The last week in India saw the new Union budget 2011-13 being presented in the parliament. The much awaited verdict of the Supreme Court of India (SC) in the case of Vodafone International Holdings B.V. (Vodafone) also came out along with the verdict on the controversial 2G spectrum case, however the SC decision in the Vodafone case is proposed to be nullified by the provisions in the new Union budget. The past few months in India have also seen some fundamental changes in the tax and capital markets regimes. We set out below a summary of the Union budget, the judgments and the changes:
Highlights of the Indian Budget 2012-13
The Indian Finance Minister presented the Budget of the Government of India for the financial year 2012-13 along with the Finance Bill 2012 on 16 March 2012. As expected, the main areas of the Budget were the infrastructure, power and the agricultural sectors, with a focus on maintaining the momentum for growth. To broaden the tax base, the Finance Minister has introduced an 'Alternate Minimum Tax' on partnerships, sole proprietorships and association of persons, tax deduction at source on immovable property transactions between residents, General Anti-Avoidance Rules, taxation on laundered money, taxation of foreign assets not brought into India, transfer pricing on specified domestic transactions and taxation of services based on a negative list.
Income tax: retrospective amendments are proposed by way of clarification, applicable from 1 April 1962, such that the SC decision in the Vodafone case (see below), which ruled that the transfer of shares of a foreign company outside India does not attract taxation in India, is nullified. This clarification would in effect bring about far reaching and significant changes with respect of taxation of international transactions involving underlying assets in India. 'Shares' or 'interests' in a company registered or incorporated outside India are deemed to be situated in India if the 'shares' or 'interest' derive their value directly or indirectly substantially from assets located in India. The definitions of 'property' and 'transfer' include disposing of or parting with any rights in or in relation to an Indian company. Such rights include rights of management or control. The characterisation of such transfer of rights as being effected or dependent upon or flowing from transfers of shares of a foreign company shall be immaterial. The cascading effect of 'Dividend Distribution Tax' (DDT) in a multi tier structure is proposed to be removed. If the subsidiary has paid DDT on dividends paid to its holding company, then the holding company would be exempt from DDT when paying a dividend to its parent company in the same year to the extent that the dividend is paid out of the dividend received from its subsidiary which has paid the DDT. Alternate Minimum Tax (AMT) on tax payers other than companies. Where regular income tax payable by sole proprietorships, partnership firms and associations of persons is less than the AMT, their 'Adjusted Total Income' will be regarded as taxable income and will be taxed at the rate of 18.5%. The threshold limit for the applicability of a tax audit in the case of a 'business' is proposed to be increased from INR 6 million to INR 10 million. The concession tax rate at 15% on a dividend received by an Indian company from a specified foreign company in which it owns at least 26% is extended for one more year. Accordingly, such dividend received by an Indian company from such specified foreign company in the financial year 2012-13 will also be taxed at the concessionary rate of 15%. The Bill rationalises the tax regime applicable to the Venture Capital industry by removing the currently applicable sectoral restrictions. Comprehensive 'General Anti Avoidance Rules' (GAAR) are proposed to be introduced from financial year 2012-3. To tackle aggressive tax planning/ sophisticated tax structures, GAAR will codify the 'substance over form' principle for tax purposes. GAAR will...