A welcome feature of Finance Bill, 2013, is that it does not contain retrospective amendments and does not seek to overrule pronouncements of Supreme Court. There are only a few proposals in the Budget relating to foreign enterprises. Our observations relating to some of the proposed amendments are as under:
Dividend received from foreign companies
Dividend received from foreign companies in which an Indian company holds at least 26 per cent equity shares is taxable at the concessional rate of 15 per cent as against the normal tax rate of 30 per cent. The concessional rate was introduced by Finance Act, 2011, for assessment year 2012-13. The period for concession was extended for one more year by Finance Act, 2012. Now Finance Bill, 2013, proposes to extend this concessional rate for one more year.
In order to remove the cascading effect in respect of dividends received by Indian company from foreign subsidiary company in which Indian company holds more than 50 per cent of equity shares, it is proposed that where tax on dividends received from foreign subsidiary is payable by the Indian holding company then, any dividend distributed by the Indian holding company in the same year, to the extent of such dividends, shall not be subjected to Dividend Distribution Tax (DDT).
While the proposed amendment should be welcome to all Indian companies which are making investments outside India, the government should consider that when the amendments are made effective for one year only, they lose their effectiveness. Foreign investments are normally part of long-term planning. Therefore, any short-term incentive is unlikely to make any meaningful dent.
GAAR
GAAR is a provision which enables Revenue authorities to plug misuse of tax provisions through transactions or arrangements which do not have commercial purpose and rather have been undertaken for the purpose of claiming tax benefit only. Finance Bill, 2012, introduced GAAR provisions which were scheduled to take effect from April 1, 2013. Later on, GAAR was postponed by one year and deferred to April 1, 2014. On January 14, 2013, finance minister issued a press release for postponement of GAAR which inter-alia provided for some other measures that would be taken by the government to relax the rigor of GAAR. It was therefore expected that Finance Bill, 2013, would bring the changes promised by finance minister in the press release. However, there are number of issues that do not find place in the Finance Bill.
It will be recalled that the rationale of such provisions has been hotly debated by the industry internally and with the Government. The Government has also amended the original proposals, which is apparent from the amendment proposed in Finance Bill, 2013. But the postponement of GAAR again to 2016 is beyond comprehension. This kind of action by the Government only adds to the confusion and uncertainty prevailing in the mind of foreign investors.
Tax residency certificate
Under current provisions, submission of Tax Residency Certificate (TRC) containing prescribed particulars, is a pre-condition for claiming benefits under Double-taxation Avoidance Agreements (DTAA). It is now proposed that submission of TRC is a necessary but not a sufficient condition for claiming benefits under DTAA. Foreign investors obviously clamoured over the proposed amendment. It is commendable that the finance minister himself admitted that the provisions are "clumsily worded". It is possible that the proposed amendments will again be modified.
Additional income tax on distribution of income by a company by way of buy-back of shares
Under current provisions, dividend distribution tax is payable on dividend declared, distributed or paid by an Indian company. In case of buy back of shares, capital gains tax is payable by the shareholder. Government observed that unlisted companies, as part of tax avoidance scheme, are resorting to buy back of shares at higher value instead of payment of dividends. This helps in avoiding payment of tax by way of DDT.
It is therefore proposed that consideration paid by a company for purchase of its own unlisted shares, which is in excess of the sum received by the company at the time of issue of shares, will be charged to tax @ 20 per cent as additional income tax. The income arising to the shareholders in respect of such buy back by the company would however be exempt from tax. In this context, a judgment of Authority for Advance Ruling (AAR) in the case of A Ltd, in re-dated March 22, 2012, is worth mentioning. In that case, the transaction of buyback of shares by Indian company from Mauritius resident company was treated as a scheme devised for avoidance of dividend distribution tax. The proposed amendment supports the view of Authority.
It is to be noted that if the proposed amendment is to curb evasion of DDT, the rate of tax on buyback should have been at the DDT rate (i.e. 15 per cent) instead of higher rate of 20 per cent. Further, if this amendment is to be brought in, the Government may also consider reframing the proposed amendment in such a way so as to enable the foreign investor to take credit of such additional tax paid in India in his home country. Government would not lose anything on this account but investor will be benefited.
