The Finance Minister was faced with a very difficult task. Fortunately, tax rates have not been raised too much. The 10% surcharge on super rich was expected and the FM's statement that it will be only for one year is comforting. The increase in tax for domestic companies, which is approximately 1.5% is also not unreasonable. However, the tax rate increase for foreign companies i.e. those which are not incorporated in India, by about 1%, while not very large, will impact entities like foreign banks and foreign companies operating as project offices, both of which sectors actually need incentivisation.

One would have hoped for a neutralisation of the retrospective amendment on indirect transfer, but unfortunately there is no such reference and one does not know what the fate will be. One would have also hoped for some directional clarity on transfer pricing and acknowledgement with some stability and ringfencing will be done, especially given that 70% of the worlds transfer pricing litigation is emanating from a country constituting less than 2% of world's global trade.

The reference to setting up a Tax Administrative Reform Commission is heartening, but one hopes that something will translate on the ground very quickly.

From an international investor standpoint, the reference to Tax residency certificate being a necessary, but not sufficient, condition for claiming tax treaty benefits is disturbing; while the Mauritius Circular of 2000 has not been expressly withdrawn, this does create significant uncertainty. Also, the hike in withholding tax rates on royalty and fees for technical services from 10% to 25% will be of concern to international companies; this is especially so in case where they find it difficult to obtain a Tax residency certificate and therefore, find it difficult to claim tax treaty benefit. 

Budget of confused mind and lost opportunity. What step the UPA govt was taking in last few months to make the conducive atmosphere ,nothing has been done to maintain the same . People expected that irritants in tax policies and administration there of would be smoothened but no action at all. 

In the run-up to the Budget, there has been a lot of discussion, debate and speculation around what steps the FM, P. Chidambaram would take for 2013. Clearly, he has been faced with a number of challenges and it was imperative to address all of these. Controlling the fiscal deficit was his number one priority. At the same time, he would have to take concrete steps stimulate growth and rein in inflationary trends.

In developing the proposals today, the FM stated that he had been guided by the need to provide “clarity in tax laws, a stable tax regime, a non- adversarial tax administration, a fair mechanism for dispute resolution and an independent judiciary. ” A few of the key proposals announced today were certainly geared towards encouraging investments. These include the re-introduction of investment allowance of 15% for investments over Rs. 100 Crores and accepting the major recommendation of Shome Committee with some modifications. Interestingly, there has been no mention on the way forward for retrospective amendments announced in last year’s Budget.

Increasing tax revenues was also a priority for the FM. After the speculation around whether the FM would tax the “super-rich”, he has introduced a 10% surcharge from those individuals with a taxable income of over Rs. 1 crore, albeit for a year. Other key proposals include the hike in surcharge on Dividend Distribution Tax from 5% to 10%. For companies with an income of more than Rs 10 crore, there is an increase in surcharge from 5% to 10%. There has also been enhancement of tax deduction rate on payment of royalty and fees for technical services which has been increased from the current 10% to 25%.

The proposal to introduce the modified version of the Direct Tax Code in this session of the Parliament is a welcome move.

In the given circumstances with revenue augmentation challenges, fiscal deficit and inflation as the backdrop, the FM has done a reasonably good job of tackling these concerns. The true test will lie in implementation of the proposed amendments – that remains to be seen.

