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Redesignate NRE account on returning to India

Author : Raghunath Rao
Dated: Jul 18, 2014

I have a fixed deposit (FD) with a bank in a non-resident external (NRE) account. In case I return to India before maturity of the FD, do I have to pay income tax on this? If so, how will it be calculated?—Arpit Kumar

Upon your return to India, you will have to re-designate your NRE account as a resident account or the funds held in the account may be transferred into a resident foreign currency (RFC) account (if you are eligible to open and hold an RFC account) immediately after your return.

The exemption on interest earned from NRE account is available until you are non-resident under the exchange control regulations.

However, interest that is earned on RFC accounts held with any scheduled bank will be exempt so long as you are a resident but not ordinarily resident in India.

In any other case, the interest earned by you will be chargeable to tax in India at the slab rates applicable to you.

I want to invest in FDs from the foreign transfers accumulated in my non-resident ordinary (NRO) account. Will my interest from FDs be taxable in India?—Kamlesh Yadav

Interest earned from deposits in an NRO account is taxable in India. However, NRIs have been provided with concessional tax provisions under which investment income derived from deposits made with banks that are public companies, by remittance of convertible foreign exchange is taxable at the rate of 20% (plus applicable surcharge and education cess).

If you choose to be governed by these concessional tax provisions, you will not be required to file returns provided your total income comprises of only investment income and long-term capital gains, and appropriate taxes have been deducted at source.

Further, depending on your residential status and the country of which you are a resident, you may also be eligible to claim benefits, if any, under the double taxation avoidance agreement. You could consult your tax adviser to understand the specific tax implications.

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Budget 2014: Expansion of tax incentive schemes

Author : Pavan Kakade and Puneet Putiani
Dated: Jul 17, 2014

Section 32AC: Investment Allowance to manufacturing companies

  1. Existing provisions:

a. Under Section 32AC of the Income-tax Act, 1961 (‘Act’), a manufacturing company is entitled to an investment allowance at the rate of 15 percent of actual cost of new asset acquired and installed during the Financial Years (‘FYs’) 2013-14 and 2014-15, if the actual cost of such new assets exceeds INR 100 Crore;

b. The quantum and manner of deduction has been provided as under:

(i)For the Assessment Year (‘AY’)2014-15, a deduction of 15 percent of the aggregate amount of actual cost of new assets acquired and installed during the FY2013-14 shall be allowed, if the cost of such assets exceeds INR 100 crore;

(ii)For the AY2015-16, a deduction of 15 percent of aggregate amount of actual cost of new assets acquired and installed during the period beginning on April1, 2013 and ending on March 31, 2015 shall be allowed, as reduced by the deduction allowed, if any, for the AY2014-15;

c. The phrase ‘new asset’ has been defined to mean any new plant or machinery with certain exceptions;

d. Further, suitable safeguards have been provided so as to restrict the transfer of the new asset for a period of 5 years (sub-section 2 of Section 32AC of the Act).

However, this restriction does not apply in a case of transfer by reason of an amalgamation or demerger.

Proposed amendments:

a. Sub-section (1A) is proposed to be introduced which expands the scope of this section to provide for an investment allowance of 15 percent as a deduction to a manufacturing company which acquires and installs new assets and the actual cost of such new assets acquired exceeds INR 25 Crores in that previous year.

b. For FY 2014-15, this proposed deduction under sub-section (1A) will not be allowed to a company which is eligible to claim a deduction under sub-section (1).

c. No deduction under sub-section (1A) will be allowed after March 31, 2017.

d. The restrictions on transfer under sub-section (2) have been extended to assets acquired as per sub-section (1A).

e. These amendments have been made to simplify the provisions of Section 32AC and to make medium size investments in plant and machinery eligible for deduction.

This amendment will take effect from 1st April, 2015.

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Check the fine print

Author : Rajeev Dimri, Partner
Dated: Jul 12, 2014

The Budget announcements have attempted a broad-based rationalisation of the existing indirect taxes. While some proposals for incentivising domestic manufacturing and addressing inverted duty structure have earned the business community’s cheer, the fine print of the Budget proposals reveal some critical fault-lines.

It was expected that a concrete roadmap would be laid out with respect to the introduction of the Goods and Services Tax (GST). While it was announced that the implementation of GST would be a priority for the government, definitive time-lines and a roadmap for this were conspicuously missing in the announcements.

In an attempt to fast track resolution of disputes, the provision under customs, excise and service tax laws empowering the appellate authorities to waive off pre-deposit of demand for admitting an appeal have been withdrawn. Instead, a mandatory pre-deposit is proposed to be introduced. Pre-deposit is to be 7.5% of the duty and penalty demanded at the first level appeal and 10% for second level appeals before the Tribunal. The proposal of mandatorily pre-depositing a percentage of penalty is unfair and unreasonable. It is well-known that penalties are applied by revenue authorities in a routine and mechanical manner without judicious evaluation of the circumstances of the case. Further, mandatory pre-deposit provisions is likely to drive adjudicating authorities towards frivolous and inflated tax demands most of which, as has been seen in the past, are unlikely to sustain before the higher courts. Thus, it seems that this provision will cause undue financial burden on the taxpayer. In this context, the cap of R10 crore on payment of pre-deposit appears unreasonably high. In terms of the language of this proposed provision, it is unclear whether the taxpayer would be required to deposit an additional 10% while preferring the second level appeal or would he be required, after having deposited 7.5% at the first appeals stage, to pay only the balance amount of 2.5%. Explanatory notes suggest the former and is likely to be a bone of contention with the tax authorities. The proposed amendment is also silent on the status of the balance unpaid demand and whether that would be deemed to have been ‘stayed’ till the final disposal of the appeals. There is a critical need for revaluating this proposal taking into account the above concerns.

