[aaykarbhavan] Business standard news item 15-1-2013

GAAR deferred by 2 yrs

BS REPORTER New Delhi, 14 January In a breather to foreign investors, especially those coming via Mauritius, the government today deferred the controversial General Anti- Avoidance Rules (GAAR) by two years, making the norms effective from the 2016- 17 assessment year. The Parthasarathi Shome committee had recommended that GAAR be pushed three years further. All other major recommendations of the panel were accepted, with some deviations. The finance ministry said GAAR would override the double- taxation avoidance agreement if an arrangement was solely aimed at avoiding taxes but experts said those coming under Indo- Singapore tax treaty and having tax residency certificates from Mauritius would escape GAAR. It would, however, not be invoked on those investing in stock markets through participatory notes. The GAAR decision would clear the air on taxes, helping Finance Minister P Chidambaram ( likely to begin his tour to Singapore and Europe, among other places, from January 22) reassure investors on the state of the Indian economy. The modified GAAR provisions say an arrangement the main purpose of which is to obtain tax benefit would be considered impermissible. The earlier provisions considered impermissible an arrangement " one of the main purposes" of which was tax benefit. It would apply when the tax benefit in an arrangement is more than ₹ 3 crore. Also, GAAR would not apply on non- resident foreign institutional investors and those who don't take tax benefit under a treaty. This means investors availing of benefits under Section 90 or 90A of the I- T Act ( which provides relief from those investing in stock markets through instruments like participatory notes would be out of the ambit. Besides a two- year postponement instead of three, the ministry deviated from the Shome panel recommendations on two other key counts. The panel headed by Shome, now an advisor to the finance minister, had suggested all investments before the commencement of GAAR be grandfathered. But the ministry has chosen the date of August 30, 2010. Second, the committee had said the approving panel's recommendations should be binding on the tax department. But the ministry has said it should be binding on both the assessee and tax department. Investments made before August 30, 2010 — the day the Direct Taxes Code was introduced in Parliament —will not be taxed, even if the profits are made after April 2016. GAAR will apply on an income after the assessment year beginning April 1, 2016, on investments made after August 2010. The panel had also recommended the abolition of short- term capital gains tax, but Chidambaram did not specifically talk about it at the press conference here today. Asked whether GAAR would override the tax treaty and apply on investments from Mauritius and Singapore, he said it would if an arrangement was found to be impermissible. Tax experts, however, say GAAR would not override the Mauritius treaty, going by Shome panel's recommendations, because of the validity of tax residency certificates. Shome panel had said where Circular 789 of 2000 with respect to Mauritius was applicable, GAAR provisions should not apply. Where GAAR and the Specific AntiAvoidance Rules ( SAAR) with Singapore are both in force, only one would apply to a given case. "Singapore is totally out because of SAAR provisions," said Dinesh Kanabar, Deputy CEO, KPMG. To apply on returns coming from April 1, 2016, on investments made after August 2010 AN IMPROVED GAAR PwC's Gautam Mehra and Anish Sanghvi explain the factors in the final set of rules that have made the difference MAIN PURPOSE: GAAR would be invoked only if the main purpose of an arrangement is to obtain tax benefit DEFERRAL: Gives businesses an opportunity to review their current investment and operating structures GRANDFATHERING: Relief to investors who made investments using the regulations prevailing before Aug 30, ' 10 GAAR- SAAR TOGETHER: Shome panel suggestion that GAAR should not be invoked where SAAR applies not followed TREATY PROTECTION: GAAR not to apply on FIIs not claiming treaty protection; no clarity on applicability on entities claiming it WHEN WOULD GAAR APPLY? If investment and transaction GAAR date is… date is… would… Before Aug 30, ' 10 Before Apr 1, ' 16 Not apply Before Aug 30, ' 10 After Apr 1, ' 16 Not apply After Aug 30, ' 10 Before Apr 1, ' 16 Not apply After Aug 30, ' 10 After Apr 1, ' 16 Apply After Apr 1, ' 16 After Apr 1, ' 16 Apply MARKETS CHEER Sensex ( intra- day) Rupee/ dollar (intra- day) Inverted scale Sensex soars to 2- year high, rupee rebounds The BSE Sensex jumped 1.23% to close at two- year high of 19,906.41. Tracking the rise in stocks, the rupee bounced back 27 paise to close at overoneweek high of 54.49 against the dollar. THE ANTI- AVOIDANCE RULE The final provisions in the GAAR proposal and key takeaways explained 6 > ECONOMY 6 > >All about the tax plug >Evolution of GAAR >Quote- Unquote THE SMART INVESTOR 1 > >Boost for participatory notes

