The controversy around Retro tax introduced post Vodafone would not be so intense if the amendments had not been drafted so widely and if it is accepted and understood that for the levy of capital gains tax, the principle on which the tax law was and is based is that tax is leviable, if in substance there is a transfer of Indian assets and all that the Supreme Court has held is that the language of the Act has, in the opinion of the Court, failed to adequately, capture this aspect. In that case there would be agreement that the Government is justified in clearly, stating the principle through retrospective amendments.
 
The controversy has really, snowballed because of various commercial consequences of the retro amendments particularly, the huge tax bill which arises on account of the levy of tax on the indirect transfer of Indian assets. The Government has the unenviable task of resolving this conflict, of ensuring that it does not sacrifice revenue which should be collected on a transfer of Indian assets, provide an atmosphere of certainty so as to attract both international and domestic investors, be fair and reasonable and be seen to be fair and reasonable in its approach to tax collection, etc.
 
A possible resolution is for the Government to  seek a power to SETTLE  tax disputes as opposed to adjudication through the legal system, the power sought being wide enough to agree on the interpretation of a provision or to forego a part or even whole of the tax or interest or penalty. Can Parliament delegate such a wide power? Does it amount to delegation of the power to legislate? Would such settlements be contrary to the fundamental right to equality? What are the safeguards which should be built in? Is reserving the power to a group/a committee (like the DRP - three Commissioners) of senior bureaucrats sufficient? It is submitted that there are answers to these and other doubts – one has to have the desire, courage and foresight to look for them.
 
The advantage will be that it will enable Government to resolve disputes in a fair manner even if the resolution goes beyond the law, while leaving the law intact and applying it on its plain language to the large class of assessees where there is no ground available to the assessee to contend on the grounds of fairness, that he should not be subject to the levy or that its rigour should be reduced.
 
Such a power can enable Government to waive interest and penalty in the Vodafone case if Government finds that in the facts of the case that is fair and reasonable. Government is unlikely to come to this conclusion unless Vodafone agrees to pay the tax. The difficulty will be in stemming the flood of settlement requests, a lot of which may not have adequate justification.
 
Separately, the retro amendments have been drafted very widely leading to unfairness, hassles, uncertainty, etc. and it is therefore, incumbent upon Government to rationalise the amendments, which have gone beyond extreme limits. The Government is showing this practical approach, though not to an adequate extent, in its response to the widespread criticism of the Companies Act. It is thus capable of reacting positively and rectifying as also reigning in excesses and hopefully, it will do so even in the case of the retrospective amendments. It is an essential step in the process of regaining investor confidence and trust.

As always, Budget time is a time to hope, wish and speculate and with a new Government elected with a growth agenda, the expectation this year are sky high; sometimes, not mindful of the economic realities facing us!!
 
Here are five things I would expect overall...many of these are strictly not Budget items but matters which FMs have dealt with in the Budget Speech to spell out Government policies:

- a definite way forward and clarification on the FDI agenda on Defence, Insurance, Pension, Real Estate and Retail. Some of the flip flops and lack of finality we have seen needs to be put behind and definitive message needs to go out that we are taking forward the entire liberalisation process

- clearly, infrastructure sector has suffered from a policy paralysis. The new Government has done away with EOGMs. What we need to see is a definitive way forward on how project approval process will move forward and the de-bottling happen. I am expecting the FM to lay down a clear roadmap here.

- on the tax front, GST is a reform waiting to happen. Again, while not a Budget subject, the FM will likely roll out a timeframe for implementation. A lot of framework is already in place and the IT backbone is also getting ready for implementation

- on the overall tax reforms, I am expecting the FM to roll back the retrospective amendments to S 9, push back GAAR by two years and, hopefully, provide a framework for settlement of tax disputes. These measures will go a long way in assuaging the fears of the investors on the stability of the tax regime and the sanctity of the Judiciary in India

- finally, I expect that the FM will give a decent burial to the DTC. It is not a reform legislation, in my opinion. It will only destabilise the tax regime and is in no way reforming the existing law. We should embrace the Shome Committee recommendation on overseas transfer and have a regime of issue of Circulars which leads to minimal litigation.
 
Keeping fingers crossed and hoping that the promise of ending 'tax terrorism' is kept!!

Transfer Pricing (TP) is one of the most important issues in the international tax scenario today. TP comes into play whenever two companies that are part of the same multinational group trade with each other. It is the setting of prices for goods and services transacted between controlled (or related) entities, usually within a multinational group. A transfer price should be comparable to what an independent third party would have paid/ received for a similar transaction.

Ever since the inception of TP regulations in India, tax authorities have been aggressively scrutinizing TP policies of multinationals, leading to huge TP adjustments & corresponding tax demands every year. The total amount of TP adjustments made by the Indian Revenue authorities from Financial Year (FY) 2004-05 (first year of TP audits in India) to FY 2013-14 is INR 2,233 billion in almost 9000 cases. The amount of TP adjustments in the latest FY 2013-14 alone was around INR 600 billion in about 1800 cases (up from INR 12 billion in over 200 cases in FY 2004-05). Such large number of cases as well as cumulative amounts are unprecedented and unheard of in any other country.

One of the reasons for such huge TP adjustments in India has been the excessive workload with the transfer pricing officers (TPOs). Most of the TP officers handle over 200 cases a year. Consequently, they have not been in a position to give full consideration to the elaborate details submitted by taxpayers during TP audit proceedings. The proposed findings of 4-5 such TPOs i.e. almost 1,000 cases go up for review and approval by a Director-Transfer Pricing (Dir-TP).  All Dir-TPs across India are supervised by a single Director General-International Taxation (DGIT) who also has the responsibility of supervising a similar large number of International Tax cases in addition to the TP officer’s cases. It is just not feasible for any one officer, however brilliant he or she may be, to do full justice to such large number of cases on a complex subject like TP.

The aforesaid set-up was created 10 years ago and was perhaps efficient at that stage.  However, with the efflux of time, growth in the number of tax payers in this category, large number of cases being scrutinized and litigated, the need of the hour is to increase the number of TPOs and Dir-TPs, with each Dir-TP supervising only a smaller group of TPOs, say 2-3. Further, instead of having one DGIT to supervise all Dir-TPs across the country, it may be more beneficial if there are separate DGs for TP and international tax.  It would be further better if there are multiple DGs for TP across India.  If that happens, it would facilitate taxpayers’ contact with the senior most officers to alleviate their grievances and would also ensure better monitoring of the quality of TP audits.

Another aspect to be noted in this regard is that the TPOs complete most of the assessments towards the end of limitation date of 31^st January but as per the recently released CBDT Action Plan for the year 2014?15, the TPOs are expected to complete 40% of the assessments by 30 September and another 50% by 31 December, leaving only a small 10% for the last month of January. This is a very good initiative, however will require fundamental change in the manner TPOs actually schedule their work.  Instead of targeting most cases to complete in the last couple of months, work efforts will be a spread out through the year.  However, this process can only be successful where the tax payers (and their authorized representatives) cooperate and are present for audit proceedings in a timely manner and not defer to later part of the year.  Periodic transfer and postings of TPOs, Dir-TPs, DGs etc. should be structured at such time of the year that new incoming officers get most of the 12 month cycle between 1^st February and 31^st January.

