1.

Capital Gains Tax

2. Transfer Pricing Issue
3. GAAR
 Capital Gains Tax
Direct tax
On the profit from sale of capital assets
Shares, Bonds, Gold, Real estate
Rate depends on time frame
 Shares, Bonds and MF

Short term 1 year Long term

15% 20%

Gold, Real estate = 3 years

 1000 Crore
Kishor Biyani
Kumar Manglam
Future Group
Birla

Pantaloon
Pantaloon
 1000 Crore
Birla Kishor Biyani
Future Group

Pantaloon
Pantaloon
 900 Crore
Birla Kishor Biyani
CGT Future Group
100
Crore

Pantaloon
Pantaloon
 900 Crore
Birla Kishor Biyani
CGT Future Group
100
Crore TDS
Withholding TAX

Pantaloon
What happened in
Hutch Deal?
 Vodafone PLC, Hutchinson
London HongKong

Vodafone, CGP investment

Netherland Holding, Cayman

Hutch Essar, India

Vodafone India
Feb. 2007
 Vodafone PLC, Hutchinson
London HongKong

Vodafone, CGP investment

Netherland Holding, Cayman
(67%)
12k Crore

Vodafone
Hutch Essar,
EssarIndia
India

Mar. 2007
 Vodafone PLC, Hutchinson
London HongKong
Entire Deal outside India
No sale/purchase of Indian
company / its shares
Vodafone,
Netherland
CGP investment
Holding, Cayman

Hutch
CGP not in anyVodafone
Essar,
other India
India
business
Entire Deal to acquire Hutch-Essar
2010: Bombay HC

Rs.12000 Cr.
CGT
2012: Supreme Court

Rs.12000 Cr.
CGT
 IT Act Clarification (2012)
SC – IT Dept. no power / jurisdiction (existing).
Govt. issues Clarification in IT act
Capital gains on companies outside India.
when value derived from Indian Asset
Such companies will be considered located
within India.
Will apply to all deals from 1962 onwards
 Evasion OR Avoidance?
Evasion Avoidance

Income / transaction Reported, everything on

hidden file
Black money But Legal loopholes used
Jailtime to avoid tax
Black money….?
Vodafone CGT
 Budget 2012: GAAR
General Anti Avoidance Rules
WEF 1/4/2014
IT commissioner take action against tax
avoidance
Indian Citizen, NRI, Foreigner
Even outside India
Even retrospective
Even if protected under any DTAA
 Avoidance
1. Shome Panel
2. Only in rare cases Budget 2012:
3. >3 Cr. + tax benefit GAAR
4. Not to fill Revenue shortfalls
5. Defer till 2016
6. (2013) Chidambaram=>
1/4/2016
 Arguments:
Pro-Government
Pro IT-dept
 CGT issues like Vodafone
Giant Bought from Indian Co.
Sanofi Aventis French Shantha biotech
General Electric Luxemburg GenPact India.
Aditya Birla, Tata AT&T Idea (16%)
Vedanta Cyprus Sesa Goa

35,000-40,000 crore tax Avoidance

Pro-Corporate Arguments
 CEO
Executives
Staff

Board of Directors
Chairman/MD

SHARE-HOLDERS IPO
 Income
CEO Tax (10|20|30%)
Executives
Staff Excise Duty 6%
PROFIT Corporate Tax 33%
Board of Directors VAT 4%
Managing Director

DIVIDEND IT
SHARE-HOLDERS
 Income
CEO Tax (10|20|30%)
Executives
Staff Excise Duty 6%
PROFIT Corporate Tax 33%
Board of Directors VAT 4%
Managing Director

DIVIDEND IT
SHARE-HOLDERS
 Vodafone:

Crore Rupees 2013

Revenue 35000 16% 5600
Profit 1850 33% 610.5
total +6210.5

CGT “LOST” 12,000 Cr.

TRANSFER PRICING
(2013-14)
 1000 Crore
Birla Kishor Biyani
Future Group

Pantaloon
Pantaloon
Kishor Biyani
Future Group
Big Bazaar Pantaloon

1000 Crore
 Decides the transfer
price of shares

Kishor Biyani
Future Group
Big Bazaar Pantaloon
CGT
100
Crore
900 Crore
 Decides transfer price of shares
1000 cr. 100 Cr.
Kishor Biyani
Future Group
Big Bazaar Pantaloon
CGT
10 Crore
90 Crore

UNDER-VALUATION
 Why Transfer?: MNC
Reduce Tax liability (Netherland =>
Mauritius)
Replace the Chain of command
 Vodafone PLC, 2007-08
London

Vodafone,
Netherland

Vodafone BPO call center

 Vodafone PLC,
London
Vodafone
Teleservices
Vodafone, India Holding
Netherland Mauritius.

