Creating businesses with an ‘edge’ | Taxes

In our lifetimes, we see a constant urge in Businesses to remain dynamic, relevant, efficient and profitable. Thy very purpose and pursuit is towards creating a ‘differentiation’ or an ‘edge’ over the rest. And obviously we all tend to believe that it lays in effective management, a classic organizational structure, great leadership, efficient processes, project execution capabilities etc, which it is surely; however, one must also look closely at a vital factor viz. ‘taxes’.

World over, ‘taxes’ are a commonest phenomenon prevalent almost everywhere and it create a significant impact for any business. The system(s), methodology and dynamics of ‘taxes’ changes over different place(s) and with different time(s), but it is a rock solid constant for ages. Globally, ‘taxes’ impacts business in following ways:

(a)  it involves a ‘cost’ – there are ‘direct taxes’ in form of Income / Corporate taxes or wealth taxes where the tax incidence is directly on the payer; or ‘indirect taxes’ like VAT / GST wherein a Business recovers tax from clients

(b)  it involves ‘compliances’ – there are a plethora of compliances prescribed almost everywhere such as return filings, tax withholding on payments, interest on short filings / payments, credit / incentives and several others;

(c) ‘litigation’ – the tax system and provisions often and almost always lead to disputes and commonly found litigations etc. At international levels, it does involves Advance Pricing, Mutual Agreement under tax treaties.  

The bigger and more complex a business tends to become, bigger would get its cost(s) and exposure towards taxes. One must understand and look at taxes at as important cost element which reflects on our Balance Sheets and also often absorbed in our (every) business transactions. Thus, the tax cost impact can be huge and its savings, fatal. Businesses that are able to effectively lower the tax cost impact (through varied mechanisms such as being able to avail incentives, better planning and tax-efficient organizational structuring), understand and stay compliant with the requirements, and manage litigation / disputes for long(er) times certainly will have an ‘edge’ over anyone. As said, ‘taxes’ are a (lethal) ever changing and dynamic constant, thus businesses must forecast, plan and prepare well in advance to deal with uncertainties and future changes.  

Businesses that are multi-locational and spread across different Countries remain subject to varied cross-border laws and have bigger exposure(s). The issues involving ‘Transfer Pricing’, ‘Treaty Shopping’, and ‘Thin Capitalization’ are therefor very commonly found. Alongwith the dispute settlements, new(er) and more complex positions in taxes continue to emerge. World over, the taxes remain volatile although. One tends to find introduction of US tax incentives by the present administration, introduction of VAT regime in the Arab World, the impact of ‘Apple tax’ involving Ireland and the EU alongwith ‘BREXIT’ and the much talked about ‘Vodafone’ tax in India. Nothing less, we see ‘taxes’ becoming (alongwith Terrorism and Global Warming) as a global phenomenon of present times.  

With globalization, increasing inter-dependence of trade and commerce among countries, a common desire emerging would be find a commonality in doing business internationally (similar to having one currency world over). Thus in today’s times, every country designs its internal tax laws and policies as per its requirements, but at a world stage / level, there is a widespread and extensive tax treaty network which almost country is able to develop. Also, there is an attempt to create standard policies vide OECD program viz BEPS – Base Erosion and Profit Shifting. The HSN system or Harmonized System of Nomenclature which classify the different commodities under standard and globally accepted categories is another example. And, a lot is in pipeline.   

Thus, Taxes require a highly proactive and not a reactive approach to deal with – to create a business with ‘edge’. It certainly is complex, but in efficiently handling and management and through a focused approach lays the vital impact of lowering business costs, becoming dynamic and above all staying healthy for a business lifetime.

The tax ‘mix’ of IGAAP, Ind-AS, normal tax provisions, MAT & ICDS

The recent times have seen a colossal of several tax and regulatory amendments one after the other. Some of these amendments have been brought directly to the tax provisions and also at places which has significant ramifications on tax landscape. The key changes are implementation of IND-AS (and its parallel existence with the IGAAP regime), introduction of ICDS^[1] in the normal tax provisions and amendments made in MAT provisions of the Income-tax Act, 1961 (‘the Act’) vis-à-vis IND-AS. Resultantly, there are changes brought to the way in which accounts are prepared, scope of tax audits done and in the manner of tax computations and filings. The existence of different accounting norms at the same time and parallel application of different tax provisions (normal tax and MAT) thereon opens up a very interesting mix of ‘tax’ positions.

IND-AS stand for Indian Accounting Standards, the same are named and numbered in the same way as corresponding International Financial Reporting Standards (IFRS). We had for last many years, accounting regime in the form of IGAAP (Indian Generally Accepted Accounting Practices); several Accounting Standards prescribed therein and Schedule III of the Companies Act, 2013. However, the Ministry of Company Affairs (MCA)[2] announced Companies (Indian Accounting Standard) Rules, 2015 and adopted 39 IND-AS standards. Pursuant to IND-AS, amendments have been brought to the Schedule III of the Companies Act, 2013. IND-AS has to be followed (in phased manner) by Companies that are: (i) listed / in process of listing; (ii) net worth of Rs 500 crores or more; or (iii) holding / subsidiary of aforesaid Company. Companies that do not fall in the above-mentioned categories can continue to follow IGAAP.

Thus, the 2 Accounting Standards IND-AS and IGAAP exist in parallel and it may happen that a Company’s financials which are on IGAAP in one particular year translate to IND-AS in subsequent year.

