The Indian M&A market always makes for interesting reading due to its continued buoyancy, and the recent Indian Supreme Court ruling involving Vodafone has only served to make it more so. To find out more, Lawyer Monthly speaks to Kalpesh Maroo, a Partner with BMR, a professional services firm offering a range of Tax, M&A and Risk advisory services for domestic and global businesses.
In the light of the Indian Supreme court ruling in favour of Vodafone, the Indian government has proposed changes to amend its tax law. How will this impact the investment and M & a transactions?
The Indian Government has amended the law relating to taxability of offshore transfers with retrospective effect from 1961. As per the amendment, income arising to any person from the transfer of capital assets located outside India will be chargeable to tax in India if such assets derive their substantial value from the assets located in India. The definition of the term capital assets is also amended to include any rights, in or in relation to an Indian Company including management and control rights.
The above amendments are significantly important for three reasons. Firstly, it is wide in its scope and covers income from transfer of capital assets located outside India. Secondly, it casts a withholding tax obligation on every buyer irrespective of the fact that the buyer is a resident of India or not. Thirdly, it is proposed to be brought into effect retrospectively. These amendments may have an impact on internal group re-organisations of multinationals / transfer of shares of companies which have an India Foot print. In addition, any transaction that has been undertaken in the past will have to be evaluated for taxability in India.
can you also tell us about the General anti-avoidance rules (“GaaR”) and its impact on Investment structuring and M & as in India?
Firstly, the good news is that the introduction of GAAR provisions has been deferred by a
year and would be applicable from Financial Year starting April 1, 2013 onwards. This deferment apart from providing an opportunity for the government and the industry to enter into detailed consultations to address key concerns also provides a window of opportunity to tax payers to appropriately prepare for GAAR including carrying out any internal business re-organisation, etc. before GAAR comes into effect.
The Indian Government has amended the law relating to taxability of offshore transfers with retrospective effect from 1961
Once GAAR becomes effective, based on the provisions laid out currently, the Revenue Authorities (“RA”) can declare an arrangement as an impermissible arrangement (“IA”) if the main purpose of the arrangement is to obtain a tax benefit and the arrangement creates rights/ obligations not normally created between persons dealing at arm’s length. An arrangement can also be treated as an IA if it results in abuse of provisions of tax laws or lacks or is deemed to lack commercial substance or is carried out in a manner which is normally not employed for bona fide purpose. If the non-resident entity is based out of a tax favorable jurisdiction, then it is presumed that the objective of the arrangement is to obtain a tax benefit. On holding an arrangement to be an
impermissible arrangement the RA can disregard the arrangement or a step in it and deny the tax benefit. The RA can look through the arrangement, re-allocate income / expense, re-characterize equity into debt or vice versa or disregard the residential status etc. As you can see, these provisions are very wide and can impact every transaction involving tax planning, right from setting up an entity in a tax efficient jurisdiction such as Mauritius / Cyprus to business restructuring decisions. LM
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Kalpesh Maroo is a partner with BMR’s Corporate tax practice in Bangalore. He specializes in corporate and transaction tax and has been advising various multinational companies and Indian business houses on a range of tax and regulatory issues. BMR is a Tier I professional services firm offering a range of Tax M & A and Risk advisory services for domestic and global businesses of all sizes.