The Union Budget 2012-13 indicates a shift towards the proposed DTC regime more specifically in relation to the collections and widening of tax base. The budget proposals clearly have far reaching implications.
The tactful speech of the Finance Minister may have silently side-tracked the government's stand on the Supreme Court decision in the case of Vodafone. However, a reading of the first few lines of Direct Tax proposals makes the intention of the government amply clear that the indirect transfer of shares/ rights/ control of Indian companies are taxable, and that too with retrospective effect.
Further, the withholding tax provisions have also been sought to be amended to include within its ambit non-resident tax payers who may not have any nexus in India.
The government has introduced General Anti-Avoidance Rule (GAAR) to tax transactions on a ‘substance over form' basis.
The GAAR is a set of rules formulated to frustrate the intention of a person to get the tax benefit as a result of an impermissible avoidance transaction or arrangement.
It would clearly send shivers down India Inc considering the wide powers bestowed on the tax authorities to disregard transactions undertaken.
The highlight on the transfer pricing (TP) has been the coverage of certain domestic transactions within the ambit of TP. The Finance Minister appears to have taken a cue from the SC decision in case of Glaxo Smithkline Asia where it had opined that the TP provisions should be made applicable to related party domestic transactions. This amendment will take effect from assessment year 2013-14.
This Union Budget has also introduced the much-awaited advance pricing agreement provisions where tax payers agree with the tax authority the ALP (arm's length price) for their proposed international transactions. It has been clarified that the pricing agreement will be valid for 5 years and would be binding on the tax payer and the tax authorities.
The author is Associate Director, Tax & Regulatory Services, Ernst & Young.
Keywords: direct tax