[aaykarbhavan] Business standard news and legal digest 3-9-2012

Market sees sunshine as GAAR clouds disappear

SAMIE MODAK& PALAKSHAH Mumbai, 2 September The festive season could come early for the markets, as experts say the Parthasarathi Shome committee report on General Anti-Avoidance Rules (GAAR) is just what the doctor ordered for boosting sentiment on the Street. The panel had yesterday recommended the postponement of GAAR by three years and abolition of short-term capital gains tax, and the general consensus is the new regime in the finance ministry would be favourably disposed towards accepting these. Nishith Desai, international corporate and tax lawyer, says the panel has done a wonderful job and the report is "hugely positive" for foreign institutional investors. According to him, the recommendation to abolish the tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents is another sentiment booster. Others agree. "The government is trying to send a signal it wants to stimulate the economy and the stock market. The Shome panel report is as positive as one could expect," says Saurabh Mukherjea, headinstitutional equities, Ambit Capital. "This draft report along with the Fed chairman's speech on Friday could give a meaningful lift to the Indian market in the coming week. However, just on the back of this draft report, it would be unreasonable to expect a roaring rally," he adds. Mukherjea expects the Sensex to be in the region of 18,000-19,000 over the coming months. Federal Reserve Chairman Ben Bernanke on Friday indicated the US central bank was open to a further easing of monetary policy, but didn't provide any clear signal of imminent action. Vikas Khemani, president and head-institutional equities, Edelweiss, says the recommendations would give clarity and comfort to the market. The committee has also suggested removing shortterm capital gains tax, 15 per cent at present, and increasing the securities transaction tax (STT) to make it tax-neutral for the government. "To make relief regarding transfer of listed securities tax neutral, an increase in STT should be reasonable. A sharp increase in STT will create problems as this tax is not seen as a creditable tax in the home country of investors," adds Desai. At present, stock market investors don't pay any tax if they hold shares for over a year. However, if they sell shares within a year, they have to pay 15 per cent tax on gains made through such transactions. Investors pay STT of ~1,700 for non-delivery and ~2,500 on delivery for trades worth ~1 crore. "Increasing STT will be a fine idea in the absence of any other tax," says Deven Choksey, managing director of KR Choksey Shares and Securities. "There will be a short-covering rally in the coming week. This will also boost the rupee," he adds. Experts, however, say other local and global developments will continue to weigh on investor sentiment. "The market had taken quite a lot of beating due to the lingering concerns over GAAR," says Motilal Oswal, CMD, Motilal Oswal Financial Services. "The market outlook will be determined more by what is happening globally. Also, other domestic factors, like the Parliament logjam, slowing growth and policy inaction, could weigh on the market."

 

