPOSALS
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INDIRECT TAX - OVERVIEW
Rates
 Increase in peak rate of excise duty and service tax from 10 to 12 percent
 Increase in lower rates of excise duty from 5 to 6 percent and from 1 to 2
percent, with certain exceptions
 No change in peak rate of customs duty and in CST rate
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Comprehensive overhaul of service tax law
Initiative for merging administration and compliance of excise and service
tax – steps towards introduction of GST
Model draft legislations for Central GST and State GST under preparation
GST Network will be set up as a National Information Utility and will become
operational by August 2012; time line for GST continues to elude
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SERVICE TAX
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
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person for consideration’
 Key exclusions are transfer of title in goods and immovable property; money and
actionable claim transactions
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SERVICE TAX
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
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 access to amusement facilities or admission to events
 agricultural services
 trading, manufacturing & production
 transmission & distribution of electricity
 public transport with specified exceptions
 specified education services
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SERVICE TAX
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
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 Loyalty programme
 Cancellation of contract
 Transfer of business
 International lease lines
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SERVICE TAX
Period of limitation increased from 12 months to 18 months
Power for compounding of offences to Central Government proposed
Settlement Commission provisions introduced
Removal of monetary limit for self-adjustment of excess service tax paid
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Non-issuance of invoice no longer a trigger for prosecution
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CUSTOMS AND EXCISE
Pre-identification of destination of sale and VAT registration added as
conditions for ACD exemption on specified products
Customs duty reductions announced for fertilizer, coal mining, infrastructure
& roads sector
Alteration in the customs and excise duty structure for certain cars and
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vehicles
Incentive for MRO – customs and excise duty exemption to parts and
testing equipments
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ACTION STEPS FOR BUSINESSES
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
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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
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BMR TAKE
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BMR TAKE ON BUDGET
Roadmap for cutting deficit
External factors could worsen inflation
Curtailing expenditure on subsidies –intent vs outcome
Stringent GAAR & anti-abuse provisions
Retrospective tax amendments impose onerous responsibility
Transfer pricing law strengthened
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Paradigm shift in ‘Taxation of Services’
Visible roadmap for tax policy reforms (DTC and GST)
Click here for BMR analysis on Budget 2012.
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Copyright © 2012 BMR Advisors
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DISCLAIMER
This presentation provides general information existing as at the time of preparation. The
presentation is meant for general guidance and no responsibility for loss arising to any person
acting or refraining from acting as a result of any material contained in this publication will be
accepted by BMR Advisors. It is recommended that professional advice be taken based on the
specific facts and circumstances. This presentation does not substitute the need to refer to the
original pronouncements.
E-mail: [email protected]
Contacts:
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Direct line: +91 124 339 5010
Mobile: +91 98111 32000
E-mail: [email protected]
Contacts:
Direct line: +91 124 339 5050
Mobile: +91 98110 60585
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ANNEXURE 1 (GAAR - ASSESSMENT PROCEDURE)
Tax Officer makes a reference to
Commissioner is satisfied
with taxpayer’s explanations
Directions to the Tax Officer to drop
Commissioner during assessment
Commissioner is not satisfied
with taxpayer’s explanations
GAAR proceedings
Approved Panel is
satisfied with
taxpayer’s
explanations
Commissioner makes a reference to the
Approved Panel*
Approved Panel is not satisfied
with taxpayer’s explanations
Directions to the Tax Officer to make
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adjustments
Tax Officer passes order confirming the
adjustments
Assessee can prefer an appeal before
Taxpayer does not
accept the order
passed by the Tax
Officer
* 3 member collegium of Commissioner or higher ranking Tax officers
the Tribunal
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Taxpayer accepts
the order passed
by the Tax Officer
Taxpayer has to pay tax

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