Another area where improvements can greatly enhance the effectiveness of dispute resolution is changes in the working of the Dispute Resolution Panel (DRP). The institution of DRP was created through the Finance Act, 2009 to facilitate expeditious resolution of international tax and TP disputes on a fast track basis (within 9 months) and no tax recovery was to be enforced during this period. Ever since the DRP mechanism was instituted, one major criticism against the institution of DRPs has been that the 3 Commissioners on the DRPs have been only part time members besides working as Dir-International Tax, Dir-TP, etc. The perception among the taxpayer community has been that their working as Dir-International Tax, Dir-TP creates an inherent& subconscious bias in the discharge of their duties as members of DRP. Thus, for quite some time now, taxpayers have been advocating the appointment offull time DRP members. That being said, even though the appointment of full time members would certainly be a step in the right direction, the DRP is still not perceived as a Panel that ‘resolves’ disputes because its decisions can be challenged, both by the taxpayer and the Revenue at the Tax Tribunal, but making its members full time would certainly begin a new chapter in the working of DRPs.

It has also been an observation by many that decisions taken in one year by an officer or panel of officers, tends to get followed similarly in each of the subsequent years.  The most critical question here is whether the aforesaid changes in TP audit at field level or at DRP level, will allow the Revenue officers to take the bold step of possibly disagreeing with decisions taken in the past by their predecessors.  Where the past year decisions are to be repeated year after year, none of the structural changes suggested above can be of any help whatsoever. The structural changes will need to essentially be complemented and supplemented with a directional mindset change.

Separately, the Indian Advance Pricing Agreement (APA) program has clearly been the need of the hour for multinationals in India. APAs appear to be the best possible solution for obtaining stability and certainty in TP matters. The tax authorities have concluded the first set of 5 APAs in just one year since the APA program was introduced in mid 2012. With 146 applications in the first year and another 232 in the second year, there is clearly an overwhelming response from the tax payers.  To be able to live up to the expectations of tax payers as well as to keep the APA program deliver meaningful results within a reasonable time frame, it has become absolutely essential to supplement the officers manning the APA team currently.  There is a need for 2-3 additional APA Officers at Joint/Additional Commissioner level and possibly 1 more APA Commissioner.  Such team expansion is essential to sustain the success and quality of the APA program. 

Given the current landscape of TP litigation in India, if the above mentioned changes as suggested are implemented appropriately, it will hopefully help in better managing TP audits; curbing the avoidable TP disputes; and ensure fair ‘resolution’ of TP disputes.

After the meeting of the State Finance Ministers with the Union Finance Minister on 3^rdJuly 2014, GST appears to be the Reform That Is Going to Happen. The differences and expectations appear well spelt out. While the Central and the State Governments have high expectations from each other, the differences between them do not now appear unbridgeable. Indeed, the time is at hand for drafting all those tedious details [Act(s), Rules,Forms etc.] Moreover, as a complementary measure, the Industry, Trade and citizens need to prepare their own wish list of things to do before implementation of the Dream GST. While we can draw upon the experience of nearly 150 countries for implementation of the new tax and for finalizing the model systems of levy and collection, besides, India may well turn out to be the first Federal country that employs an inter-State tax to connect markets.

And what will be there in any wish list for GST? I have ten items in the wish list. This is how the list reads: -

1. A Common State Act: -

One appreciates that there will be a separate Central Act. But do we really have to live with thirty odd State Acts and perhaps seven Acts of the different Union territories? Almost all of the significant provisions will not only be similar; they will be identical. The Empowered Committee [EC] can prepare a Model Act, Rules, Forms and what not and enjoin upon the member – States to implement the EC draft. This will be a huge saving in compliance cost for multi-State companies. This is the first wish.

2. The IT Support: -

The obvious thing is to call for a nation – wide IT backbone. There is even a new Company formed [GSTN], which is to provide a migration strategy to GST, enable digitalization of the whole of the transaction chain and operate a national portal for Registration, Returns and Payments. But the Company is still in the recruitment mode. It needs to issue early contracts and be ready for the show six months before the introduction of GST. The ERP service providers are going to need at least 6 months if not more to prepare / revise their software applications.

3. The Amendment of the Constitution: -

No need to hurry. Once things get moving and discussions move forward, new concerns will emerge. There will be issues which are not addressed by the present version of the Amendment Bill. Far better to address these concerns now and move a new amendment bill in the Winter Session of the Parliament, if not in the next Budget Session. This is to wish that the Central Government will sit back, have a look and then move the amendment.

4. Inter-State Transactions: -

What will be unique to GST in India is the treatment of the inter-State transactions. No country has squarely addressed this problem. The present IGST model is astoundingly good. But as discussions have lingered, stakeholders are coming up with modifications. This needs to be sealed early.

5. Entry Tax: -

Surprising as it may seem, support is being drummed up for the retention of Entry Tax in the post – GST era. This would be about the same as allowing a general truncated credit instead of full input tax credit. Unless appearances are misleading, even the Central Government appears half – convinced or reconciled to retention of Entry Tax.

It is here that progressive States and Trade and Industry should be countering the demand.

6. Petroleum Products: -

Nearly thirty percent of the aggregate sales tax revenue in India is paid by the Oil marketing Companies on their sales of transport fuels. Not surprisingly, the States wish to secure this revenue and are pushing for the exclusion of petroleum products from GST.

The aim is laudable but can be achieved equally well by disallowing credit on consumption or use of transport fuels. Exclusion of petroleum products from GST will lead to multiplicity of tax laws and a cascading tax burden on the oil refineries. The States need to agree on inclusion of petroleum products in GST.

7. Dual Control: -

The Central and the States Governments appear to be converging to the view that a Dual Control over tax – payers is essential if not inevitable. But surely, a solution can be found to the effect that once one Government [Central or the State] has taken up a case for scrutiny, then the other Government [State or the Centre] will not take up that case for scrutiny for that period. Unless this is done, the tax – payer may be faced with divergent decisions for the same transaction.

8. CST Compensation: -

When in 2007, the Central Government started reducing the rate of Central Sales Tax [CST], the States were promised compensation for the lost revenue up to March 2010. The date was fixed on the common assumption that GST would be introduced by that time. The Central Government has stopped the compensation for the last three years and is merely cavilling – no other word. The arrears of compensation now reach nearly 30,000 crore rupees.

It has not been possible for the States to get a firm assurance from the Central Government over the payment of the compensation. If the trust deficit is to be bridged, then the Central Government must make a public commitment that all of the arrears of CST compensation will be paid, in phases, before the commencement of GST.

