The wait gets longer

Written by Girish Vanvari | Updated: Mar 4 2014, 10:56am hrs
In vote-on-account last month, in keeping with form, the

Finance Minister refrained from introducing any changes on the direct tax front, disappointing foreign investors waiting for clarity on numerous issues, including those pertaining to capital gains tax. However, investors expectations were not unjustified, considering the top brass of the Opposition have been making noises about the abolition of income, excise and sales taxes.

Foreign investors have been waiting for clarity and possible relaxation on taxability in case of indirect transfer of Indian

assets. Supreme Court, in the case of Vodafone International Holdings B.V., ruled that indirect transfer of Indian assets upon transfer of shares of foreign companies should not trigger any capital gains tax in India. The government, however, amended the tax laws with retrospective effect, thereby nullifying the Supreme Court ruling.

With the primary objective of restoring investor-confidence and allaying concerns over ambiguities, the Prime Minister set up a committee to look into the unjust and harshly-amended provisions relating to indirect transfer of Indian assets. The committee submitted its report in October 2012 but the uncertainty around provisions relating to indirect transfer continues to prevail. In an environment where acquisition of businesses is the next big thing, prolonging uncertainty in tax laws relating to mergers and acquisition is damaging India's prospects.

While foreign investors are grappling with issues around indirect transfer, including the mechanism to compute capital gains, cost of acquisition, etc, there is also continuing uncertainty on the applicable rate of long-term capital gains for certain classes of foreign investors. The Finance Minister, in the Budget 2012, intended to bring the tax rate applicable to non-resident investors, including private equity investors on a par with the rate applicable to Foreign Institutional Investors. However, the language of the provision which brought in the amendment posed several issues of interpretation, compounding the uncertainty. Specifically, the uncertainty revolved around whether the applicability of reduced rate of tax would only be for unlisted public companies or for private limited companies as well. No clarity has been provided yet by the Ministry of Finance despite several representations being made by various industry bodies. This uncertainty cropped up even before the dust of the applicability of long-term capital gains tax rate on sale of listed securities by non-resident investors had settled.

The uncertainties spooked the foreign investors further when the I-T department issued a notice to Shell India wherein the department sought to tax FDI. In the case of Shell India, I-T authorities issued a transfer pricing order alleging the issue of shares to the parent company at less-than the Discounted Cash Flow (DCF) pricethis means that Shell India implicitly gave a loan to the parent company on which it ought to have charged interest. This issue is not restricted to Shell alone. Similar notices have also been issued to Vodafone and some other MNCs as well.

The problems do not end here. Foreign investors grapple with availing of the Double Taxation Treaty (DTT) provisions. Indian tax authorities have been challenging the legal status and substance of holding companies incorporated in various tax jurisdictions such as Mauritius, Cyprus, etc. This is despite the non-applicability of GAAR and a favourable Supreme Court ruling.

Considering that the Finance Minister has been conducting road-shows globally in order to assure foreign investors about investing in India, it was not unreasonable for the foreign investors to expect clarity on lingering tax issues. The investors have already waited patiently for nearly two years hoping for issues to get sorted. We believe they would not mind waiting for four more months when the new government presents its full Budget.

Co-authored by Hiren Bhatt, director-Tax, KPMG in India

The author is co-head of tax, KPMG in India.

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