Budget 2012: Far-reaching recos, litigations ahead

While the Budget has not tinkered with the corporate tax rates by leaving it at the current base rate of 30%, the provisions of alternate minimum tax (AMT) have been amended to embrace all forms of tax payers (other than companies who are subject to minimum alternate tax), which was earlier restricted to limited liability partnerships (LLP).

The government seeks to tax the consideration received by a company (other than a company in which public is substantially interested) on issue of shares to the extent the consideration received exceeds the fair market value. This is likely to have an adverse impact on the investments especially FDI in joint ventures where the strategic partners contribute their resource to create a synergy.

In an attempt to further tighten the noose around black money, the government has sought to mandate that every resident, irrespective of whether he has taxable income or not, having any asset (including financial interest in any entity) or signing authority in any account located outside to furnish a return of income.
The government has also decided to  extend the time limit for re-opening of cases to 16 years.

Further, the finance minister has proposed to table a white paper on black money in the current session of the Parliament.
Much required amendment to mitigate the cascading effect of dividend distribution tax (DDT) to multi-tier structure has been introduced.  This will give boost for creation of holding company structures in India, promote downstream investments and enable cash efficient repatriation.

In order to stimulate foreign lending in specified infrastructure sector by non-residents, budget has reduced taxation of interest from the present rate of 20% to 5% on borrowings made between July 1, 2012, and July 1, 2015. This will provide companies engaged in roads, ports, power, etc to access overseas debts at a low cost.

The much anticipated general anti avoidance rules (GAAR) has been finally introduced.  The said rules will empower the tax officer to deny tax benefits if a transaction has been carried out for the purposes of tax evasion.

There is need to ensure that the GAAR does not hurt the sentiments of investors and are invoked only in genuine cases of tax avoidance or evasion.

Exponential rise in the quantum of transfer pricing adjustments has been one of the key areas of concern for taxpayers in the recent past.  Government has finally introduced the advance pricing agreements (APAs) program.

The joy brought to multinational companies by the decision of the Supreme Court in the case of Vodafone seems to be short-lived. Government has sought to overcome the decision by making retrospective clarificatory amendments to the Act  This will create a lot of uncertainty in the minds of the investors.

While there will be net revenue loss of Rs4,500 crores on direct tax proposals, but the measures pronounced in favour of power sector will accelerate the operationalisation of power projects.

Samir Kanabar, Tax partner, Ernst & Young, and Shashidhar Upinkudru, Senior tax professional