Under IND-AS, several new line items would appear in a Company’s Financials as compared to IGAAP.  Resultantly, the IND-AS compliant financials could reflect different line items and value of profits / loss as compared to IGAAP. The first time adoption of IND-AS from the IGAAP regime will also throw up the ‘transition amount’ – arising due to application of IND-AS on IGAAP financials of earlier years. The application of IND-AS would bring in significant changes to the accounting policies / practices – for instance, compulsory application of fair value of ESOP as compared to the option of intrinsic or fair value provided under IGAAP. IND-AS could also have new classifications reflected in the financials such as ‘Other Comprehensive Income’ comprising of prescribed items such as hedging reserve, revaluation reserve, actuarial gain / loss in respect of employee benefits and others. In the IND-AS Balance Sheet, ‘Other Equity’ would reflect including pure equity, reserves and equity component of instruments convertible into equity like Compulsorily Convertible Debentures. For deferred tax computation, only the Balance Sheet approach is provided under IND-AS; also it requires inclusion of Effective Tax Reco (ETR) in Deferred Taxes. Due to IND-AS, certain transactions which would per se be non-existent, but due to accounting requirement, may appear in financials - for instance, on Preference Shares (which are issued at below Market Rate of Interest), an ‘interest’ expense could be recognized in financials relating to its debt component. Such expense would not exist in real sense & may be construed ‘notional’.

For tax computation purposes, the tax payer would determine the profit / loss figures as per IND-AS or IGAAP and would thereby carry out the tax computation. For determining income and tax under the normal tax provisions, the taxpayer has to (additionally) consider the impact of Income Computation and Disclosure Standards (‘ICDS’).

ICDS are the guidelines introduced to bring consistency in computation and reporting of taxable income. There are 10 ICDS prescribed which have to be followed for computation (and disclosure) of income by all taxpayers (other than an individual or a Hindu undivided family who is not required to get his accounts of the previous year audited under the Act[3]) following mercantile system of accounting. ICDS has to be followed for computation of income only under the heads: (a) Profits and Gains of Business and Profession; and (ii) Income from Other Sources. ICDS is qua normal provisions and tax computation under MAT provisions remain unaffected by ICDS. ICDS is a very refined version of the Accounting Standards prescribed by the Authorities earlier[4]. Through the (revised) tax audit report format, even the tax auditor is required to comment upon a taxpayer’s compliance of ICDS.

ICDS would govern alongwith the normal provisions of the Act. For instance, in a matter involving capitalization of interest cost relating to the pre-construction period of an asset, it will have to be determined in light of Section 36(1)(iii) and Section 43(1) Explanation 8 of the Act. Additionally, the provisions of ICDS – IX (Borrowing Costs) will have to be seen and given effect to in terms of determining qualifying asset(s) and treatment of general/specific purpose borrowings. Similarly, a matter involving a taxpayer’s receipt of Government Grants would have to be seen as per section 2(24)(xviii) of the Act and ICDS-VII (Government Grants). Likewise, for depreciation purposes, the value of asset(s) will have to be determined as per section 43 / 43A of the Act alongwith provisions of ICDS-V (Fixed Assets). In case of conflict between the Act and ICDS, the Act will prevail. However, in respect of the authority of case-laws over ICDS, it has been clarified[5] that ICDS shall be applicable to the transactional issues dealt therein in relation to AY 2017-18 and subsequent AYs. ICDS does not require separate books of accounts to be maintained.

ICDS also provide for certain situations that could pre-pone the recognition and taxability of income. For instance, ICDS provide for recognition of Government Grants in the year of receipt for tax purposes, whereas the taxpayer (let’s call Company XYZ) can avail the option to recognize only a portion of such income every year in its accounts on deferred income basis. Thus, derivation of income/losses under tax and financials can get very different due to ICDS. Also, since the normal tax provisions (and also ICDS) tend to follow real income theory, the aforesaid ‘notional items’ which would reflect in IGAAP and plentiful in IND-AS Accounts (of both income and expense) may have to be disregarded in tax. Thus, by implication of ICDS and normal provisions on IGAAP or IND-AS financials, it may so happen that the profits / losses reflected in financials differ substantially from the taxable income of the assessee.

Concerning the inter-play between the aforesaid and MAT provisions, the profits / losses reflected in IND-AS or IGAAP financials will have to be adjusted as per section 115JB of the Act and higher of the taxes (as determined under normal provisions r/w ICDS and section 115JB of the Act) will have to be paid. For the purposes of MAT derivation, section 115JB of the Act remain a self-sustained code and there is no implication of ICDS or any other guideline thereon. As far as the IGAAP financials are concerned, the existing provisions of section 115JB of the Act Explanation 1 will continue to apply like in the past.

In respect of applicability of MAT on IND-AS financials, vide Finance Act, 2017 sub-section(s) 2A, 2B & 2C and CBDT Notification[6], provisions have been incorporated into the Act for governing the tax treatment of different items appearing in Ind-AS financials.  As per the newly inserted provisions, for a Company whose financial statements are drawn up as per IND-AS, the ‘book profits’ reflected in financials need to be further adjusted in prescribed manner i.e.

a)       increased by (i) amount(s) credited to other comprehensive income in financials under the head ‘items that will not be re-classified to profit or loss’; and (ii) amounts debited to profit & loss account on distribution of non-cash assets to shareholders in a demerger as per IND-AS 10;

b)       reduced by (i) amount(s) debited to other comprehensive income in financials under the head ‘items that will not be re-classified to profit or loss’ and (ii) amounts credited to profit & loss account on distribution of non-cash assets to shareholders in a demerger as per IND-AS 10;

The above shall not be applicable to the amounts credited / debited in respect of asset’s revaluation surplus as per IND-AS 16 or gains / losses from investment in equity instruments designated at fair value as per IND-AS 109. 

