Shailendra Kumar

Hello & welcome to the special episode of simplyintaxicating. Today we are going to talk about & discuss in details the Union Budget 2015.Primeminister while hailing the budget presented by Mr. Jaitley described the budget by 5 Ps. He said P no 1 Practical, progressive, pragamative, progent so he found that this is bundle of true economic wisdom & fiscal wisdom. Prime Minister also talked about the measures proposed by Mr. Jaitley against the black money going to bring back every rupee of the Indian wealth lost in the past & stashed in foreign waltz. of course we look at the general reaction of the corporate India the different segment of economy, the economist, fiscal experts. It appears that mr jaitley has rely little more on indirect tax sides to gather revenue this year. On the direct tax side ofcourse apparently has not given too much from his kitty because individual tax payers are not too happy. The roadmap which is suggested is little pragmative it talks about the long term vision it also meets the 3Cs theory which is related to the tax system in any country. That is about the certainty that is about the consistency that is about the stability. All those aspects maybe attributed to mr Jaitley's budget. But the unfortunately the domain experts find even TIOL editorial team has come to a conclusion that mr Jaitley is relying more on indirect tax proposals to garner more revenue. We should not have in case every progressive economy gathers more through direct taxes not indirect taxes because the indirect taxation will be born equally by the poor economity in the economy. My my colleagues & editors Asha & Sudipto joining me today to talk about various dimensions of the budget the proposals with respect to direct taxes of course. we will have the separate programming on indirect tax later, so Asha tell us briefly first of all may be in bullet form points what are the key changes you find so far as the income tax proposals are concern.

Aasha

Well, Like you said it seems a very programmatic budget & to touch on some of the international tax proposals was he has done away with GAAR. It was the controversial tax law, he has deferred it for 2 years for done it away for the time being. The second change he brought about is he reduced the rates on royalty. The tax on royalty has been reduced from 25% to 10%. And the third thing which he brought about which is very welcome move for the industry for the companies is the threshold limit has been hike from 5cr to 20cr for transfer pricing. So now only if your specified transactions are more than 20 cr then you have to get into the transfer pricing norms.

Shailendra Kumar

Only then the TP provisions probably inconvenience you..

Aasha

Yeah! They will activate when your aggregate is more than 20cr. And another good thing he has done is, he has given the power to CBDT to frame the method for granting the foreign tax credit, so earlier there used to so much discrepancies, an adhocism used to be there so now its going to be a little more methodical. And there is good news for FIIs also because whatever their income was for corporate bond & government securities the 5% tax which they paid now that has been extended. It was lapsing on June 20 so that has been extended to 2017.

Shailendra Kumar

Okay. Let me go to my colleague Sudipto. Sudipto you have some interesting points to share with us, with the TIOL viewers..

Sudipto

Since I have been focusing on the corporate issues, so to talk about the certainty the imp issue was the sec 9, so there for the consistency part the sec 9, the retrospective amendment it stays as it is. So its not been done away with it.

Shailendra Kumar

Okay so the most hated amendment continues with there..

Sudipto

Right, atleast the one which has been so much of news so that stays as it is..

Shailendra Kumar

So that's not good news for Vodafone

Sudipto

Yes Vodafone. Exactly. But in year 2012 sec 9 was amended after the Vodafone judgement that was the explanation of sec 5 was introduced which used an expression of substantial value, now that left undefined & that has been addressed in this budget by adding one more explanation which I will explain in details when I come back in this case..

Shailendra Kumar

Okay so that triggered more litigation.

Sudipto

Yes. That used to triggered more litigation so I mean we needed certainty so that c factor that has been addressed in this sec 9. Now there are another plenty of issues like the offshore funds were actually moving out of India because there were some grey area in the taxation which actually laid to undue the taxation liability arising on them, so that has again been addressed in this offshore funds basically sec 6& this can also be classified under the giving some comfort to them but if you talk about to titan of the norms the concept of the effective management like which is more known as poem the effective management, now what has happened a lot of companies they have actually set up companies in the countries like Mauritius or Singapore just for tricky shopping but actually they used to operate in the Indian jurisdiction.

Shailendra Kumar

Okay, so practically they are Indian companies but their board of directors etc they are outside India..

Sudipto

Just to have benefits of DTAA they used to set up companies in Mauritius. So without going to detail all I can say is again that issue has been addressed in sec 6. Then some of the important changes are like there is macro level changes I would say like in the capital sector that is the merger of the forward market commission with the SEBI so that again has lot of good news for mutual fund industry..

Shailendra Kumar

So there is something more for the capital market..