Post the Supreme Court’s decision in the case of Fiat India, excise authorities had been targeting all loss making manufacturing companies across various sectors and those especially in the automobile sector. While CBEC issued a circular earlier this year seeking to selectively apply this judgement for creating demands, industry representation was to specifically amend the law. For providing a legislative protection in such cases, valuation rules under the excise law have been amended to provide that transaction value would apply in cases where excisable goods are sold at a price below the manufacturing cost and profit provided there is no additional consideration flowing from the buyer. However, a closer look at this proposed amendment would suggest that it may not necessarily be able to overcome the Fiat judgement. This is because the proposed amendment applies only in cases where no additional consideration flows from the buyer to the seller. It may be recalled that the Supreme Court in the Fiat judgement had held market penetration by way of predatory pricing as constituting ‘additional consideration’ with the result that such a fact pattern would be beyond the purview of this rule. It is important to reword this rule to address this anomaly.

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Rationalizing indirect taxes

Author : Rajeev Dimri, Partner
Dated: Jul 11, 2014

While some current tax issues were addressed, we will have to wait for the government to present its first full-year budget next year. But there is possibility of tax law amendments during the year.

The budget has attempted to rationalize indirect taxes with a view to boosting domestic manufacturing and providing relief to some specific sectors like power, renewable energy and infrastructure. For service tax, it appears that focus has been on widening the tax base.

As an incentive for the domestic manufacturing sector, the problem of the inverted duty structure prevailing in few select industries has been addressed. Basic Customs Duty (BCD) has been reduced on raw materials required for manufacturing soaps, chemicals and petrochemicals. Also, showing a big step forward, the issue of accumulated credits of Additional Duty (SAD) for the IT hardware manufacturing industry has been largely addressed by exempting SAD on almost all inputs/ components used in manufacturing computers.

A significant focus has been placed on the power and energy sector by providing concessions for the solar and wind power equipment suppliers. Duties on various forms of coal have also been rationalized to eliminate possibility of classification disputed in the future.

The budget has tinkered with the excise duty rates on 'sin' goods with a significant increase in the duty. On one hand, excise duty on cigarettes has been hiked from 11% to 72% (for cigarettes of length less than 65 mm), with a balanced increase in duty rates of other tobacco products. An additional excise duty of 5% has been levied on aerated drinks. Clean energy cess (a carbon tax) on coal has been enhanced.

With respect to service tax, significant amendment includes taxation of online and mobile advertising. With this amendment, advertisements anywhere on the internet, billboards, buildings, commercial publications, cell phone applications, or ATMs would be made liable to service tax, only with the exception of advertisements made in print media. Also, in a significant change, 'intermediaries' for goods located in India and engaged in facilitating sale of goods by offshore suppliers would now be subject to service tax.

The Large Taxpayer Unit (LTU) scheme was announced to bring respite to large taxpayers, but its success has been questionable. The scheme was intentioned to be a one-stop solutions for large tax payers with respect to corporate tax and indirect tax filings and also to facilitate distribution of Central Value Added Tax (Cenvat) credit. But this budget has significantly narrowed the scope of LTUs by disallowing transfer of Cenvat credit from one taxpayer unit to another. This may further re-Column duce the attractiveness of the LTUs. One of the major expectation from this budget exercise was with respect to implementation of new methods of dispute resolution or expansion of the scope of existing ones. It seems that close attention has been paid to the suggestions laid down in the Tax Administration Reform Commission (TARC) report that was released last month. In a significant move towards addressing this problem, it has been announced that the option of filing an advance ruling for indirect taxes cover resident private limited companies as well. Also, the scope of the Settlement Commission seems to have been somewhat expanded. In order to clear the backlog of litigation, a mandatory pre-deposit at the appellate stage has been introduced. Other steps relating to formation of high level committee to act as advisor to both the revenue boards, amendments to address the Fiat judgment issue on excise valuation are also welcome steps.

On Goods and Services Tax, announcements were made that the focus in the coming year would be on approval of the legislative scheme for introduction of the GST. However, no clear commitments were made in this regard. On the whole, while the budget announcements have tried to address current tax issues of the industry, a reformist budget will have to wait for the government to present its first full year budget in the next year. However, possibility of tax law amendments during the course of the year cannot be ruled out.

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Budget reflects BJP's election manifesto priorities

Author : Bobby Parikh, Partner
Dated: Jul 11, 2014

Expectations have a tendency of running away ahead of every budget exercise, but these had reached unprecedented levels in the run up to finance Minister Arun Jaitley's Budget 2014. Would it be a Budget replete with announcements of big bang reforms? Or would it stay away from such announcements at this stage but set out the government's fiscal priorities and define a roadmap for addressing these priorities?

Regardless of the tack that the he chose to adopt, the consensus expectation was that this budget would be different. In the overall analysis, if Budget 2014 has to be different, it will lie largely in the rigour, focus and effectiveness of the overall implementation effort.

Budget 2014 reflects a number of priorities identified in the Bharatiya Janata Party's election manifesto-the need to simply the taxation regime, provide a non-adversarial tax environment and revamped dispute resolution mechanisms. Building consensus with state governments to introduce the Goods and Services Tax expeditiously was another priority.

Budget 2014 takes a number of steps to mitigate tax disputes. A mechanism of advance rulings, which is only available to non-resident taxpayers (and public sector undertakings), is now proposed to be extended to cover all other resident taxpayers as well. Practical experience suggests that it takes considerable time to obtain rulings from the ruling authority; further burdening the ruling authority would enhance concerns about the efficacy of the forum. The finance minister acknowledges this and has proposed to augment the capacity of the ruling authority. Disputes emanating from the transfer pricing domain are sought to be pre-empted through a number of amendments to the law that have been proposed. The scope of the Settlement Commission is proposed to be redefined to make it a potentially more effective dispute resolution forum. Details in this regard are to be released in the current session of Parliament.

A high level committee, which will interact on a regular basis with industry and issue clarifications on a current basis on direct and indirect tax issues, is proposed to be constituted.

The finance minister reiterated the the government's intent to provide a non-adversarial and business friendly tax environment. A widely anticipated move that would have signalled this intent was the abolition of the retrospective "Vodafone" amendment. There has been disappointment on this score for a number of reasons. While the finance minister stressed that the government would consider retrospective amendments only in exceptional circumstances, it did not repeal the retroactivity of the Vodafone amendment. It has proposed that a Central Board of Direct Taxes constituted committee will review any new cases to which these retrospective provisions may apply, although the mandate of such a committee is not clear presently thereby perpetuating uncertainty that envelops such transactions. Finally, a government appointed committee had made a number of recommendations with regard to how these provisions should operate; these clarifications do not feature in Budget 2014. Accordingly, and at least in this area, greater clarity and certainty remain elusive.