An example of the above-mentioned item of ‘other comprehensive income under the head ‘items that will not be re-classified to profit or loss’’ could be of value of actuarial gain / loss that is included in other comprehensive income but will not be re-classified to profit or loss a/c. There are certain items such as hedging reserves which are included in other comprehensive income but get classified to profit or loss a/c subsequently (at the time of actual settlement of transaction). 

In respect of the book profit of the year of convergence and each of the following four years, it shall be increased / reduced by 1/5th of the ‘transition amount’.  The term ‘transition amount’ is defined to mean the amount or the aggregate of the amounts adjusted in other equity (excluding capital reserve, and securities premium reserve) on the convergence date but excluding few specified items such as – (i) revaluation surplus for assets as per IND-AS 38; (ii) gains / losses from investment in equity instruments designated at fair value as per IND-AS 109; (iii) adjustments on property, plant and intangible assets recorded at fair value as deemed cost as per IND-AS 101; (iv) amounts adjusted in other comprehensive income on convergence date which shall be subsequently reclassified to profit and loss a/c and (v) others specified.

By virtue of the above, the MAT provisions have been amended as a result of which it will imply on several IND-AS related adjustments. Firstly, the book profits which are derived as per IND-AS will form the basis of MAT computation. Such book profits can include several items such as of ‘capital’ / ‘notional’ nature. Subsequently, it need to be adjusted in the prescribed manner to increase / reduce the book profits with items of other comprehensive income and others. Furthermore, it require increase / reduction by 1/5^th of the transition amount (comprising of several specified items).  

The above-mentioned application of (different) tax provisions & accounting norms at the same time require an effective and clear inter-linkage(s) and reconciliation between financials and tax (though it may not be required to maintain separate books for tax purposes). The Accountants, Auditors, Tax Advisors and even Assessing Officers will have to start performing business as usual on the new (and translated) accounts from IGAAP to IND-AS and must comprehend with intricacies involved in it. It would add to complexity & may also lead to several untested positions.

By implication of different tax provisions (normal and MAT), it may happen that under normal provisions, the items of notional or capital nature reflected in accounts are clearly dis-regarded in computation of taxable income, however for MAT purposes, the so called notional items continue to be included in ‘book profits’. Whether items of ‘capital’ nature can be included in book profits or not remain debatable. The above could also lead to a situation wherein a taxpayer could be doubly taxed on the same income / receipt. In our aforesaid example involving Company XYZ, it may happen that while the Company spread over such income over years proportionately in its accounts, it however, pays tax on Government Grants in first year (of receipt) itself (as per normal tax provisions and ICDS). However, it can happen that in subsequent year(s), on the proportionate amount of same income reflected in its financials, the same Company would have to pay MAT thereon again. Thereby, the tax ‘Mix’ could become a tax ‘Fix’.

The Hon’ble Authorities have made several attempts to bring in (much needed) clarity on the subject matter. However, the positions emerging through inter-play of several accounting and tax norms are likely to remain vague for the time being and would open up several unique and untested positions. The aforesaid is a reality now and it will require a highly proactive approach to comprehend and deal with it effectively.  

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[1] Income Computation and Disclosure Standards

[2] Notification dated 16^th February, 2015

[3] Section 44AB of the Act

[4] Section 145(2) of the Act

[5] CBDT Circular dated 23th March, 2017

[6] CBDT Circular No 24 / 2017 dated 25^th July, 2017

BEPS - Base Erosion and Profit Shifting and the future of Global Taxes

As a tax observer, it'd be heartening for anyone to see that today, TAX is figured out as one of the top priority items on the agenda of Global Leaders - alongwith phenomenon like Terrorism and Global Warming. It certainly, is that Important! Resultantly, we see BEPS making head-lines across the World & emerging as one of the most keenly watched topics of present era. 

Base Erosion and Profit Shifting [as commonly referred to as BEPS] is a globally recognized phenomenon whereby using aggressive and (sophisticated) tax planning strategies, Multinational Enterprises are able to shift profits from high tax jurisdiction(s) to a low tax jurisdiction(s) for a (undue) tax advantage - there could be several ways to do this. BEPS, has eventually become a global phenomenon that could potentially rob-off the nations from their due share of taxes - a common concern shared by several world countries.

In order to address the above, the G20 nations sponsored the BEPS Project with an underlying idea to reshape the global tax policy - for moving towards a global tax system that would be (largely) fair and acceptable to different Countries, provide them their fair share of taxes & also do good to World economy.

The Organization for Economic Cooperation and Development [OECD] has been identified as the agency to execute this project. Till date (beginning from July 2013), the OECD has come out with a 15 action plans alongwith implementation framework - basis which all the countries are to adopt and modify their respective tax laws. Till now, several countries have carried out (major) amendments in thy tax laws in their attempt to align with the BEPS project.

India is one of the first countries to have adopted many such recommendations and in the last 2 Budgets of Indian Union Government, it has brought in several (unexpected) amendments in the tax laws.  It'd be certainly interesting to analyze where India stand amid all the aforesaid developments & euphoria, lets see : 

OECD has identified 15 action points to combat BEPS :

1.   Tax Challenges of Digital Economy; 

2.   Hybrid mis-match arrangements; 

3.   Strengthen CFC (Controlled Foreign Company) Rules; 

4.   Interest deductions and other financial payments; 

5.   Building Transparency and Substance; 

6.   Prevention of Treaty abuse; 

7.   Prevention of artificial PE avoidance; 

8.   Intangibles; 

9.   Risk and Capital; 

10. High risk transactions; 

11. Collection and Analysis of Data; 

12. Disclosure of aggressive tax planning arrangements by taxpayers; 

13. Transfer Pricing (TP) documentation; 

14. Effective dispute resolution mechanism;

15. Multi-lateral Instruments

Before we move ahead, let us keep in perspective the rationale of BEPS project - to create a tax framework globally whereby Businesses pay taxes in jurisdictions where the economic activities are performed and where the real value is created - to enable the countries get their fair tax piece.