1300 Crore 250

Crore

Vodafone India
Services (VISPL)
2009-10
 Vodafone PLC, Vodafone
London Teleservices
India Holding
Mauritius.
Vodafone,
Netherland 3,200 Cr.
8500
Crore
Vodafone India
Services (VISPL)
FY 2013
 Vodafone
1. October 2014: Bombay HC ruled
in favor of Vodafone Transfer
2. Nov. 2014: similar case, Royal Pricing Case
Dutch Shell co. wins (18,000 cr.)
3. January 2015: Modi Government
decides NOT to appeal against
Vodafone in Supreme court.
4. Improve investor confidence.
 CGT
Bought company from Hutch
Did not pay capital gains tax
SC says matter out of
jurisdiction
But Pranab Clarification: tax
demand stands
2014: Vodafone sends
arbitration notice under
Netherland Bilateral
investment treaty
Transfer Pricing
Transferred Pune-BPO
shares to Mauritius
company
Allegedly undervalued the
shares
Bombay HC did not find
fault.
Modi decides not to pursue
further
 MCQ- Find incorrect statement
A. CGT is an example of indirect tax
levied during sale of capital assets.
B. During such transaction, Seller of
Capital assets, is required to withhold
the tax.
C. Both A and B
D. Neither A nor B
1. Skip 2. Attempt 3. Mark n Review
 MCQ- Find Incorrect statement
A. CGT is an example of indirect tax
levied during sale of capital assets.
(WRONG)
B. During such transaction, Seller of
Capital assets, is required to withhold
the tax. (WRONG)
C. Both A and B
D. Neither A nor B
1. Skip 2. Attempt 3. Mark n Review
 MCQ- Find Correct statement
A. CGT is an example of indirect tax
levied during sale of capital assets.
(WRONG)
B. During such transaction, Seller of
Capital assets, is required to withhold
the tax. (WRONG)
C. Both A and B
D. Neither A nor B
1. Skip 2. Attempt 3. Mark n Review
 MCQ- Find Correct statement
A. State government can levy stamp duty
on insurance policies, shares and
debentures.
B. Union government can levy tax on the
transfer of shares and debentures.
C. Both A and B
D. Neither A nor B
1. Skip 2. Attempt 3. Mark n Review
 MCQ- Find Correct statement
A. State government can levy stamp duty
on insurance policies & promissory
notes. (Union List I, #91) WRONG
B. Union government can levy tax on the
transfer of shares and debentures.
(Union List I, #91) right
C. Both A and B
D. Neither A nor B
1. Skip 2. Attempt 3. Mark n Review
Nokia Tax Row
 તકલીફ #૧
Royalty payment
 CEO
Executives
Staff

PROFIT

Board of Directors
Managing Director
DIVIDEND
SHARE-HOLDERS
 Pantaloons

Future Group
 Quantitative restriction on royalties
Indian Company=> Foreign Parent
Maximum 8% royalty
 Tax on Royalty

if India has DTAA with that

country (e.g Finland)
10%
If India doesn’t have DTAA
with that country
25%
 Nokia software
Finland 100 Cr. Royalties
10 Cr. India
Royalties Tax (100% owned)
 Nokia 90 Cr. Royalties
Finland

India

TDS
Withholding Tax
Indo-Finland DTAA
 Nokia
Rs.25,000 Cr
Finland royalties

India

2006-2013
 Timeline 2013
Jan 2013: IT raids Sriperumbudur (Tamil
Nadu) plant and offices in Chennai.
Feb: Nokia’s bank accounts ceased
April 2013: Delhi HC unfreeze
 Arguments
1. India-Finland DTAA: TDS on
Royalties …yes Nokia
2. but “Computer software”
not in definition
3. Computer software = “RAW
Material”
 Argument
1. Microsoft 8 billion USD
Income Tax
2. But did not explain Department
liability
3. Quick action to prevent
escape
 Nokia
Chennai plant = Rs.2500 Cr
Tax =6000+ cr. Current
Case can go on. Strategy
Not part of Microsoft deal.
Continue production on contract :
Stopped in 2014, November.
VRS + skill training offered to 7k
staff
Case Defeat=> Attach factory.
Nokia Tax Row
 Royalties Tax
Corporate Tax

Sriperumbudur
SEZ

Export duty 1% Domestic

Excise duty 0% 4% VAT
Export proof not given
2009-12
 After thoughts

1.Fiscal imperialism
2.DTAA models
3.Avoidance until when?
 Post WW1, League of nations
British Company UK Authorities

Dividend
Residual Profit
Royalty Payment
Source country..x
Interest Payment

Indian subsidiary Indian Authorities

 Tax agreement
Vodafone PLC, @Source Model
London

Vodafone,
Netherland Vodafone India
90 Cr. Payment
 Tax agreement
@Destination
Vodafone PLC, Model
London OECD
90 Cr. tax
Vodafone,
Netherland Vodafone India

Fiscal imperialism
 Foreign Parents

Intermediate
Holding Company

Costa Rica
BVI
Supply Chain Developing
Transaction Countries

Cayman
Bermuda
Interest transfer
Luxembourg Lease transfer
payments payments
TAX HAVEN Royalty transfer
payments
 After thoughts
1. DTAA: Legal, technical, definition
loopholes will remain
2. Will continue until India becomes a
developed country.
Vodafone tax issues
Nokia Tax issues
NEXT: BoP, CAD, Cap.Account
convertability