The introduction of a general anti-avoidance rule in India’s tax code threatens to override the benefits availed by its tax treaty network
In keeping pace with a growing Indian economy, the legal field has been undergoing massive change in recent months. Legislators have been responding to increasing international interest in doing business with India, and a number of notable developments are likely to have a significant impact on the business environment, as well as the financial structures of domestic and international operations in the country.
Before the business community could recover from ripples created by the tax liabilities arising from the judgment of Vodafone, the Bombay High Court has brought a fresh perspective to tax planning in its decision in the matter of Aditya Birla Nuvo Ltd (ABNL). The episode provided some important take-aways on availing the benefits of double taxation treaties (DTTs).
In the ABNL matter, the High Court held that capital gains arising from the sale of shares in Idea Cellular by its Mauritian shareholder, AT&T Mauritius, were not protected by the India-Mauritius DTT. The court affirmed the stance of the revenue department that the beneficial owner and investor in this case was New Cingular Wireless, which being a US resident was not protected under the India-Mauritius treaty.
This decision highlighted the importance of factual disclosures to the income tax department while availing the exemptions from deducting tax at source. Corporate planners should tread the Mauritius route with caution, as such peripheral and overriding agreements run the risk of being challenged by the income tax department.
The vigilance and strict interpretation by the tax authorities is likely to continue in the coming years, with India re-negotiating DTTs with several countries known as tax-heavens, as well as introducing a general anti-avoidance rule (GAAR) in the direct tax code.
The code proposes certain provisions to act as a check on tax avoidance. It proposes to disregard and re-characterise transactions entered into by the assessees if they are considered to lack, inter alia, commercial substance. The application of a GAAR will also override the benefits availed under a DTT.
The implementation of such provisions is yet to be tested against the proposed objective standards promised by the government in the second discussion paper accompanying the bill. However, this is no guarantee that the noble objectives of the GAAR will not actually cause more hardship to the assessees, due to the unprecedented sweeping powers being given to the tax authorities to examine and challenge transactions.
The Indian government has proposed to establish a Pension Fund Regulatory and Development Authority, which may allow foreign direct investment of up to 26 percent in this sector, giving global players access to more than $2bn in assets. The new scheme is likely to be based on individually-defined contribution pension schemes. These would have unique features such as central record-keeping, and the selection of market players would be through competitive bidding on costs, fees and charges for the funds and fund managers.
The proposal to allow FDI in multi-brand retailing, after more than a decade of stagnation, has recently gained momentum with the cabinet, which passed a proposal to allow 51 percent FDI in the sector in November 2011. This follows from the sustained effort and debate which can be traced to the Department of Industrial Policy and Promotion (DIPP) floating a discussion paper in 2010 seeking the views of industry.
The opening of the sector will be conducted in a systematic and phased manner, with a clear set of conditions on procurement of farm produce, domestically manufactured merchandise, and imported goods. The 51 percent permit is to enable domestic players to enter joint ventures and benefit from the management practices, technology and know-how of foreign players looking to enter the market.
The DIPP has issued a discussion paper mooting the idea of granting legislative protection for utility models. The discussion paper highlights minimal usage of the current patent system by India entities for reasons such as higher costs and complexities in obtaining a patent. The DIPP suggests that a variation of known technologies, as practised by Indian entities but otherwise not patentable, ought to be protected – albeit for a shorter duration.
The acceptance of the proposal may effectively circumvent the thresholds of the patent law, and undermine the IP portfolios of companies entering India. On the other hand, draft amendments to the Patent Act propose that India becomes an international search authority, which would provide huge cost advantages to companies intending to do prior art searches.
On the trademark and copyright front, India has adopted the Madrid Protocol by way of an amendment to the Trademarks Act 1999. The Madrid Protocol is an international treaty that allows a trademark owner to seek registration in any of the countries that have joined the protocol by filing a single international application.
The Copyright Amendment Bill 2011 seeks to introduce a unique concept under which even after assignment of a cinematographic work or sound recording, the owner of the work will continue to have the right to claim royalties for any subsequent assignments. In addition, the definition of an ‘author’ is sought to be broadened to encompass a principal director for a cinematographic work, and a producer for a sound recording. The proposals are expected to significantly impact all foreign production houses operating in, or seeking to enter, India.
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