"The tax proposals contained in Budget 2013-14 presented by India's Finance Minister, P Chidamabaram, in Parliament today in many ways are "no surprises" which by itself is a great virtue in terms of providing stability in tax matters. However, with an enviable track record in presenting innovative tax policy proposals in the past, a sense of disappointment is evident in terms of not seeing any significant game changing tax proposals from the FM's table. There are ofcourse some laudable proposals, for eg, bringing investment allowance at 15% on investments in Plant and Machinery exceeding Rs 100 crores and providing Dividend Distribution Tax (DDT) exemption to Indian companies distributing dividends out of dividends brought in from overseas subsidiaries which would be eligible for a lower rate of tax at 15%. However the dampner is an effective increase in corporate tax rate from 32.5% to 34%. The FM seems to have equated the tax on super rich individuals with super rich companies which is unfathomable as investment in risk capital to run businesses cannot be equated with income earned by individuals. Also, the 42,800 individuals reporting taxable income exceeding Rs 1 crore mentioned in the FM's speech, who will now be subjected to additional 10% surcharge, would have liked to see some actionable steps to increase the tax base and increase in tax GDP ratio beyond mere statements of intent in the Budget. Finally, whilst the FM reiterated the imperative need to attract foreign investment, it is disappointing to see no attempt to address the retrospective amendment on Indirect transfers and many others brought on the statute book in last year's Budget. Moreover, the proposal to increase the withholding tax rate on royalties and Fees for Technical Services (FTS) from 10% to 25% is strange when the tax treaty rates are in the range of 10-15%. All in all, the good news in this year's Budget is that there are no big bang news to be worried about. However, there are enough pin pricks in the fine print, some of which could have been easily avoided." 

The Finance Minister started the Budget speech with the objective to contain current account deficit and Fiscal deficit by rationalising the expenditure. However there was no clarity in his speech on how the same is going to be achieved especially when he proposed to increase the Plan expenditure. 

The good initiatives were the creation of a new industrial corridor - Bengal Mumbai Industrial Corridor (BMIC ) and expediting the Delhi Mumbai Industrial Corridor (DMIC)  which could provide impetus  to the industrial growth. Also further as a sequel to the Companies Amendment Bill 2012 which provided for forced Corporate Social responsibility (CSR)  various contributions which would qualify as CSR spent in to be notified.

A good initiative coming from the budget was the desire to look at avenues to reduce the transactions cost of doing business in India by constituting a panel. Also some measures have been made to provide impetus to the Financial markets viz Banking, Mutual Fund and Insurance sector. 

While the Finance Minister has consciously avoided any increase in the tax rates to ensure India remains competitive in the global market, in fact the effective tax rates of corporate taxpayers in India will increase on account of increase in the surcharge rates.  Further, in line with the news reports floating for the past one month or so, the Finance Minister has introduced a surcharge of 10% on the super rich (ie persons excluding companies having taxable income in excess of INR 10 million). However the only silver lining   appears to be the statement of the Finance Minister that the same will be applicable for one year.

The relevant amendments proposed in the budget on the direct tax front are listed below:

1. Taxability of income arising on buyback of shares

 The Finance Minister has expressed an apprehension that Indian companies are avoiding the liability to pay Dividend Distribution Tax (DDT) by undertaking profit repatriation in the guise of buyback of shares rather than declaration of dividend.  The Finance Minister has thus proposed to levy a final withholding tax of 20% on the profits distributed by unlisted companies to shareholders through buyback of shares.  This introduction seems disturbing for the following reasons: 

• A plain reading suggests that taxes would be levied on the excess of consideration paid by the Indian company over the sum received by it on issue of shares.  In such a scenario, the Indian Company would need to disregard the price at which shares may have been acquired by shareholders through secondary purchases (rather than initial subscription to shares) for computing the amount on which taxes are payable;
• If the intention of the Finance Minister is to bring parity between dividend distribution and buyback of shares, the final withholding tax should have been restricted to the rate prescribed for DDT;
• Further, in a cross border scenario, the shareholders may not be able to get credit of taxes withheld in India akin to DDT since this tax is proposed to be levied on the Indian company rather than the shareholders, which could add to the cost of operating in India for the overseas investor.                                                                         

2. Rationalisation of General Anti Avoidance Rules (‘GAAR’)

Bowing to the outcry of global investor community, the Finance Minister has paid heed to the recommendations of the Shome Committee.   Accordingly, the Finance Minister has deferred the applicability of GAAR by two years.  However, on an overall reading the actions of the Finance Minister are not adequate.  The Finance Minister has completely ignored the recommendations of the Shome Committee relating to (i) grandfathering of investments; and (ii) providing a suitable monetary threshold for the applicability of GAAR to keep small taxpayers out of the net.  Accordingly, this would be viewed as only half a job well done by the Finance Minister.  

