The Indian Finance Minister (FM) had presented the Finance Bill, 2012 (FB 2012) to Parliament on 16 March 2012. The FB 2012 had proposed a number of far reaching amendments to the Indian Tax Law, including a proposal to introduce General Anti- avoidance Rule (GAAR) and taxation on indirect transfer of assets situated in India, with retrospective effect.
General Anti-avoidance Rule (GAAR)
Taxpayers and the tax authority to be given more time to address the issues relating to GAAR, the applicability of GAAR has been postponed by one year, and it will now apply to income from tax year 2013 -14.
The FM has also proposed the following amendments to the GAAR provisions:
- The onus of proof, that an arrangement is not an impermissible anti-avoidance arrangement, will not vest entirely with the taxpayer.
- In order to ensure transparency, the GAAR approving panel will include an independent member, an officer of the level of Joint Secretary or above, from the Ministry of Law.
- Any taxpayer, resident or non-resident, can approach the Authority for Advance Rulings (AAR) for a ruling on the applicability of GAAR.
- Initiative to provide clarity and certainty on GAAR provisions, a Committee constituted under the chairmanship of a high ranking tax officer to give recommendations for formulating the rules and guidelines for implementation of the GAAR provisions. This Committee will submit its recommendations by 31 May 2012.
Retrospective amendments
The FM has clarified that the FB 2012 retrospective amendments, relating to the taxation of indirect transfer of assets situated in India, will not override India’s tax laws. It would only impact those cases where the transaction has been routed through low tax or no tax countries with which India does not have a tax treaty.
Retrospective amendments will not be used to reopen any cases where assessment orders have already been finalized.
The Central Board of Direct taxes (CBDT) will issue a policy circular to clearly state this position after the passage of the FB 2012.
Other provisions
- In order to provide balance to Private Equity investors and other non-resident investors with Foreign Institutional Investors (FIIs), the tax rate on long term capital gain arising from sale of unlisted securities will be reduced to 10% from 20%.
- The benefit of tax exemption on long term capital gains on the sale of unlisted securities to be formulated even in cases of an initial public offer and the levy of Securities Transaction Tax (STT) at 0.2% on such sale of unlisted securities will be levied.
- Investors, who invest in start-up companies, will be notified as an exempt class of investors.
- Extension of lower rate of withholding tax, of 5%, on external commercial borrowings for the infrastructure sector to all businesses, and not only to companies engaged in specified business. This lower rate of tax would also be available for funds raised through long term infrastructure bonds in addition to borrowing under a loan agreement.
- A provision for tax neutral subsidiarisation of Indian branches of foreign banks has been incorporated.
- The proposal for withholding tax on transfer of property has been withdrawn.
- Collection of tax at source (TCS) by the seller at the rate of 1% of the sale amount from the buyer for all cash transactions exceeding INR 0.2 million to reduce the transaction of unaccounted money in the bullion and jewellery trade. This threshold has been enhanced to INR 0.5 million in respect of jewellery and in respect of bullion, it is being clarified that bullion will not include any coin or other article weighing 10 gms or less.
Comments
Proposals contained in FB 2012 require serious attention on the impact on the investment and business environment in India. The major amendments that have been proposed and guidance that may be issued to assess whether the proposals would favour investor concerns. The proposal to defer GAAR by a year would be welcomed by taxpayers as it gives them reasonable time to assess the impact on their existing structures.
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