Now, the above-mentioned items identified in the BEPS Project of OECD imply: 

1. On Digital economy, it is recommended to develop a virtual PE standard as an alternate but this is not concluded. It also aims to address issues such as VAT, CFC & artificial PE avoidance - India already has an aggressive source based approach to tax digital economy by treating websites as PE and may also increasingly characterize payment of digital goods as royalties and fee for technical services. 

2.  On hybrid mis-matches : it mainly targets towards hybrid instruments (having features of both debt and equity) such as funding through Compulsorily Convertible Debentures and also, hybrid entities or financial institutions [interposing an intermediate finance company leading to a hybrid mis-match];

3. CFC regulations : in the Indian context, the CFC got introduced as part of Direct tax code but never got implemented - has a close nexus with the Place of Effective Management (PoEM) provisions under the Indian Income-tax Act, 1961;

4. Interest and other financial payments : this action item seem to look at base erosion through use of internet and economically equivalent payments - measures to restrict interest payments up to a certain limit of EBITDA etc could be an alternative to curb this;

5. On Transparency and Substance : it could suggest substantial activity test to determine / freeze down tax ability in a particular situation. Also, to improve transparency through compulsory exchange of information / rulings;

6. Prevention of Tax Treaty abuse has certainly been a priority item for several countries. The mechanism employed for this could be to prevent treaty shopping and use of conduit companies. Also, to Promote Limitation of Benefits (LoB) in tax treaties, introduce Principal Purpose Test (PPT) and include in the tax treaties intention to avoid creation of opportunities for non-taxation;

7. Prevention of artificial avoidance of PE : In the Indian context, it would be fair to believe that India, through its extensive tax treaty network and position therein, interpretation followed in judicial rulings and India's stated position on OECD model convention, is already ahead of OECD on this.

8. Action points 8,9,10 and 13 deal with aspects to assure that transfer pricing outcomes are in line with value creation. It include special measures to ensure there are regulations to look through accrual of inappropriate returns due to one party's assuming certain risks, the Authorities have powers to re-characterize certain transactions and also a three tired approach to TP documentation;

9. On development of a multilateral instrument that would presumably bind the entire BEPS project, it charts out on one of the top priority items for several countries including India, since it would help in combating the tax treaty abuse;

10. On the other action items, the prime focus would be to derive a mechanism to have adequate disclosures of information from taxpayers, collation and sharing of data by the respective tax authorities and have a well developed dispute settlement system in place

India is a member of the G20 Country club and thus, bound by the final BEPS recommendations. India, though a non-OECD member, but has a history of a working relationship and value its association with OECD. India is also a signatory to the SAARC limited multilateral agreement on avoidance of Double Tax Avoidance and Mutual Administrative Assistance in Tax Matters and consented on automatic exchange of information.

The (major) amendments brought in by India in its tax laws to align itself with the BEPS project over the last couple of years could be :

- Introduction of FATCA;

- Implementation of Place of Effective Management [PoEM] concept - akin to CFC rules;

- Implementation of GAAR (from FY 2017-18);

- Introduction of Equalization levy;

- Introduction of Thin Capitalisation from FY 2017-18 wherein deduction of interest payments to a
  foreign AE (in prescribed conditions) is restricted to 30% of payer's EBITDA and carry forward of     excess to 8 subsequent years;

- TP documentation procedures and Country-by-Country Reporting [basis some prescribed limits][;

- addition of Limitation of Benefit (LoB) clause in several Double Tax Avoidance Agreements; 

Certainly, we do expect and look forward to some more changes in future. This apart, Indian tax laws are already ahead of some of the above-mentioned recommendations.

Interestingly, on the acceptability / governance of BEPS recommendations, a reference can also be drawn from the Indian Judicial Precedents such as : Baker Hughes Singapore Pte. Ltd [TS-214-ITAT-2015(Del)] wherein the Hon'ble ITAT observed that BEPS is merely a tax policy consideration for law making and has no role in judicial process and that the judicial process will infringe neutrality if it is to be swayed by such policy considerations.

In view of the aforesaid, it would be right to believe that BEPS will continue to hold a lot of rigor in its store and will continue to surprise us in near future. Businesses must take note of developments in and around BEPS Project and (without an option) must keep a sharp eye hereon. It wont be an exaggeration if we were to believe that in today's business decisions (particularly involving the foreign dealings), a serious and proper consideration MUST be given to BEPS and its likely impact. 

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Budget 2017 - the Tax Impact

A few days back the Indian Union Government presented its Budget for the upcoming year. The Budget announced on 1st Feb, 2017 by the Hon'ble Finance Minister include several policy, tax and regulatory amendment proposals - just like the Budget(s) presented in the past, but this time Budget was presented on 1st Feb, instead of 28th Feb and also, a consolidated budget including Railway Budget was presented.

So, Budget 2017 is the new Buzzword everywhere around. It obviously has its share of positive and negative impacts that it has start showing / will show shortly - few sectors in economy such as Affordable Housing already on upward swing. Naturally, everyone wants to know the real impact of Budget 2017, the changes it propose to bring in, which items become cheaper and vice versa, which ones are welcome moves and which are the onea that did not meet 'Expectations' etc. Therefore, in any Budget analysis 'Expectations' becomes a very vital factor .

