MARCH 19, 2012

Budget 2012: Significant Amendments In Direct Taxes Laws

By Sumeet Khurana & Tarun Jain

THE Finance Minister through the Parliament has sought legislative overruling of Supreme Court's interpretation in Vodafone International case by proposing the following amendments with retrospective effect (right from 1962 onwards);

++ Scope of “capital asset” has been extended to include “any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever”.

++ Scope of “transfer” in respect of capital asset has been extended to include even indirect interest creation.

++ Section 9, which deems certain income to be taxable in India , has been amended to declare it a ‘look through' provision whereas the Supreme Court has specifically ruled to the contrary. Corresponding provision has also been introduced in the General Anti Avoidance Rules (GAAR) to empower the tax authorities to ‘look through' the impermissible avoidance arrangements.

++ Shares of a foreign company are declared to be capital assets situated in India and liable to capital gains if such shares derive their substantial value from Indian assets. Thus the conclusion of the Supreme Court that the situs of shares of Cayman Islands Company was in Cayman Islands has been reversed and such shares are now deemed to be situated in India .

++ The conclusion that tax deduction requirement under Section 195 does not apply to Non-Resident payers has been undone and now it has been declared that even the Non-Resident payers of income are obliged to comply with the tax deduction provision even if they do not have any business connection or presence in India.

To add salt to the injury, the Finance Bill also provides for validation of demand raised against Vodafone (and undone by the Supreme Court) in as much as the amendments carried out in this Budget with retrospective effect from 1962 will apply to Vodafone irrespective of the Supreme Court's categorical decision. The provisions may be subject to further litigation but given the trend of Courts on validation laws the slide seems to be tilted heavily against Vodafone.

The Budget has also sought to provide finality (though against the tax-payers and favour of the Revenue) by making a number of retrospective amendments to the provisions, as under;

++ The consideration for rights to use of Computer software is deemed to be ‘royalty' and thus despite contrary decisions of various High Courts and Tribunal benches since 1976 onwards, it is now been deemed that such consideration will be taxable only as royalty and not business income. The argument of the assessee that the subject matter is a copyrighted article thus may no longer be valid. However its impact on cases governed by DTAA may require closer scrutiny before a final conclusion is arrived at.

++ The contentious issues of ‘equipment royalty' and ‘process royalty' are also settled against the assessee in as much as consideration for grant or transfer of ‘any right, property or information even if located outside India and even if simultaneously also used by the receiver of income, is deemed to be royalty with retrospective effect right from 1976 onwards.

++ Similarly consideration for utilization of transponders, cables etc. for ‘transmission by satellite' is deemed to be royalty with retrospective effect from 1976 onwards. Thus the decision of Delhi High Court against the Revenue is now undone.

A lot has been done on the forefront of the recent demands against combating corruption and black-money. While the Finance Minister has promised a White Paper on this aspect in this Parliamentary session itself, he has also proposed a number of changes in the Act itself. These can be understood as under;

++The Budget introduces a new return filing requirements for Residents having asset located outside India or signing authority in any account outside India .

++ The time-limit for reopening of assessment where income in relation to an asset located outside India has escaped assessment is increased to sixteen years instead of the general rule of six years.

++ The time-limit for reopening of assessment for agents of Non-Residents has also been increased from two to six years.

++ However the Finance Minister has led down all the demands of a VDIS scheme like last occasions wherein the public was expecting reduction in inflation and other debt crisis through the influx of money from abroad under such scheme.

A new chapter pertaining to General Anti Avoidance Rules has been introduced, thereby fast-tracking its application instead of applying it under the proposed Direct Taxes Code Bill to that under the correct income tax law. These rules seek to undo any tax benefits that may be obtained by the assessee by entering into an impressible avoidance arrangement wherein inter alia the transactions lack commercial substance or are not bonafide . These provisions have far reaching implications in as much as vague phrases have been employed thereby making them susceptible to abuse by Revenue officers. Further, the applicability of these Rules will override all other provisions of the Act and therefore even though a particular result is provided under the Act, the treatment may be different after applicability of the GAAR which implies that the object of ‘certainty in tax' as delineated by the Supreme Court in Vodafone has also been substantially undone through these Rules.

On transfer pricing front its ambit has been substantially expanded by extending the same to specified domestic transactions beyond the threshold of Rs. 5 crores, these being primarily pertaining to Chapter VI-A deductions and claim of SEZ tax-holiday. Further, the ongoing controversy relating to five percent adjustment has been given a quietus by (effectively) retrospectively declaring it not to be a standard deduction. Also, the internationally accepted mechanism of Advance Pricing Agreements is now proposed to be operational in India with these agreements being binding on either sides upto a period of five years thereby introducing some certainty against application of transfer pricing regulations.

Some other changes can be discussed as under;

++ Share Premium charged by closely held companies is now specifically brought to tax net by taxing the difference between fair market value of the shares and the consideration received on issue of such shares.

++ The benefit of tax treaties is now subjected to obtainment of ‘tax residency certificates' and application of GAAR provisions.

++ The investment based incentives under section 35AD for new units have now been increased to 150% of the expenditure for subsequent assessment years. The deduction have also been extended to other eligible businesses such as setting-up and operating inland container depot or warehousing facility for storage of sugar; bee-keeping etc.

++ The monetary thresholds for mandatory audit have been increased for subsequent financial years thereby reducing a lot of paper-work for those assessees.

++ Presumptive taxation under Section 44AD is clarified as to be not applicable for professionals, brokerage or commission income or agency business.

++ The law has been prospectively amended to levy Capital Gains by treating the fair market value of the asset transferred as consideration if is consideration is not otherwise ascertainable. Thus rulings of AAR in the case of Dana Corporation and others on this issue are now undone.

++ On the count of unexplained money, the explanation as to source of share capital of companies now need to be supplemented by the explanation of the source of investor as well. Failing which the share capital can be treated as unexplained money taxable under section 68.

++ The alterative minimum tax (AMT) provisions introduced in the previous budget for LLPs have now been extended to non-corporate assesses. Further, AMT is now applicable to all persons claiming Chapter VI-A or SEZ benefits with adjusted total income above twenty five lakhs.

++ On the MAT front, revaluation reserves are now subject to MAT upon disposal or retirement of the revalued asset.

++ The powers of Dispute Resolution Panel have been extended by legislatively overruling the Karnataka High Court decision and thereby allowing these Panels to examine even those issues which have not been raised by the assessee before them. Further, the binding nature of their rulings is now undone by authorizing the Commissioners to file appeal against orders passed by these panels.

++ A new provision has been introduced requiring tax deduction at source at the rate of one percent on payment for transfer of non-agricultural immovable property in specified areas above specified threshold.

++ The Budget also provides that offences under the Act shall be tried by Special Courts and thereby fast tracking the prosecution.

++ A number of other amendments have been made in penalty and tax deduction provisions.

(The authors are Joint-Partner and Principal Associate respectively of Lakshmikumaran & Sridharan, Attorneys )