Friday, April 13, 2012

FINANCE BILL 2012 – MAJOR ISSUES AND CHALLENGES


The Finance Bill 2012 was presented in the Lok Sabha recently and is under consideration of the Parliament. A very heated debate is happening on several new provisions and issues arising there from.

Vodafone Controversy

The Govt. wanted to tax the capital Gain on sale of telecom business of HUTCH in India to Vodafone by transfer of share holding in a holding company outside India. The Vodafone case, based on the current law has already been upheld in favour of Vodafone by the Hon'ble Supreme Court and even the review petition has been rejected. There are proposals to make clarification amendments with retrospective effective from 1.4.1962 in various sections of the Income Tax Act to establish that source country has taxation right on the gains derived of offshore transactions where the value is attributable to the underlying assets situated in that country. Validation clause is also being introduced to ensure pursuing the Vodafone case once the Bill is passed.

The retrospective amendment is being questioned by number of tax analysts and foreign investors. They are alleging that rules of the game should not be amended  retrospectively. In our view, the Government of India is fully justified in ensuring that the income earned in India or valuation increase of business or assets in India is taxed in India as income and / or capital gain and any device or methodology or structure designed to defeat or circumvent the basic intent of law cannot be supported at macro level. It is clear that Hutch made a substantial gain from sale of its telecom business to Vodafone. In such a situation the government is seeking  payment of tax on actual capital gain as the real purpose of the transaction was transfer of telecom business in India.

In case the laws are being interpreted or misinterpreted in a manner so as to defeat the very objective or intent of the tax legislation, the government is fully justified in bringing out a retrospective amendment.

Anti avoidance laws

The General Anti Avoidance rule (GAAR), domestic transfer pricing, amendment in section 68 seeking source of the source and taxation of the share premium, where it is not supported by fair value are amendments in the right direction, to plug the various loop holes in the tax laws. In a large number of developed countries, the interpretation of tax statue is being done on the basis of the intent and object of the legislator.India can consider the laws relating to interpretation of tax statutes to be modified appropriately to address this basic concern of the government.

Corruption a Serious Concern

The honest tax payers are seriously concerned about the genuenity of interpretation and harassment at the assessment level due to wide spread corruption. It is suggested that the personal interaction between the assessee and the tax officials can be reduced to the large extent and for reviews, scrutiny and assessment greater use of electronic mode may be resoted to. The persons  initiating such communication from the department should be unknown to the assessee and should be at substantial
distance. In case of dissatisfaction at the end of the assessee, the draft assessment order itself should be subject to judicial scrutiny and right of being heard by a panel. The proceeding of this panel can be fully recorded and only reasoned order can be given, which are transparent and subject to public / media scrutiny. It is very important to nail down the corruption in the tax  department, in case we want fair treatment from the assessee and with the assessee. It is also important to  ensure that the tax rate is further cut, at the higher bracket, so as to ensure almost full compliance by India Inc. We must also appreciate a positive amendment to reduce penalty in case of disclosure of undisclosed income at the time of search. This will pave the way for reducing corruption. In fact we need to achieve, at the earliest the position that personal privacy of assessee is not disturbed by survey, search and raids.

Introduction of Excise and TCS on gold

There is a substantial risk to all investors at these price levels. A major contributor in increase in prices is special demand of gold arising out of Euro Zone crisis, very heavy import of gold by India (in excess of US$ 40 million per annum). The  speculative activities in gold and silver derivatives have added fuel to the fire. Gold and silver have been traditionally considered as one of the best and safe investment and a hedge against inflation. However the recent surge in prices is beyond reasonable expectations and calculations. The recent attempt of the Government to control the activities of gold loan, imposing excise on gold, introduction of tax at source for gold purchases are certain initiatives which are required to be further matured and modified in a manner so that we are able to efficiently and effectively check the risk to Indian economy and Indians arising out of a possible bubble burst. The Indian Government needs to check the gold hoarding and speculative activities in gold and silver to ensure sanctity of the precious metals.

Negative list of services

The Government has imposed service tax on all services subject to a small negative list, which require complete reconsideration and should be deferred pending a debate. Accrual system of imposition of service tax on chartered accountant is completely misplaced.

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