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No Respite From The Taxman

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As far as direct tax is concerned, there was no expectation of a major announcement, except some recalibrating of tax rates, and also the possible neutralisation of the Supreme Court decision on the Vodafone ruling going forward. What has transpired however, is shocking in terms of the sweep and extent of the supposedly clarificatory amendment.

Capital Gains On Transfer Of Shares Of Offshore Companies
The SC has recently ruled in the Vodafone case that transfer of shares of a foreign company is not liable to tax in India, even if the primary asset of that company is shares of the Indian company. While this was expected to be amended, the government now proposes to retrospectively tax such transactions right from 1962. Even Vodafone will be impacted, because the withholding tax provision is going to be retrospectively amended. Of course, the matter will not end here. There have been judicial precedents which provide that even in a case of retrospective legislation, there are fetters. But in the meantime, this will seriously hurt investor sentiment.

Corporate Tax
There is no change proposed in the overall corporate tax rates. However, to encourage the fund-starved infrastructure sector, the withholding tax rate on interest payment on external commercial bowworings (ECBs) is proposed to be reduced from 20 per cent to 5 per cent for companies engaged in constructing ports/roads, operation of aircraft, generation/distribution/transmission of power, etc. Exemption from the cascading effect of the dividend distribution tax (DDT) is to be extended to a multi-tier corporate structure; it is proposed that if a company receives dividend from a subsidiary (that has paid DDT), then, dividend distributed by the holding company in the same year shall not be subject to the DDT of 15 per cent.

General Anti-Avoidance Rules (GAAR)
The Finance Bill proposes to introduce General Anti-Avoidance Rules (GAAR). This would be applicable from FY 13. The GAAR provisions are sweeping and while one cannot be against anti-avoidance rules, we must recognise the reality that the Indian tax administration is often very discretionary and disputes take a long time to
get resolved. 

Advance Pricing Agreements (APA)
The Bill seeks to introduce the much awaited Advance Pricing Agreements (APA). The CBDT would have power to enter into such agreements with any person undertaking an international transaction. Such APAs would include the manner of determination of arm's length price in relation to a transaction.

Dispute Resolution Panel (DRP)
It is proposed that the Assessing Officer may also file an appeal before the tax tribunal against an order passed in pursuance of directions of the DRP. This amendment is surprising if the intention of DRP was to minimise litigation. Also, the architecture of the DRP is badly flawed because administrative commissioners with revenue raising responsibilities (as opposed to independent officials) are members of the DRP.

There have been several budgets which have not been up to expectations. However, from a direct tax standpoint, one cannot remember a budget that has led to such a strong feeling of being let down.

(This story was published in Businessworld Issue Dated 26-03-2012)

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