On GST, he expressed determination in resolving differences with the state governments before the end of the year paving the way for GST to be legislated. There was hope of a more clear timetable but industry must for now remain content with the finance minister's statement of intent.

The financial services sector and the capital markets received focus. A taxation framework for real estate and infrastructure investment trusts has been proposed. He reiterated the commitment to implement the recommendations of the Financial Sector Legislative Reforms Commission and also indicated that the government would implement a number of recommendations made by the Sahoo Committee to permit greater flexibility in the market for American depository receipts, Global depository receipts and Indian depository receipts.

The budget's revenue arithmetic appears to be predicated on an uptick in economic activity. This government's ascension to power is based on its commitment to act, to execute, to deliver. Budget 2014 is the first significant policy announcement against which the government's commitment will be measured and tested; if it delivers, "acche din" will arrive!

Bobby Parikh

Chief mentor and partner,

BMR & Associates LLP

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Mukesh Butani: A preparatory exercise

Author : Mukesh Butani, Partner
Dated: Jul 11, 2014

Finance minister tries to put house in order before reforms are unveiled in February

The run-up to this year's Union Budget witnessed unprecedented hopes and aspirations from industry following the massive electoral mandate to the Narendra Modi government. While stakeholders anticipated a cure-all Budget, the government's maiden one strikes a fine balance between fiscal prudence and a reforms agenda to spur inclusive growth, and sets the tone of reforms to be pursued over three to five years. It is important at the same time to view this year's Budget in the context of the tough macroeconomic state the incumbent government inherited, and the need for urgent directional measures to revive the economy in the medium to long term.

The Economic Survey, unveiled on the Budget eve, emphasised the importance of structural reforms in the tax policy and administration for inspiring sustainable economic growth, and suggested that the next stage of tax reforms ought to usher in structural shift from the extant industrial policy-based tax system to a simplified and more equitable regime. The finance minister's Budget speech carries an unequivocal commitment to implementing tax policy reforms in the form of the goods and services tax (GST) and the Direct Taxes Code (DTC) - though I was expecting a definitive date on the GST roll-out. Whilst policy announcements on these two key tax reforms are anything but surprising, the current administration may eventually have its way by conjuring states' consensus and an acceptable revenue compensation formula. The proposal to introduce a revamped DTC Bill after taking into account stakeholders' feedback will elicit mixed reactions - especially when the large quarter of the investor community would not expect a comprehensive overhaul of the direct tax legislation in successive Budgets of the past. To me it seems that the controversial General Anti-avoidance Rules (GAAR) reform has been deferred.

Another important cue for me in the Economic Survey was the two-pronged strategy to contain deficits rather than the traditional measure of curtailing the expenditure-to-gross domestic project (GDP) ratio; an absence in the Budget of any significant doles by way of reduction in headline tax rates, barring relief to individual taxpayers, is in line with a revenue-driven sharper fiscal-correction goal. The finance minister's ambitious fiscal deficit targets (three per cent by 2016-17) will make it imperative for the government to usher in a new fiscal responsibility and budget management Act with "teeth" for greater transparency and improved budgetary management.

At the tax-policy level, the government's stated abstinence from making retrospective amendments is a huge relief. The proposal to set up a specialised committee in the tax administration to review disputes emerging from retrospective amendments carried out in the Finance Act 2012 is a welcome administrative reform; though investors would have merrily embraced a more incisive review of the controversial amendments. Given the finance minister's legal background, the convention to not intervene in matters before a court of law would have played on his mind.

Proposals to rationalise transfer-pricing rules were largely anticipated; a rollback provision in the advance pricing agreement regime shall significantly enhance its acceptability and help resolve pending high-stake transfer pricing disputes. Allowing use of Organisation for Economic Co-operation and Development-advocated inter-quartile range for the determination of an arm's-length price and multiple year data would add renewed spirit to transfer pricing compliance and documentation - and eventually lead to a better dispute-resolution framework for multinationals in India.

In the spirit of minimising avoidable disputes, the Budget does away with the income-characterisation controversy surrounding taxability of portfolio investors in India; characterisation of income from investment in securities as capital gains shall provide much desired certainty.

A three year-extension of the tax holiday for power generation undertakings (till March 2017) is the largest fiscal proposal the Budget has for the energy sector, which wishes for the re-introduction of the holiday for upstream and downstream operations. Perhaps these two key tax reforms for the energy sector could see the light of the day as the sector undergoes a structural transformation in the near term. Tax pass-through status for infrastructure investment trusts and real estate investment trusts is a welcome move for channelising new investments in these sectors.

What is more encouraging for me personally is administrative reforms proposed to strengthen tax dispute resolution framework. Enabling the reach of the authority for advance rulings (AAR) to resident taxpayers; strengthening the AAR's bandwidth by adding new benches; and reinforcing the settlement commission forum for efficacious and timely dispute resolution are largely in line with the Tax Administration Reforms Commission (TARC)'s recommendations submitted a month before the Budget. A wholesome implementation of the TARC's wider set of recommendations would have been more reformist; perhaps the finance minister has bought himself adequate time to debate these recommendations comprehensively before enacting appropriate reforms in the next year's Budget.

On regulatory policy, the Budget scores well by elevating the composite foreign direct investment cap to 49 percent in the defence and insurance sectors. Roll-out of a number of infrastructure projects under the public-private-partnership mode will catalyse new investments in this capital-starved sector. The announcement of the acceleration of a green energy corridor, and to resolve the regulatory impasse for development of the mining sector in an expeditious manner are encouraging moves; the test shall though lie in an enthusiastic follow-through of the statements in the Budget document.

There are a few misses, too - though fewer. Absence of any significant growth-inspiring fiscal policy articulation for special economic zones is a dampener. Similarly, I would have anticipated the Budget to extend the sector-agnostic tax pass-through status to alternative investment funds. There was no definite announcement on a road map for implementation of the GAAR; ideally, I would have liked to see deferral of GAAR for several years. A timeline to last-mile implementation of the GST and the DTC was again conspicuous by its absence.

