[aaykarbhavan] Business standard news updates 29-6-2013

Parliament panel might propose optional GST for states

GYAN VERMA & VRISHTI BENIWAL New Delhi, 28 June Parliament's standing committee on finance might propose making it optional for states to introduce the Goods and Services Tax ( GST). The panel, which met today to consider its draft report on the Constitution (115th Amendment) Bill on the GST, feels states should be given enough fiscal space if the success of Value Added Tax ( VAT) is to be replicated. In its Bhubaneswar meeting in January, the Empowered Committee of State Finance Ministers suggested states get the option to stay out of GST at the time of its rollout or quit later if needed. The argument given by then EC Chairman Sushil Modi ( he was finance minister of Bihar) was that once GST was rolled out, states would not find it sensible to stay out of it and quitting later won't be easy either. VAT was also optional for states at the time of its introduction but gradually all states adopted it. However, Finance Minister P Chidambaram turned down the proposal, as keeping some states out of GST would break the chain when goods were moved from anon- GST state to a GST state and vice versa. The standing committee, headed by the Bharatiya Janata Party's Yashwant Sinha ( he's also a former union finance minister), feels Centre and states should arrive at a broad consensus on key issues regarding GST implementation before enactment of the Constitution Amendment Bill. It is surprised that there has been no finality in the views of the Union finance ministry itself on key areas of GST. To address concerns of the states on revenue loss, the panel might recommend an automatic compensation mechanism, wherein a fund is created under the proposed GST Council. It also wants a study to evaluate the impact of GST on the revenue of states. It could suggest a floor rate with a narrow band, decision by voting and not consensus in the GST Council, omitting the provision on setting up a Dispute Settlement Authority, subsuming entry tax in GST and giving powers to states to levy tax in the event of a natural calamity, among other things. The report of the standing committee could be adopted in its next meeting and the finance ministry, after incorporating the panel's views, would approach the cabinet to present the Bill in Parliament with the changes. CONTINUING GST RIDDLE AND A NEW TURN Former EC Chairman Sushil Modi ( left) argued that once GST was rolled out, states would not find it sensible to stay out of it and quitting later won't be easy either. However, Finance Minister PChidambaram turned down the proposal

 