9. GST Compensation: -

Under GST, the States lose the CST revenue and will be compensated by the newly leviable service tax revenue. But several States are apprehensive that the service tax revenue may not be adequate to compensate the CST loss. Hence the need for a compensation mechanism.

The Central Government needs to come up with details of the compensation scheme to persuade the States to move forward.

10. Commencement Date: -

The GSTN IT system and the software applications of the taxpayers will have to be in harmony with the legislation. The Act(s), Rules and Forms are yet to be drafted. Because of the federal nature of the polity, it will be difficult to amend the legislation once GST is introduced. It is better to have a well – crafted GST even if slightly delayed, than an early but half – baked GST. I wish the Central Government and the Empowered Committee publicly accept the conclusion and announce 1 April 2016 as the date of implementation of GST, which will give adequate time for the Governments, GSTN Incorporated and Industries to embrace the biggest Indirect Tax Reform in post – independence India.

The Information Technology (IT) industry has helped India transform from a rural and agriculture based economy to a knowledge based economy and a global player in providing world class technology solutions and business services. India is currently referred to as the back office of the world owing mainly to IT and Information Technology enabled services (ITes) sector. Indian IT companies have carved a great niche for themselves in the global market and are known for their IT prowess. Global giants are using the successful outsourcing strategy and keeping ahead of their rivals - thanks to the competitive advantage gained by investing in India.  The IT sector in India has been at the forefront on enabling entrepreneurship in the country, building global success stories and contributing to Indian exports, employment and image. With over 15,000 technology start-up and IT small and medium enterprises today, India is the second largest hub globally, after China.
 
While the industry has created a strong focus on sustaining growth, there are a number of Transfer Pricing (TP) issues that have created hurdles in doing business for companies, increasing litigation and uncertainty, thereby impacting future investment for companies engaged in IT/ITes services.
 
In addition to numerous judicial rulings on TP issues, the Indian TP laws witnessed various developments on the Safe Harbour front, the Dispute Resolution Panel (DRP), the Advance Pricing Agreement (APA) program, etc. However, despite the above, there is a mounting need to provide clarity on the various transaction specific issues and on TP principles in India.
 
In the run upto the Union Budget 2014 which shall be tabled before Parliament on 10 July 2014, the New Government has publicly reiterated on various platforms / discussions that its aim after assuming office (in line with its election manifesto of ‘Inclusive development’ and ‘economic growth’ as propagated), shall be to set a direction to increase the ease of doing business and restore confidence in the economy[1]. President Pranab Mukherjee in his speech to both houses of Parliament last month also stated that the new government will "embark on rationalisation and simplification of the tax regime to make it non-adversarial and conducive to investment, enterprise and growth."
 
Accordingly, there is anticipation as to whether the Finance Minister shall be able to “walk the talk” and introduce reforms and guidelines relating to the existing Indian TP laws, to assist in reducing the current litigious climate and provide an investment favourable environment for MNEs operating in India. Following are the recommendations for entities operating in the IT/ITES sector.  

Rationalization of Safe Harbour (SH) provisions – these provisions which were aimed at small and medium enterprises met with a tepid response from taxpayers to date, primarily on account of the much higher margins prescribed.  Moreover, as apprehended, the Revenue authorities randomly used the sub-categories as detailed in the SH rules (BPO, KPO, contract R&D) as a framework to categorize companies in several jurisdictions and used the SH margins as the base rather than the outer limit in determining the arm’s length margins (ignoring the fact that the SH margins are not reflective of the arm’s length concept, but instead premium prices to avoid litigation and achieve certainty).
 
It is recommended that the SH rules be revisited with presumed profits pegged at more realistic levels. The prescribed SH in the lower range ought to be calibrated down by atleast 5% and in the higher range by 10%. This is because the SH rules in their current from if accepted, are likely to entail huge incremental tax outlays, coupled with difficulty in aligning the same with global TP policies of MNCs. Rationalisation of the SH norms would make the SH program appealing to small and medium enterprises and make it a viable mode of proactive dispute resolution, potentially reducing the burden on the APA program which currently seems the only viable mode of effective dispute resolution in India.
 
Further, in the prevailing SH rules, though software development is a separate category with a SH of 20 percent and contract R&D with insignificant risk is another category with SH of 30 percent, there currently exists a very fine line of distinction between contract R&D and software development and is rather ambiguous and subject to the interpretation and understanding of the Revenue authorities.  Clarifications / detailed guidance along with illustrations on what activities would come under each of the above categories would be helpful to taxpayers.
 
Permitting Roll Back of APAs - In respect of the APA program which seems to be emerging as the effective option to manage dispute resolution and providing certainty to taxpayers – permitting “Roll Back” provisions (which permit the results of the APA to resolve the past cases in dispute) and commitment of additional resources in the APA teams would be welcome.
 
Changes relating to the Dispute Resolution Panel (DRP) - Restricting Revenue’s right to appeal post the DRP rulings would be welcome, as this renders the DRP ineffective. Further recasting the DRP with experienced senior members who have ‘independent’ charge of the same (absolving them of their current dual responsibilities) and no revenue collection responsibilities would make the panel a truly empowered one. Making the DRP autonomous and measuring their success based on the number of cases under dispute which have been effectively resolved by them, shall be particularly beneficial and add credence to the Indian administrative machinery.
 
Domestic TP – the ‘Specified Domestic Transaction’ provisions were introduced in Finance Act 2012 to cover all domestic transactions between affiliates if the aggregate amount of all such transactions entered into by the taxpayer in the previous year exceeded INR 5 crores in the previous year. Increasing the threshold limit to 15 crores, coupled with reduction in compliance burden especially for cases with no tax arbitrage, i.e. to entities subject to the same tax rates, would make these provisions more meaningful. Also, providing clarifications that such transactions could be covered within the purview of the APA program (which currently covers only international transactions) would be welcome.
 
Data for comparability analysis - In this respect, clarifications should be introduced in the existing Indian TP regulations permitting the use of contemporaneous data / multiple year data for comparability analysis, including:

• Taxpayers’ average results (being the past two to three years’ financial results) be considered for comparison with the financial results of the same time period for the comparable companies. 
• Directing tax authorities to use only contemporaneous data - as available to the taxpayers at the time of setting their transfer price and preparing the documentation.
• Use of foreign comparables being permitted in cases where the tested party is outside India (as part of a regional and global approach to benchmarking).
• Specific guidelines being introduced restricting tax authorities from adopting secret comparables that are not available to the taxpayer at the time of setting the transfer price.

 
Adjustments to comparable data - As there is currently no guidance / instructions providing for the manner in which adjustments are to be made to comparable data, adjustments in areas such as differences in levels of working capital, risk profiles, volumes, etc. are not generally being permitted by tax authorities in the course of TP audits.  Accordingly, suitable guidance providing for the manner of carrying out adjustments to comparable data is necessary and should be introduced having due regard to the taxpayer’s business strategies and other bonafide peculiarities.
 