I- T summons Nokia auditor PwC arm in tax evasion case

BS REPORTER Chennai, 14 January The income tax ( I- T) department, probing acharge of ₹ 2,500- 3,000 crore tax evasion by the Indian arm of Nokia, the Finlandbased telecom multinational, has summoned the companys audit firm, Price Waterhouse and Co. The latter issued a statement that, " The department has called us as they are seeking our inputs on this. We will extend full cooperation". A questionnaire sent to Price Waterhouse was not answered. The audit for Nokia was done by four officials of PWC from its Delhi branch and they signed the audit report. I- T department sources allege misrepresentation of facts in the report and has also seized emails, described as " key evidence". The audit firm and Nokia have both been summoned on Wednesday, said the official. KBaskaran, public relations officer for the chief commisioner of income tax here, had said, " It has been gathered that Nokia India has been making remittances to its Finnish parent, Nokia OYJ, as payments for software supplies since 2005. The above payments for software would attract TDS (tax deducted at source) as per the provisions of the I- T Act, 1961. But is the learnt that the assessee company has not made any TDS on the above software payments. In order to gather the relevant evidence on the issue, a survey has been organised." Adding: " Prima facie, there appears to be some defaults with respect to TDS deductions on royalty payments made to its parent company at Finland. It is also observed that the company has changed its accounting model and is in the process of re- organising the existing business to bypass certain direct and indirect tax liabilities." Nokia India had paid around $ 5 billion as royalty in the last six years and the TDS amounts works to $ 500 million, said an official, who didn't want to be named.

RBI introduces $-₹ swap

BS REPORTER Mumbai, 14 January To enhance flow of credit to the export sector, the Reserve Bank of India ( RBI) has introduced adollar- rupee swap facility to support incremental pre- shipment export credit in foreign currency ( PCFC) by banks, it said today. Banks will have the option to access rupee refinance to the extent of the swap with RBI under a special export credit refinance facility, said the release. The facility will be available to banks from January 21 till June 28, 2013, for a fixed tenor of three or six months. " During any particular month, the maximum amount of US dollars that banks would be eligible to avail of from RBI through swaps would be equal to the incremental PCFC disbursed with reference to a base date (November 30, 2012), subject to a limit," RBI said. The limits would be communicated to eligible individual banks separately. The limits would be reviewed periodically, based on actual utilisation and other relevant factors. The overall cap for the banking system works out to $6.5 billion, said RBI. "Under the swap arrangement, abank can buy US dollars up to its eligible swap limit from RBI and simultaneously sell the same amount of dollars forward as per the term of the swap, at the prevailing market rates for swaps of similar tenor," said RBI. At the end of the swap term, the bank will exchange with RBI, the dollars against the rupees, the release added. The facility will be operationalised by RBI's financial markets department here. Depending on the market conditions, the central bank would decide the number of banks that can avail of the facility, the maximum amount of swap that RBI would undertake with banks and the maximum quantum each bank can do on a particular day. Move to support incremental pre- shipment export credit in foreign currency by banks The facility will be looked after by RBI's financial markets department

 

