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Economy

Budget 2012: GAAR Deferred, Taxes at Source Cut

In his prepared remarks introducing the Finance Bill into Parliament today, Indian Finance Minister Mr. Pranab Mukherjee announced some changes to the "Budget" elements. (Also read about the Startup Tax that has been diluted)

GAAR Diluted, Deferred, Clarified (Sort of)

The FM delayed, by a year, the General Anti-Avoidance Rules which would have taxed transactions and structures created purely for the purpose of avoiding tax. They will now apply only for transactions after April 1, 2013.

Also, now the tax department needs to first prove that a structure was designed only to avoid tax; earlier the onus was on the taxpayer to prove that he didn’t.

Taxpayers can now approach the Advance Ruling Authority (AAR) to find out before doing a transaction if GAAR will apply. Further, the GAAR approving panel (no GAAR decisions will be taken by individual officers) will now consist of an independent member, from the Law Ministry. Finally, a GAAR committee will announce recommendations so that GAAR isn’t applied indiscriminately, by May 31, 2012.

Retrospective Tax Not For The Already Assessed; Vodafone Will Still Pay

To make the retrospective amendment less scary, the FM said those cases where assessment orders have already been issued will not be reopened. This isn’t great for those that did deals recently, because I have known AOs to be delayed for a couple years or more. Vodafone, obviously, didn’t get a final AO. So they’ll still have to pay under the current bill.

Also, amendments will NOT override the Double Taxation Avoidance Agreements (DTAA) between India and other countries. Note that we DO have a DTAA with Mauritius. But it seems we are reconsidering that DTAA itself.

Tax at Source Cut

The 1% tax-deducted-at-source on real estate transactions that was proposed in the Budget has now been removed.

Jewellery sales of Rs. 500,000 or more will now attract 1% tax-deducted-at-source. (The earlier limit was Rs. 200,000) Also, buying gold coins of 10 grams or less will not attract any tax-at-source deductions, though any higher unit weight with a total sale value of over Rs. 200,000 will attract that 1%.

Others

Private Equity investors currently pay 20% on capital gains made by selling unlisted companies. This has been brought down to 10%, to bring parity with FIIs. Useful for startup investors where it gets acquired before it goes IPO.  

Additionally, any sale of stock in an IPO used to attract tax if it was a sale by a promoter or an investor. Usually in IPOs, companies issue fresh shares, but sometimes shares are sold by promoters or anchor investors, and the capital gain on the sale of these shares were taxed as STT was not paid. The FM has now decided to exempt long term capital gains tax on such IPO sales of unlisted shares, introducing a 0.2% STT on the sale value.

Withholding tax on debt for infrastructure sectors was cut to 5% (on the interest paid). Now it has been cut to 5% for all businesses, and will also be available for foreign investments in long term infrastructure bonds. This can be quite significant in cutting the arbitrage between interest rates abroad and those in India. We’ll have to see the final wording to see if they will somehow disallow borrowing from abroad if you wish to invest in the markets instead.

Service tax will not apply where there is a deemed sale of goods. This brings some clarity, as the original bill sounded like it would tax a product sale with service tax as well in some cases.

It’ll be useful to see how many other changes are made before the bill is passed, but I can’t see them doing much more than the above modifications. The changes, especially with GAAR, are short-term positive. The change in withholding tax for foreign borrowings can be a huge game-changer for the rupee, if the eventual notification doesn’t put a spanner in the works. If anyone in India can borrow abroad and pay just 5% withholding tax on the interest, the three-way arbitrage between Indian interest rates, the rupee-dollar, and foreign interest rates becomes very attractive.