Arithmetic mean vs. Inter-quartile range - The computation of a single arm’s-length price as currently prescribed, poses practical difficulties, since arriving at an appropriate TP involves a subjective commercial analysis. The Indian TP regulations could therefore be amended to permit application of the concept of an arm’s-length range of prices, similar to provisions contained in the OECD regulations and those of other developed nations.  
 
Elimination of “Retrospective” amendments and making them effective since their date of their introduction, i.e. prospective – this is imperative and shall sync in well with the New Government’s pledge to bring in clarity in interpretation and implementation of tax laws.
 
Absence of Article 9(2) in the Double Taxation Avoidance Agreements restricting Bilateral APAs and Mutual Agreement Procedure - India does not have Article 9(2) in its DTAAs with certain major trading partners including Belgium, Germany, France, Singapore and the Republic of Korea. In the absence of Article 9(2), the Competent Authority of India has so far followed the practice of not admitting cases of economic double taxation under its MAP and similar positions have been adopted in the APA program. This position of the Indian Government ought to be revisited as MAP / Bilateral / Multilateral APAs would ensure elimination of double taxation and therefore would facilitate increase in the number of bilateral and multilateral APAs being filed. This would also assist India in projecting itself as a coming of age and mature tax jurisdiction seeking to achieve effective global tax dispute resolution, in a true sense.
 
Clarifications on contentious issues like applicability of TP provisions to transactions which are per se not taxable, such as issuance of share capital.  It is common knowledge to fund a subsidiary by subscribing to its share capital. Issue of shares to a parent neither transfers underlying assets nor gives rise to income and hence ought not to be taxed under TP regulations. Moreover, in an economy like ours, for which capital is the need of the hour, any justification of a portion of capital infusion being deemed as income is contradictory and projects India as an immature tax jurisdiction.
 
The Way Forward
Statistics show that India has earned a dubious distinction of accounting for 70% of global TP disputes by volume – seemingly ironic for a country which accounts for only 2% of global trade. As India’s international trade is becoming increasingly voluminous and complex, the Indian TP regulations need to be amended to address business realities and bring the regulations in line with global best practices. Expectations are high from the New Government, especially in the wake of the alleged “tax terrorism” during the reign of the predecessor Government. It would therefore augur well for the new Government to provide guidance / incorporate the above stated aspects, in the forthcoming Union Budget 2014. This would assist in restoring investor confidence and potentially bridging the trust deficit currently prevailing between taxpayers and the Revenue authorities, thereby enabling taxpayers to focus on doing business rather than on litigation in India. 
 
*The views and opinions expressed herein are those of the author

[1] Statement by Minister of Commerce and Industry Ms Nirmala Sitharaman (deputy of Finance Minister Mr Arun Jaitley) in an interview published by Business Standard on June 24, 2014

Background and current position
 
The Income tax Act, 1961 (‘the Act’) provides benefits to export businesses conducted through SEZ Units and to certain eligible infrastructure businesses in the form of an income-tax holiday. 
 
Broadly, under section 10AA of the Act, a Unit set up in an SEZ enjoys a 100% tax deduction on export profits for the first five years, and 50% for the next ten years (subject to conditions).  Further, a 100% deduction is provided to an SEZ Developer for a block of ten consecutive years under section 80-IAB.  Similarly, section 80-IA provides for a 100% deduction for a block of ten consecutive years to taxpayers engaged in the specified businesses, including the business of developing or operating and maintaining of infrastructure facilities (such as roads, highways, sea ports, airports, water supply projects etc.). 
 
Section 115JB of the Act provides for levy of Minimum Alternate Tax (‘MAT’) of 18.5% on “book profits” of companies, without, inter alia, excluding profits otherwise deductible under sections 10AA, 80-IA and 80-IAB of the Act.  Similar provisions exist in section 115JC which are applicable to non-corporate taxpayers.  The Act, however, provides for allowing credit of the additional taxes paid under MAT.  This credit can be claimed within a period of ten years, and is restricted to the taxes due over and above the MAT liability in the year of set-off.
 
As can be seen, at almost two thirds of the general corporate income-tax rate of 30%, the rate of MAT, in itself, is very high.  In specific context, the benefits available under sections 10AA, 80IA, and 80-IAB of the Act get substantially taken away on account of application of MAT, as the taxpayers end up paying income-taxes despite having incomes which are eligible for a tax holiday.
 
The legislative background
 
SEZ Units in India are governed by the provisions of the Special Economic Zones Act, 2005 (‘SEZ Act’). With a view to promote exports, the SEZ Act, inter alia, provided an income-tax exemption on profits earned by SEZ Units/ Developers, including exemption from MAT.  Corresponding changes were also introduced in the Act in 2006.  However, vide the Finance Act, 2011, the Act was amended and the exemption given to SEZ Units/ Developers from the levy of MAT was withdrawn, to ensure “equal sharing of corporate tax liability” by SEZ Units/ Developers and other companies.
 
Similarly, the erstwhile MAT provisions (section 115JA), inter alia, provided for exclusion of profits of eligible infrastructure businesses for MAT purposes.  However, such exclusion is not available under the existing MAT provisions which were introduced with effect from 1 April 2001 (section 115JB). 
 
Judicial position
 
As expected, the Constitutional validity of the amendment imposing MAT on SEZs was challenged.  In a writ petition, the Karnataka High Court, in 2013, upheld the constitutional validity of the amendment and concluded that the amendment was not hit by the doctrine of promissory estoppel, and was within the legislative powers of the Parliament of India.   
 
Likewise, in 2009, the Gujarat High Court had dismissed a writ filed by a taxpayer challenging the imposition of MAT provisions on profits of a business which were otherwise eligible for a tax holiday under the regular provisions of the Act. 
 
The business case
 
The amendment of 2011 took away a key income-tax benefit promised to investors in SEZs.  This adversely impacted investor confidence and discouraged additional investment into SEZs.  A survey indicated that around 75% of the respondents opined that MAT had impacted India's credibility as a dependable investment destination and about 62% of the respondents had suspended plans of investing further in SEZs.
 
Although levy of MAT on SEZ Units/ Developers may have passed the test of constitutional validity before the Courts, it defeats the objective of ‘certainty in tax’ with the Government having levied MAT almost five years after the SEZ scheme came in vogue. 
 
One may argue that the MAT levied is anyways eligible for a credit in subsequent years, and hence does not lead to additional costs for the taxpayers.  But, it is a business reality that levy of MAT impacts cash flows, planned investments and profitability of the businesses, making them less attractive investment options.  Further, in some cases, depending upon how the business of the taxpayer grows, there may also be situations where the MAT credit remains unutilised within ten years.  Seen differently, the levy of MAT, with an inbuilt credit mechanism, only results in the Government pre-poning tax collections. 
 
