Union Budget 2013 was expected to contain significant announcements to steer the economy back on a high growth path without hurting the common man and to restore investors? confidence in doing business in India.
While the finance minister in his Budget speech highlighted that foreign investment is a necessity and underscored ?clarity in tax laws and a stable tax regime? as the underlying theme, there seems to be little to support this. On the contrary, a new provision has been introduced providing that a tax residency certificate shall be necessary ?but not a sufficient condition? for claiming treaty benefits. Surely this subjectivity can?t be good for foreign direct investment? Hopefully, on the FDI front, something more alluring will emerge in the FDI policy due to be announced in April.
The expectation that the government will address the highly criticised retrospective amendments relating to indirect transfers has not been met. The Shome committee had recommended that taxation of indirect transfers should ideally be prospective and not retrospective. If retrospective, they should affect only the recipient of income and not the payer. The committee has also recommended waiver of interest and penalty. Having not dealt with this issue, the message appears to be that the government has left this controversy for the judiciary to deal with.
Similarly, while introducing the General Anti-Avoidance Rules effective 2015-2016, the change in burden of proof recommended by the Shome committee has not been accepted, nor is there any clarity on whether exit of investments made prior to the date of introduction of GAAR but continuing to exist after GAAR will be governed by GAAR or by the law as it stood prior to GAAR.
While the reintroduction of investment allowance will be welcomed by the manufacturing sector, the increase in domestic law withholding rate on royalties/fees for technical services from 10% to 25% may hit both manufacturing and the services sector, particularly where the payee is not eligible for treaty benefits and the agreements are tax-protected. Where the agreements are not tax-protected, this may adversely impact such non-resident provider of technology and services.
Share buy-back by unlisted companies, permitted under the Companies Act, has been considered ?tax-avoidance? and taxed in the hands of the company undertaking the buy-back at 20% of the difference between the amount paid by the company on share buy-back and the amount received by the company from the shareholder against issue of shares. Further, since this tax is levied on the company (such income is exempt in the hands of the shareholder), credit for this tax may not be available to the non-resident shareholder.
Transfer pricing was expected to get the government?s urgent attention. However, the adverse implications of an important ruling by the special bench of the Income Tax Appellate Tribunal on the issue of allowability of brand promotion expenses incurred by the Indian company on brands licensed by foreign owners remain unaddressed as does the issue of several high-pitched transfer pricing adjustments involving issuance of shares by Indian companies to their foreign parents.
One can?t expect many smiling taxpayers. Certainly not the shocking low number (42,800) of taxpayers who declare an annual income in excess of R1 crore and have now been slapped with a 10% surcharge, and must be wondering whether the same Income Tax Act applies to everyone in India.