The Indian Parliament will on Monday discuss the Finance Bill for
financial year 2012-13. The debate is expected to revolve around the
proposed General Anti-Avoidance Rules (GAAR), as well as a retrospective
law that will allow overseas deals involving India-based assets to be
subject to capital gains tax in India.
In a nutshell, GAAR allows Indian officials to deny tax benefits on transactions or arrangements that do not have any commercial substance or consideration but are conducted merely to avoid paying taxes.
1. Postponement of GAAR: Foreign investors are expecting Finance Minister Pranab Mukherjee to soften the blow. One thing they are looking for is the deadline for GAAR implementation to be pushed back. The current proposal is for an April 2012 rollout. However, the Standing Committee has recommended that the GAAR be implemented, along with the Direct Tax Code, in April 2013, a year from now.
2. Clarity on Participatory Notes: Investors will be looking for further clarity on P-Notes not being taxable. P-Notes, which are issued by foreign institutional investors, are held by private investors such as funds or high net worth individuals. Investors are also hoping that private equity funds, which invest on behalf of their clients, will attract a lower rate of tax, while angel investors will likely be exempt altogether. The government is also expected to design permissible and impermissible arrangements with examples of how it will work.
3. Burden of proof on tax department: The onus on proving tax liability is likely to be on the income tax department. This will be a big relief to investors since they will not have to deal with cumbersome red-tape since the burden of proof will be shifted to the tax authorities. The Standing Committee had also recommended onus of proving liability to lie with the tax departments.
4. Rollback of retrospective tax amendment: The government is also facing pressure from the investor community to roll back a controversial propsosal to retrospectively tax all deals signed overseas but that involve assets based in India. The Finance Mukherjee has already said that cases older than six years will not be opened. The government is also expected to propose that cases which have reached finality in Court of Law will not be opened. Such a proposal will exempt Vodafone from paying $2.2 billion in capital gains tax for its 2007 acquisition of Hutchison Essar. While the deal was between Vodafone and a Cayman Islands-based entity, it involved telecom assets and operations based in India. The Supreme Court has already ruled in favour of Vodafone.
5. Excise duty on unbranded jewellery: The government is also expected to remove a proposed 0.3 per cent excise duty on unbranded jewellery, which accounts for the largest chunk of jewellery sales in India. Jewellers went on a three-week strike in March over the proposal, resulting in a steep fall in jewellery sales. The annual budget also included a tax collected at source on transactions worth more than Rs 200,000 and doubled import duty on gold to 4 percent.
In a nutshell, GAAR allows Indian officials to deny tax benefits on transactions or arrangements that do not have any commercial substance or consideration but are conducted merely to avoid paying taxes.
5 facts about the general anti-avoidance rule (GAAR)
Shares have plunged since last week on fears that the Indian government will review its tax treaty with Mauritius that allows foreign institutional investors to invest in India without being double-taxed. The investor community is also worried about GAAR in the Union Budget for 2012-13.
Here are the five things the market will be looking for in the debate:
1. Postponement of GAAR: Foreign investors are expecting Finance Minister Pranab Mukherjee to soften the blow. One thing they are looking for is the deadline for GAAR implementation to be pushed back. The current proposal is for an April 2012 rollout. However, the Standing Committee has recommended that the GAAR be implemented, along with the Direct Tax Code, in April 2013, a year from now.
2. Clarity on Participatory Notes: Investors will be looking for further clarity on P-Notes not being taxable. P-Notes, which are issued by foreign institutional investors, are held by private investors such as funds or high net worth individuals. Investors are also hoping that private equity funds, which invest on behalf of their clients, will attract a lower rate of tax, while angel investors will likely be exempt altogether. The government is also expected to design permissible and impermissible arrangements with examples of how it will work.
3. Burden of proof on tax department: The onus on proving tax liability is likely to be on the income tax department. This will be a big relief to investors since they will not have to deal with cumbersome red-tape since the burden of proof will be shifted to the tax authorities. The Standing Committee had also recommended onus of proving liability to lie with the tax departments.
4. Rollback of retrospective tax amendment: The government is also facing pressure from the investor community to roll back a controversial propsosal to retrospectively tax all deals signed overseas but that involve assets based in India. The Finance Mukherjee has already said that cases older than six years will not be opened. The government is also expected to propose that cases which have reached finality in Court of Law will not be opened. Such a proposal will exempt Vodafone from paying $2.2 billion in capital gains tax for its 2007 acquisition of Hutchison Essar. While the deal was between Vodafone and a Cayman Islands-based entity, it involved telecom assets and operations based in India. The Supreme Court has already ruled in favour of Vodafone.
5. Excise duty on unbranded jewellery: The government is also expected to remove a proposed 0.3 per cent excise duty on unbranded jewellery, which accounts for the largest chunk of jewellery sales in India. Jewellers went on a three-week strike in March over the proposal, resulting in a steep fall in jewellery sales. The annual budget also included a tax collected at source on transactions worth more than Rs 200,000 and doubled import duty on gold to 4 percent.
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