Sudipto

Correct. again some impetus has been given to real estate sectors in terms of MAT, in terms of exemption from capital gain tax to the real estate investment trust, so again I would repeat my statement which I made that it's like comforting in one hand & tightening another hand, so if some one is like broad statements like corporate budget I think that is very pre matured maybe a very motivated statement but if you actually going to the final point it is the balanced budget.

Shailendra Kumar

But if you see the Finance Minister with lot of glow he talked about that the corporate tax rate is going to be aligned with the Asian rate and over the period of 4 years this is going to 25% which present is 30%, but he has not given, I mean that is not going to be effective from this financial atleast maybe in future but on the other hand the finance minister hike the surcharge across the board, so is it not the case without giving anything he has taken away a lot of stuff. A lot of revenue rather that cash of corporate for doing business. You know its recession continues there the slow down, we are not ought to be in slow down..it continues & ofcourse the fund available in the banks but the credit of take is not very appreciable. if you look at there is very tardiness in their off take, because its very expensive& investment opportunity across the country. So that case how do you look at that mr Jaitley may not giving, ofcourse the corporate india was not expecting so far as corporate tax reduction is concern but hiking this surcharge & then across the board you have companies, firms, individuals..do you think its an additional burden?

Sudipto

I think its an additional burden but as you see there are some structural changes, there are some macro changes which has been proposed in the bill 2015 which will generate actually more business more revenues of business, let's say if I take the example of mutual fund industry now if the merger actually happens between SEBI & forward market commission then what would happen is this mutual funds which wanted to invest in the commodity market which they could not, because commodities are considered as contracts not as securities & mutual funds are controlled or driven by SEBI so since your regulator does not allow you to invest in the securities so a very potential option of investing in the market was not available, so that will open up for you.

Shailendra Kumar

Fine sudipto, we will take a short break & I will come back to discuss about you particularly the changes proposed in sec 9 & what it means for corporate India, what it means for all those who continue to find indirect transfer outside the India it's a wonderful transaction & how its going to be impacted by the changes in India.

Shailendra Kumar

Welcome back we will continue with the debate with respect to sec 9 the most villainous perhaps sec of Income Tax Act, so sudipto you were talking about the changes which been proposed & you were also suggesting that this was a potential time bomb for triggering a lot of litigations, to avoid that kind of litigation the CBDT has come out with this kind of amendment, what is the clarification?

Sudipto

If I have to respond to those heavily loaded words like time bomb, reconian & that, so I would say in direct transfer of share its reality & it exist across several jurisdiction but the problem in Indian regime taxation was there is no certainty & there are lot of grey area which had to be addressed so this sec 9 has been more clarity has been brought in sec 9. so as I said earlier that there was explanation 5 which been inserted just to book these transactions of indirect transfer, so it days that any transfer of share may nonresident transfer to another nonresident,if it derived substantial value assets located in India then sec 9 shall get triggered. Now the problem came what do you mean by substantial value. In 2014 the assesse went for advance ruling, they got favorable ruling the department challenged the decision they filed red petition for Delhi high court so again there were conflict in interpretation of the meaning of substantial value. So had it been left unaddressed again this litigation been continued so that has been addressed in this finance bill 2015..

Shailendra Kumar

So what was held by Delhi high court decision?

Sudipto

They said that the substantial value means majority. Majority of the value if it is deriving from the assets located in india then it can be considered as a substantial value so actually the change in the persuasion of the decision of the Delhi high court only & this can be actually considered as a welcome move towards the welcome in foreign direct investments &to make this entire environment more clean& more certain, because if I will be structuring the transaction, at least I know in which of eventualities the sec 9 will get triggered as supposed to I am always left in state of guessing then I am not sure when sec 9 gets triggered so substantial value has been defined which actually says that if the shares which is getting transferred from lets say a country Mauritius there is a non resident company which is transferring shares to another non resident company in Cyprus but as a result of that its feting transferred. So if those shares derived there value in access of 10 cr of the assets located in the Indian company & it is 50% those, I mean the entire valuation of shares should derived its value which should be atleast 50% value of the assets located in India so both the conditions are met then the sec9(1) gets..otherwise you atleast you are clear now..

Shailendra Kumar

So Mr Jaitley infuse a lot of stability & certainty in sec 9 which was actually scaling a good number of investors..So it's a good news for FII's and foreign investors.