Considering the criticality of the infrastructure sector and exports for resurrecting the Indian economy, the Government could use its tax policy to provide a positive momentum. 
 
Conclusion
 
In view of the current economic scenario, and the need of further capital/ capacity building in India, the Government should favorably look at a roll-back of levy of MAT on the SEZ Units/Developers and exempt eligible infrastructure business.  Besides boosting infrastructure and export sectors, generating employment and foreign exchange, this would also help the new Government restore investor confidence. 
 
“The views and opinions herein are those of the authors and do not necessarily represent the views and opinions of KPMG in India. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.”  

The concept of ‘Rollback’ in the context of APA means application of negotiated position under an executed APA could be applied to the prior years, provided the facts and circumstances of the international transactions are similar. 

Currently, the Indian APA program provides certainty to taxpayers by specifying in advance the arm's-length pricing for cross-border transactions among related parties for prospective years. In order to provide a stable and non-adversarial tax regime, there is a buzz that the Indian Finance Ministry may soon contemplate providing for Rollback of negotiated APA position and apply it for the past open years. This move, could be an attractive propostion to usher in greater certainty to taxpayers and foreign investors and afford the much needed relief to the international taxpaying community, weary of challenges presented by aggressive regulatory positions and chronic litigation and desperate for sustainable resolution strategies in a highly litigious system. There is a modest debate on the applicability of Rollback provisions with two views emerging; one view urges the applicability of rollback to only open audit years while the other advocates that rollback would be best effective if also made available for past years under litigation. Nonetheless there is no dispute that rollback provisions could be an effective tool for resolving past issues and achieving certainty for future years in a single process. The introduction of rollback provisions by the Government is bound to send a positive message to the investors and also could unlock the amount held up in disputes by applying the agreed outcome of APA to preceding years where unresolved transfer pricing disputes exist at various litigation levels.

There is an emerging consensus in regulatory corridors that rollback provisions should be limited to Transfer Pricing Methodology (TPM) agreed and not on the margin/price agreed under the Advance Pricing Agreement. For instance, if the cost-plus method has been agreed under an APA, the same could be available for application to previous years if same circumstances had prevailed. Thus it is quite possible that, in the event rollback provisions are introduced in domestic legislation, in order for rollback to be appropriate, regulatory authorities would agree for a rollback only where it is appropriate to the facts of the case and where similar facts and circumstances to those in the executed APA existed for previous periods where a roll back is requested. 

So far the taxpayers who have applied for APA process in India have invariably faced transfer pricing challenges and repetitive adjustments in the past. Considering the fact there will not be material difference between the facts and circumstances of the transaction in dispute vis-à-vis the APA application for covered years, it would be prudent to have the rollback provision introduced in the APA rules to provide certainty and conducive business environment for taxpayers.

Also from the perspective of revenue authorities much of the transfer pricing litigation is resolved at the ITAT level and statistics reveal about 74% of the cases have been in favour of the taxpayer. This could prompt revenue authorities to accept the outcome of APA as equally applicable for the past litigated years as the same would be outside of the appellate process.

Precedents from other jurisdiction having rollback provisions

Some of salient features of rollback provisions from other jurisdictions are discussed below:

CANADA – Rollback of APAs are considered either at the behest of the taxpayer or , if the terms and conditions of the prior years are similar the tax officer may apply the concluded APA to the prior years. Rollback provisions are not available for unilateral APA.

CHINA – Rollback option are available to taxpayers for the period as far back as 10 years. Rollback provisions will be applicable only in the case of specific requests made by the taxpayer and if the same is approved by tax authorities.

GERMANY - A rollback of APA for past years is allowed if the taxpayer proves that the assumptions stated within the application are also fulfilled for past years. The rollback years are processed under a separate Mutual Agreement Procedure (MAP) that is conducted together with the APA procedure.

JAPAN - Provides for rollback only if APA request is accompanied with MAP request and concluded TPM is appropriate for prior years.

UK - Provides for rollback to earlier years either at the request of taxpayer or on suggestion of the tax authorities, only for bilateral or multilateral cases.

USA - A taxpayer may request an APA rollback to cover one or more of its pre-APA years. Rollback is not applicable to taxable years whose period of limitation for assessment of tax has expired. The draft APA revenue procedure (released in November 2013) provides additional guidance regarding APA rollbacks. As per the draft procedure, the tax authorities reserve the right to pursue an APA rollback to any or all of the taxpayer’s open pre-APA years and the burden is placed on the taxpayer to explain why a rollback of the APA is not to be considered. If the taxpayer refuses to accept a rollback. Tax authorities may decline to initiate the APA process,

A pertinent observation based on the practices in overseas jurisdictions is applicability of rollback of APA outcomes to cases that are bilateral and where there is an ongoing MAP process relating to past litigation.  This enables efficient deployment of resources and remove duplication of efforts on the part of revenue, APA authorities and the taxpayer.

The Indian APA process has been lauded by the taxpayers, while there has been positive response with approximately 370+ applications filed so far, the introduction of rollback provisions could serve to heighten the popularity of the program and increase the prospect of more applicants embracing it. It is quite possible that the applicability of rollback may come with a rider - that for the years in dispute before the appellate authorities the taxpayer would be required to withdraw the appeal and accept the APA outcome and re-compute the tax liability and  consequent interest. 

If appropriately conceptualized and implemented the rollback provisions would be helpful in addressing double taxation woes consequent to transfer pricing adjustments, provide certainty, reduce prolonged litigation and send a positive message to the investor community at large. Certainly, the introduction of rollback provisions could prove to be a game changer and a win-win possibility for both the taxpayer and the Government.

Limited Liability Partnership (‘LLP’) form of entity in India finally got its wings with the Reserve Bank of India’s (‘RBI’) circular on 16 April 2014 issuing guidelines for foreign investment in LLP (only in sectors where 100% foreign investment is permitted under the automatic route with no conditions). Although the LLP form came into effect in 2009 and the Government permitted foreign investment in LLP in 2011, guidelines from RBI were awaited for the final go-ahead for foreigners to contribute money to an Indian LLP. The RBI circular has now reignited the debate whether LLP could be the preferred form of entity for foreign companies doing business in India.

Foreign companies would need some convincing to evaluate LLP as a possible entity form as opposed to traditionally forming a private company. The new Companies Act has made a private company liable to many onerous compliances similar to that of a public company. However, looking at the mood of the new Government and the recent draft notification issued by the Ministry of Corporate Affairs, private companies could still enjoy certain relaxations – exemption from compliances for related party transactions, variable voting rights, etc. Additionally, an LLP offers compelling considerations in its favour as against a private companysuch as no tax on distribution of profits to its partners and exemption from tax on this profit in hands of the partners, no mandatory spend of 2% CSR, no wealth tax, variable profit share / management rights andease of operations.

