TAXES IN INDIA PENDING REFORMS, HIGH RATES AND RETROSPECTIVE TAX INCREASES

Transcription

1 Andreas Flach Pradeep Kasthala Indo-German Investment Summit Berlin October 2012 TAXES IN INDIA PENDING REFORMS, HIGH RATES AND RETROSPECTIVE TAX INCREASES

2 AGENDA 1. Pending reforms: New DTC & GST 1.1. Indirect tax structure and movement to GST 1.2. DTC POEM and GAAR 2. High rates: Why profit repatriation from India is expensive! 3. Retrospective taxation of share transactions abroad: The Vodafone case and its consequences 4. Experiences of German multinationals operating in India 2

3 Indirect Tax Structure and Movement to GST 3

4 CURRENT INDIRECT TAX STRUCTURE IN INDIA Federal levies Customs Duty: On import of goods into India CENVAT (central excise duty): On manufacture of goods in India Service Tax: On provision of Services State levies State Value Added Tax (VAT): On sale of goods within a state Central Sales Tax: On inter-state sale of goods Entry Tax: Tax on entry of goods into a State Other local levies 4 Slide 4

5 MOVEMENT TO GST The proposed introduction of GST will be an inflection point for Indian Supply Chains. It marks a transition from origin based taxation regime to destination based taxation Shift in taxable events from manufacture and sale of goods to supply of goods and services Move away from taxes that cannot be set off to taxation on value add basis Apply uniformly on all supply of goods and services throughout the supply chain Move towards a unified market Single Market Provides opportunities to reduce supply chain complexity and improve effectiveness coupled with flawless credit mechanism 5

6 SUPPLY CHAIN STRUCTURE A COMPARATIVE Outside India Finished Goods Import Raw Material Import BCD +CVD + ADC BCD+ CGST + SGST Raw Material Inter-State Raw Material Intra-State Input Services BCD +CVD + ADC BCD+ CGST + SGST Excise duty + CST IGST Excise duty + VAT CGST + SGST Service Tax CGST + SGST or IGST India Plant Excise Duty (credit of Excise duty CVD + ADC + S. Tax) CGST + SGST or IGST net of input taxes credit Current tax regime GST Regime VAT ( VAT credit) CGST + SGST net of input taxes Distributor (intrastate) credit CST Depot / Agent IGST net of input taxes credit Finished Goods Export 6 Stock Transfers from other Units Excise Duty CGST + SGST or IGST No Taxes (Refunds available for Cenvat Credit and State VAT) No Taxes (Refunds available for CGST, SGST and IGST Distributor (inter-state)

7 DICHOTOMY BETWEEN EU VAT AND INDIAN INDIRECT TAXES Customs Regime: Largely akin to European Union However, an additional duty component to equalize the levy of Excise Duty and Central Sales Tax on the products in India is levied as a component of customs duty. Service Tax: Recently moved to a negative list regime from 01 July A great deal of convergence with the EU Regime. Excise Duty: Not applicable in EU. To be converged into GST. State VAT: Supply of goods within a State. Based on the value addition concept. However, significant differences across the State VAT Laws of different States Central Sales Tax: Not applicable in EU. To be converged into GST. Proposed GST Regime would bring in the much desired convergence with the best of the VAT Systems across the Globe. 7

8 DTC POEM & GAAR 8

9 FDI IN INDIA Source: Fact sheet on FDI by Department of Industrial Policy and Promotion: 9

10 Place of Effective Management ( POEM ) Test DTC 2012 Conditions when a foreign company can be classified as a resident in India: As per DTC Bill, 2010 POEM of Company means- The place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or In a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions. In Integrated Container Feeder Service Vs. Joint Commissioner of Income Tax, it was held that Place of effective management is a place from where factually and effectively the day to day affairs of the Company are managed and controlled, and not merely where the Board of Directors meetings are held. 10

11 Impact Round-Tripping : If Control and Management of Foreign Companies is proved to be in India - Global income will be taxed in India. Minimum Alternate Tax and Dividend Distribution Tax provisions would be applicable. Withholding tax provisions applicable. Expenses can be disallowed if taxes not appropriately withheld. Compliances of Income-tax, Company Law etc. (Audits, filing tax returns etc) Possible exposure to penalty and interest provisions Risk for German parent Companies for getting taxed in India is limited. 11

12 I propose to introduce a General Anti Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel -Hon ble Finance Minister Shri. Pranab Mukherjee 12

13 PROVISIONS OF GAAR Intention : To curb the misuse or abuse of the provisions of the Income-tax Act and aggressive tax planning made via sophisticated corporate structures Conditions for treating a transaction / arrangement as an impermissible avoidance arrangement Proposed Provisions : To treat a transaction / arrangement as an impermissible avoidance arrangement To codify the principles of Substance Over Form To tax transactions lacking commercial substance To override the Double Taxation Avoidance Agreements 13