I reckon this year's Budget a prudent preparatory exercise to put the house in order before significant regulatory and fiscal reforms are unveiled, hopefully, in the first full-year Budget next February. For now, I shall expect the interim policy direction and sporadic fiscal measures should pump in enough adrenaline in the economy to sustain the positive momentum, and achieve a reasonable rebound growth target of near six per cent in the current fiscal. I shall, however, anticipate a big-bang reformist Budget in 2015.

The writer is managing partner at BMR Legal.
These views are his own

(With inputs from Sumit Singhania)

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Jaitley shows little mercy to large taxpayers

Author : Mukesh Butani, Partner
Dated: Jul 11, 2014


Playing safe, retrospective amendments made in 2012 have been kept, letting the ball in the ‘courts’ to take them to their logical conclusion by deciding on their constitutional validity

After weeks of speculation and expectation buildup, Modi government’s first Budget is finally here. I think some have been addressed, though, importantly, the finance minister has set the stage for a reforms-oriented agenda.

If the Economic Survey of India presented customarily day before the Budget was any indicator of measures to come, there haven’t been any unpleasant surprises. As a convention, the survey lays down a set of recommendations for Parliament and it’s up to the law makers to pick and choose. The tax-GDP ratio stood at 10% as per survey and the FM stressed on a higher ratio by increased tax buoyancy and mobilisation, thereby, leading to increased tax revenue. Though the FM admitted that the tax collection target laid by his predecessor was ambitious, I wonder why he didn’t scale it down unless the thought behind it is to end the year marginally ahead of the fiscal deficit target.

Focusing on fiscal prudence, he reiterated that cutting on expenditure was not feasible in the view of needs of the growth economy of India. Hence, no major tax sops have been announced for large taxpayers and the tax rates have remained same.

Playing safe, the retrospective amendments made in 2012 have been kept, letting the ball in the ‘courts’ to take them to their logical conclusion by deciding on their constitutional validity. The only relief being that all pending cases affected by these amendments would be examined by a high level committee of CBDT before taking any action.

Transfer pricing, which has been a highly-litigious area, has seen some welcome changes. Faster disposal of advance pricing mechanism with an option of rollback for four years is in line with the global practices. Allowing multiple year data for comparability and recognition of quartile ranges endorsed by OECD TP guidelines 2010 would hopefully lay to rest the controversy on these long debated issues. The advanced rulings option has now been extended to residents as well and more benches of advance ruling authority may enable taxpayers to obtain a ruling before undertaking the transaction.

What may, however, be imperative for the AAR is to ensure judicial discipline so that rulings coming from coordinate benches are consistent. Tax pass through status to infrastructure investment trust and REITs will help encourage private investment in the infrastructure and real estate sector.

For aam admi, the increase in basic exemption limit to R2.5 lakh and section 80C limit to R1.5 lakh coupled with token changes in excise duty reduction puts some more disposable cash in his hands while encouraging individual domestic savings.

Hopefully, the FM’s next steps would be to implement some key suggestions of in-depth TARC report through a series of administrative and legislative changes.

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Scoring on Policy Announcements, Falling Short on Tax Reforms

Author : Shefali Goradia, Partner
Dated: Jul 11, 2014

Budget 2014 was heralded as the `Budget of Hope' which would reboot the economy. Budget has scored on policy announcements but has fallen short of expectations on the tax reforms front.

To provide an impetus to the manufacturing sector (particularly MSME) the threshold of Rs 100 crores for claiming investment allowance has been reduced to Rs 25 crores. The investment horizon has been extended to March 31, 2017. This should encourage capacity building by Indian companies. Further, extending 5% concessional tax rate on interest on foreign currency borrowings to all sectors will deepen corporate bond market.

Power sector has been given a breather by extending the sunset clause for claiming tax holiday to March 31, 2017. The concessional tax rate of 15% for dividends earned from foreign subsidiaries has been made permanent.

Presently, if an Indian company fails to meet its TDS obligations, tax deduction is denied. Considering the high level of disputes, such a disallowance is followed by interest and penalty. As a major relief, now only 30% of such expenditure will be disallowed. Further, extending the advance ruling framework to residents is a welcome move. However, denial of a deduction for CSR expenditure is a dampener. This will discourage companies from spending on CSR. Further, grossing up dividends for DDT will reduce the distributable profits for the shareholders.

Unlisted shares will now need to be held for 36 months to qualify as `long term' and enjoy a lower tax rate, instead of 12 months. This could impact the PIPE investments. There has been no respite from the deemed tax introduced on pre mium in excess of fair value. This will impact funding for the start-ups. It would have been heartening to see some bold proposals including deferral of GAAR and complete tax exemption for one-time conversion to LLPs.
Given the dynamism of the PM, there is a feeling that the Government has underdelivered. The promise to make India a business friendly country remains unfulfilled. However, considering the new Government is only 45-days-old, one should hope to see more reforms in the course of year.

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Plan Expenditure

Author : Mukesh Butani, Partner
Dated: Jul 11, 2014

Rs 5, 75,000-crore Plan expenditure in Budget 2014-15 mark an increase of 20.9%over 2013-14. Finance Minister Arun Jaitley' s B udget has l argely focused on spending I n health, education, roads and transport sectors through the public-private partnership Model

Rs 37,880 cr

New Investment in the National HighwaysAuthority of India Includes Rs 3,000 crore for the northeast

Rs 14,389 cr

To be spent on the Pradhan Mantri Gram Sadak Yojana

Rs 7,060 cr

For Development of 100 smart cities

‘’DTC alive no definitive date for rollout’’

Mukesh Butani, Chairman, BMR Legal, a tax and risk advisory firm

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The break of a new dawn?

Author : Shefali Goradia, Partner
Dated: Jul 09, 2014

Budget should lay the foundation for a stable and investor-friendly tax environment

Even though the new government has not had much time, there is a hope that Budget 2014 would give out the positive signals that the international investor community has been waiting for, and reignite the stalled engine of the Indian growth story.

