Wednesday, January 25, 2012

The Vodafone verdict - Supreme Court judgement & DTC Provisions

The Supreme Court Judgement in the Vodafone case will have a short life as Direct Tax Code has specific provisions to tax such income.  Delay in implementing Direct Tax code may prompt the Government to amend the Income Tax Act, 1961 as early as during this year budget itself.  This article discusses the Vodafone judgement "as it is" and also tries to understand the provision under DTC.

The much talked about Vodafone verdict has been delivered and the trade heaved a sigh of relief on receipt of a favourable decision.  The sections under question where Section 9(1)(i), Section 195 & Section 163 of the Indian Income Tax Act, 1961.  The following are the main areas of dispute
  1. Whether a share transfer involving two off shore entities one of which is registered in a tax haven called "Cayman Islands' is subject to Capital Gains tax in India since the underlying company whose shares are being transferred has assets / business / generates income in India
  2. Whether the non-resident being the purchaser of shares liable under section 195 to deduct Capital Gains tax on such transfer as a representative assessee of the seller
Vodafone International Holdings BV (VIH) incorporated in the Netherlands bought shares from Hutchison Telecommunications International Limited (HTIL) registered in Cayman Islands.  The Shares transacted where of Hutchisson Essar Limited which is registered in India and carrying on business in India.

The contention of the tax department in simple words are :

Though the transaction between VIH & HTIL has been transacted overseas but the underlying assets / business of the subject matter company is in India therefore the provisions of section 9(1)(i) are being invoked and the transaction is liable to Capital Gain tax in India.  Further as per section 195 tax is deductable on payment of consideration by VIH as a Representative Assessee as defined under section 163.

Arguments of VIH in simple words are :

The transfer of shares are between two off shore entities beyond the jurisdiction of Indian tax laws, and hence the share transfer cannot be taxed under deeming provisions of section 9(1)(i) and section 195 cannot be invoked against VIH.

The Key observations of Supreme Court are :
  1. Principle of "Look At" and not "Look Through" upheld.  Section 9 has a deeming provision for taxation of income.  Section 9 is not a "Look Through" provision but a "Look At" provision
  2. There is no transfer of Capital assets transfer which is situated in India
  3. Only if the transaction is a sham could tax authorities invoke the "Substance over form" principle or "Piercing the Corporate Veil" test
  4. Section 9(1)(i) being a deeming provision can be invoked only in case of - Transfer; existence of a capital asset & situation of such asset in India.  The subject matter in this instance case is "Indirect Transfer" which cannot be deemed as income under section 9(1)(i) as there is no "Direct Transfer"
The Supreme Court further states that Tax Planning is not illegal provided the transaction in not a sham or coloured transaction.  In this instance case the companies incorported in Cayman Islands are there in existence since the last 14 years and cannot be said to be incorporated for the purposes of avoidance of capital gains tax in India. 

The Supreme Court was of the view that since this is not a Sham transaction and the transactions are between two off shore entities there is no jurisdiction for Indian Tax Laws

The was forward - DTC or No DTC

The way forward will be definitely not as per the Supreme Court ruling.  First the Government will come out with an amendment to the Income Tax Act, 1961 (may be even retrospective) to plug this gap as early as this budget. 

The Direct Tax Code 2010 (DTC) - Section 5(4)(g) on Income deemed to accrue in India, has the following provision :

"income from transfer , outside India, of any share  or interest in a foreign company unless at any time in twelve months preceeding the transfer , the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent of the fair market value of all assets owned by the company"

Clearly the way forward is to tax the Vodafone kind of transactions, and the language of the law is quite clear. 

Summary

In this case Supreme court interpreted the law "as it stands" which is welcome as it brings in consistency in interpreting the law and the trade is quite clear on do's and don'ts under the laws of the land.  Taxation of all business income should be possible and this should not be taken away by poor drafting of tax laws and tax havens.  Government should act swiftly to plug these holes and ensure that revenue is protected.  Caution should be taken in drafting tax laws which should contain clear provisions and not subject to interpretation and consequent litigations.  Clear provisions will enable corporates to be clear on their tax liabilities and plan their strategies around it.


