By not making any retrospective amendments, there is an attempt to bring in transparency and certainty in the tax regime, and there is clarity on general anti-avoidance rules (Gaar).
The proposal of accepting key recommendations of the expert committee on Gaar, would help investor sentiment.
A well laid-out procedure, strong unbiased approving panel, invoking Gaar only where the ‘main purpose’ is to obtain tax benefit, making Gaar effective only from April 1, 2016, are some of the key proposals that would provide clarity to foreign investors.
However, the finance minister has also slipped in certain negative amendments, which go against the set global principles, and do not provide clarity on certain aspects.
It was widely expected that the finance minister would come out with certain guidelines on how the indirect transfer would be taxed (for e.g, determination of substantial value, cost of acquisition, period of holding, sales consideration etc), but surprisingly, it seems to be lacking, thereby increasing the uncertainty over the issue.
Additionally, he has, as a mechanism to curb tax avoidance, proposed to tax the consideration paid for buyback of shares by an unlisted Indian company.
The Indian company conducting the buyback of its shares would be required to pay tax at the rate of 20% and the income arising to the shareholders would be exempt in their hands. This is contrary to general tax rules accepted globally for such transactions and would impact the existing structures and financial models of various companies.
To aggravate, the Budget has increased the tax rates on royalty and fees for technical services payments to non-residents from the existing 10% to 25%.
While the tax treaty benefit may be available, but such a step is negative in an era where India needs innovations (Innovation as a theme also forms part of the budget).
Finally, while the finance minister, in his Budget speech referred to Safe Harbour rules, there are no clear date on when these will be published. Also, the Budget has no clear or concrete measures on fair mechanism for dispute resolution (although it is one of the theme of the Finance Minister). In fact the safe harbor rules have not still been prescribed and there is still no clarity on when they can be expected.
The writer is a partner and leader-international tax services, E&Y