Copyright 2012 BMR Advisors

In association with

Webinar partners

DIRECT TAX PROPOSALS

| 2

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

Enhanced rigors for domestic Transfer Pricing

Copyright 2012 BMR Advisors

Crackdown on tax evaders

3|

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

Scope of term through clarified to include by means of, in consequence of, or by reason of
Copyright 2012 BMR Advisors

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

4|

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 Amendments at variance to OECD guidelines
Copyright 2012 BMR Advisors

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)

5|

GAAR FAST FORWARDED

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

Copyright 2012 BMR Advisors

creates rights/ obligations not normally created between persons dealing at arms 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
6|

GAAR FAST FORWARDED

Onus of proof on the taxpayer Contrary to Standing Committees 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

Challenges
Copyright 2012 BMR Advisors

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

7|

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*

Transfer of assets where value not determinable, FMV of asset to be deemed as sale consideration
Copyright 2012 BMR Advisors

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]

8|

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 Unexplained cash credits, unaccounted investments** to be taxed at maximum marginal rate of 30%; no allowance for expenditure
Copyright 2012 BMR Advisors

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

9|

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

Definitions altered retrospectively from April, 2001 to expand coverage

Copyright 2012 BMR Advisors

International transaction to include business restructuring, capital financing, guarantees, inter-company receivables/payables Intangibles to include marketing, human, location, business etc

10 |

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) Stringent penalties for failure to report transactions from July, 2012
Copyright 2012 BMR Advisors

11 |

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 Rationalization of tax exemption available to Venture Capital enterprises :
Copyright 2012 BMR Advisors

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

12 |

INDIRECT TAX PROPOSALS

| 13

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

Comprehensive overhaul of service tax law

Copyright 2012 BMR Advisors

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
14 |

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
person for consideration
Copyright 2012 BMR Advisors

Key exclusions are transfer of title in goods and immovable property; money and actionable claim transactions

15 |

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
access to amusement facilities or admission to events
Copyright 2012 BMR Advisors

agricultural services trading, manufacturing & production transmission & distribution of electricity public transport with specified exceptions specified education services
16 |

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

Loyalty programme
Copyright 2012 BMR Advisors

Cancellation of contract Transfer of business International lease lines

17 |

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 Non-issuance of invoice no longer a trigger for prosecution

Copyright 2012 BMR Advisors

18 |

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

vehicles
Copyright 2012 BMR Advisors

Incentive for MRO customs and excise duty exemption to parts and testing equipments

19 |

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 Prepare for the changes revised compliance requirements, realignment of
Copyright 2012 BMR Advisors

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

from the Government

20 |

BMR TAKE

| 21

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 Paradigm shift in Taxation of Services
Copyright 2012 BMR Advisors

Visible roadmap for tax policy reforms (DTC and GST)

Click here for BMR analysis on Budget 2012.

22 |

Copyright 2012 BMR Advisors

In association with

Webinar partners

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: Mukesh.Butani@bmrlegal.in

Contacts:
Direct line: +91 124 339 5010
Copyright 2012 BMR Advisors

Mobile: +91 98111 32000 E-mail: Rajeev.Dimri@bmradvisors.com Contacts: Direct line: +91 124 339 5050 Mobile: +91 98110 60585

24 |

ANNEXURE 1 (GAAR - ASSESSMENT PROCEDURE)

Tax Officer makes a reference to
Commissioner is satisfied with taxpayers explanations

Directions to the Tax Officer to drop GAAR proceedings

Approved Panel is satisfied with taxpayers explanations

Commissioner during assessment

Commissioner is not satisfied with taxpayers explanations

Commissioner makes a reference to the Approved Panel*

Directions to the Tax Officer to make adjustments

Approved Panel is not satisfied with taxpayers explanations

Copyright 2012 BMR Advisors

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 Taxpayer accepts the order passed by the Tax Officer

the Tribunal

Taxpayer has to pay tax

25 |