Before i could pen down my analysis of Budget and tax proposals particularly, I would like to go back to the run-up to the Budget. The time when we all expected the present Government to present a 'Populist' Budget in last few years of its term; also expected certain changes on cash transactions and income disclosures amid the Euphoria of 'Demonitisation'; some of us could sense the changes in International tax provisions in view of OECD BEPS initiative and also if there could be certain really bold and revolutionary changes (as much as getting a new Income tax Act itself) from the present Government. 

So, what has been the outcome of Budget? On the personal tax side, existing tax rate reduced for income between INR 0.25 million to INR 0.50 million is reduced to 5%. It also propose a surcharge at 10% for Individuals having income between INR 5 million to INR 10 million. These coupled with increase in rate of deduction for contributions to National Pension Scheme by self employed individuals and also tax exemption on partial withdrawal from National Pension Scheme. Also, businessmen having gross receipts up to INR 20 million in a year into the eligible business (except plying and leasing trucks) will be subject to tax at 6% (from 8% presently) if amounts are received through Banking channels. Also, it is proposed that set-off of lossses from House Property against any other income restricted to INR 0.2 million in a year. Basis the above, it would be possible to form a view that this is not a 'Populist Budget' for common man and there was much more expected from the Budget. However in my opinion the above changes depict objectivity of Budget and an attempt somewhere to hold high the economic interests instead of merely having a Budget with attractive tax schemes. 

On the Corporate tax side, there were reduced tax rates / regime introduced in the last year. Following the same premise, the corporate tax rate for companies with turnover up to INR  500 million and also for new domestic manufacuring is reduced to 25%. The time limit to claim MAT credit is also enhanced from 10 to 15 years. Also, in line with Ind-AS introduction (new accounting regime), mechanism for computation and applicability of MAT  is also prescribed. Income from transfer of Carbon credits will be taxed at 10% (no expenditure against such income shall be allowed). Except for domestic companies, trusts etc, income by way of dividends exceeding INR 1 million shall be taxable at 10% on gross basis for all taxpayers. 100% deduction provided for profits derived from housing / affordable housing projects and also by proposing certain relaxations in size of units of such projects and time limits for completion of such projects. Also, the domestic transfer pricing measures / compliances applicable till now have been removed / reduced to cut short compliance burden on Companies. For real estate developers, proposed that taxable value of house property held as stock in trade will be NIL in case property is not let out during previous year. Also, conversion of preference shares to Equity will not be regarded as taxable transaction - this proposal brings in more clarity on structuring / funds movement perspective.

Further to the changes made in the earlier year(s) to promote Start-ups, it is proposed that in case of change in shareholding of a start-up by more than 49%, losses would be allowed to transferee based on specified conditions and within time limits. Also, 100 % of profits derived from eligible start up business shall be tax exempt for a period of 3 years out of (newly proposed) 7 years. 

The above developments can make us believe that the attempt of legislators is towards doing away with exemptions / deductions available in current regime and also to move towards a low tax cost regime. Thus, we see that there is no extensions to the several tax exemption measures such as 80 IB or even accelarated depreciation beyond March 2017. I would like to believe that there would be more changes on these lines in future.

On International tax side, 5% TDS shall be applied to interest paid on Masala / Re denominated bonds for issuance upto 2020 year, also for External Commercial Borrowings (ECB). Also, upon transfer of Re denominated bonds from a non-resident to another will not attract capital gains tax. There is also some clarity brought on non-applicabilty of Indirect transfer provisions qua FIIs registerewith SEBI. 

Also, in line with Legislators attempt to promote investment into India, the Foreign Investment Promotion Board has been abolished. The exact FDI guidelines in lieu of the same are yet to be seen / notified. Also, there has been merger of Authority of Advance Rulings for all Direct and Indirect Tax matters - to see if cases could be speedened up. In this line of changes, not to forget the Indirect tax measure of removal of Research and Development Cess of 5% - but if the underlying transaction remain subject to Service tax, then there would be no effective impact of this change.

As part of BEPS initiative, the introduction of Thin Capitalisation in India tax regime for first time has, honestly, been quite bold. This restricts deduction of interest cost to the payer at 30% of EBITDA if loans taken from associate foreign entity over INR 10 million. Also, there is introduction of 'Secondary Adjustment' to be made by taxpayer in case a primary adjustment to transfer price has been made by taxpayer suo moto or purauant to Advance Pricing Agreement or other prescribed conditions - this will not apply if primary adjustment does not exceed INR 10 million and transactions relating prior to FY 2015-16. Separately, it is proposed that cost of acquisition of shares of Indian Company in hands of resultant foreign company in case of demerger shall be same as it was in hands of transferor. 

On restricting the cash / alternative economy, increasing usage of banking and online transactions and developments concerning this, it is proposed that any payment for asset acquisition which is in cash exceeding INR 10,000 to a person in a day shall not be considered as a part of asset acquisition cost. Also, payment for revenue expenditure made in cash exceeding INR 10,000 to a person in a day shall be disallowed - this limit is INR 20,000 per day currently. If a person receive any sum in excess of INR 0.3 million in cash, then there could be 100% penalty levied on the same. Donations made in cash shall be allowed as deduction only up to INR 2,000 - this limit is INR 10,000 currently. If Individuals pay a rent of more than INR 50,000 per month to a resident, it will attract 5% TDS or withholding tax. Also, some measures to bring transparency in electoral funding and contributions made to exempt trusts and bodies. 

