India: Where Are We Today? - IFA-UK

Nikhil V Mehta
Gray’s Inn Tax Chambers
[email protected]
7th March 2013
20th January: Vodafone win in the SC decision
17th February: Indian Government files review petition
9th March: Parliamentary Standing Committee on Finance’s
Report on the DTC recommends relaxations to the proposed
Vodafone tax charge and the GAAR
16th March: Indian Budget contains provisions to tax offshore
share sales with retrospective effect from 1st April 1962, and
introduces the GAAR from 1st April 2012
20th March: The Supreme Court dismisses the review petition
28th May: Finance Act enacted with retrospective changes:
Committee’s recommendations ignored. Vodafone back in play.
GAAR becomes law but from 1st April 2013
1st August: P. Chidambaram becomes FM
30th September: Shome Committee’s Final Report on the GAAR
31st October: Shome Committee’s Final Report on Indirect
Aggression of Tax Authorities
Independence of the Courts
Cautious Optimism with new FM
In 2009, injection of additional equity from
Dutch parent into Indian subsidiary
Cash paid on basis of Rs.10.00 per share
In January 2013, Indian tax authorities
claimed gross undervalue of shares and,
using transfer pricing, valued shares at Rs.
183 per share
In US$ terms, the undervalue in total is
@2.7bn: claim is for @US$ 1bn
Tax on FDI through transfer pricing
In August 2009, 2 French Companies sold
shares in a French holding company to Sanofi
The holding company held 80% of the shares
in an Indian pharma company, SBL
The Indian tax authorities attempted to tax
the sale as an indirect transfer of the shares
of SBL
They further argued that the retrospective
changes applied and overrode treaties
Sanofi, like Vodafone, was exposed because it
failed to withhold tax from the purchase price
Decision by the Andhra Pradesh High Court
went against the tax authorities
Vodafone followed in part, including
domestic and foreign case-law on tax
avoidance (Tower MCashback referred to in
Tax authorities criticised for their arguments
on looking through commercial substance of
a bona fide JV company (“ambivalent or
An odd approach to France/India treaty by Indian
tax authorities to overturn France’s exclusive
right to tax what was ostensibly a domestic
French sale of shares
Application of extended meaning of “transfer” in
retrospective provisions to “alienation” of shares
representing “participation” in a company: Article
14(5) of the Treaty
Court clearly not prepared to contemplate that a
domestic retrospective provision could override a
No attempt to argue that what was taxable in
France was not the same as what was taxable in
Focus on increasing the tax take without
dramatic increases
Further measures to curb tax avoidance
For foreign investors, what’s not in the
Budget is more interesting than what is in it
Taxing the “super-rich” by increasing
surcharges on income tax to following rates:
1. 10% on individuals earning more than Rs. 1 crore per
year (@£112,000): 42,000 taxpayers in this bracket
2. Also 10% on domestic companies earning more than
Rs. 10 crores (@£1.12m) and 5% for foreign
Increasing withholding tax on royalties from
10% to 25%
20% distribution tax on unlisted share
buybacks with effect from 1st June 2013
Tax residence certificates no longer
conclusive for treaty claims (but no guidance
on what else may be needed)
Simplification of regulatory procedures
Investment in exchange-traded derivatives up
to Rs. Exposure
Ability to put up corporate and Government
bond investments as margin
Reductions in securities transaction tax on
exchange deals
Shome Committee Report’s recommendations
accepted in part
Postponement to 1st April 2016 confirmed
but NB it applies from 1st April 2015
Factors constituting an “impermissible
avoidance arrangement” clarified
Approving Panel will have tax administration
in minority
Procedural improvements
“Property” deemed always to have included any
rights relating to an Indian company including
rights of management
“Transfer” expanded to include any way of
parting with an asset, directly or indirectly
notwithstanding that it is legally achieved by a
direct transfer of foreign shares
But even foreign shares are deemed always to
have had an Indian situs if they derive their value
from Indian shares
Withholding by non-residents deemed always to
have been necessary
Despite endorsing the importance of
certainty, the Finance Minister has remained
silent in the Budget on the status of the
retrospective changes: no mention of the
Shome Committee’s recommendations
Something may come in the Direct Taxes
Code Bill
An anti-climax
Contradictions between Government
pronouncements and Indian tax authorities’
conduct: attack on tax avoidance based on
mindset of tackling tax evasion
Attack on mutinationals-India’s own version
of Starbucks: transfer pricing a particularly
thorny area
But the Courts continue to defend legitimate
tax planning
Defensive tax planning pre-GAAR
Incredible !ndia

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