Though important proposals have been laid out in the Budget 2013, the FinMin seems to have missed out on important considerations for foreign investors in pursuing the larger objective of reviving the Indian economy from the impact of the global recessionThe avowed objective of the proposals tabled this year in Budget 2013 was to ensure 'higher growth leading to inclusive and...
Though important proposals have been laid out in the Budget 2013, the FinMin seems to have missed out on important considerations for foreign investors in pursuing the larger objective of reviving the Indian economy from the impact of the global recession
The avowed objective of the proposals tabled this year in Budget 2013 was to ensure 'higher growth leading to inclusive and sustainable development'. The Hon'ble Finance Minister introduced the tax proposals in the Budget 2013, by re-affirming to bring clarity in tax laws, a stable tax regime, a non adversarial tax administration, a fair mechanism for dispute resolution and an independent judiciary to provide greater assurance to taxpayers.
The Hon'ble Finance Minister has shown great equanimity while tabling the tax proposals in the Budget as no major levies have been introduced nor have any significant incentives been granted. The underlying thesis of this article is to set out the controvertible position of seeming philosophy of economic expediency that the tax proposals in the Budget could bear on sentiments of investors investing in India.
India may see affluence in investments as the Finance Minister has promised a few capital market reforms including rationalisation and simplification of procedures and norms for foreign portfolio investors such as Foreign Institutional Investors and QFIs. The development of a robust debt market and boost to infrastructure debt funds is a step in the right direction. Detailed tax proposals having an impact on the foreign investment flows are discussed in the ensuing paragraphs of the article under various categories.
General Anti Avoidance Rules: Still unclear?
The Finance Bill has proposed a few amendments to the general anti-avoidance rules ("GAAR"), introduced into India's tax statute last year, to resolve certain concerns of the foreign investors. GAAR which was initially planned for implementation from April 1, 2013 is now proposed to be deferred for two years.
Furthermore, currently, GAAR may apply even if obtaining the tax benefit is one of the main purposes of an arrangement. It has been proposed in the Finance Bill, 2013 that GAAR shall apply only if the main purpose of an arrangement is to obtain a tax benefit.
The Finance Bill, 2013 proposes that factors such as the holding period of the investment, availability of an exit route and whether taxes have been paid in connection with the arrangement may be relevant but not sufficient for determining commercial substance of a transaction. It is pertinent to note that these were the key factors considered by the Supreme Court of India when it decided that the USD 11.1 billion Vodafone-Hutch transaction could not be taxed in India.
Finance Bill, 2013 also proposes to introduce a few procedural safeguards for the implementation of GAAR. It is proposed that GAAR cases shall be scrutinised by an Approving Panel chaired by a retired High Court Judge, a senior member of the tax office (of the rank of Chief Commissioner of Income Tax) and a reputed academician or scholar with expertise in taxation or international trade and business, and that the directions issued by the Approving Panel shall be binding on the assessee as well as the income-tax authorities. The existing provisions relating to the Approving Panel only contemplate members from the tax department.
Though, the proposals on GAAR provide great comfort to investors, various comments / proposals contained in the Ministry's Press Release and Expert Committee Recommendations have not been addressed. For instance, provisions relating to grandfathering of GAAR, impact of GAAR on FII's, treaty override do not find mention in the Budget proposals.
Taxing Buyback of shares
Finance Bill has purported, to make buy back of shares more tax inefficient in comparison to payment of dividends by proposing an additional levy on domestic unlisted companies when such companies make distribution pursuant to a buy back at the rate of 20 per cent on the difference between the buy back price and the issue price of shares, which are bought back. The proposal stems from the background that various unlisted companies are opting for the buyback route to repatriate monies and claim treaty benefits for capital gains earned and repatriate monies overseas without paying distribution tax on dividends.
The proposed amendment will impact foreign investors who have made investments from countries such as Mauritius, Singapore, Cyprus etc. where buy-back of shares would not have been taxable in India due to availability of tax treaty benefits. Further, being in the nature of additional income tax payable by the Indian company, the aspect of eligibility to claim foreign tax credit may also be doubted.
Cloud of uncertainty on sanctity of Tax Residency Certificate ("TRC"): Yet again
Finance Bill, 2013 proposes to amend the Income-tax Act, 1961 to provide that submission of TRC is a necessary but not sufficient condition for non-residents seeking to avail the beneficial provisions of the applicable Double Taxation Avoidance Agreement. Concerns were raised, in particular by Foreign Institutional Investors ('FIIs'), that the proposed amendment would mean that the TRC produced by a resident of a contracting state could be questioned by the Income Tax Authorities in India. In view of the FII concerns, the stock markets suffered a major-set back.
In a bid to allay the fears of foreign investors, the Ministry of Finance has issued a press release, pursuant to tabling of the Finance Bill, 2013 stating that the TRC produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the Income Tax Authorities in India will not go behind the TRC and question his resident status. In addition, it was stated that in the case of Mauritius, Circular no. 789 dated April 13, 2000 continues to be in force, pending ongoing discussions between India and Mauritius.
The press release assures that the concerns relating the proposed amendment will be addressed suitably when the Finance Bill is taken up for consideration, however, repeated casting of doubts, amendments of provisions relating to TRC has only led to further uncertainty in the tax system and may result in loss of faith of the taxpayers.
Taxing the "rich"
While the base income tax rates for the assessment year 2014-15 have not changed for domestic and foreign companies, Finance Bill has proposed an increase in the surcharge levied on the taxes paid by companies. In case of a foreign company with total income in excess of INR 10 crores, a surcharge at the rate of 5 per cent of income-tax will be levied. A surcharge of 2 per cent will continue to be levied on foreign companies with total income in excess of INR 1 crore but which does not exceed INR 10 crores. Furthermore, surcharge would be levied on individuals at the rate of 10 percent where the total income of the individual exceeds INR 1 crore.
The proposal to increase surcharge as stated in the Budget Speech by the Hon'ble Finance Minister, is only for one year. However, this proposal needs to be balanced with the ultimate objective of achieving voluntary compliance of tax laws amongst the taxpayers.
Royalties and Fee for Technical Services: Higher Tax Rates on the radar
The Finance Bill proposes to increase the withholding tax rate on royalties and fee for technical services to 25 per cent from 10 per cent under the current law. Though the non-resident may still avail of tax treaty benefit for lower rates of withholding on such income, this increase has come has a surprise to the investor community considering that the definition of royalty was only amended to expand its ambit last year with retrospective effect.
Though important proposals have been laid out (as discussed above) in the Budget, 2013, the Hon'ble Finance Minister, in the arduous task placed before him of reviving the Indian economy from the impact of the global economic downturn, has seemed to miss out on various important considerations for foreign investors, like providing clarity on taxation of indirect transfers, impact of retrospective amendments made last year in definition of royalty and provisions relating to transfer pricing, strengthening of the dispute resolution panel. Plausibly, the same may be attributed to the fact that the Direct Taxes Code Bill, as promised by the Hon'ble Finance Minister in the Budget Speech, is in the offing. What needs to be seen is how this fine balance proposed in the Budget 2013 would impact the systemic Indian tax framework.
Disclaimer-The views expressed in this article are the personal views of the author and are purely informative in nature.