Boost for P- notes PALAK SHAH Mumbai, 14 January The use of the controversial offshore derivative instruments known as participatory notes (P- notes) in Indias stock market is set to get a boost. This is after Finance Minister P Chidambaram today specified that P- notes will be excluded from the General AntiAvoidance Rules ( GAAR), the implementation of which itself was postponed by two years. GAAR, announced in Budget 2012- 13, was perceived as a draconian law. It gave the taxman the much- needed alibi to target P- note investors and had spread a " reign of terror" among foreign institutional investors ( FIIs). For many years, P- notes provided a perfect smokescreen to those who wanted to camouflage their identity. They were identified as an instrument to route black money and FIIs were worried the taxman would go behind them after GAAR was implemented. Legal experts say the finance minister's announcement that the tax authority will have to issue a show- cause notice to FIIs or companies before invoking GAAR provisions against them, has come as a major relief. "Many foreign brokers issuing Pnotes will increase their book size after the finance minister's green signal. Though, I would restrict myself from saying that the finance minister has opened the flood gates for flow of foreign money via P- notes," said Saurabh Mukherjea, head of institutional equities at Ambit Capital. Added Nishith Desai, founder of Mumbai- based Nishith Desai Associates: " P- note structures are not aimed at tax avoidance, but essentially seek to provide an alternative means for exposure to Indian markets. Certainty on non- application of GAAR will definitely make P- notes more to be to prove they were using a specific structure for commercial purposes and not to avoid tax. Taxmen could have questioned claims of companies and FIIs. This is not the case now, if a tax residency certificate was presented. However, there is also a counter view. " Exemption of P- notes from tax will only create trouble as their use will rise. When you give concessions to an instrument, it becomes a preferred vehicle and regulators have often tried to discourage the use of P- notes," said asenior Mumbai- based tax lawyer. P- notes came under the lens of taxmen and the Securities and Exchange Board of India ( Sebi) due to the difficulty faced in ascertaining the ultimate beneficiaries of these instruments. In 2007, it was discovered that 60 per cent of FII exposure to the Indian market was through P- notes after which former Sebi chairman M Damadoran banned these. P Chidambaram, the then finance minister, had advocated limiting the use of these instruments. According to former finance minister Yashwant Sinha, any tax concession for P- notes will increase its use by FIIs and, thereby, encourage roundtripping (transactions in assets meant to avoid tax). Sinha said he was not against the use of P- notes, but Sebi is yet to devise a mechanism to track the ultimate beneficiaries of these instruments and black money holders continue to operate from behind a smokescreen. In such a scenario, if P- notes are exempt from tax, its use will go up and the finance minister cannot take credit for introducing an unadulterated GAAR, Sinha, a Bharatiya Janata Party leader, told Business Standard. According to the latest data released by Sebi, the total value of Pnote investments in Indian markets (equity, debt and derivatives) rose to ₹ 1.77 lakh crore at end- November after falling to a near three- year low of ₹ 1.28 crore in May. The November figure has reached the highest level since February, when the cumulative value of such investments stood at ₹ 1.83 lakh crore. Short- selling through the use of P- notes was a major issue in the markets. Postponing GAAR and exclusion of P- notes from the preview of the law will result in increased use of this ' hot money' instrument Total value of Total FII assets PNs as % PNs (~ lakh cr) (~ lakh cr) FII assets   Lapses found in shareholding data of listed companies PRESS TRUST OF INDIA New Delhi, 14 January More than 500 cases have come under the scanner of the market authorities for discrepancies in shareholding patterns of listed companies, including those related to wrong disclosure of pledged shares and mismatch in total number of shares. Under their listing agreement with the stock exchanges, the listed companies are required to submit their shareholding patterns within 21 days of every quarter in a particular format and the same is disseminated on the website of the bourses for the benefit of investors. However, the stock exchanges have come across numerous cases where the companies have either submitted the data after the expiry of the deadline, or have not been submitted at all for months together. Besides, there have been discrepancies in the shareholding pattern data of the companies