The RBI circular brings up pertinent considerations for an LLP having foreign investment:

1. Only cash contribution: Contribution to the capital can be made only in cash and accordingly, there can be no capitalization of assets or of payablesdue to an LLP.

2. No overseas debt: Overseas debt is preferred by capital intensive industries on account of its lower cost and for tax-efficient repatriation by way of interest. LLP cannot borrow overseas debt as per the RBI circular. However, capital infusion in the LLP could also be used for payment of interest (since interest on capital can be paid to partners), but the permissibility of the same is not quite clear under the RBI circular. In spite of the above, LLP could still be evaluated for the service industry which requires low capital investment.

Further, there is no clarityregarding withdrawal of capital from an LLP under the RBI circular although LLP Act permits free withdrawal.

3. Repatriation: While repatriation of current profit share should be freely permitted since it is a current account transaction, there is no specific mention in the guidelinesabout repatriation of past profits of an LLP.Clarification from RBI in this regard would be welcome.

4. No downstream investment:An apex holding structure is required for investing in various other entities or businesses and for ease of repatriation. An LLP with foreign investment is not permitted to invest in any entity in India even though investment in a company outside Indiais permitted under the outbound regulations. Accordingly, an LLP cannot be set up as an apex holding entity and would be workable only as an operating structure.

5. Designated partner: A designated partner (‘DP’) is an individual who is responsible for all the compliances of an LLP and is liable for penalties in case of contravention of any compliance by the LLP. While the LLP Act permits a foreign company to appoint a nominee to act as a DP, the RBI circular mandates that the body corporate which nominates an individual to act as a DP must be an Indian company. Further, FIPB insists on the DPs to contribute to the capital and have pro rata voting rights.

There are also certain tax considerations relevant to an LLP and the upcoming budget could resolve / clarify some of the issues:

1. Tax benefits: Various tax benefits are presently only available to a company and could be extended to an LLP:

• Tax holiday is available for developing infrastructure facilities such as roads, ports, airports, waterways, irrigation projects, water treatment systems (LLP form must also be recognized by relevant regulatory authorities);
• Transfer of assets during reorganizations such as amalgamation / demerger of companies or between holding and subsidiary companies are not subject to tax;
• Transfer of Indian company shares between foreign companies on account of overseas reorganization is exempt from tax;
• Capital expenditure for business of warehousing, cold chain facility, hospital, housing project, etc. are eligible for one-time deduction.

2. Conversion of company into an LLP: A private or unlisted company, not having security interest in any asset, can be converted into an LLP.Transfer of assets and shareholding in the company on conversion into an LLP is exempt from capital gains tax subject to conditions, inter alia, turnover less than INR 60 lakhs in any of the three preceding years, etc. Such a low threshold may not be met by many companies, thus making the conversion taxable (although it could also be argued that there is no ‘transfer’ on conversion and there is only change in the entity form).

There are no specific provisions for determining sale consideration of the assets transferred on conversion and application of deemed sale consideration such as stamp duty value for transfer of land could inflate the capital gains in hands of the company. An analogy could be drawn from the recent Kolkata Tribunal decision in case of Aravali Polymers LLP(ITA No. 718/Kol/2014)which states that sale consideration of assets (other than land) would be the value at which the same are recorded in the books of the LLP.

Further, capital gains would be taxable in hands of the shareholderas the difference between the value of interest in the LLP and the cost of acquisition of the shares in the company and in case of a foreign shareholder, treaty benefits could be availed.

3. Sale of profit share: Interest in the profit share of an LLP can be sold without transfer of management rightswhich can be used for investments by private equity players. Can it be said that such transfer is not taxable as capital gains since the cost of acquisition of interest in profit share is unascertainable and hence, computation mechanism fails? This question may not be relevant for tax treaties which provide that capital gains on transfer of interest would fall in the residuary clause of ‘any other property’ and be usually taxable only in the resident country of the partner.

4. Treaty benefits and treatment in foreign countries: Since the definition of ‘person’ in most tax treaties means an entity which is treated as a taxable unit as per domestic laws,  an Indian LLP (not being fiscally transparent) should be eligible to claim treaty benefits.

Many countries such as Netherlands, Luxembourg offer participation exemption to dividends earned from qualifying subsidiaries and also to capital gains arising from transfer of such subsidiaries.It needs to be evaluated whether such participation exemptions may also be extended to share of profits received from an Indian LLP and capital gains on transfer of interest in such an LLP. In Mauritius, share of profit from an Indian LLP would be taxable in hands of the partner and underlying tax credit may not be available for Indian taxes paid by the LLP since tax treaty offers underlying tax credit on ‘dividends’ received from an Indian ‘company’. However, the Mauritius domestic laws could be checked to claim such credit.

5. Bearing of tax liability: There is a specific provision holding partners liable for taxes of the LLP at the time of liquidation (in case of LLP’s inability to pay) and the same is triggered only if non-payment of taxes is due to negligence, breach of duty, etc. of the partner. Due to the provisions making partners of a ‘firm’ jointly and severally liable to the firm’s taxes, partners of an LLP may also be liable for its taxes even during the life of the LLP andeven though the liability of partners of an LLP is limited.

Various laws, besides tax and exchange control, need to be clarified and alignedfor truly embracing LLP as an entity form in India. For example, the Special Economic Zone Act 2005 does not specifically include LLP in its definition of a person and hence, setting up of an SEZ unit by an LLP has not been formalized. Government authorities granting projects under public-private partnership do not recognize LLP in concession agreements. A pervasive approach towards LLP and clarifications from tax and exchange control authorities would go a long way in making this form of entity a success.

With the Hon’ble Finance Minister all set to present the Union Budget, there are lot of hopes and excitement across sectors in the entire country as well as globally for the expected changes and new policies. The upcoming budget is expected to improve the business sentiments amongst the investors and bring relief for the public at large.

This Union Budget should set the path for future changes which can be expected from the new government as this is one of the big opportunities for them to sow the seeds of a strong foundation. This would help the economy to regain the confidence amongst the global investor fraternity and thereby making India as the most desired investment destination.

Extending tax benefits on inorganic transactions has been a trend in the union budget for some time; however, no major incentives/ benefits have been provided during the last few years. The time is ripe now for the much awaited reforms and reliefs that will give boost to the consolidations in different sectors of the economy.

This year may see consolidation and strengthening of businesses by players in different sectors to overcome the specific challenges faced in their respective sectors. For instance, hyper competitive telecom sector, reeling under the pressure of stressed margins, with the clearance of much awaited M&A policy may get the desired push in consolidation. Even the global players are willing to create their presence through acquisitions or consolidations in those sectors in India, which are currently restricted from foreign investment perspective. Also, some consolidation is expected in the retail, real estate, e-commerce and insurance sectors.

The government plays a major role in augmenting these consolidations by providing support in terms of tax reforms and reliefs, which can help generate adequate return for the investors. Focus should be on introducing tax reforms which make consolidation as a lucrative option for the investors. Some of the tax reforms and reliefs which may be considered by the government are discussed in the below paragraphs.