3. Lower tax rate on dividends received from foreign companies and relief in respect of DDT  

On a positive note, the concessional tax rate for dividends received by Indian companies from specified foreign companies has been extended by one year.  Further, in the interests of equity, it is proposed that no DDT would be levied on the dividends distributed (in the same year as receipt of dividends) by such Indian Companies to the extent of dividends received from the specified foreign companies.  While this is a welcome development, from a mid term outlook, it might be more beneficial if the Finance Minister upfront provides a 2-3 year window for the dividends received from foreign companies rather than providing an extension on an annual basis.  

4. Boost for long term infrastructure bonds

 With a view to widening the financing avenues for Indian companies issuing rupee denominated long term infrastructure bonds, the Finance Minister has proposed that the concessional tax rate of 5% on interest paid on long term infrastructure bonds would apply to Indian rupee loans as well subject to fulfilment of prescribed conditions.  This is a step in the right direction since it should provide greater access to cheap financing options for cash starved Indian companies.  

5. Indian Transfer Pricing regulations

 The Safe Harbour Rules (the enabling provisions for which were introduced in Budget 2010) are expected shortly, which can provide certainty of tax outflows and avoid litigation costs & efforts.  

6. Investment Allowance

As an impetus for industrial growth a deduction of 15% on acquisition of new plant and machinery would be allowed to  tax payers engaged in the manufacture or production where the amount of investment is above INR 100 Crores  spread over a period of 2  years. This deduction can be claimed over a period of 2 years depending upon the investment to be made.

This should be considered as a welcome move in an otherwise lacklustre budget.  Providing a deduction of 15% over and above the depreciation rate should work as a good incentive for the manufacturing industry.  

7.   Withholding Tax on transfer of immovable property

Withholding Tax at 1% on payments made to resident for purchase on an immovable property where the consideration is in excess of INR 5 million.

These provisions would cause hardship to the Individual tax payers who reinvest the entire sale proceeds into house property for claiming deduction.  Taxpayers claiming deduction for reinvestment of capital gains would now have to claim refunds from the Government. Further as the transaction for above 30 lakhs is also reported in Annual Information Report (AIR) I am not sure what good would be achieved by increasing the additional compliances on tax payers.

8.     Tax Residency Certificate

Earlier a Tax Residency Certificate (‘TRC’) was a sufficient documentary proof to claim beneficial provisions of the Tax Treaty. However, now the Finance Minister has amended the provisions of the Income Tax Act to state that TRC would be necessary but not sufficient proof to claim Tax Treaty benefits.

This amendment once again overrules the Supreme Court Ruling in the case of Azadi Bachao Andolan and Circular No 789 dated 13^th April 2000 issued by the Central Board on Direct Taxes (in context of investments from Mauritius) wherein it was clarified that TRC should be a sufficient proof to claim Treaty benefits.  This amendment would result is severe hardship on foreign tax payers for claiming Treaty benefits in India.

9. Royalty

Tax on Royalty and Fees for Technical Services has been increased from 10% to 25% under the Income-Tax Act.

In order to align the provisions of the Income Tax Act with various Treaties, the Finance Minister has increased the rate of tax on royalties and fees for technical services received by Foreign Taxpayer to 25%.

Most of the Tax Treaties have a tax rate of 10% or 15%. However, the increase in these rates under the Income Tax Act would cause severe hardship to Foreign tax payers who are located in the countries which do not have Tax Treaty with India.  

It would be pertinent to note that on one hand the Finance Minister mentioned that beneficial provisions of the Tax Treaty would prevail, however on the other hand he has said that TRC would not be a sufficient proof to claim Tax Treaty benefits which would cause hardship to claim treaty benefit.  

“It is expected that in 2013 the rules may be notified. It seems the mark up is likely to be in the range of 20% to 22% on outsourcing units. Norms are also likely to be notified for loans and guarantee on the rate of interest or guarantee fee to be charged. Norms are also expected for auto ancillary and contract research & development units.

“Many tax authorities apply safe harbour as a better administrative practices rather than a means of the best arm’s length result to achieve certainty and reduce compliance and administrative burden. While this will benefit tax payers in reducing compliance cost, tax authorities also can focus their limited resources on bigger and complex transactions.