in hundreds of other cases, a senior exchange official said. According to the latest data compiled by the Bombay Stock Exchange ( BSE) at the beginning of January, as many as 516 cases of discrepancies were found, concerning the shareholding pattern of more than 450 companies. Besides, more than 900 companies were yet to submit their shareholding patterns for the quarter ended September 30, 2012, although the listed entities are required to submit the shareholding data for the next quarter, October- December 2012, by January 21 next week. Another 415 companies submitted their shareholding data for the July- September 2012 quarter after the expiry of the deadline for that period. BSE has more than 5,000 listed companies on its platform. BSE is asking the concerned companies about the non- submission or late submission of their shareholding data, while others are being asked to rectify the discrepancies and errors in their shareholding pattern data. In terms of discrepancies, a large number of non- compliant companies are found to have provided wrong annexures, or no annexures at all, in their shareholding filings, while there are also cases of mismatch in total number of shares. Besides, the number of demat (electronic) shares exceed the total number of shares for many companies, and there are also errors related to percentage calculation in disclosure of pledged shares. LITTLE BIG ERRORS |More than 500 cases under the scanner of the market authorities for discrepancies in shareholding patterns of listed companies |Under listing agreement, firms are required to submit shareholding patterns within 21 days of every quarter in a particular format; the same is disseminated on the website of the bourses for the benefit of investors |Bourses have come across cases where companies have either submitted the data after the deadline, or have not been submitted at all |More than 900 companies were yet to submit their shareholding patterns for the quarter ended September 30, 2012 |BSE has asked the concerned companies about the nonsubmission or late submission of their data, while others are being asked to rectify errors in pattern data |Large number of non- compliant companies have provided wrong annexures, or no annexures at all, in their shareholding filings, while there are also cases of mismatch in total number of shares GAAR: All about the tax plug depreciation CLARITY ON GAAR The major recommendations of the expert committee on the General Anti- Avoidance Rules ( GAAR) have been accepted, with some modifications, and the following decisions taken by the government: EVOLUTION OF GAAR Finance Act/ Draft CBDT norms (March/ June 2012) [1]GAAR to come from April 1, 2014 [1]To be invoked if tax benefit is one of the main purposes [1]All three members in approving panel to be from the government [1]Panel's directions to be binding on income tax authorities [1]A limited tax treaty override to be provided in the Act [1]GAAR provisions to apply even if the tax benefit is in lakhs [1]No provision for grandfathering of investments Final report of Shome panel (September 2012) [1]Defer GAAR by three years [1]GAAR to be applied when tax benefit is the main purpose [1]Five- member panel to have two from outside the government [1]Panel's directions to be binding on income tax authorities [1]GAAR not to override a treaty which has " limitation of benefit" [1]GAAR won't be invoked if tax benefit is less than ₹ 3 crore [1]Investments before GAAR commencement date exempted Decision of Finance Ministry (January 2013) [1]GAAR deferred by two years [1]GAAR to be applied when tax benefit is the main purpose [1]To have a judge as chairman, a tax officer, and an academician [1]Directions to be binding on tax department as well as the assessee [1]To override treaty if purpose of an arrangement is to avoid taxes [1]GAAR won't be invoked if tax benefit is less than ₹ 3 crore [1]GAAR won't apply to investments before Aug 30, 2010 [1]An arrangement, the main purpose of which is to obtain a tax benefit, would be considered an impermissible avoidance arrangement. The current provision prescribing that it should be " the main purpose or one of the main purposes" will be amended accordingly [1]The assessing officer will be required to issue a show cause notice, containing reasons, to the assessee before invoking the provisions of Chapter X- A [1]The assessee shall have an opportunity to prove that the arrangement is not an impermissible avoidance arrangement [1]The two definitions in the current provisions, "associated person" and " connected person", will be combined and there will be only one inclusive provision defining a "connected person" [1]The approving panel shall consist of a chairperson who is or has been a Judge of ahigh court; one member of the Indian Revenue Service not below the rank of