Dividend received from foreign companies
Dividend received from foreign companies in which an Indian company holds at least 26 per cent equity shares is taxable at the concessional rate of 15 per cent as against the normal tax rate of 30 per cent. The concessional rate was introduced by Finance Act, 2011, for assessment year 2012-13. The period for concession was extended for one more year by Finance Act, 2012. Now Finance Bill, 2013, proposes to extend this concessional rate for one more year.
In order to remove the cascading effect in respect of dividends received by Indian company from foreign subsidiary company in which Indian company holds more than 50 per cent of equity shares, it is proposed that where tax on dividends received from foreign subsidiary is payable by the Indian holding company then, any dividend distributed by the Indian holding company in the same year, to the extent of such dividends, shall not be subjected to Dividend Distribution Tax (DDT).
While the proposed amendment should be welcome to all Indian companies which are making investments outside India, the government should consider that when the amendments are made effective for one year only, they lose their effectiveness. Foreign investments are normally part of long-term planning. Therefore, any short-term incentive is unlikely to make any meaningful dent.
GAAR
GAAR is a provision which enables Revenue authorities to plug misuse of tax provisions through transactions or arrangements which do not have commercial purpose and rather have been undertaken for the purpose of claiming tax benefit only. Finance Bill, 2012, introduced GAAR provisions which were scheduled to take effect from April 1, 2013. Later on, GAAR was postponed by one year and deferred to April 1, 2014. On January 14, 2013, finance minister issued a press release for postponement of GAAR which inter-alia provided for some other measures that would be taken by the government to relax the rigor of GAAR. It was therefore expected that Finance Bill, 2013, would bring the changes promised by finance minister in the press release. However, there are number of issues that do not find place in the Finance Bill.
It will be recalled that the rationale of such provisions has been hotly debated by the industry internally and with the Government. The Government has also amended the original proposals, which is apparent from the amendment proposed in Finance Bill, 2013. But the postponement of GAAR again to 2016 is beyond comprehension. This kind of action by the Government only adds to the confusion and uncertainty prevailing in the mind of foreign investors.
Tax residency certificate
Under current provisions, submission of Tax Residency Certificate (TRC) containing prescribed particulars, is a pre-condition for claiming benefits under Double-taxation Avoidance Agreements (DTAA). It is now proposed that submission of TRC is a necessary but not a sufficient condition for claiming benefits under DTAA. Foreign investors obviously clamoured over the proposed amendment. It is commendable that the finance minister himself admitted that the provisions are "clumsily worded". It is possible that the proposed amendments will again be modified.
Additional income tax on distribution of income by a company by way of buy-back of shares
Under current provisions, dividend distribution tax is payable on dividend declared, distributed or paid by an Indian company. In case of buy back of shares, capital gains tax is payable by the shareholder. Government observed that unlisted companies, as part of tax avoidance scheme, are resorting to buy back of shares at higher value instead of payment of dividends. This helps in avoiding payment of tax by way of DDT.
It is therefore proposed that consideration paid by a company for purchase of its own unlisted shares, which is in excess of the sum received by the company at the time of issue of shares, will be charged to tax @ 20 per cent as additional income tax. The income arising to the shareholders in respect of such buy back by the company would however be exempt from tax. In this context, a judgment of Authority for Advance Ruling (AAR) in the case of A Ltd, in re-dated March 22, 2012, is worth mentioning. In that case, the transaction of buyback of shares by Indian company from Mauritius resident company was treated as a scheme devised for avoidance of dividend distribution tax. The proposed amendment supports the view of Authority.
It is to be noted that if the proposed amendment is to curb evasion of DDT, the rate of tax on buyback should have been at the DDT rate (i.e. 15 per cent) instead of higher rate of 20 per cent. Further, if this amendment is to be brought in, the Government may also consider reframing the proposed amendment in such a way so as to enable the foreign investor to take credit of such additional tax paid in India in his home country. Government would not lose anything on this account but investor will be benefited.
Co-authored by Alok Gupta Email: hp.agrawal@sskmin.com