Safe harbor norms are prevalent in Mexico, Australia, Switzerland and Belgium

In fact recently OECD in their paper on Mutual Agreement Procedure and APA has recommended adoption of safe harbor norms between competent authorities of the two tax jurisdiction while resolving / preventing the dispute. As per press report USA and Canada are going to adopt such norms for not so complex transactions.

However, the margins should not be rigid and safe harbor mark up should not deemed to be the arm’s length price. "If a company reports a margin which is less than the stipulated benchmark, the authorities should give the enterprise an opportunity to defend its case." 

On the one hand, the FM unhesitatingly accepted that the only way to bridge the current account deficit (“CAD”) was promotion of FDI/FII/ECB into India. On the other hand, by introducing following amendments, the FM may achieve just the opposite of the desired objective.

i  Newly proposed sub-section (5) to section 90 of Income-tax Act, 1961

The sub-section proposes to makeTRC as a necessary but not a sufficient condition for granting double tax treaty benefit. Effectively this amendment withdraws CBDT Circular No. 789 which had even been approved by Supreme Court in Azadi Bachao Andolan (263 ITR 706).  As everybody knows a significant portion of FDI/FII investments into India are routed through certain jurisdictions like Mauritius in particular, this innocuous looking sub-section may hurt the FDI/FII investment into India.  One may expect lot of avoidable tax litigation with no certainty of tax benefits to the nation.

ii Newly proposed 20% tax on share-buyback

Here also, the FDI investment through jurisdictions like Mauritius is likely to be adversely impacted as the investors claiming benefit of India’s  double tax treaties with these jurisdictions would not be able to claim a tax benefit on share-buyback which they were earlier entitled to. 

(The views expressed above are author’s personal views. )

“The much awaited Union Budget, 2013 has been tabled by the Hon’ble Finance Minister today before the Parliament. The arduous task before the Finance Ministry whilst tabling the Finance Bill, 2013 was to tackle the impact of global economic downturn and the focus was therefore, on resolving to austerity measures. Therefore, the Budget this year should have been a growth budget based on the principles of sustainable development.

As stated in the Budget Speech, the objective of this year’s proposals is to create a balance between the economic policy on one side and economic welfare on the other. On the revenue side, the FM has sought to align the same by proposing to increase the Tax GDP ratio over the last year, mainly by way of increase in / levy of surcharge rates for companies and the super rich having income above Rs. 1 crore.

On the direct tax front, the announcement of placing of the revised Direct Taxes Code Bill before the end of the Budget session for consideration hopefully would help achieve the initial objective behind the introduction of a new Code of ensuring ensure clarity and stability in the tax system especially considering the commitment towards achieving this by revising the Code for the second time post its first release to the public. Incentives to manufacturing industry to invest in huge capital intensive machinery and plant by providing an investment allowance of 15% in addition to normal depreciation available is a welcome move. Changes on taxation of buyback of shares by imposing an income tax on companies undertaking buyback at 20% is bound to bring in new concerns and issues in the applicable framework. Detailed provisions for tax treatment of securitization trusts and Alternate Investment Funds has also been introduced which is move keeping in view the changing financial industry and the markets and efforts to bring in clarity here is commendable.

On the aspect of ensuring favorable foreign investment climate, notification of safe harbor rules in transfer pricing which has been long awaited has been stated to be released shortly. Furthermore, the provisions on General Anti Avoidance Rules (GAAR) have been amended largely in line with the Expert Committee Recommendations to address the investors concerns. An important aspect under consideration for investors is the increase in the tax rate for royalties and the additional tax imposed on the company on buyback of their shares as would create a direct impact on the amounts being repatriated to foreign companies.

Though the Hon’ble Finance Minister started the Budget Speech on the note of ensuring clarity for investors and proposing to clear the present ambiguities on FDI vs FII, no mention has been made in the Speech or the fine print of the Bill on the provisions relating to indirect transfers introduced last year even though great assurance was being offered prior to the announcement of the Budget.