The deduction limit for banks to claim expense on account of provision for bad and doubtful debts enhanced from 7.5% to 8.5% of total income. 

With GAAR round the corner, on anti abuse, the provisions to tax receipt of money or property exceeding INR 50,000 without consideration has been extended to all taxpayers - this earlier covered only Individuals and HUFs, but covers all kinds of taxpayers. In another move, exemption from long term capital gains on listed equity shares is made available only if on such acquisition securities transaction tax was chargeable. Also, where consideration for transfer of shares (other than quotes share) is less than its Fair Market Value, its Fair Market Value shall be considered as its value. 

On procedures side, there is an attempt to reduce the time-limits for completing assessments and re-assessments by tax authorities further by 3 months - a move similar to last year's amendment brought in. Time limit for revision of return by taxpayer also reduced to end of relevant assessment year. The base year for computing long term capital gains shifted from 1981 figure to 2001 figure. Holding period in case of immoveable property reduced from 36 months to 24 months for computing long term capital gains. Also, proposed that TDS 2% will apply to payments made to persons engaged in business of operation of call centre. Further, if a taxpayer does not file tax return in time, there could be additional levy / fee on such delay. 

On the Indirect tax side, as GST expected shortly, thus no major changes brought in through this budget. 

Customs duty reduced on Liquified Natural Gas, Solar tempered glass, LED light parts and others. Basic Customs Duty (BCD) increased on Cashew nuts, RO membrane element and certain other items. Countervailing Custom Duty (CVD) reduced on Micro ATMs, Iris scanner, parts of LED lights, parts used in manufacture of solar tempered glass and others. CVD enhanced on few items. Similarly, Special Customs Duty (SAD) decreased and enhanced on few items. Also, Export Duty levied on other Aluminium ores including laterite. Also, goods imported through postal parcels, packets etc exempt from Customs if value does not exceed INR 1,000. Bill of Entry to be presented by end of next working day of import. Concept of 'beneficial owner' introduced to cover any person on whoae behalf goods are imported or exported or who exercise effective control on goods - included in definitions of importer and/or exporter. 

Similarly, in Excise law, there is increase in Central Excise Tariff on few items and reduction in duty on few items. Also, exemption on point of sale devices and goods used in manufacture thereof extended till 30 June 2017. Also, changes made in Cenvat Credit Rules, 2004 concerning Banks, Financial Institutions and NBFC. 

In Service tax, services for carrying out any process amounting to manufacture or production of goods except liquor shall be tax exempt. Certain other changes made in exemptions concerning services provided by IIMs and others. For works contract services, service tax shall be levied at normal rate if value of land is not included. If the same is included, service tax shall be payable on reduced value from July 2010. 

In view of the above and looking at domestic and international factors existing and holding relevance in 2017, the Budget seems to have delivered on creating a boom for sectors such as housing, it does seem to be promoting foreign investment and ease of doing business in India, it seem to be doing its bit in view of new regulations of Ind-AS and GST, it also seem to be doing enough on International developements such as OECD BEPS initiative. But as a taxpayer one's expectations still remain. Honestly, it could have been great if the Budget could introduce provisions to simplify existing tax regime and focus on reducing and removing tax litigations. Also, there are mind boggling numbers to suggest that a large part of Indian economy is still out of tax administration reach. Thus, it would be interesting to see if there are changes made in future to specifically focus on the above.

Goods and Service Tax (GST)

Goods and Service Tax, as fondly known as GST, is a proposed tax regime in India which claims to bring with itself certain major overhaul / reforms in the Indian Indirect Taxation system and thereby the Economy. Interestingly, GST is not a new but an internationally well recognized and established tax regime prevalent in over 160 countries across the World covering Asia, Europe and Australia. 

Under the existing tax regime in India, there exists multiple indirect taxes such as: (i) Centre levies of Excise, Customs and Service tax; and (ii) State levies such as Entry Tax, Value Added Tax (VAT) and others. The above-mentioned taxes are levied in different situations and by the Central and different State Governments respectively. The present system has certain issues such as complexities, cascading effect of taxes, double taxation, multiple compliances, non-availability of proper tax credits, administrative hassles encountered by different Governments and so on. Keeping the aforesaid in perspective, GST is a simplistic and integrated tax which propose to replace / subsume within itself, the various Central and State levies into one uniform tax. Therefore, GST is reformatory tax regime that will supposedly bring in simplicity, reduce tax burden on taxpayer, generate better revenues for the Government, act as stimulus to economy and make compliances simpler and effective.  

The first time when I heard about GST was in the year 2005 (in the Budget speech of then Hon’ble Finance Minister of the Indian Union Government) and till today a lot has been said and done about it, but it is not enacted as a law till date. There are various theories around and almost every other person holds a different perspective on GST’s enactment, the timing, the form and the manner of such enactment / implementation. The fact is that not even after 11 years of continuous deliberation and much conviction shown by the Hon’ble legislators, GST could not see the light of day and is still a proposed ‘bill’ in the Indian Parliament. It surely is complicated and requires treading a difficult path.  

But before I could come to the GST and its supposed form, impact and so on, it is important to have a look at the present taxation system, its anomalies and the certain substantial events that has taken place to reach us where we are currently. 

