Topical tax issues

Caucasian businessman using digital tablet in cafeThe newly crowned Modi Government has completed three months in office. In this short time, it has succeeded in instilling confidence in global investors on the attractiveness of the Indian economy as an investment destination. It is attracting the attention of several MNCs, who are crafting roadmaps to enter the Indian market or uptick their existing investment budgets for the country. Furthermore, the Prime Minister’s maiden Independence Day speech, in which he emphasised on his desire to make India a major manufacturing hub, will go a long way in boosting current and prospective investors’ confidence.

One of the areas of concern for investors is the long-drawn litigation cycle and uncertainty relating to tax laws. Recent measures, including an increase in the number of benches of Authority for Advance Rulings, constitution of a High Level Committee to deal with cases of indirect transfer and the roll-back provisions of the Advance Pricing Agreement in the Union Budget 2014, are expected to limit litigation as well as ease the processes and make certain the outcome of tax disputes, if these are implemented in the right spirit.

One of the trends witnessed in recent times has been the concentrated effort made by the Income Tax Department to focus on the structures of permanent establishments by questioning these and establishing the fact that deputed employees are part of the foreign enterprises, which depute them to their Indian subsidiaries or joint ventures. Factors such as foreign enterprises continuing to contribute to social security in their home countries and their employees having the right to receive salaries from their erstwhile foreign employers have been viewed adversely. The Income Tax Department is also securing information from social sites such as LinkedIn to gain an insight on the work profiles of employees at liaison offices. While there can be views on the admissibility (or otherwise) of such evidence, this indicates the need for enterprises to comply with “hygiene”-related measures as part of their internal policies. The Tax Department is conducting surveys to understand the functional integration of Indian subsidiaries with their foreign parents by tracking email trails, reporting channels, etc., in their decision-making processes to establish the fact that subsidiaries are in actuality the alter egos of their foreign parents. It is also trying to establish that subsidiary functions under the control of foreign parents far exceed the tolerable control exerted by shareholders. To sum up, these developments indicate the immediate need for MNCs to review their structures in light of evolving judicial trends and the aggressive stance taken by the Tax Department in India.

Amalgamations are largely perceived to be tax-neutral. Recently, the Supreme Court (SC), in the case of SMIFS Securities, held that goodwill arising on account of amalgamation is an intangible asset and is eligible for depreciation. Prior to this decision, there was a debate on whether mere goodwill is an intangible asset within the meaning of section 32 of the Income Tax Act 1961 (ITA), and therefore, if it is eligible for depreciation. The SC, in the case of SMIFS, held that goodwill is an intangible asset that is eligible for depreciation. This aspect will need to be factored in or considered when mergers are contemplated.

One thought on “Topical tax issues

  1. While we see that there has been a unprecedented change in the policy of the government to limit the litigations on the tax aspects, I still don’t see the policy being percolated down to the tax officers. A good example can be the situation of the Service tax refunds which are rightfully refundable to the Exporters of services but we see a lot of litigations before the refunds are realized.

    Moreover with the new impending tax legislature like DTC and GST and the already notified Companies Act are going to negate the jurisprudence we had over the year and initiate new areas of tax disputes. Hence in my opinion, till the time the policy is percolated down till the tax officers and there is a mind set change in their approach, I don’t see how the same would impact the negative sentiments of the corporates.

    Hence I see a bigger challenge for the Modi government to follow the policy announcement with implementation at the very grass root level of the tax administration.

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