chief commissioner of income- tax; and one member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices. The current provision that the approving panel shall consist of not less than three members being incometax authorities or officers of the Indian Legal Service will be substituted [1]The approving panel may have regard to the period or time for which the arrangement had existed; the fact of payment of taxes by the assessee; and the fact that an exit route was provided by the arrangement. Such factors may be relevant but not sufficient to determine whether the arrangement is an impermissible avoidance arrangement [1]The directions issued by the approving panel shall be binding on the assessee, as well as the income- tax authorities. The current provision that it shall be binding only on the income tax authorities will be modified accordingly [1]A monetary threshold of ₹ 3 crore of tax benefit in the arrangement will be provided in order to attract the provisions The implementation of General Anti- Avoidance Rules ( GAAR) should be deferred by three years to April 2017, the Parthasarathi Shome committee had suggested The anxiously awaited government response to the Shome committee has finally emerged. Key points are the deferral of GAAR till the financial year ending March 31, 2016 and, in that sense, is a breather to tax payers, including international investors KETAN DALAL, joint tax leader, PwC India Acceptance of the Shome committee report on GAAR by the government is certainly welcome step. Industry and global investors were waiting for acceptance of the report, as it was fair and had considered the views of cross- sections of industry and professionals KR SEKAR, partner, Deloitte Haskins & Sells The announcements are welcome. The very fact that GAAR has been deferred by two years means all foreign investments will get a breather till 2016. Income after April 1, 2016, will be taxed if the investment was made after August 30, 2010 DINESH KANABAR, deputy CEO, KPMG Deferring GAAR is a very positive step and should contribute to improving the investor sentiment and business confidence. This will go a long way in reducing uncertainty and give time to all stakeholders to more fully debate, better understand and appreciate the way forward before implementation PRANAV SAYTA, tax partner, Ernst & Young QUOTE- UNQUOTE Main purpose The GAAR provisions were originally drafted to be invoked where the main purpose or " one of the main purpose" was to obtain a tax benefit. This would have impacted all transactions, which would result in reduction of tax, even when the transaction was otherwise justifiable from a commercial standpoint. The statement confirms acceptance of the committee's recommendation and provides that GAAR should be invoked only if the main purpose of an arrangement is to obtain a tax benefit Deferral of GAAR provisions to April 1, 2015 The acceptance of deferral of GAAR provisions for two years as against three years as recommended by the Committee is a relief to assessees. It provides businesses and investors an opportunity to review their investment and operating structures and reflect on the commercial rationale of their structures, wherever necessary Grandfathering of investments The finance minister has indicated that investment structures prevailing prior to August 30, 2010 ( when the Direct Taxes Code Bill, 2010, which first envisaged introduction of GAAR provisions, was released) would be grandfathered. The grandfathering should at least provide relief to investors who made investments using the then prevailing regulations. This provision, though, is not as liberal as the recommendation of the committee, which recommended grandfathering till the actual implementation of GAAR provisions GAAR and SAAR co- existence The statement provides that where GAAR and SAAR provisions co- exist, only one of these would be applied — it does not follow the panel recommendations, which said where SAAR provisions were applicable to a particular aspect or element, GAAR should not be invoked Treaty protection The statement is silent on the applicability of GAAR provisions to entities that claim tax treaty relief. It, however, states that GAAR provisions will not apply to those FIIs which do not claim treaty protection. The committee specifically recommended that GAAR not be invoked on Mauritius entities which have tax residency certificates THE ANTI- AVOIDANCE RULE As the financial markets cheered the finance minister's decision to water down the GAAR norms, PwC executive director Gautam Mehra and associate director Anish Sanghvi explain the factors in the final set of rules thatmade the difference

 

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CS A  RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
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