IFA Technical Session India: Where Are We Today?

1. IFA Technical SessionIndia: Where Are We Today? Nikhil V Mehta Gray’s Inn Tax Chambers 19th April 2012

2. Timeline • 20th January: SC decision in Vodafone • 17th February: Indian Government files review petition • 9th March: Parliamentary Standing Committee on Finance’s Report on the DTC recommends relaxations to the proposed Vodafone tax charge and the GAAR • 16th March: Indian Budget contains provisions to tax offshore share sales with retrospective effect from 1st April 1962, and introduces the GAAR from 1st April 2012 • 20th March: The Supreme Court dismisses the review petition: Vodafone gets back the funds it had deposited, together with interest • ? May: Finance Bill will become law

3. Finance Bill Measures • GAAR • Treaty Claims • Capital Gains Extension

4. GAAR • Very broad attack on “impermissible avoidance arrangements” • Onus on taxpayer to disprove avoidance • IAA may be countered as tax authorities see fit • Treaty override • Prescribed guidelines and conditions to be published • Effective 1st April 2013, but applies to “previous year” i.e. from 1st April 2012 • No grandfathering • No TAAR removal • No clearance procedure

5. Tax Treaties • GAAR applicable to structures where location of residence of an entity has no “substantial commercial purpose” other than getting a tax benefit • Duration that treaty structure has been in place irrelevant c.f. Chief Justice’s comments in Vodafone in distinguishing investment and avoidance • New tax residence certificate must contain particulars to be prescribed by Indian tax authorities, but effective from 1st April 2012

6. Capital Gains Extension • “Property” deemed always to have included any rights relating to an Indian company including rights of management • “Transfer” expanded to include any way of parting with an asset, directly or indirectly notwithstanding that it is legally achieved by a direct transfer of foreign shares • But even foreign shares are deemed always to have had an Indian situs if they derive their value from Indian shares • Withholding by non-residents deemed always to have been necessary • In essence, the Bill contains a heavy handed attempt to enact all the (unsuccessful) main arguments of the tax authorities in Vodafone

7. Practicalities • Any exit by a foreign entity (including on a return of capital) before the Finance Bill is enacted has uncertain tax consequences • Caveat multinational sales of divisions even where the Indian component is small if the sale includes parting with rights over an Indian company • Even the SC decision in Vodafone did not remove the need for a tax indemnity for a purchaser willing not to withhold tax. Now likely to be replaced by withholding in any event in non-treaty situations, and indemnities in treaty situations unless there are sensible guidelines

8. Practicalities • The hope is that the Indian Government will listen to the considerable noise made both by the private sector and by other Governments • They may have underestimated how much demand the new uncertainties will put on the tax authorities: even with the DTC, remarkably little was forthcoming on administration and due process