Friday, April 27, 2012
Dear Readers, Newspapers are filled with analysis of how draconian the Finance Bill really is and the fears of investors in India. Zenobia Aunty agrees. For the online version of Law Street in The Economic Times, click here, else please scroll below. Owing to certain circumstances, Zenobia Aunty will be taking a break and is unlikely to publish her monthly column in May. But she will be back, soon after the Finance Bill is enacted with her views. So stay tuned. Best regards, Lubna
A stretch too far
• Knowing the source of income of your shareholder is difficult
• Terms in tax treaties can be defined by Indian tax authorities
• Tax withholding provisions have been widened
Zenobia Aunty is proceeding on a short sabbatical to an undisclosed address. The tedious, convoluted provisions of the Finance Bill are making her head spin. While the retrospective amendments relating to indirect transfer of a capital asset (where one can immediately relate to the long drawn out Vodafone battle) have been much spoken about, this isn’t the only provision that is causing strife to taxpayers.
Certain things have been stretched too far. Let us take a few illustrations.
(i) Stretching the ‘know your shareholder’ rules too far: Not only do closely held companies have to know their shareholder, but they also have to know the source of funds of such shareholder. If the closely held company fails to discharge this additional onus, the sum contributed as share capital will be treated as income of the company (and of course taxed!). This proposed amendment comes into force from April 1, 2013 (It is applicable to the FY 2013-14) onwards. By doing so, the Finance Bill has overturned several court decisions including the one of the Supreme Court (SC) in the case of Stellar Investments Limited. Here, it was held that if the shareholders are not genuine, the amount received as share capital cannot be taxed in the hands of the company.
(ii) Tax to be withheld on import of computer software as the payments will be characterised as royalty: This amendment is effective retrospectively from June 1, 1976. Why this date? Because, as Soli Uncle the tax guru, explained, the provisions relating to Royalty were introduced in this year in the Indian Income-tax Act. “Else perhaps this provision also would have been introduced with retrospective effect from April 1, 1962 when the current draft of Indian Income tax Act, first came into being”, adds Zenobia Aunty, wryly. Several courts had said the right to use software is akin to reading a book, it is the use of a copyrighted article instead of a copyright and cannot be treated as royalty. It may be possible to argue that exporters from treaty countries could take protection under the narrow definition under the tax treaty to argue that it is not royalty and is not subject to tax in India. However, it is likely that the Indian importer may want to withhold tax at source to avoid litigation and avoid any disallowance or penalties in its hand. The end result – the exporter will suffer, as its home country is unlikely to give a tax credit for tax wrongly deducted in India. It is true, that our country is growing and is a major market, but do we want to arm-twist those wanting to do business with us?
(iii): Tax treaty? We define it: Through a notification a term in the tax treaty can be defined (provided the definition is not contained in the tax treaty), this interpretation would date back to the date the tax treaty entered into force. India has entered into tax treaties with as many as 80 countries. One can only wonder about what can be unleashed on residents of such treaty countries, through issue of deadly notifications.
The requirement of obtaining a Tax Residency Certificate (TRC) for claiming tax treaty benefits has been much spoken about. Everyone is rightfully upset. Not all countries issue such a certificate. For instance: Indian tax laws itself do not contain any provision empowering its tax authorities to issue a TRC. Yet, obtaining a TRC containing the prescribed details, by a person doing business with India, is now mandatory. Further the TRC, even if obtained, will not act as sufficient proof and inquiries can be made to determine tax residency of the other country. The SC in the case of Azadi Bachao had upheld circular 786, issued by The Central Board of Direct Taxes (CBDT) which provided that: Obtaining a Mauritius tax residency certificate was sufficient proof to avail the benefits under the India-Mauritius tax treaty. The only saving grace is that this non-practical provision is not retrospective.
There are yet other provisions that require a class of persons or cases (to be notified by the CBDT) to apply to the tax officer to determine the proportion of sum chargeable to tax in India. It was a set rule that there is no obligation to deduct tax at source when making payment to a non-resident if such sum is not chargeable to tax in India. It sure looks like anything and everything will be chargeable to tax in India.
Both Zenobia Aunty and her niece, this columnist, are seriously considering a change of career, to a less taxing one. We are seriously contemplating learning how to cultivate mushrooms, herbs and strawberries. After all agricultural income will never be taxed in India.
Source of the photograph: http://www.flickr.com/photos/64818595@N02/5902541250/ (Creative Commons License)
Posted by Lubna at 9:58 AM