Government notifies rules for blacklisting tax havens VRISHTI BENIWAL New Delhi, 28 June The central government on Friday notified amendments to the Income Tax Rules, allowing it to blacklist countries that don't cooperate in sharing information about suspected tax evaders. Indian residents will find it tough to do business with these countries, as they stand to lose the tax benefits provided otherwise. According to the new rules, an assessee will need to submit an ' authorisation' to claim deduction in respect of apayment made to any financial institution located in a jurisdiction notified as noncooperating. Therefore, people who have stashed their money in these countries might find it difficult to conceal it anymore. Form 10FC has been prescribed for submitting the authorisation for waiving all protections provided under any law and allowing the tax department to obtain the information and records of the foreignaccounts. These include documents identifying the account holder, the beneficial owner, authorised persons, account opening documents, correspondence between the bank and the customer/ beneficial owner or third parties in relation to the account, account statements, and statements of assets. Such assessees will also have to maintain some additional documents such as description of the person they are dealing with in the blacklisted jurisdiction, including their name, address, location; aprofile of the multinational group of which the specified person is a part, and a broad description of the business of the person and the industry he operates in. "The information and documents will have to be kept and maintained for eight years from the end of the relevant assessment year," said the Central Board of Direct Taxes in the notification. According to officials, Switzerland, United Arab Emirates ( UAE), Hong Kong, Singapore, Samoa, and Seychelles are some of the countries India has requested for information but they haven't done so effectively. While the government might consider blacklisting a small country to send a signal, it would be difficult to take any action against important trading partners, such as the UAE, as it could spoil India's relationship with them. In Budget 2011- 12, the finance ministry inserted Section 94A in the Income Tax Act to notify countries not cooperating in exchange of information. While the provision came into effect from June 2011, the government did not notify the rules as it wanted to use the provision as a threat . Recently, India approached about half a dozen foreign jurisdictions, including Singapore, Samoa, British Virgin Islands, Cayman Islands and Cook Islands, for banking and other financial details of about 500 individuals and entities that might have ' secret offshore accounts' there. The names and listed addresses of 505 India- linked entities were made public after a global expose on secret offshore accounts by a US- based rights group, the International Consortium of Investigative Journalists. Indians transacting with such countries will have to share details with tax dept Defining control of Indian firms: Are we there yet? The Reserve Bank of India ( RBI) is soon expected to notify the Foreign Exchange Management Act, or Fema rules on the definition of " owned or controlled". The nod from the Cabinet Committee on Economic Affairs is awaited. However, assessing control is a complex and contentious issue in countries across the world. In fact, it has been the subject of many court cases on matters of foreign ownership, taxation, transfer of shares and residency status. The issue in India has come up because no longer can mere foreign shareholding of a company be used to determine the extent and control of an Indian company. Control has two aspects: de facto control and de jure control. Merely using a shareholding threshold of 25 per cent or 50 per cent foreign ownership to define an Indian company as a foreign- controlled company is looking at it purely from ade jure control perspective — a narrow legal view that doesn't take into account the other aspects and rights accorded to shareholders. On the contrary, de facto control looks at whether the foreign owner has any direct or indirect influence on strategic decisions taken at the shareholder or the board level, and in the operating day- to- day management. For a proper determination of control, one needs to go beyond the form and look at substance, which translates to recognising de facto control, and not merely restricting the evaluation to de jure control. The concept of de facto control is not just about influencing the composition of the board of directors, but also influencing other powers of the board and management. Positive and negative consents, veto rights, contingent control, put and call options, among others are all examples of control features incorporated into the shareholders' agreement that goes beyond the current shareholding. The RBI has taken a step in the right direction to raise the issue of de facto control and notify it in the foreign direct investment policies. Other regulations – the Companies Bill, 2012 and the Securities and Exchange Board of India ( Sebi) takeover code – seem to recognise the de facto control aspect. The Companies Bill, 2012, pending in Parliament, says: "' Control' shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders' agreements or voting agreements or in any other manner". The Sebi takeover code paraphrases the same definition of control as that of the Companies Bill. Many countries such as the US, Canada and Australia recognise the de facto control feature. In legislation where national security or public interest is involved, de facto control is considered. Increasingly, court rulings are looking into de facto control. In India, as sectors such as retail, aviation, defence and nuclear power are opened up to foreign ownership, it is de facto control that needs to be considered. For one recent transaction in focus, the Jet- Etihad arrangement, if we use the de facto control test, it is likely that Jet Airways will be treated as an Etihadcontrolled entity. De facto control is visible in the following rights ceded: 1. Appointing three nominee/ investor directors in the current board with strength of seven; 2. Appointing one of its nominee directors as vice- chairman of the board; 3. Having the authority to appoint one of the joint auditors; 4. Having the authority to have at least one of its nominee directors in each of the board committees; 5. Having unrestricted access to Jet Airways' books, registers, records, premises, offices, officers, employees, accountants and consultants; 6. One of the amendments under the heading " investors board member" proposes: " The investor board member shall not be liable for any default or failure of the company in complying with the provisions of any applicable laws. The investor board members shall not be identified as an ' officer in default' of the company or occupiers of any premises used by the company under laws." The Jet board also proposed modifying the Articles of Association (AoA) of Jet Airways with amendments that provide Etihad Airways superior rights over and above other public shareholders. In looking at control, an additional distinction needs to be made for control of unlisted companies and listed entities. In listed entities, a shareholders' agreement between the promoters and the other shareholder ( Etihad in the case above), discriminates against other public shareholders and gives them inferior rights. Though some of the provisions of the shareholders' agreement may be incorporated in the AoA of the company, and subject to approval by shareholders, it is unfair to the minority investors if there is no open offer made to them owing to any change of control. Investors must have the right to know whether there is a de facto control change. In the absence of an open offer, at the very least, the shareholders' agreement should be a treated as a public document and be provided to the investors for scrutiny in addition to the AoA being approved by majority of the minority shareholders, with the signatories to the shareholders' agreement abstaining. Globally, the interpretation of de facto control itself is evolving. In India, there needs to be uniform application of de facto control definition and all the regulators should agree on and use a common interpretation. This necessarily means de facto control being defined on a case- by- case basis, and that may be the reason the Foreign Investment Promotion Board is right in seeking additional details in the Jet- Etihad arrangement. At the end, the true test of control is whether majority shareholders of the Indian company have strategic and operational freedom to take decisions independent of the foreign shareholder. The author is Founder and Managing Director of InGovern Research Services, India's first proxy advisory and corporate governance research firm SHRIRAM SUBRAMANIAN There is a need of uniform application of the concept of de facto control in India In India, as sectors such as retail, aviation, defence and nuclear power are opened up to foreign ownership, it is de facto control that needs to be considered ILLUSTRATION: AJAY MOHANTY

 

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