Thursday, January 19, 2012

Time of Payment of TDS

Question

Our company had deducted TDS on 31/03/2008 and deposited the same on 31/05/2008.The income tax department issued a demand notice for interest on delayed payment. Is our company  liable to deposit the interest? Sir, guide me on this matter

Answer

As per Rule 30(1)(b)(i)(1) of Income Tax Rules, 1962 TDS can be paid to Government account within 2 months of the expiration of the month in which the credit has been made provided in that month the accounts of the company is being made. (ie) if your accounts are finalised as on 31.3.2008 then you can remit TDS within 2 months from date of such closure which is 31.5.2008. So your payment seems to be in order.

This rule has been amended since 1.4.2010 and Rule 30(2)(a) states that payment has to be made to Government on or before 30th day of April where the income or amount is credited or paid in the month of March.

Wednesday, January 11, 2012

100% FDI in Single Brand Retail

Department of Industrial Policy & Promotion (DIPP) has issued Press Note No.1 (2012 Series) dated 10.1.2012 through which it allows 100% FDI to be invested in Single Brand Retail.  International companies are now free to invest upto 100% in Single Brand Retail.  The following are the main conditions laid down for this 100% FDI investment
  1. Products sold should be of Single Brand only
  2. Products should be sold under the same brand internationally
  3. The products should be branded during manufacture
  4. The foreign investor should be the owner of the brand (not a person paying Royalty for the same)
  5. If investment is more than 51% then 30% of the product sourcing should be done only through Indian Small / Cottage industries whose investment does not exceed USD 1 million in Plant & Machinery
Though the conditions stipulated above are quite stringent, there is always scope once the scheme is kicked in there will be further relaxation. 

Currently in Single Brand Retail sector there is not much investment due to the 51% cap, in fact as per statistics provided by Economic Times in its 11 Jan edition in the last three and half years only Rs.196 crores were brought in as FDI in Single Brand Retail, which surely does not talk about success of this scheme.  I also doubt by bringing in the above 5 conditions to run along with 100% FDI in Single Brand Retail there will be substantial flow of FDI.  It will be sometime before both the Government and FDI's get their act together and give this sector a much needed boost

Monday, January 9, 2012

HRA in Tax - Rent Receipts

"Tax Season" for employees have commenced and all of us will be busy calculating our tax liabilities and providing exemption certificates to our employers.  All of you will be aware that for claiming exemption under HRA if we are living in a rented accomodation we have to produce rent receipt from the landlord.  The following are the provisions notified by CBDT vide their Circular No.05/2011 dated 16.08.2011.
  1. No requirement to produce rent receipt if rent paid per month is less than Rs.3,000 - but if in case of assessment by the income tax officer, the income tax officer may direct to produce such receipt so it is advisable to get the rent receipt
  2. All rent receipts exceeding Rs.15,000 per month or Rs.1,80,000 per annum should contain the PAN number of the landlord.  If the landlord does not have a PAN then the employee should give a declaration that the landlord does not have a PAN and provide in the declaration the details of landlord like his name & address

Sunday, January 8, 2012

Centralised Processing of Returns Scheme, 2011

CBDT has notified Centralised Processing of Returns Scheme, 2011 vide Notification No.2/2012 [F.No.142/27/2011-SO(TPL)] dated 4.1.2012.

This schemes details out the entire process of e-filing of income tax returns, acknowledgement of such return & processing of returns in the Centralised Processing Centers.  The scheme also provides procedure for rectification of mistakes on the returns and also provides for issuance of Order Under Section 154 of Income Act, 1961. 

This scheme will provide full clarification to all procedural aspects in relation to e-filing of Income Tax Returns.

Point of Taxation & GTA

Query

At present, we are paying Service tax on GTA on payment basis (i.e.when we are paying the amount to the transporters on due date).  During the audit of Central excise team, they informed us to pay the service tax of GTA on Bills booking basis (i.e. when I will book my bills irrespective of payment made).  Now, I am in confusion, which one is right either payment basis or bills booking basis.

Answer

Rule 7(b) of Point of Taxation, Rules 2011 (as amended vide notification number 25/2011 dated 31.3.2011) states the following


"(b) the persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994;

shall be the date on which payment is received or made, as the case maybe

Provided further that in case of services referred to in clause (b) where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist :"
In short, it means that service tax has to be paid "on payment basis" of GTA bills if payment is made within 6 months from the date of the invoice. If payment is not made within 6 months from the date of invoice then service tax would become payable as if Rule 7(b) does not exist (ie) service tax payment has to be made based on the date of invoice.