India, being a federal republic, has several ‘Indirect Taxes’ – some levied and administered by the Central / Union Government and few levied and administered by the respective State Governments in both of their respective Constitutional rights. The Taxes collected by the Central Government gets deployed in Central Government’s initiatives / projects and also distributed amongst various States, whereas the respective State taxes directly go to the kitty of such State. Conventionally, on activities such as ‘manufacture’ of goods and ‘import’, ‘export’ of goods into / from India, there have been Central levies of Excise and Customs. Similarly, upon ‘sale’ of goods from a particular state / entry of goods into a particular state, there has been a levy of ‘Sales tax’ / ‘Octroi’ or ‘Entry tax’. Whenever, goods occasioned inter-state movement (from one Indian state to another), there has been a levy of ‘Central Sales Tax’ (CST) thereon. Clearly, it is a complicated and burdensome structure where Central Government forms its rules and remains responsible for its set of taxes, likewise respective State Governments. Often they both act in parallel on the taxpayer and mostly, they do not meet each other. One can imagine what could happen to a taxpayer amid all this. 

Indian federal structure, socio-economic, political and several other considerations have contributed to the above, over the past. Continuous conduct of above structure has led to huge disputes (between Taxpayer and Government and sometimes between Governments) and several inefficiencies. The need to reduce complexities, have a better tax system, provide stimulus to the business / economy, keep taxes in healthy check, ensure proper administration and consistency in the attitude of different Governments and also to increase tax base have been increasingly felt time and again.

Much has also been done by the Legislators towards this direction and several attempts have been made to keep the taxation system progressive and effective, over the recent past particularly. Few measures requires a mention here, such as (a) reduction in Central Sales Tax rate from 4% to 2% (this remain non-creditable); (b) Introduction of Service tax by the Centre (from the year 1994) and a substantial expansion of the same; (c) rationalization of CENVAT (Excise duty) rates and (d) enactment of Value Added Tax (VAT) in all States and Union Territories.

However, despite all this, the present system of taxes still continue to suffer from anomalies. As an illustration, if a manufacturer of certain product has a cost of INR 100 and margin of INR 10, his final price would be INR 110, there will be excise duty (on manufacture) of 12.5% which is INR 13.75. Upon sale, there will be VAT of 12.5% on total price (inclusive of excise), thus on taxable value of INR 123.75, there will be VAT of INR 15.47. Thus, the product ultimately get sold at price of INR 139.22. The Purchaser of such product may sell it further and would have tax liability on it. Such purchaser may / may not be eligible for set-off of taxes paid on input(s) with his output tax liability. Thus, there exists cascading effect of taxes in the value chain (State taxes over Centre taxes), simultaneous levy of Central and State taxes and credit of inputs against output may not be uniform and consistent. Due to lack of clarity, a few items could have multiple tax levies (for instance on sale of software and food, there could be levy of both Service tax and VAT). Upon inter-state movement of goods, there could be further taxes, procedures (Entry form, C / E1 form etc) and delays. For CST, no credit available.

To put our example in the GST scenario, on the final price of the manufacturer (i.e. INR 110), there will be a levy of GST (say 20% - comprising Central GST of say 10% and State GST 10%). Accordingly, the tax cost will be INR 22 and final price of product INR 132. Thus, GST propose to remove cascading effect of taxes, it proposes to levy only one tax on underlying taxable transaction and leave such taxes to the Authorities to distribute among itself. Taxpayer does not have to deal with different Authorities.

GST propose to subsume within its scope Central Taxes such as Excise, Service tax, CST, Additional and Special Custom Duties, other surcharges and State Taxes such as VAT, Luxury Tax, Entry tax, Octroi, Purchase Tax. Few taxes such as Basic Customs duty, Stamp Duty, Taxes and Duties on liquor for human consumption have been kept out of GST as of now. The proposed model of GST will be in the form of dual GST model comprising of (i) Central GST – levied by Central Government; (ii) State GST – levied by State Governments; and (iii) Integrated GST (sum of CGST and SGST) – on inter-state and import transactions. Credit for CGST input against output liability of CGST available, similar for SGST. However, credit for IGST available against both CGST and SGST in prescribed manner. Does it make it sound like old wine in a new bottle – actually it may not be the same as old since taxpayer may not deal with multiple authorities here and it is left to the Authorities to work this out in a proper manner.

In the GST scenario, following taxes shall be chargeable on supply of goods and services: (i) On within the state transactions - CGST (To be collected by the Central Government) and SGST (To be collected by the State Government), (ii) On interstate transaction : Sale of goods transactions: IGST - To be collected by the Central Government and additional 1% (maybe); Supply including provision of services (other than sale of goods transaction) – IGST, (iii) On import of goods - BCD and IGST, and (iv) On import of services – IGST.

At a conceptual level, GST is different from the existing regime – that GST shall supposedly be levied on the taxable supply of goods and services. It does not recognize the concepts of ‘manufacture’, ’sale’ or ‘provision of services’ prevalent in the current tax regime. Whereas the current tax regime taxes levies tax on ‘origination’, GST is a ‘destination’ based tax. Thus, GST has got resistance from Industrially advanced Indian States such as Maharashtra which till now could produce / originate a lot of Industrial output and earn huge revenues thereon by levying several (origination based) state taxes.  Unlike current system where no credit is available for CST, GST propose to provide credit of IGST (against the output liability of both CGST and SGST) in a prescribed manner. The existing system also provide numerous exemptions (to sectors such as Power Generation, to Pure Agents) and also recognize concepts of Branch / Stock transfers. The fate of such concepts in GST is yet to be seen. The GST rate is also supposedly going to be around 18 to 20%.