Indirect transfers

The retrospective taxation of indirect transfers has spooked the investors. The FM needs to offer assurance that his government will not resort to retrospective change in law. Much as one would like, the FM may not be able to withdraw the amendment in law which brought to tax indirect transfers of foreign companies that derive substantial value from Indian assets from 1961. However, administrative instructions not to purse tax demand arising out of retrospective taxation can help. Clarity on threshold for ‘substantial’, computation mechanism, etc, should be there to provide investors with tax certainty on sale of their investments in India.

Tax disputes

Tax controversies are at an all-time high. The practice of finding innovative avenues for creating new transfer-pricing disputes needs to be checked. In many ways, India is at a cusp. It can either continue its stand-off behaviour on collecting over-the-top mark-ups on Indian captive service providers, thereby driving them out, or it can come forward with an intention to resolve disputes and engage in bilateral dialogue with foreign competent authorities to end the disputes. There is a sense of uncertainty over taxation globally, on account of action plans on base erosion and profit shifting (BEPS) under consideration at OECD and G20. India should react responsibly by watching how the tax environment evolves. The TARC recommendations to reduce tax disputes through reconciliatory mindset and robust alternative dispute resolution mechanisms should be adopted.

Deferment of GAAR

To provide greater certainty to foreign investors, Budget 2014 should defer GAAR for a period of three years. Taking a cue from the UK, the provisions should be triggered in ‘anti-abuse’ cases rather than ‘anti-avoidance’ cases. Shome Committee recommendations on respecting limitation of benefit provisions of tax treaties, not applying GAAR where specific anti-avoidance rules exist, etc, should be adopted.

Capital gains

Budget 2012 had introduced a concessional capital gains tax rate on sale of unlisted securities by non-resident investors. But the ambiguous wordings of the amendment have resulted in confusion whether such concessional tax rate is applicable to securities of private companies. Budget 2014 should clear such unintended anomaly. Removing all capital gains tax on listed securities would be a step in the right direction.

Foreign borrowings

The reduction of tax rate on interest on certain foreign currency borrowings and infrastructure bonds was laudable. Considering the funding needs of the infrastructure sector, Budget 2014 should extend the concessional tax rate to all debt from non-resident investors. The sunset clause should be extended to 2020 considering the long-term funding needs of Indian businesses.

Thrust to SEZs

There has been a policy flip-flop on the role of SEZs in growing the Indian economy which is mirrored in the tax policies. Since the government’s focus is on incentivising the manufacturing sector, Budget 2014 should exempt SEZ developers and units from MAT and DDT liability (as was the case earlier).

Tax concessions for LLPs

For private investments, structures such as LLPs are more attractive and tax efficient as there is no second-tier of tax on dividends. The exemption offered on conversion has a very low threshold for turnover and will lead to a lot of litigation. There should be a one-time exemption offered to all existing private firms if they would like to convert into LLPs.

The need for India to be recognised as an investor-friendly and investment-worthy destination is acute. The global investor community will be keenly watching if the FM will do the course correction and lay down the foundation for a stable and investor-friendly tax environment.

(With inputs from Pratikshit Vijay Misra)

The author is partner, BMR &

Associates LLP. Views are personal

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Reigniting energy project development

Author : Gokul Chaudhri, Partner
Dated: Jul 08, 2014

A market-driven pricing framework for the supply-chain is the reform the sector needs the most

Over the past decade, the international investor community closely watched the development and delivery of two global-scale upstream projects in India—the gas-rich fields off the coast of Krishna- Godavari popularly known as the D6 project, led by Reliance Industries Ltd, and the onshore oil field discovered and developed by Cairn Energy. The fact that both projects were also subject matter of secondary international investment—over $7 billion in the first project by energy giant BP for a 30% stake and the latter being majority acquired by the Vedanta Group with investment of close to $9 billion—illustrates the scale of investment that energy projects involve, both at the greenfield development stage and subsequent brownfield acquisitions. Developments for both projects raised policy and regulatory issues; quite logical, since ndia was experiencing such large-scale natural resource development for the first time since the opening of state-owned Bombay High in the late 1970s.

Similarly, the build-up of the knotty issues across the entire energy supply chain and continued failure to resolve several and half-way resolutions for others has culminated in creating a spaghetti bowl that requires deft unravelling for reigniting development of the energy sector. Priority of resolution should be to the big three challenges: first, deciding the role of the government in the determination of “highly taxed” fuel prices, both for subsidy-based diesel and for domestically-produced natural gas; second, for the licensing framework for production sharing contracts; and third, putting the tax genie back into the box to end the ongoing uncertainty and litigation.

A transparent, market-driven pricing framework is the significant policy reform which, if unveiled, could facilitate long-due and much-discussed reforms for the Indian natural gas market and finally end the misery of the downstream industry that has been locked in with controlled prices for diesel, LPG and kerosene. But it may be too optimistic to anticipate such announcement in the upcoming Budget as the incumbent government has had less than six weeks to assess the existing gas pricing framework for improvisation.

The upstream industry anticipates key announcements in the Budget, including a roadmap for the bidding of hydrocarbon acreages, either under the tenth round of the existing NELP or by transitioning to an Open Acreage Licensing Policy regime under which acreage will be available round the year instead of cyclical bidding prevalent under NELP. It will also be relevant for the government to set out an unequivocal policy framework on the existing cost-recovery based

PSC regime versus the revenue-sharing model for PSC contracting—the present policy ambivalence has been a cause of concern for some of the largest E&P companies. Besides, the Uniform Licensing Policy (ULP) should enable licences, once awarded, to be extended to all fossil fuel sources—gas, shale and coal-bed methane.

From the renewable industry’s standpoint, reiteration of the National Solar Mission target of adding 20 GW of grid connected and 2 GW of off-grid capacity by 2022 and steps for strengthening the renewable energy certificates (REC) market shall be important. With a view to diversify the energy mix for meeting future demands, it is but imperative for the government to underline significance and potential of nuclear source with a clear action plan for nuclear capacity addition in the 12th Plan period.