Sudipto

Atleast they are now aware of I mean there taxation liability I mean when this taxation liability can arise instead of I mean they have to keep on structuring in such a manner to avoid the... I mean going ahead again there have been changes in the private establishment norms as this also I have discussed earlier wit respect to the offshore fund because since these off shore funds there were plenty of Indian off shore funds, Indian origin off shore funds which were operated in India, so they basically invest across the world. Now these investments are taking place outside India but the business connection norms were such in India that by just virtue of your physical presence of your physical operation in India the profits which you make even at the outside level even from the investments which are made outside India they get taxed in India attributable to the PE, to the activities that are undertaken and plus the management fees also. So I mean there are taxation at two levels. Now this problem has been addressed and lot of these offshore funds, ICICI has offshore funds, AXIS Bank has offshore funds, these funds can come back to India and the fund industry has actually the offshore fund industry has welcomed this change so now it is the tax liability is neutral so even if it is in India but you are making investment outside India you won't be taxed just because you are operating in India. This business connection norms has been relaxed. But again if to talk about the tightening the norms then earlier that is shell companies which also had mentioned that they used to make a very mockery of this DTAA's and used to go for blatant treaty shopping so they again can't do this because if they are having their control from India and just because they have one famous building in Mauritius where all the companies are operating that wont entitled them any longer to avail the benefits of DTAA. So if they are effective control and management that is place of effective management is in India then they shall be liable to they will be considered as the resident in India and poem is a very established concept a lot of countries actually they have defined what exactly means by effective control so as of now the bill only provides that's only the crucial commercial decisions that are taken in India then it will be construed as a Indian resident. But as we progress I am sure the department would come out with more clear guidelines under which situation this would consider as an Indian resident.

Shailendra Kumar

Little more clarity is required. May be question answer format you know.

Sudipto

So these are some of the major reforms which were actually long due and have been addressed by our Honourable Finance Minister, so I think these are welcome changes.

Shailendra Kumar

So that reminds me Aasha is there anything substantial on dispute resolution I mean the kind of dispute which are pending at various judicial forums and if you look at lot of revaluates appeals lot of cases the department is going in appeal sometimes on settled issues you know even for instance assesses also sometimes they also you know they probably think that this fun doing it. So is there something some kind of majors which have been initiated which have been proposed in this bill.

Aasha

Yes in fact there has been, there are two changes which the budget brings about this is the income limit has been increased. It has been increased; the monetary income has been increased to 50 lakh. So now these are the cases which the single member bench can look after. And another change which has been brought about is there are lot of cases which are pending in which the same question of law against the same assessee is being done again and again even though the same question is pending in the Higher forum. So now when a case against the same asseesee regarding the same issue is pending before the Supreme Court then the revenue need not make an appeal again. It is sensible because it is actually choking the jurisdiction. So it will be something like call book register where as soon as the judgement comes about we will apply.

Sudipto

To speak of something which has been left totally unaddressed that is the section 14A and rule 8D which is actually very unfortunate still so many litigations are going on. Lot of scope of arbitrariness lot of actually unnecessary additions which have been done by the department. There is a feeling among the departmental cell that this should actually get addressed. This is actually strange to see that how come I mean a person Mr Jaitley with such vision he could miss out this important issue.

Aasha

He is going to announce the bankruptcy law because he has declared CICA and BIFR cannot work. So how do you think that's going to...?

Sudipto

That's a very welcome move and India is actually, the Indian banking sector especially the PSU banks they have been suffering so badly there actually bleeding because of this non productive assets the NPA the cases of wilful defaults. I am sure TIOL viewers would be aware of so many cases of wilful defaulters that the news of Kingfisher's Chairman Mr Vijay Mallaya being termed as wilful defaulter. It made a lot of hue and cry in news and unfortunately these issues of NPA these issues of wilful defaulters they are only governed by a master circular issued by the RBI so we don't have any as such proper statued and bankruptcy norms are there almost in every jurisdiction they are in UK chapter XI in US perhaps in every government. So at least now I mean the banking sector this is a very welcome move and its a much needed impetus to the banking sector to revive atleast they would be expecting a mechanism to deal with this errant borrowed goods and to how to manage their entire credit health of this economy.

Shailendra Kumar

That brings us probably the last topic which we should be talking about is whether I should say the favourite topic for Modi government or the topic which is changing the Modi government like a shadow you know that is the BLACK MONEY. In India we want to know more because our judiciary is the cease of the issue. And the civil society is very concerned about it the government is of course they have to be because it was there pole blank. So Aasha can you tell us briefly about the Black Money thing or the key features. Do you really believe that this the major propose by Mr Jaitley actually will be strong enough to bring back every rupee which the Prime Minister has been talking about which has been stolen from this country and kept in those beautiful vaults in Swiss Banks.