14 PROVISIONS OF GAAR Proposed Provisions : 14

15 PROVISIONS OF GAAR Consequences : Disregarding or combining any step or party to the arrangement or ignoring the arrangement per se Reallocating expenses and income or accrual, deduction, relief or rebate Relocating place of residence or location of a transaction or situs of an asset Lifting the corporate veil Re-characterizing equity into debt, capital receipt into revenue or vice versa 15

16 GAAR Impact Analysis of typical transactions Illustrations / Instances 1. Exit Planning Exit of an investment in an Indian entity through an IHC located in a low tax jurisdiction 2. Long Term Financing Substantial Investment by way of CCD for a relatively long period and Payment of Interest on the same 3. Outbound Investments Investment in an entity abroad for the purpose of shifting of profits 4. Losses of Foreign Branch Losses incurred in a foreign branch to be set off with profits of Indian entity 5. Sale & Lease back A sale and lease back transaction Possible Consequences The existence of the IHC may be disregarded The gains arising out of the sale of shares may be taxed in the hands of the parent company The debt may be re-characterized as equity Interest payment may be treated as dividends Implications of DDT provisions The foreign entity may be disregarded Profits of the foreign entity may be treated as profits of the Indian entity The status of the branch may be disregarded The losses incurred by the branch may not be allowed to be set off with the profits of the Indian entity The transaction will be treated as an impermissible avoidance arrangement The lease payments will not be allowed as expenditure 16

17 GAAR Impact Analysis of typical transactions Illustrations / Instances 6. Investment through Accommodating party Investments / other transactions through an accommodating party (whether related or not) with the motive of tax benefit 7. Transfer of funds between entities Transfer of funds (secured or unsecured borrowings, promissory notes, debentures, etc.) among parties without substantial commercial purpose 8. Merger of loss making companies Merger of loss making entities to avail the benefit of set off of the losses against the profits of the amalgamating company 9. Holding of IPR abroad Holding of IPR in a low tax jurisdiction Payments of royalty towards the same Possible Consequences The accommodating party may be combined with the assessee and treated to be the same as the assessee The intermediate entities through which the funds are transferred may be disregarded The funds may be treated as if received from the entity from where it originated The transaction of merger may be treated as an impermissible avoidance arrangement Transaction may be related as not entered into Losses would not be allowed to be set off against the profits The arrangement of parking of IPR abroad may be treated as an impermissible avoidance arrangement Payments of royalty may be disallowed 17

18 GAAR Powers given to revenue authorities to disregard, combine or re-characterise any part or whole of a transaction / arrangement GAAR further supported by specific anti-abuse rules (SAAR) in circumstances such as payment to associated persons in respect of expenditure, international transaction not at arm s length, transactions resulting in transfer of income to non-residents and avoidance of tax in certain transactions in securities GAAR to override the provisions of the tax treaties Onus is on the taxpayer to prove that a tax benefit was not the main purpose of the arrangement Issues raised GAAR provisions sweeping in nature and may be invoked by the tax authorities in routine manner. Also no distinction between tax mitigation and tax avoidance 18

19 High rates: Why profit repatriation from India is expensive! 21

20 Profit repatriation from India Dividend distribution tax (DDT) Profits before Tax No income can be taxed twice in the hands of the same person Domestic companies pay normal % Dividend distribution tax is payable by the dividend-paying % at the time of dividend repatriation Sort of double taxation dividend is distribution of profits earned by the company that already suffered taxes DDT is not allowed as tax credit in the hands of foreign shareholder Corporate Tax Profits available for distribution DDT Balance to reserves 22

21 Arguments in favor of DDT Tax department brings up the concept of separate juristic personality DDT is not double taxation as the dividend is taxed at the time of passage of money to the shareholders albeit in the hands of the company paying dividend Memorandum explaining finance bill 2003 stated that it has been argued that it is easier to collect tax at a single point, i.e., from the company rather than compel the company to compute the tax deductible in the hands of the shareholder 23

22 Case for withdrawal of DDT Lift the corporate veil Shareholders own the company and any levy of DDT reduces the quantum of dividend declared hits the foreign investors directly DDT does not qualify for tax credit in investors home country this additional income tax (DDT) is paid by the company and not the shareholder A strong disincentive for equity investment in India by foreign entities DDT should also be considered for withdrawal from DTC 24

23 Latest jurisprudence Authority for Advance Rulings in the case of A March 22, 2012 None of the other shareholders accepted the offer of buy back A had not distributed dividends since 2003, the year in which DDT was introduced AAR concluded that capital gains arising in this case should be taxed as dividends A (Mauritius) A (India) 25.06% Buy back 25

24 Retrospective taxation of share transactions abroad: The Vodafone case and its consequences 26

25 Judicial Anti Avoidance Duke of Westminster principle Lord Tomlin proclaimed: Every man is entitled, if he can, to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. Ramsay Principle In Ramsay a taxpayer borrowed money from a financier and purchased two loans: he was supposed to make a tax free gain on one loan and an allowable capital loss on the other. In order to achieve this result, money was sent around in a circle or a series or circles, beginning and ending up with the promoter of the scheme. The House of Lords decided that the taxpayer did not make any real loss and could not have tax relief for a loss. 27