The current provisions allowing carry forward and set off unabsorbed depreciation and accumulated business losses on amalgamation are restricted only to select sectors. Broader approach of allowing the above benefit to other sectors like healthcare, e-commerce, retail, etc. will be a welcome initiative of the government.

Further, as per the existing provisions, in order to avail the above benefit, an amalgamated company is required to hold fixed assets of amalgamating company for five years post amalgamation. In view of the fast changing technology and evolving needs of businesses, such fixed assets may become redundant for the amalgamated company and therefore, the government may consider relaxing this condition.

Similarly, the Government may consider pushing the effective date for applicability of GAAR provisions by a year or two, largely from the perspective of making India Inc. prepared for such provisions and also to build the required administrative platform for its effective implementation.

To win the trust of FII and other foreign investors, it is essential to provide clarity on the taxability of indirect transfer of shares by defining the meaning of term ‘substantially’. The Government may also consider the possibility of removing retrospective amendments brought in earlier budget.

Other changes / tax reliefs which may be considered in the Union Budget 2014-15 are allowability of carry forward of MAT credit of the amalgamating company to the amalgamated company post amalgamation and necessary clarifications and amendments may also be considered to rationalize the other relevant provisions.

Lastly, it is equally important to refer to the recent enactment of the Companies Act, 2013, which has affected M&A space in many ways making it necessary to bring radical changes in the tax laws and bring clarity on the tax regime in line with the changes brought by the Companies Act, 2013, especially on cross border mergers taxability.

It is most important that the Finance Minister sends a strong signal to the international
business community that India is open for business once more and foreign investment is welcome.
Specific areas which could be covered:
1. Eliminate retrospective legislation
2. Undertake detailed review of government policies and simplify wherever possible to increase transparency and reduce bureaucracy.
3. Defer the implementation of GAAR until the new government has the opportunity to carry out a thorough review.
4. Improvement to Tax policies and administration with regards to International Tax Matters. For example, the refund process currently has many complications. 

The Indian Special Economic Zones (‘SEZ’) passage has been marked from initial great enthusiasm to a period of deep valley.   In other words, ups and downs, resulting from changes in the Government Policies, Slowing of Global Economies, High Inflation in India, Emergence of other alternate destinations, etc. have been witnessed.  Further, it also had its own share of controversies from being seen as engine of growth to being regarded as land grab by industrialists / real estate speculators.  

While India was amongst the pioneers of the concept of Export Promotion Zones, the birth of SEZ concept could be traced to the short comings of various formats of Export Promotion Zones introduced by the Government and its intent of transforming its policies to achieve faster growth.   SEZ concept was introduced with a noble intent of fueling economic activity, generating employment opportunities, increasing the foreign exchange reserves through exports, create world class infrastructure, etc.  

From a statistics perspective, so far 570 SEZs have been formally approved, out of which 388 SEZs stand notified.   Investment to the tune of over Rs. 2,88,476.98  crores as on 31.12.2013 have been infused in the SEZs and employment to 12,39,845 persons is being provided in the SEZs. 

Looking at the above statistics, a question arises in mind, has the SEZ concept achieved the intent with which the same was introduced?   While on a standalone basis the statistics may appear encouraging, the real answer to the above question lies in the fact that did the concept achieved its purpose and how do statistics compare to its potential.

A larger question which merits consideration is whether the SEZ concept is still relevant and can it help the nation achieve its current objective.  If yes, what improvisation are required?

The New Government has promised in its election manifesto the need and intent of rapid creation of jobs in the manufacturing sector and transform nation into a globally competitive manufacturing hub powered by Skill, Scale and Speed.  To achieve the above objectives, the Government intends to set up world class investment and industrial regions.  The above aspects were reiterated in the post-election address of the President to both the houses of the Parliament.

The vision of the Government answers the question that SEZ are still relevant and improvisation is required to make the same viable / attractive option and refuel them as engines of growth.

The authors believe that the below mentioned areas would require close evaluation by the Finance/Commerce Ministry and addressing them would go a long way in infusing fresh enthusiasm, which is very critical for SEZ to mushroom and achieve its birth objectives. 

• Minimum contiguous land requirement for settling up SEZs do not gel well with the marginal land holding pattern.  In other words, the SEZ developer would be required to deal with large number of land owners to auger the land required for SEZ.  While support of Government in some cases was sought, there were concern around perceptibly unfair play leading to agitations and accusations.  Recently, the Government has enacted a new Land Acquisition Act 2013 replacing the 120 year old Land Acquisition Act, 1894, which addresses the rights of people affected due to land acquisition and ensuring greater transparency in the land acquisition process.

This legislation is also applicable to acquisition of land for SEZs, and hence the developers would have to comply with all the procedures prescribed therein.  Though project cost would increase due to higher compensation and Resettlement and Rehabilitation package, agitations and accusation ought to reduce.  Having said this, the time process of land acquisition could increase and the schedules would be dependent upon the timely government clearances.  The Government should work on streamlining the approval process which would ensure effective and timely implementation and further the theme of “Minimum Government, Maximum Governance”

• In addition to a tax holiday, SEZ developers and units were exempt from levy of Minimum Alternate Tax (‘MAT’) on their book profits.  SEZ developers were also exempt from levy of Dividend Distribution Tax (‘DDT’) on distribution of dividend to shareholders. 

However, such fiscal incentives were withdrawn from FY 2011-12 onwards. Further, an Alternate Minimum Tax was also introduced on Limited Liability Partnerships setting up SEZs or SEZ units. The sudden withdrawal of incentives would result into huge negative impact on the projections and decisions made by industry.  Furthermore and more importantly, the subsequent withdrawals creates distrust in the Government policies and degree of skepticism on the SEZ concept. 

While, few SEZ developers and SEZ unit operators approached the judiciary to challenge the constitutional validity of the withdrawal basis the rollback of promised incentives or breach of promissory estoppels, the litigation continues.   

The Finance Minister could reinstate the incentives and provide stability to the SEZ which would augur well to infuse investor confidence and also make SEZ attractive.  This step would certainly create a policy environment which is predictable, transparent and fair and make the tax regime non-adversarial and conducive to investment, enterprise and growth.

• The proposed Direct Taxes Code 2010 (‘DTC’) intends to withdraw the existing profit linked incentives available to SEZs.  Instead, investment linked incentives will be available.  This will further marginalise incentive for SEZs.   The expectation would be to continue the existing incentives even under the DTC and a policy statement in the Budget would usher investor’s confidence, which could act as a catalyst to growth of SEZs.

• From a process perspective, ensuring a single window system of clearance at Centre and State level would also be very crucial since it would increase the ease of doing business and act as a great USP for SEZs.

