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Getting to the core
Budget analysis
India Budget 2012
International Tax Update
The Indian Budget was announced on 16 March 2012.
Whilst the proposed Direct Taxes Code [DTC] could not
be implemented in full from 1 April 2012, the key provi-
sions proposed in the DTC relating to the introduction of
a general anti-avoidance rule [GAAR], taxation of indirect
transfers of shares, widening the denition of royalties and
the introduction of advance pricing arrangements [APAs]
are all proposed to be introduced in existing law.
The key international tax proposals of the Budget are
discussed below. The provisions proposed in the Budget
are likely to be enacted towards the end of May or the
rst week of June.
General Anti-Avoidance Rule [GAAR]
The GAAR is proposed to be introduced primarily to codify
the doctrine of substance over form and to deal with
aggressive tax planning. An arrangement entered into
by a taxpayer may be declared to be an impermissible
avoidance arrangement [IAA] if its main purpose, or one
of the purposes, is to obtain a tax benet and it satises
one of the four tests: (1) it creates rights and obligations
normally not created between parties at arms length; (2)
it results in a misuse of tax law; (3) it lacks, or is deemed
to lack, commercial substance; (4)it is not bona de. Once
a transaction is treated as an IAA, the tax authorities have
wide powers to, inter alia, disregard or ignore the arrange-
ment or part thereof, recharacterise any step, disregard
any corporate structure, deny treaty benets, or recharac-
terise debt as equity amongst other things. The onus to
prove that the main purpose of the arrangement is not to
obtain tax benets is on the taxpayer. Please also note that
the GAAR provisions shall override tax treaties to prevent
treaty abuse.
An important point to be noted is that the GAAR is to be
applied in accordance with prescribed guidelines, which
are expected to be announced in the coming months. As
regards procedural aspects, a reference has to be made to
the GAAR Approving Panel comprising of senior Revenue
ofcials prior to applying GAAR and the taxpayer can
appeal against a GAAR order directly to the Tax Tribunal
for quick resolution of the dispute.
Companies with existing or proposed investments in India
may consider reviewing their position, including holding
company structures and cash repatriation mechanisms, in
light of the proposed GAAR.
Taxation of indirect transfer of shares
Close on the heels of the landmark Supreme Court
judgment in the Vodafone case, Indian tax law is proposed
to be amended retrospectively from 1961 to provide for
the taxation of indirect transfers of shares. The amended
law will clarify that any share or interest in a foreign
company will be deemed to be situated in India if its value
substantially derives, directly or indirectly, from assets
located in India. By virtue of this deeming provision, the
sale of shares of a foreign company could be liable to
capital gains tax in India if it satises the test of substan-
tially deriving value from Indian assets. The term substan-
tially has not yet been dened. A related amendment
claries that a foreign company is required to comply
with the Indian withholding tax provisions while making
payments to another foreign company this applies even
if the payer does not have a residence, place of business,
business connection or any other presence in India. Please
note that the time limit for initiating proceedings against
the payer as an agent of the other foreign company has
been increased from 3 years to 7 years from the end of
the tax year (i.e. 31 March).
Therefore despite the fact that the law is amended retro-
spectively from 1961, the Revenue authorities can go back
only 7 years to initiate proceedings against a company. In
other words, only transactions from 1 April 2005 will be
open to scrutiny after 31 March 2012, unless proceedings
have already been initiated in the past.
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Widening the denition of royalties
The scope of royalties under the Indian tax law is proposed
to be widened retrospectively from 1976 to a signicant
extent. Firstly, it is proposed to be claried that the transfer
of rights for use / right to use computer software (including
granting of a licence) will be in the nature of a royalty.
Secondly, a royalty will include consideration in respect
of a right, property or information, whether or not: (1)
possession is with the payer; or (2) this is used directly by
the payer; or (3) its location is in India. Lastly, it has been
proposed that the term process be claried to include
transmission by satellite, cable, optic bre or by any other
similar technology, whether or not such process is secret.
Pursuant to the proposals, payments for software licences,
bandwidth charges, etc. are likely to attract withholding tax
in terms of the Indian tax law.
Advance pricing arrangements [APAs]
APAs are proposed to be introduced in India with effect
from 1 July 2012. Though not all details of the APA program
are announced, the key points to note are:
- Ve||d|ty of /l/s w||| not exceed b consecut|ve yeers.
- /l/s w||| be |ege||y b|nd|ng on the texpeyer end the
Revenue authorities, unless there is a change in law or
facts.
- vhere tex return hes e|reedy been f|ed, texpeyer w||| be
required to le a modied return within three months
from the end of the month in which the APA was
entered.
- /ssessments / reessessments wh|ch ere pend|ng or
completed for the years to which the APA applies to
be completed / reassessed by the Revenue authorities in
accordance with the APA.
- /l/s to be vo|d where there |s freud or
misrepresentation.
- he process end procedures of the /l/ progrem w||| be
prescribed.
Other amendments
- / fore|gn texpeyer w||| be requ|red to subm|t e ex
Residency Certicate [TRC] obtained from the govern-
ment of the country of residence, containing the
prescribed particulars, in order to be able to claim the
benets of the tax treaty.
- he trensfer pr|c|ng prov|s|ons ere proposed to be
extended to specied domestic transactions between
related persons (say, two Indian subsidiaries of an
overseas company) as well as in computing prots of
units eligible for tax holidays.
- Subect to certe|n cond|t|ons, the me|n one be|ng the
requirement of the loan agreement being approved by
the government, the withholding tax rate on interest
on foreign currency loans will be reduced from 20% to
5% for specied industries such as power, operation of
aircraft and infrastructure, amongst others.
- Lffect|ve 1 !u|y 2012, the Revenue euthor|t|es cen eppee|
before the Tax Tribunal against orders passed by the
Dispute Resolution Panel in international tax and transfer
pricing cases.