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General Anti-Avoidance Rules (GAAR)

Proposal to introduce General Anti Avoidance Rule to counter aggressive tax avoidance scheme. GAAR (under Chapter X-A) is a broad set of provisions which seek to tax an 'impermissible avoidance arrangement whose main purpose is to obtain a tax benefit Specific provisions are inserted which describes the circumstances under which transaction is deemed to lack 'commercial substance' Eg . For instance, an entrepreneur sets up an undertaking in a backward area to claim tax benefit. The provisions give taxmen the right to disallow the benefit, saying there was no commercial substance in the transaction, as the sole purpose of selecting the location was to claim a tax benefit. Onus lies with the tax payer to prove that the main purpose of the arrangement was not to obtain tax benefit It is also provided that a scheme for regulating the condition and the manner of application of GAAR provisions would be prescribed. This will take effect from AY 2013-14 (FY 2012-13)

Advance Pricing Agreements

Advance Pricing Agreement (APA) is a measure aimed at providing certainty APA is an arrangement between a taxpayer and the tax authority covering future transactions, wherein the transfer pricing method to be applied for a certain future of time are mutually agreed upon.

Transfer Pricing
The increasing participation of Multi-National Companies in economic activities has given birth to new and complex issues emerging from the transaction entered into by the by the Inter-group companies of that MNC. The profits derived by such group enterprises can be controlled by manipulating the price charged causing erosion of tax revenues. The law on Transfer Pricing in India was introduced to streamline the process and cover loopholes that caused tax erosion. Lets understand it with the help of transfer pricing definition Transfer Pricing in India relates to determination of correct market price of the transaction a.k.a Arms length price. It helps in ensuring that profits taxable in India are not understated (losses overstated) by declaring low receipts or higher outgoings than those actually liable to be declared. Application of Transfer Pricing in India As per section 92 (1) of the Income Tax Act, 1961 Income from an international transaction shall be computed having regard to the Arms length Price (correct market price). And it is not only the sale price that shall be determined as per Arms length price but even the allowances for any expenses and interest arising from an international transaction will be computed evenly. The above rule applies even where the international transaction shall comprise of only outgoings i.e expenses, interest . Eg: An enterprise in India sells good/services to an associated enterprise in USA for Rs. 1,00,000where as the Arms length Price is Rs 3,00,000. Therefore the income of Indian Enterprises shall be determined with respect to Arms length Price i.eRs 3,00,000.

International Tax and Amendments

Deeming provision for income accrual in India proposed to be amended by retrospective explanations added with effect 1st April 1962 for taxation of:
Indirect transfer of Indian company shares by deeming situs of foreign share in India if value of such share is derived substantially from the Indian assets Payments for software and payments for satellite transmission by treating as Royalty.

Retrospective amendment to definitions

Capital asset to include any rights including rights of management or control, in or in relation to, an Indian company. Transfer to cover international transfers of shares which results into disposing of or parting with any asset or interest in asset, situated in India directly or indirectly .

Retrospective amendment on fundamental principle of determination of tax on Indian assets transferred and which have an adverse effect on stability of Indian Income Tax

Vodafone Tax Case

Budget 2012-13 impact

Background of the case

In February, 2007 Vodafone entered into an agreement with Hutchison Telecommunications International Limited for acquiring 67% shares of Hutchison Essar Ltd for a value of US $ 11.2 billion. The tax authorities demanded $ 2 billion from Vodafone as it did not deduct tax while buying the stake and making payments to Hutch. According to the tax authorities, the tax is liable to be paid in India as it involved assets located in the country. Vodafone disputed saying that neither Vodafone nor Hutch was liable to pay the tax as both the companies located outside India and the deal happened outside India. Vodafone moved Mumbai High Court saying share transfer was done outside India. HC dismissed the petition saying IT department has the right to investigate the case. The Supreme Court dismissed the appeal and referred the case to Mumbai High Court. Mumbai High court decided the case in favour of the IT department and asked Vodafone to pay the taxes. Vodafone moved to Supreme Court against this decision. In Jan 2012 Supreme Court decided the case in favour of Vodafone. The Government is now planning to move Supreme Court for a review.

Proposed Amendment in Budget 2012-13

In the meantime, the Finance Bill, 2012 has proposed to amend the law with retrospective effect from April 1962 to tax deals involving overseas firms with interest in India. This move will go against the Supreme Court order in the Vodafone tax case.
Historically, overseas investors have adopted multi-tier holding structures typically based out of tax friendly jurisdictions while investing in India. Such a structure provided an opportunity to overseas investors to exit from India by means of a cross border transaction involving non-residents, resulting in minimal or nil tax implications.

If the amendment is passed, Vodafone will have to pay tax despite winning the case in Supreme Court. The Government clarified that it is only following Supreme Courts suggestion that if the state wanted to tax such transactions, it should change the law.