• Job Work in SEZ: Any process amounting to manufacture or production of goods finds place in the negative list of services and accordingly not exigible to Service Tax. Further the phrase ‘process amounting to manufacture or production of goods’ has been defined in section 66B of Chapter V of Finance Act, 1994 to, inter alia, include a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944. This would mean that there shall be no Service Tax charged on job work amounting to manufacture for the reason that the activity of manufacture is subjected to levy of Central Excise duty. Section 3 of Central Excise Act, 1944 specifically excludes the levy of excise duty on goods produced or manufactured in a Special Economic Zone. 

However, in terms of Rule 4 of the Place of Provision of Service Rules, 2012, the service is deemed to be provided in India if the goods are made available by the service receiver and consequently would be liable to tax.   

From the foregoing provisions it has been open to interpret by the revenue authorities that the exemption from Service Tax, provided through negative list, on job work amounting to manufacture would not be applicable if such job work is being carried out by a unit in Special Economic Zone – notwithstanding whether the goods have been received from outside India and the manufactured goods are sent out. Accordingly in the absence of any specific clarification the Service Tax exemption on job work amounting to manufacture would be seen as otiose from SEZ perspective.

Accordingly it is hoped that suitable clarification is issued or a retrospective amendment is made to Rule 4 supra to extend the benefit of exemption from Service Tax on job work carried out in SEZ.

• Interstate supply of goods to SEZ developer/co-developer: Rule 32 of Special Economic Zone Rules, 2006 provides for exemption from Central Sales Tax (CST) to registered dealers on interstate sale of goods to a unit in or developer of SEZ for undertaking authorized operations. Further section 8(6) of Central Sales Tax Act, 1956, such exemption would be available if the SEZ developer issues Form I to the dealer effecting the sale of goods. In terms of Rule 10 the benefit of all exemptions, drawback and concessions, which would inter-alia include exemption from Central Sales Tax, available to the developer, co-developer are also made available to contractor and sub-contractors appointed by such developer/co-developer. 

From the foregoing it would be apparent that there exist no complete consonance between section 8(6) of CST Act, 1956 and rule 10 read with rule 32 of SEZ Rules, 2006. The reason being, rule 10 of SEZ Rules extends the benefit of exemption from CST also to a sub-contractor also however section 8(6) of CST Act provides for issue of Form I to a registered dealer effecting the sale of goods to a developer and does not explicitly cover the sub-contractor.

However by virtue of overriding powers of SEZ Act as envisaged in section 51, it has been the practice of the developers to issue Form I in favour of sub-contractors but not without facing the flak from the revenue authorities which is causing operational hurdles.

Accordingly it is hoped that suitable clarification in this regard is issued to permit the hassle free issue of Form I by SEZ developers to original supplier/ sub-contractor in addition to the selling dealer.

• Supply of Service in Domestic Tariff Area (DTA): Consideration for services provided by a SEZ unit to a unit in DTA is required to be realized in foreign exchange as provided for in SEZ Act, 2006, whereas there is no such requirement in respect of sale of goods to DTA unit.

The requirement of earning foreign exchange is understood to be associated with the sole purpose of bringing foreign exchange into India from outside India rather than exchange of Indian Rupees with previously earned foreign currency already available in India. The condition of earning foreign exchange on provision of services to DTA would fall in the latter part whereas the intention of earning foreign currency is as stated in the former part. 

Accordingly it is expected that the condition of earning foreign currency on provision of DTA services is relaxed and brought on par with supply of goods to DTA unit, at the same time necessary safeguards with respect to monetary limits on provision of such service to DTA may be welcomed.

Conclusion

Summing up, SEZ could act as one of the possible tool of achieving economic growth.  While some steps have been taken by the Commerce Ministry to relax minimum land requirement, graded scale of land requirement, sectoral broad banding, friendly exit policy, etc, to revive investors interest in SEZs and boast exports, in authors view, fixing some of the above aspects would be crucial to further the performance of SEZ and help the nation in its march towards being an economic power. As a concept it has huge potential which is currently untapped and step in the right directions are must. 

 1.No retrospective application of tax law. 

Although Parliament remains sovereign in enacting laws, this process should be used sparingly and inappropriate situations and not in case where the courts have already judicially pronounced on the rights of a litigant.  Retroactive legislation in such (latter case).
(a)   would adversely affect investor confidence which is paramount in maintaining the proper investment climate;
(b)   would go against the principle entrenched in the doctrine separation of powers;
(c)    would be a breach of the rule of law.
 

2. No treaty override.

It is important for any Government to act according to norms of international law.  If there is a specific SAAR in a tax treaty then GAAR should not be given effect to domestically.  A negotiated SAAR would be by bilateral discussions and would ensure that necessary safeguards are in place to present treaty abuse.  This proposal by Dr. Shome (Based on broad principles of international law (Vienna Convention) and Article 3(2) of the DTAC (Model Convention) should be given effect to as there is much wisdom in it.  It also restores investor confidence.
 

3. Quick resolution of pending DTAC negotiations

We expect a quick resolution of pending issues relating broadly to DTAC with countries like Mauritius.  This would give predictability certainty and stability which is much needed for a investment climate congenial to economic growth.
 

4. Grandfathering of treaty rights

Grandfathering of rights under existing tax treaties or treaties which are being renegotiated.  This is an appropriate policy measure to restore investor confidence.
 

5. Consistency in the policy

Consistency in broad application of policies e.g. short termism in application of Dividend Distribution Tax (DDT) which was removed to introduce a WHT for 2 years.  The WHT was abolished to re-introduce DDT.  This again creates uncertainty for investors (who are unable to make long term investment decisions).
 

6. Automatic Exchange of Information

Rapid implementation of the automatic exchange of information under the exchange of information chapter.  India is already a signatory of the OECD Multilateral Convention.  However, a quick implementation of exchange of information on an automatic platform (as the one already announced with Mauritius) will be enormously helpful to address the issues of black money allegedly stashed in offshore jurisdictions.
 
* This document has been collated by Rajesh Ramloll with inputs from IFA Mauritius team.

The retrospective amendments have generally been considered by one and all , i.e. those in the Industry and by the foreign investors and by the legal world, as extremely harsh and oppressive. In the light of the recommendations of high powered committees including the Dr. Shome Committee and other expert bodies, the government has every justification to do away with the retrospective amendments and instead make it prospective. That will be consistent with its announcements to woo foreign investors and FDI.

I personally feel GAAR has to be deferred by atleast one more year, preferably 2 years as the Revenue has to put its house in order and be completely prepared for its implementation and make its tax policy very clear. It will be advisable if DTC and GAAR are brought in simultaneously.

I expect some sort of a beginning on GST since concerns of various States have been addressed. Infact one of the major concerns was relating to privacy of assessees which has also been addressed by CBEC. The constitutional issues regarding overlapping of powers have also been taken care of. A beginning has to be made somewhere and teething problems can be taken care of.

I also expect government may not now seek to amend or clarify provisions relating to taxation of share transactions under Transfer Pricing provisions considering them as international transactions.