Till today, GST has encountered several roadblocks. There have been unprecedented hurdles which also had to be overcome prior to its implementation – the biggest being building consensus amongst the Central and State Governments towards revenue sharing, administration and acting under a single uniform tax code after 6 to 7 decades of past tax practices followed by Independent India. It also require necessary infrastructure to implement and administer this law. Also, effective dispute resolution mechanism, taxpayer registrations, faster and effective ways to ensure inter-state movement of goods and so on. It also require a Constitutional amendment, where it is right now.  Meanwhile, certain procedures relating to GST returns, refund, registrations etc have been prescribed.

GST has been the Buzzword across all Industrial sectors – be it FMCG, Power, Real Estate, Pharma, Capital Goods, Logistics and Transportation, Textiles, Software, Food, Services (including Financial Services) or be any other sector in India today. The businesses do realize that GST not only brings a change in the tax numbers and overall costs, but somewhere will be a shift from the way business is being done currently in India. As much as I have experienced, Indian Businesses have been proactively taking measures to examine the impact of GST and taking necessary steps to deal with it effectively. Much is expected from the present Administration to enact this long pending legislation and really be able to achieve what it intends to. 

What is the tax impact involved in movement of goods within India!

In our today's business world, the businesses perform movement of material / goods within the Indian territories very commonly. Whether it is manufacturing concerns or construction companies or infrastructure / project companies; whether it is movement of raw materials or semi-finished / finished goods; and whether it is movement between branches or godown or to customers or even to job workers for certain repairs, material movement is a very common phenomenon. Business use all possible means of transport for the above - by rail, road, air, sea ferry etc. Basis the business requirements, the nature of transactions to be performed and the means used for material movement, the formalities / procedures would generally differ, but what remain more or less common in the impact of taxes.

But in a basic simple transaction where goods are to be moved from one place to another within the same country, how would TAXES impact? At this stage, lets keep in perspective the basic nature / requirements of TAXES - it generally involves : (i) a payout of money; and (ii) compliance with the prescribed procedures. 

Whenever there is a material movement, one has to first of all understand the stimulus for the same. Why is the material movement happening - is it under sale or transfer from one branch to another or transfer to sale depot, understanding the stimulus which triggers such material movement is a must - since the tax impact would differ significantly basis such stimulus. 

Whenever there is a sale or transfer in the ownership, it would typically have a levy of sales tax or Value Added Tax (VAT, as commonly known). The same is levied at the time of sale - generally, when the invoice is raised. Thus, it needs to be seen in a transaction involving material movement. However, if the material is moving from one branch to another branch and there is no sale / transfer of ownership, it would not be subject to VAT. The above might have certain tax registration and other compliance involved which we will talk about later. Also, lets be aware of the levy of EXCISE which would typically be levied on manufacture of goods and has to be discharged before the removal of finished goods from the respective factory. 

Now, after we have understood the stimulus and are aware of the general tax impact involved in the same, lets be clear about the modalities for the material movement i .e. understanding if the material movement involve transfer of goods to another Indian state (or sometimes to another Municipality) or would it be within the existing state where the goods would be currently present. To move the material within the state, the respective state Government would require certain forms etc to be filled and submitted by the respective mover. Generally, for movement within the state taxes would not be levied. However, we have seen in the past that taxes like LOCAL BODY TAX were levied by the respective state which were levied when goods moved from a certain municipal limits to another. 

Similarly, for inter-state movement of goods, there could be prescribed forms etc which has to be complied with by the mover. Generally a lot of Indian States prescribe their own specified WAYBILLS - which has to be filled by the purchaser of goods (the person who is responsible for bringing the goods into that respective state). At the time of entry of goods into the respective state, there could be ENTRY TAX which would differ depending on the commodity / goods involved and the same would have to be discharged in prescribed timelines to the respective state Government. Interestingly, we find that in inter-state sale, there is a levy of CENTRAL SALES TAX at a concessional rate (as compared to VAT in such state) which later on requires the transacting parties to issue the prescribed C forms etc. to the seller. Similarly, there could be transactions such as sales in course of inter-state movement which would later on require issuance of E1 or E2 forms. In case of transfer from one branch to another, it would require issuance of F Form. These forms are state specific and every Indian state has prescribed procedures to issue / get the same - sometimes, online or otherwise from the Department.

In order to execute the above, one will require prescribed tax registrations. Any taxpayer who wish to execute sale transaction in a particular state,   bring goods from one state to another (and issue C forms or E1 / E2 forms) or would like to deal in sensitive goods or would like to execute works contract in a state would require VAT and / or CST registration. It is important to include in such registrations details of all premises / places where goods would be lying or from where business of taxpayer would be performed.  Commonly, it happens that after a main registration, additional places of business are added.

One would experience that the manner in which the above mentioned procedures are implemented and administered by the respective state Governments,  it would be essential to obtain VAT / CST registration before any material movement.  During the material movement, one has to ensure that valid waybills, invoice and other details are available with the transporter / carriage. The prescribed procedures are complied with. Entry tax or other taxes, wherever applicable, are paid in time. Necessary returns are filed within time. Prescribed forms are generated and provided to the concerned parties. Every time,  the nature of transaction is understood clearly and necessary forms are procured and provided to carriage (even in case of branch transfers or job works, forms are required as we have seen above). Additional places of business are regularly updated. Whenever dealing with sensitive goods, prescribed procedures are followed.

It would flow as an imperative that non-compliance with any of the above requirements could have serious implications in terms of detention/seizure of goods, penalties and prosecution of people involved etc. Sometimes the stakes could get really high and implications very serious.

Thus, businesses must reckon that this area of material movement holds significant stake and exposure and thus, needs to be dealt with very professionally - as good or as bad as any other significant tax function.