Aasha

Well this is a very bold move which Mr Jaitley has taken. We had list of Indians who have foreign assets overseas but so far nothing really has been done about it and it's just like moving the ball from one court to the other. I feel Mr Jaitley is sort of getting ready. It is a good initiative. He is gathered everything. He is going to put out a new law and the essential thing which he wants to do is not only target and stop the generation of black money in India as well as overseas and he also wants to bring back the black money stash from overseas. So the essential points are everyone has to declare the foreign accounts and foreign assets overseas. The filing of return is mandatory relating to foreign assets. Non-filing of return, false declarations, inadequate disclosures or concealment of income or even evasion of tax on foreign asset it has been made a predicate offence which means that it will enable the authorities to not only attach and confiscate unaccounted assets which are held overseas but also confiscate and equivalent asset value situated in India in case they cannot get overseas because it's a cross border this thing. Now the tricky thing is he has made it so harsh that any non-filing or inadequate disclosure can attract rigorous imprisonment up to 10 years which is very harsh.

Sudipto

In fact I would like to chip in here I mean it's a question I mean since the draft is not available and we don't know actually how this law would actually look like how is it going to shape up but just a question which is coming to my mind that since we are more concerned about the money which is already taxed away in the tax heaven s and which has actually India has lost which we want to recover. I mean is it going to be retrospective and if retrospective then it talks about criminal offence which means there will be a imprisonment.

Aasha

Basically I think he is going to only have an amnesty scheme he is going to give people a chance a opportunity to declare their foreign assets which are overseas and if they don't then probably this law will kick in. Well we don't know exactly.

Shailendra Kumar

It is a very vital point which Sudipto has raised. Ultimately its going to be criminal offence and we cannot apply retrospective legislation.

Sudipto

Then the problem would be the blatant violation of the constitution criminal offence when you did that it was not a criminal offence now it cannot be made retrospectively criminal offence. So that would be challenged comes into play.

Aasha

So we just have to wait and watch and see how it comes.

Shailendra Kumar

Mr Jaitley also talked about he proposed in the Finance Bill itself a few amendments in a prevention of money laundering Act FEMA for instance and it looks like you know that kind of power he is trying to vest into this..

Aasha

The predicate offence where that comes in that is introduction of 37A section in FEMA. So that gives the powers to the competent authority to attach your property in India.

Shailendra Kumar

You now the FERA again we are going to waste so much of power in the enforcement officers under FEMA. Are we going back to FERA? The question is that at one point of time FERA was described as the most villainous act by corporate India. The government of India to the day took a call and they also consider yes probably it is being not misuse it is being terribly abused. And therefore it was gloating. It was replaced by a new act called FEMA (Foreign Exchanged Management Act) again you are putting on so much of power in setting new sections wasting power by attachment for jail etc etc etc..where exactly we are heading for. I think Mr Jaitley should be taking a call so you know let me now wrap it up.

Of course the black money is going to be real challenge for Mr Jaitley. The entire nation and the experts constitutional experts the domain experts and even common taxpayers will be looking forward to those expressions those words the language which will be used in the legislation and only then one can talk about the how a prospective legislation is going to recover the money India lost in past 25-30 years. But whatever it is the intend of the Modi government and Mr Jaitley must be appreciated that this legislation is going to curb the growing phenomena of trade mispricing the black money generation and taking it up a bay out of India through various channels like Hawala for instance may be foreign currency smuggling itself is a problem for India. There are different ways which are resorted to by different kinds of economic offenders. Before that I personally feel and even my editorial members they think that Mr Jaitley has overall presented a very balanced budget. The only area where we feel that Mr Jaitley perhaps could have avoided was that he has not only hiked service tax but also going into levy again which is yet to be notified and announced that on certain services or all services Swachch Bharat cess is going to be there. So it is going to be 14% plus cess. So from that perspective because services are being used by every individual in this country. Every citizen in this country and incident of burden you know this service tax indirect tax is going to be almost equal for every segment of people in the society whether poor middle class lower middle class upper class so that could have been perhaps avoided by Mr Jaitley but nevertheless let me congratulate Mr jaitley for atleast coming out with some kind of vision document he is trying to infuse the element of stability certainty which were missing earlier and of course a road map for tax reforms also which he had promised ultimately the government will take a call on Dr Shome committee report whim hare of course are required because our net needs to be toned up perhaps restructured and it has to undergo some kind of changes. So thanking you for watching us we will certainly bring more reports more analysis more insightful debate on the issues of Indirect Tax may be very soon.