Shome panel ends ambiguity in investing via FIIs BS REPORTER New Delhi, 2 September The Parthasarathi Shome panel has given further clarity on provisions of the proposed General Anti-Avoidance Rules (GAAR) for portfolio investors coming into India through the foreign institutional investor (FIIs) route. It has recommended that all kinds of non-resident investors through FIIs, either direct or indirect, be spared from GAAR so far as transactions in listed securities are concerned. Basically, it has suggested exempting any non-resident investor above the FII level in listed securities from the proposed GAAR. This clarification was necessary to dispel any ambiguity among these investors as FII structure is generally multilayered. FIIs who do not seek benefits of tax treaties would also not come under GAAR, the panel said in its draft recommendations. But whatever be the case of FIIs in terms of seeking benefits under tax treaties, direct and indirect investors through FIIs will be exempted from GAAR. "Whether an FII chooses or does not choose to take a treaty benefit, GAAR provisions would not be invoked in the case of a non-resident who has invested, directly or indirectly, in the FII — where the investment of the nonresident has underlying assets as investments made by the FII in India," the panel said. The earlier draft report by afinance ministry committee had also recommended that FIIs who do not seek benefits of tax treaties and subject themselves to domestic laws will not come under GAAR. That committee had also recommended that whether FIIs chooses to take treaty benefits or not, GAAR provisions cannot be invoked in the nonresident investors of the FII. However, this raised an issue that the earlier committee's suggestions provides certainty only to immediate (first level) investors in the FII. As the FII structure is generally multi-layered and may be a synthetic investment structure, an investor may exist at subsequent upper levels, and may not be a direct investor in the FII. As such, the Shome panel said all kinds of investors in FIIs be exempted from GAAR. "This committee felt that the intention of the guidelines should be to exclude all investors in portfolio investments above the FII stage from the purview of GAAR," the committee added. Analysts said this provides clarity to those investing through FIIs in India, using instruments such as participatory notes. "The recommendations provide greater clarity to nonresident investors through FIIs. Those investing through participatory notes may not be at the first level and may be at the subsequent levels," NC Hegde, partner Deloitte, Haskins & Sells, said. Total value of investments in capital markets through participatory notes range between 12 and 16 per cent of total assets managed by FIIs in a month. However, the panel clarified that all these exemptions to nonresident investors through FIIs be restricted to only transactions in listed securities. Some stakeholders had asked the panel if these would also be given to FIIs or those investing through FIIs in unlisted securities with prior permission. To make GAAR provisions clear, the committee wanted an illustrative negative list to be released to tell taxpayers where the proposed provisions would not apply. Shome Committee sends out positive signal The Shome Committee report is a triumph of democracy over tax bureaucracy. The Committee's recommendations to severely restrict the scope of GAAR, and to abolish tax on gains from transfers of listed shares are bold and far reaching. They are a breath of fresh air in an environment of despondency and gloom surrounding unprecedented retrospective and retrograde tax changes enacted in the last Budget.They establish supremacy of rule of law over indiscriminate tax bureaucracy. The Committee describes GAAR as "an extremely advanced instrument of tax administration", meant to deter misuse or abuse of tax law through complex and contrived arrangements. However, without adequate safeguards, it could become an instrument of abuse in the hands of inapt tax officials, deterring voluntary compliance by law-abiding taxpayers. GAAR has been discussed and debated extensively ever since it was first proposed in the White Paper on Direct Taxes Code (DTC). Industry has been crying hoarse ever since about the wide scope of the provisions, and the great discretion given to tax administrators. These concerns were addressed in the Report of the Parliamentary Standing Committee on DTC, 2010, which made useful recommendations to deter abuse / misuse by the bureaucracy. However,the provisions introduced in the Budget completely negated the suggestions of the Parliamentary Committee. The Shome Committee's suggestions are similar to those of the Parliamentary Committee, and go beyond. It recommends significant pruning of the scope of GAAR, approval by an independent Advisory Panel before it is invoked, athree-year deferral of its implementation, an exemption for mutual funds and other pooling vehicles making investments through lowtax treaty jurisdictions like Mauritius and Singapore, and grandfathering of investments made prior to its implementation. These elements aim to restore investor confidence in Indian democracy and provide certainty to taxpayers.The Committee's proposal to abolish the tax on gains from transfer of listed shares (whether by way of capital gains or business income) is a pleasant surprise. The exemption would apply to both residents and non-residents of India. The Committee supports this recommendation on the grounds that many other jurisdictions do not tax non-residents on their share capital gains. In theinterest of tax equity, India should also not tax gains from shares. Interestingly, the former finance minister, Mr Pranab Mukherjee, had viewed the absence of capital gains tax in other jurisdictions as the primary consideration for taxing such gains in India, and that too with retrospective effect. Dr Shome turns around the same logic to reach an opposite conclusion. As discussed in my column in Business Standard on April 30, the former FM's logic was flawed. Capital gains tax is actually a third tier tax on corporate earnings over and above the corporate income tax and the dividend distribution tax. Taxation of capital gains in addition to the corporate income tax and dividends amounts to triple taxation, which is contrary to the principle of tax neutrality. This is one of the reasons that several international jurisdictions cited in the Committee report do not apply tax to share capital gains.Even if there were any logic in applying tax on the share capital gains, the tax should apply in the country of residence of the shareholders and not in the country of source of income (i.e., where the underlying assets are located). This is indeed the case in virtually all countries around the world, with the notable exception of India. In most international tax treaties, the right to taxation of share capital gains is given to the residence country, except for capital gains on shares of companies holding mainly real property. Both OECD and UN model tax agreements reflect this principle.Even though many countries apply capital gains tax on the residents, the Committee recommends an exemption for both the residents and non residents – a view also shared by the Kelkar Committee Report of 2002. It may be appropriate to tax capital gains on residents where personal tax is substantially higher that the corporate tax rate on earnings. In India, that is not the case, as the personal and corporate tax rates are the same. The recommendations would go along way in bringing certainty in the application of law and encouraging voluntary compliance by the taxpayers. Most importantly, at a time when India is already grappling with an economic slowdown and the global investors are looking askance about the certainty in its policy decisions, the recommendations would send out a positive signal to them.It is unfortunate that an intervention by the Shome Committee was needed for India to come to this point. We wish the bureaucracy's wisdom and maturity were reflected in GAAR, retrospective taxation of capital gains, and such other provisions at the time of their enactment in the last Finance Bill. The author is Tax Partner, Ernst & Young. Shalini Mathur, senior tax professional, Ernst & Young, contributed to the article. GAAR REVIEW SATYA PODDAR   LEGAL DIGEST >Rentarrears no ground forwinding up The Supreme Court has held that a winding up petition against a company would not be maintainable in a tenancy dispute in the absence of any specific finding as to the rate of rent and the period of default committed by the tenant company. In this case, Raju Jhurani vs M/s Germindia Ltd, the landlord evicted the tenant company, but claimed arrears of various dues. Since they were not paid, the landlord moved a winding up petition under the Companies Act. The Calcutta high court rejected the petition on the ground that the winding-up petition was not maintainable as there was no admitted arrears and there was no ascertained amount due in respect of which a windingup order could be passed. The Supreme Court upheld this view and dismissed the landlord's appeal observing that "there are various stages involved in deciding the amount of rents and the periods of default and also the amount to be ultimately calculated on account of such default and the same cannot be tried in a summary way, without adducing proper evidence. It is, therefore, necessary that such issues be heard and tried in a properly constituted suit for recovery of such dues." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Call forfresh tenders upheld The Supreme Court last week dismissed the appeal of Mangal Amusement Park Ltd challenging the change of land use of its land from 'commercial' to a 'regular park' in the town planning scheme of Indore and also the decision of the Madhya Pradesh government to call for fresh tenders for the land. The court ruled that the company had only alicence on the land and not a lease. Moreover, the agreement had lapsed due to expiry of time and therefore the company could not claim any right for renewal of the agreement. The court also accepted the argument of the Indore Development Authority that the company had not utilised the land fully for many years and the fixtures like the games and rides could be removed without financial loss. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Claim of refund rejected The Supreme Court has upheld the judgment of the National Consumer Commission which had rejected the claim of an allottee of a house sold by the Karnataka housing board for refund. He had agreed for registration of the sale deed showing the cost of the flat as Rs.4,31,918 although the actual cost was Rs.5,23,232. The concession was made by the housing board. The allottee then claimed refund according to the cost shown in the registered deed. Dismissing the appeal in the case, S Sreenivasa Murthy vs State of Karnataka, the court stated that "having taken advantage of the offer made by the board to get the deed registered at a price less than the actual cost of the flat, he cannot turn around and demand the refund." MJ ANTONY

 

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CS A  RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
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