The retrospective taxation of indirect transfers has spooked the investors. The FM needs to offer assurance that his government will not resort to retrospective change in law. Much as one would like, the FM may not be able to withdraw the amendment in law which brought to tax indirect transfers of foreign companies that derive substantial value from Indian assets from 1961. However, administrative instructions not to purse tax demand arising out of retrospective taxation can help. Clarity on threshold for substantial, computation mechanism, etc, should be there to provide investors with tax certainty on sale of their investments in India.
Tax controversies are at an all-time high. The practice of finding innovative avenues for creating new transfer-pricing disputes needs to be checked. In many ways, India is at a cusp. It can either continue its stand-off behaviour on collecting over-the-top mark-ups on Indian captive service providers, thereby driving them out, or it can come forward with an intention to resolve disputes and engage in bilateral dialogue with foreign competent authorities to end the disputes. There is a sense of uncertainty over taxation globally, on account of action plans on base erosion and profit shifting (BEPS) under consideration at OECD and G20. India should react responsibly by watching how the tax environment evolves. The TARC recommendations to reduce tax disputes through reconciliatory mindset and robust alternative dispute resolution mechanisms should be adopted.
Deferment of GAAR
To provide greater certainty to foreign investors, Budget 2014 should defer GAAR for a period of three years. Taking a cue from the UK, the provisions should be triggered in anti-abuse cases rather than anti-avoidance cases. Shome Committee recommendations on respecting limitation of benefit provisions of tax treaties, not applying GAAR where specific anti-avoidance rules exist, etc, should be adopted.
Budget 2012 had introduced a concessional capital gains tax rate on sale of unlisted securities by non-resident investors. But the ambiguous wordings of the amendment have resulted in confusion whether such concessional tax rate is applicable to securities of private companies. Budget 2014 should clear such unintended anomaly. Removing all capital gains tax on listed securities would be a step in the right direction.
The reduction of tax rate on interest on certain foreign currency borrowings and infrastructure bonds was laudable. Considering the funding needs of the infrastructure sector, Budget 2014 should extend the concessional tax rate to all debt from non-resident investors. The sunset clause should be extended to 2020 considering the long-term funding needs of Indian businesses.
Thrust to SEZs
There has been a policy flip-flop on the role of SEZs in growing the Indian economy which is mirrored in the tax policies. Since the governments focus is on incentivising the manufacturing sector, Budget 2014 should exempt SEZ developers and units from MAT and DDT liability (as was the case earlier).
Tax concessions for LLPs
For private investments, structures such as LLPs are more attractive and tax efficient as there is no second-tier of tax on dividends. The exemption offered on conversion has a very low threshold for turnover and will lead to a lot of litigation. There should be a one-time exemption offered to all existing private firms if they would like to convert into LLPs.
The need for India to be recognised as an investor-friendly and investment-worthy destination is acute. The global investor community will be keenly watching if the FM will do the course correction and lay down the foundation for a stable and investor-friendly tax environment.
(With inputs from Pratikshit Vijay Misra)
The author is partner, BMR & Associates LLP. Views are personal