Resolution of tax issues is a subject that seeks an immediate redress. The most significant expectation being the reintroduction of the income-tax holiday for E&P activities, sunset on which was enacted by the Finance Act, 2011, the parity for past years for natural gas as mineral oil, and the removal of the retrospective definition that tax holiday is to be taken on singular basis of PSC and not as per the concept of tax undertaking. Refiners too expect the new finance minister to mitigate the impact of removal of the tax holiday incentive (available until March 31, 2012) by providing an investment-linked tax amortisation in the identical manner as legislated for cross-country pipeline projects. It is equally necessary to clarify that seismic survey and other oilfield services rendered by non-residents are eligible for deemed profit legislations under the time-tested provision of tax laws. This is needed to bring closure to the litigation that has been provoked by the taxman whose contention has been rejected by several tax tribunals and select High Courts.

To provide a stable fiscal framework for the power sector, the government may consider extending tax holiday incentive for generation and/or distribution of power till 2020, and thus do away with the rolling tax policy which has witnessed yearly extension of such incentive, keeping the developer guessing every year.

In summary, there are a significant number of issues accumulated by the previous UPA regime that have cumulatively hampered investment and growth of energy projects in India. To rebuild early momentum and bring back clarity and certainty for investors, both domestic and foreign, it is imperative that the Budget provides impetus for carrying out the measuresdiscussed here.

Assisted by Sumit Singhania

The author (Gokul Chaudhri) is partner,

BMR & Associates LLP.

Views are personal

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A Budget of Aspirations

Author : Mukesh Butani, Partner
Dated: Jul 07, 2014

While expectations are soaring, there is reason for one to believe that Union budget 2014 may only be a curtain raiser for more planned and structured reforms the new government will focus on. Markets have been buoyant and business confidence, in anticipation of a growth cycle, has seemingly picked up. While inflationary conditions on food prices continue to be a concern besides an expected under-par monsoon and rising crude oil prices, the government has not fallen short in putting out encouraging reformist statements. Business sentiment, in general, makes the job of the finance minister tricky, as he is expected to contain rising fiscal deficit, improve business climate and rein in inflationary tendencies. With long-standing policy paralysis and controversial tax changes plaguing the country’s image over the past few years, the stage is all set for a grandiose curtain raise on 10 July.

Our survey on taxpayers’ perception of how this budget would deal with fiscal policy and tax matters revealed an overall optimistic mood. Here are my observations on the key findings of the survey.

On the economic policy front, only bold reforms will lead the economy into an orbit of 7% GDP growth, and most optimists have held a return to 9% growth as a mirage. The government would need to make an efficient and realistic determination of sources of revenue from taxes and channelling of savings. It is expected to fund part of its budgetary spending through timebound and structured disinvestments from public sector undertakings and the majority of respondents felt the budget would announce a structured divestment programme.

From a foreign investment perspective, while the BJP has categorically opposed foreign investment in multi-brand retail, it is likely to announce the opening of growth-driving sectors such as insurance, e-commerce and defence. Most respondents also felt that foreign investment norms, in general, would be liberalized, with a 49% cap in all sectors.

Another key area to watch would be on how the new government tackles the parallel economy. In its first decision, the government established a special investigation team for dealing with hidden offshore wealth. While achieving this end is not easy and entails moving through a quagmire of legal and political bottlenecks, the intention seems well-directed. I anticipate the budget proposals would set direction for this objective.

Tax litigation and stability of tax policies seem to top the list in pulling down India’s charm for foreign investors. Added to this, the general anti-avoidance rules (GAAR), indirect transfer provisions and disputes on transfer pricing seem to top the survey findings.

  1. GAAR has been intensely debated in the context of the tax administration’s ability to handle a mature legislation coupled with inadequate guidance on its applicability. While it seemed evident that the erstwhile government was determined to introduce GAAR from April 2015 on hopes of stability, respondents felt the budget may delay its implementation.
  2. It is imperative for the budget to consider expert committee recommendations on the prospective applicability of indirect transfer provisions. Almost two-third of respondents hope the retrospective amendments to law will be withdrawn.
  3. Transfer pricing adjustments and consequential tax effect continue to rattle globally-experienced multinationals. Also, the pace of issuing advance pricing agreements and settlement of disputes under the treaty mechanism ranked high on respondents’ agenda. It is becoming imperative to issue directives in administering to simplify transfer pricing provisions and reduce tax litigation as echoed in the survey. I feel that to combat unprecedented litigation, new, quicker and efficient alternate dispute resolution mechanisms should be introduced. This view finds support from a majority of respondents.

Most respondents felt a need to rein in tax administration and embrace a coherent and service-oriented approach. Recommendations of the tax administration reforms commission (TARC) must be holistically adopted and suitably implemented. Nearly 58% anticipate that the recommendations of TARC will be accepted and implemented.

Though expectations on tax incentives, in general, are absent, the majority felt that tax holidays for the energy sector will be extended, taxes for SEZs will be simplified and 10% median excise duty rate for specified industries would be extended to all for reviving manufacturing.

Lastly, after over four years of speculation, the fate of two most ambitious tax reforms—direct taxes code (DTC) and goods and services tax (GST)—may well be decided in the upcoming budget, though majority felt that DTC may be shelved. I feel that a decision should be taken on the need to enact DTC, especially after the extant legislation has undergone several changes in the past few years with introduction of GAAR, APA, safe harbour rules, etc. GST will be a focal point of tax reform agenda and hence an overwhelming majority felt that the government will announce measures and a concrete plan for introducing GST by 2016.

Overall, I expect that the budget will focus on economic reforms, resetting the tax policies and attempt to bring stability and certainty to revitalize growth over a long-term period. The extent to which the new government would be able to deliver on its promise in this year’s budget remains to be seen. However, it will certainly be seen as a step in that direction.

The author is managing partner, BMR Legal. The views are personal.

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An Investor’s Perspective

Author : Amit Jain, Partner
Dated: Jul 07, 2014

At a time when the country was in election mode, the Reserve Bank of India (“RBI”) in its monetary policy statement on April 1, 2014, made an unexpectedly positive announcement beneficial for foreign investors i.e. of its intention to withdraw pricing norms for shares both at the time of initial investment as well as at the time of exit. The RBI indicated that such transactions would henceforth be based on “acceptable market practices” and operating guidelines were to be notified separately (not issued as yet).