26 Judicial Anti Avoidance Craven vs. White the series of transactions was, at the time when the intermediate transaction was entered into, pre-ordained in order to produce a given result; the transaction had no other purposes than tax mitigation; the intermediate transaction was not even contemplated practically as having an independent life, and the pre-ordained events did in fact take place In these circumstances the court can be justified in linking the beginning with the end so as to make a single composite whole to which the fiscal results of the single composite whole are to be applied 28

27 Judicial Anti Avoidance in India Application in Indian context McDowell case Tax planning may be legitimate provided it is within the framework of law. Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Azadi Bachao Andolan case In developing countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology. They are able to grant tax concessions exclusively to foreign investors over and above the domestic tax law provisions. In this respect, it does not differ much from other similar tax incentives given by them, such as tax holidays, grants, etc. 29

28 Background to Vodafone case Facts Hutchison Group, HK HTIL, Cayman Islands CGP Investment Co (CI) Acquisition Vodafone International Holdings BV (Netherlands resident) Multiple Companies (India and Mauritius) HEL, Holder of Telecom Licenses 30

29 Background to Vodafone case The Issue Whether sale of shares of CGP by HTIL to VIH attracted income tax act provisions? Whether it was sale of share of CGP outside India or indirect sale of Indian assets? Whether s.9 (1) of the Indian Income Tax Act, 1961 would apply to indirect transfer of capital asset in India? Whether tax authorities can lift the corporate veil by applying GAAR? 31

30 Background to Vodafone case Arguments Vodafone The transaction was only in respect of one share of CGP in Cayman Islands This is a capital asset situated outside India that neither had any income accrued or arisen in India No other income is deemed to have accrued or arisen in India Tax Authorities Share & purchase agreement of Feb 11, 2007 and other documents - a composite transaction Involved the transfer of rights in HEL by HTIL 32

31 Background to Vodafone case The Two Judgments Bombay HC The transaction had a significant nexus with India Change in the controlling interest in HEL which constituted a source of income in India Supreme Court Section 9 covers only income arising from a transfer of a capital asset situated in India Does not intend to cover income arising from indirect transfer of capital asset in India Transfer of foreign holding company s shares off shore cannot result in extinguishment of holding company right S.9 (1) (i) is not a look through provision 33

32 Retrospective taxation of share transactions Impact of Vodafone Judgment The government filed review petition and this was rejected by the Hon ble SC Amendments were made in the Finance Act as under: Definition of Capital Asset to include any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever (s. 2(14)) Definition of Transfer (s. 2(47)) Explanation of the word Through (Expl 4 to s. 9 (1)(i)) Clarification of deeming presence in India if the value is from assets in India (Expl 5 to 9 (1) (i)) Consequential amendment to s.195 (Expl 2 to s. 195) whether the NR has a residence or place of business or business connection or whatever 34

33 The retrospective amendments Conclusions Is it good? For the removal of doubts.. whose? Certainity Retroactive vs Retrospective amendments Grandfathering provisions 35

34 Experiences of German Multinationals in India 36

35 Experiences of German Multinationals in India Experience of exotic tax pratices & the quest for maximising tax substrate: Too many bodies levying indirect taxes E.g. automtive supplier with production unit located in 2 states: production triggering CST and Entry Tax Not part of OECD, hence TP / PE standards not aligned TP practice is still a moving platform Interpretation of DTA between Germany and India not consistent E.g. assembly of equipment (PE) is taxable in India according to German DTA interpretation, but not the profit from 37 the sale of material. India wants to tax profits on material sales also. Different assessments between TP officer and valuation branch of custom office E.g. design firm imports used machine: Special Valuation Branch assesses double the price as the TPO For direct investments: profit repatriation no reasonable option due to DDT model USE A TAX ADVISOR ALREADY IN THE PLANNING PHASE

36 . THANK YOU 38

37 Contact at BDO Germany For any questions you might have, please contact ANDREAS FLACH Partner BDO AG Wirtschaftsprüfungsgesellschaft Frankfurt am Main / Germany andreas.flach@bdo.de Andreas Flach is a certified public accountant / tax advisor and partner of BDO Germany and heads its India Desk. He is focused on advising German companies investing or operating in India and Indian companies investing or operating in Germany since 2004, including financial statement audits, tax and transaction advisory services. Between 2006 and 2009, Mr. Flach lived in New Delhi, India, serving German clients across India. Mr. Flach speaks regularly on tax and regulatory matters in India on seminars and conferences in Germany. 39

38 Contact at BDO India For any questions you might have, please contact PRADEEP KASTHALA Partner BDO Consulting Pvt. Ltd. Hyderabad / India pradeep.k@bdoindia.co.in Pradeep Kasthala is a chartered accountant and a law graduate from India and heads the tax practice at BDO, Hyderabad office, India. He specializes in international taxation and tax litigation. Pradeep speaks on tax matters at various seminars and conferences in India. 40