On the indirect tax front, Budget 2013 has not proposed any change in normal rates of excise duty and service tax which is currently 12 %. Also, peak rate of basic customs duty for non-agricultural products have also been retained at of 10 %. Various concessions in customs / excise duty have been notified for industries in distress and increased rates / new levies are proposed on various goods including high-end luxury products. No major changes are proposed under service tax regime to maintain stability in tax regime. A Voluntary Compliance Encouragement Scheme’ has been proposed to be introduced for defaulter for the period from 1st October 2007 till December 31, 2012 to defaulters to file returns and pay tax dues.
In summary, it can be stated to be a balance budget as no major levies have been proposed to hurt the taxpayers sentiments and no major incentives have also been provided. Furthermore, non introduction of any sector specific reforms or profit based incentive could be due to the reason that the Direct Taxes Code Bill and the Goods and Service Taxes are back in the radar. However, no amendments / clarity on the retrospective provisions relating to indirect transfers may have an impact on foreign investment inflows into the country. 

Budget’13 – Not a Game Changer

“Roti, Kapda aur Makan” are not sufficient to fulfill the needs of modern India. Mr. Chidambaram set out to garner popular mass support by his generous expenditure outlay in key sectors like education, health, infrastructure, sanitization and rural development; however, the country needs far more than just promises. While the nation looked on with keen interest for economic and tax reforms, Mr. Chidambaram had in store a lukewarm and ‘safe-bet’ Budget.

The reaction of the markets post the budget speech has less to do with what was said and more to do with what was unsaid. While there have been positive steps proposed for infrastructure, real estate, banking and capital market, there was no action to clarify the misdoings of the retrospective amendments and the back-door entry of Tax Residency Certificate (‘TRC’) is not something that would largely attract investments back into India. Domestic Transfer Pricing provisions stay the way Mr. Mukherjee had them and the Budget has no clarifications that were much needed. On one hand, the high surcharges and taxes on luxuries have made sitting ducks of the more affluent class and on another hand, the expenditure allocation would mean something to the poor only if ‘Direct Benefit are actually transferred’ to them.

Budget’13 has nothing for the aam aadmi and while we are promised a ‘non-adversial tax regime’ the proposals don’t seem to be in line with the spirit of the charged budget speech. Overall, coming from Mr. Chidambaram, this Budget has been more for the socialist rather than the Economist. Whether this pragmatic shift in approach is attributable to the upcoming elections or not – is best left unsaid.

Considering the recent spate of transfer pricing adjustments and few other crucial retroactive adjustment it was important to re-ignite the investors’ confidence in India. Consequently what was anticipated from the budget was clarity on the most debated issues in transfer pricing– domestic transfer pricing, share valuation and intangibles. Further, the wave of optimism swept when the Finance minister quoted in its first part of the speech - “Investment an act of Faith”. However, all the enthusiasm came to an end when the FM did not even remark on the highly debated subject “transfer pricing”. This act of the government to stay away from such controversial issues could either mean that they do not believe that the recent adjustments around transfer pricing truly hold merit and may get rectified through the legal process or it could be in a phase to understand the core changes required to bring certainty in areas around valuation of intangibles or share transactions including their taxability aspect. However, from the tax payer perspective it has not assuaged the investors’ sentiments. The only ray of hope is the announcement of the release of circular on safe harbour provisions for IT/ITES and contract research companies on the basis of the Rangachary committee. However, the same is also very vague considering that some reports are yet expected by end of March this financial year. Though overall the tone of the budget is fairly reasonable considering intention to introduce modified GAAR that too in 2016, bringing in the DTC during this budget session etc, tackling some of these transfer pricing pain areas could have gone a long way in reducing the anxiety level amongst the taxpayers from an international perspective. 

Direct taxes – The complete absence of any referral or any provision on the taxation of Indirect transfer of shares and the retrospective amendments is a major gap in terms of the expectation of foreign investors and the tax community at large.

Indirect Taxes – Given the constraints of the current credit system, the Finance Minister has rightly not raised the rate of Excise Duty and Service Tax. The introduction of an Amnesty scheme from 2007 offers an option to address several interpretational controversies by the payment of tax while saving interest and penalty. The introduction of a provision for arrest on Service Tax issues is not a welcome step as it will potentially be subject to misuse when there is a revenue crunch and the tax officers are under pressure for collection.