As a background, the basic thinking of having valuation norms as part of Indian exchange control law, was to ensure that shares of Indian companies were not purchased by foreign investors at less than “fair” value and likewise, exit was not more than “fair” value. Consequently, valuation norms from an exchange control perspective provided a minimum/ floor price for share acquisitions in India and a maximum value within which the foreign investor could exit.

Initially, for unlisted shares a historical valuation base was used (the erstwhile Controller of Capital Issues, or CCI guidelines) to value unlisted shares in cases of a fresh issue of shares and for a transfer from a resident to a non-resident. CCI method basically provided for a simple average of “net asset value” and “capitalization of past profits” method for valuation of unlisted companies’ shares with suitable discounts for illiquidity. For listed companies, market price was the basic parameter for valuation. In 2010, the valuation methodology was changed to Discounted Free Cash Flow (DCF) method for unlisted companies; for listed companies the valuation benchmark was aligned with Indian securities law legislation which was primarily market price linked.

There are basically two issues in regulators prescribing a particular valuation methodology for valuation; fundamentally, the need for having a valuation methodology prescription at all and secondly, to prescribe a specific method(s) for such valuation.

Addressing the basic issue first, M&A transactions especially cross border deals have become fairly complex. There are several factors that impact valuation of businesses – market entry, achieving market leadership, acquiring greater control by buy-out of partner, combating competition, etc. Discussions on valuations for such and other transactions, especially between unrelated parties, are hard and reached after intense board room negotiations. Several financial and non-financial parameters go into the decision of Buy/ Sell and at what price. Therefore, to have a regulator providing a prescription on valuation is uncalled for and goes against the basic principle of free trade.

While it is understandable for regulators to be nervous of fraudulent transactions/ money laundering etc., there are separate regulations to take care of such situations and the RBI and other regulators have other powers with them to regulate such transactions. In any case, the DCF regulation too effectively operates on “self-certification” since based on the valuation certificates filed with bankers the transaction can go through without any prior RBI approval. In case of transactions with related parties, Indian tax authorities, through transfer pricing and other corporate tax provisions also have powers to scrutinize such share transactions. Therefore, while we wait for guidance from RBI on this issue, it would be interesting to observe whether RBI would completely leave the discretion on pricing to corporates or would go for valuations norms which provide some more flexibility on methodology.

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Budget must revive GST

Author : Rajeev Dimri, Partner
Dated: Jul 04, 2014

The business community looks forward to a liberalised credit scheme wherein all goods and services used for the business purpose are entitled for credit

The new government has come to power at a time when India faces a host of economic challenges such as inflation, manufacturing slump and a depreciating rupee. The new regime has pledged to revive the economy by kick-starting capital investment, employment and economic growth.

Expectations are high that a concrete plan for implementation of Goods and Services Tax (GST) would be introduced in the upcoming budget. So far, due to resistance from the states, introduction of the GST has been an unmanageable, if not impossible, task. The states are still awaiting compensation for reduction in CST rates in preparation for its subsequent abolition. There are several to-dos for introduction of GST—the finalisation of the GST legislation, tabling of the revised Constitutional Amendment Bill, enabling of IT infrastructure prior to implementation, to name a few. Since GST is the key indirect tax reform in India, with a potential to substantially add to the economic growth of the country, the expectation is that the new regime would overcome the several hurdles it faces.

The CENVAT credit scheme, over the years, has been narrowed down in scope. The credit restriction results in a higher tax cost for businesses. The business community looks forward to a liberalised credit scheme wherein all goods and services used for the business purpose are entitled for credit. Expansion of the credit base to miscellaneous duties and cesses that contribute towards significant tax costs for businesses would also be welcome. Rationalisation of the CENVAT credit scheme is one of the most anticipated changes in the excise and service tax laws.

The infrastructure sector faces substantial service tax costs during the setting-up phase as this service tax does not enter the CENVAT credit pool. While there are service tax exemptions provided for setting up certain infrastructure facilities, there is a need to broad-base this exemption to key sectors such as power, oil and gas, etc. It is also necessary to provide a mechanism for exempting service tax through the value-chain of contractors and sub-contractors, engineering services and the likes.

The excise authorities have also been targeting manufacturing companies that are incurring losses and selling their goods below the cost of production, on the basis of the Supreme Court ruling in the case of Fiat India. The concept of notional tax is regressive. Although a circular limiting the application of the Fiat judgment was subsequently issued by the CBEC, an amendment in the law is expected to provide the required protection to the industry.

Protracted and delayed litigation is a factor adversely impacting the sentiments of the business community in the country. The authorities issue tax demands on superficial grounds without considering judicial precedents, and such demands are routinely confirmed by lower level authorities. Eventually, however, most of these demands do not sustain and are quashed by tribunals and the higher courts. The smallest of disagreements between the tax officer and the taxpayer ends up as a long-drawn litigation, imposing huge costs on the taxpayer. The new government is expected to introduce newer means of dispute resolution to address the huge backlog of legal cases. Tax disputes can be significantly minimised by expanding the scope and strength of the Authority for Advance Rulings (AAR) and the Settlement Commission.

Then, there are issues regarding administration of indirect taxes that need addressing. The multiplicity of audits and investigations by the taxman is a point of pain for the taxpayer. Multiple agencies audit or investigate the same set of transactions of a taxpayer due to which the taxpayer ends up explaining same set of transactions and tax positions to multiple authorities. There are stringent prosecution provisions in place for defaults and omissions by taxpayers. It is to be appreciated these powers, for instance, arrests, etc, should be allowed only in exceptional cases and not as a tool for arm-twisting taxpayers where disputes are of a technical nature, involving interpretative issues. Other administrative issues, like inordinate delay in refund by the tax authorities to exporters of goods and services—especially SEZs and STPIs also needs urgent attention. There is a pressing need to develop a robust system for timely disposal of refunds.

Recently, the Tax Administration Reform Commission (TARC) issued a report focussing on the problems facing tax administration much like those discussed above and has given recommendations for aligning the prevalent tax policies and laws with the global practices. The new government is expected to implement the recommendations of TARC and needs to address these issues by reposing greater faith in the taxpayers, minimising the number of audit/investigating agencies and restricting the scope of prosecution powers.

Budget proposals are keenly awaited in the above backdrop.

With inputs from Saurabh Kanchan

The author is partner, BMR
& Associates LLP. Views are personal

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Dividend from equity mutual funds is tax exempt

Author : Raghunath Rao
Dated: Jul 04, 2014

I am an NRI and I have a rupee fixed deposit in India whose interest is credited to my savings account. Do I need to file a return for the interest even though tax is deducted at source?

—Samuel John

Non-resident Indians (NRIs) have been provided with concessional tax provisions under which investment income derived from deposits made with banks that are public companies, by remittance of convertible foreign exchange is taxable at the rate of 20% (plus applicable surcharge and cess).

If you choose to be governed by these concessional tax provisions, you will not be required to file the return of income provided your total income comprises of only investment income and long-term capital gains (LTCG) and appropriate taxes have been deducted at source. If the deposits held by you were not made by remittance of convertible foreign exchange or you have earned income from other sources, then you will be required to file your return of income if your total income exceeds Rs.2 lakh (assuming that you are not a senior citizen).

What is the tax treatment for an NRI selling her stock options of a company listed in India?

—Tarika Mehrotra

The tax treatment of the proceeds from sale of listed equity shares would depend upon the period for which the shares have been held.

If the shares have been held for more than 12 months, gains arising on sale of such shares would be exempt from tax in case the transaction is subject to securities transaction tax (STT). Short-term capital gains (STCG) arising from sale of shares held for less than 12 months and subject to STT would be taxable at the rate of 15% (plus applicable surcharge and cess).

NRIs would be eligible for benefits if any under the applicable Double Taxation Avoidance Agreement, which India may have entered into with the country in which the NRI is a tax resident.

What is the difference in taxation for mutual funds (MFs) for an NRI? I have made investments through systematic investment plans (SIP) in equity MFs, and will be shifting to Australia in another month.

—Hari Krishnan

Income from MFs could take two forms—dividends and capital gains. Any dividends on units of equity MFs will be exempt from taxation irrespective of whether you are a resident or a non-resident under the Indian tax laws.

LTCG on sale of equity MFs which are subject to STT are exempt from tax. STCG on sale of units of equity MFs which are subject to STT are taxable at the rate of 15% (plus applicable surcharge and cess).

LTCG computed without considering the benefit of indexation from transfer of unlisted securities would be taxable at the rate of 10%.

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Level the playing field for services

Author : Himanshu Tewari, Partner
Dated: Jul 02, 2014

The annual export of services from India stands at $145 billion while the export of merchandise stands at $312.5 billion. Services make for 31% of the total export of goods and services and compare well with the quantum of merchandise export; however, in our view, services export need more focus, attention and equitable treatment under the foreign trade policy (FTP) of India.

A comparison of the export incentives under the FTP for goods and services makes it evident that merchandise exports enjoy clear advantages over services export under the FTP. To bring equity between the two, it would be fair to expect duty-free sourcing of input services used in export of services; flexible Served from India Scheme (SFIS); deemed export benefits for supply of services to specific projects; and efficient and time-bound refund of input service tax as an equivalent to drawback disbursement based on industry rates.

Besides equity and fairness, the services sector needs the export incentive schemes to be tailored to its need. Some of the current schemes such as the Software Technology Parks of India (STPI) are born out of the manufacturing-under-bond mindset which puts unwarranted restrictions on the business.

With services exports contributing 7.5% to our GDP, the government should expand the scope of export incentives for it and rewrite the terms of policy, procedures, notification and circulars, which are attuned to the reality of the contribution of the services sector to India’s global trade and the changed mindset of voluntary compliance as different from government-as-gatekeeper approach.

In the backdrop of India’s need for foreign exchange and the bona fide expectations of the service exporter, it has been reported that the commerce ministry is reviewing the export incentives to the services sector with an aim to provide extra thrust to exports. One key step in this direction is the review of the terms of SFIS. This scheme offers service exporters 10% duty credit on net foreign exchange earnings with conditions such as ‘actual user’ and ‘non-transferability’ attached to it. The changes being considered are removing the actual user condition and making SFIS duty credit scrip transferable—this will help the exporter monetise incentives by selling the scrip in the market; and making SFIS scrip eligible for payment of service tax, for payment of output tax liability and for payment of service tax on reverse-charge basis also, with CENVAT credit benefit.

Since services export is not very capital-intensive, with an ‘actual user’ condition, the utility of such credit is limited for the the service exporter and the scheme has failed to incentivise exports.

Transferability and payment of service tax using the SFIS credit will help the industry. This may also put a question mark on the utility of STPI scheme, more so because STPI and SFIS benefits are mutually exclusive and the one more suited to the business will survive.

STPI scheme was born in 1991 out of the framework of the Export Oriented Unit (EOU) regime. Our estimates show that STPI contributes 33% to services export. But many of the compliances—customs warehousing licence, bonding of capital goods, restriction on movement of goods—need rationalising.

With the Export Promotion Capital Goods (EPCG) scheme for services, with no bonding, customs warehousing requirements, etc, STPI scheme is not the preferred choice of exporters. Transferability of SFIS may provide the incentive and force service exporters back to the drawing board to reconsider the FTP scheme most suited to the business.

Transferability of SFIS credits will generate surplus duty credit which the business can monetise by selling the scrip in the market—much like the FTP flagship DEPB scheme for merchandise export. This financial advantage of ‘additional income on account of monetisation of surplus SFIS credit’ will enable service exporters move out of STPI and adapt to emerging, benign and benevolent condition of SFIS. Moving out of STPI will reduce unwarranted interface with central excise, allow operational flexibility and reduces compliances.

Transferability of SFIS credits will trigger an analysis of possible credit surplus that a business may be able to generate and monetise; if the quantum of credit surplus is significant to offset the advantages of other schemes including the STPI scheme, then businesses will take the call of moving out of the legacy of STPI scheme that only offers import duty incentives. But only changing the conditions of SFIS credit will not deliver equity to service exporters under the FTP. More is expected of the government for a fair deal for the services sector.

The author is with BMR & Associates LLP. Views are personal

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