Taking Sting Out of Retro Tax

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - Taking Sting Out of Retro Tax

Hema Ramakrishnan





SILVER LINING: While Vodafone case continues, foreign investors can draw comfort as tax will be charged only on certain offshore deals where the underlying asset and value derived are in India

British mobile giant Vodafone hasn't been bailed out, with Finance Minister Arun Jaitley maintaining status quo on taxing past offshore deals. However, foreign investors can draw comfort as tax will be charged in India only on certain offshore deals where the underlying asset and the value derived thereon are in India.The Budget offers clarity on the conditions under which tax will be charged when Indian assets change hands between offshore entities. Here, Jaitley has done well to accept the recommendations of the Parthasarathi Shome panel, set up by the previous UPA government.

A US company, for example, holds global assets in various countries including India. The sale of the US company will attract tax in India only when the value of the Indian assets in its total assets is 50% or more. However, if the value is less than Rs 10 crore, then the sale will be tax free. The law says the Indian entity will have to provide information on offshore deals if they directly or indirectly change the ownership structure of the Indian company. Failure to do so will attract penalties.

"The clarification on indirect transfers is fair and reasonable as it will only impact any change in strategic interest, and not minority stakes. Moreover, the law is clear that indirect transfers through participatory notes and other indirect investments through off-shore funds will not be charged to tax", says Sudhir Kapadia, partner and national tax leader, E&Y.

Capital gains will be exempt when the transfer of shares of a foreign company deriving its value substantially from the shares of an Indian company is under a scheme of amalgamation or demerger.

However, the festering dispute with Vodafone or similar cases will not end with the Budget clarification. Vodafone had bought 67% of Hutchison Essar in February 2007 from the target company's Hong Kongbased parent. The actual payment was received by a Cayman Islands-based Hutchison group company; hence the parties to the deal held no tax was liable to be paid in India. This interpretation was contested by the I-T department. The Supreme Court ruled in Vodafone's favour, but Pranab Mukherjee's 2012 Budget changed the language of law. A retrospective clarification on the intent of tax law was meant to remove any un certainty or ambiguity. But that stays.

"While the threshold for `substantial' investment is accepted at 50%, the ex emption for small investors is only avail able for holding less than 5%. Moreover, while foreign mergers and demergers have been granted exemption from indirect transfers, there is a reporting requirement and penal consequences on failure to do so on the Indian company. In portfolio investment structures, the Indian firms may not be privy to the information on change in shareholding at the investor level. Therefore, the penal provisions are draconian," says Shefali Goradia, partner BMR Associates.





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Strong Medicine for State-run Banks

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - Strong Medicine for State-run Banks

Sangita Mehta





TIME TO DELIVER Poor lending practices of the past and constant political meddling have resulted in many of them performing below potential, leading to a surge in bad loans at a time when capital requirement is on the rise

The government, in its determination to change the structure of state-run banks, is reviving the idea of a holding company structure to hold its shares in them. As a first step, it is planning to constitute a bureau that will spearhead hiring of senior executives for banks and advise them on business strategy. The bureau will eventually morph into the holding company.

"The bureau will search and select heads of public sector banks and help them in developing differentiated strategies and capital-raising plans through innovative financial methods and instruments," Finance Minister Arun Jaitley said in his speech. "This would be an interim step towards establishing a holding and investment company for banks."

The government wants to reduce the banks' dependence on it for capital amid a tight fiscal situation. It has set aside `9,555 crore for the next fiscal year, against `6,990 crore this fiscal, for investment in state-owned banks, including Nabard.

"It (the bureau) will improve governance, lay norms for the appointment procedure and will screen candidates for the post," said TM Bhasin, chairman of Indian Banks Association and CMD of Indian Bank.

Both the government and the Reserve Bank of India are seeking to revamp state-run banks, which account for nearly three-fourths of the market share. Although these banks are large, poor lending practices of the past and constant meddling from the political system have resulted in many of them performing below potential.

Some of the decisions of the government are based on the recommendations of the PJ Nayak Committee on revamping corporate governance practices in state-run banks. The panel had suggested the splitting of posts of chairman and managing director, a plan that is already being implemented in banks such as Bank of Baroda and Punjab National Bank.

In the last seven years the govern ment has invested `68,724 crore in PSU banks. Capital will be a critical factor in running public sector banks as the new Basel norms require banks to hold higher capital to grow their loan book. India Ratings & Research has estimated that PSU banks will need `4.5 lakh crore in capital in the next three years to meet the Basel III accord. With the government in a fiscal consolidation mode, to bring down fiscal deficit to 3% of the gross domestic product, not much funding would be available for banks. So, it has directed them to improve their efficiencies.

The Economic Survey released on Friday said banks should be proactive in booking profits from their bond holdings that has been gaining in value. Instead of showing gains as profits, banks should sell them, provide for bad loans, and utilise the undistributed profit to create capital buffer.

Skeptics abound when it comes to changing the way state-run banks function. "A lot will depend on people who are selected in the committee and what kind of procedure they follow," said DK Mittal, former financial services secretary. "If the committee continues to have members from the RBI and finance ministry it would just be like old wine in new bottle. More significantly, there is a need to have more filtering in the selection of candidates and group discussions."

FM Fires up Make in India Engine

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - FM Fires up Make in India Engine

Binoy Prabhakar





PLENTY OF PROPOSALS Manufacturing units expected to benefit from specific steps such as customs & excise rejig, greater access to credit, focus on improving skills and broader impetus on ease of doing business and infrastructure

Arun Jaitley has attempted to bolster Prime Minister Narendra Modi's Make in India project by packing his budget with proposals that are expected to help manufacturing units cut costs as well as access credit and skilled manpower.

Both in terms of specific proposals such as reduction of customs duty on inputs and parts and the broad emphasis on making it easy to do business and infrastructure, the budget was unwavering in its attention on Modi's pet project. Jaitley said the first pillar of his tax proposals was to deal with black money while the second was the promotion of manufacturing and `Make in India' (manufacturing found mention 15 times in Jaitley's speech while Make in India made it 10 times).

True to his word, he announced customs duty cuts on 22 items that will make it cheaper for Indian companies to import parts to manufacture products. He sought to protect domestic makers of commercial vehicles such as trucks and buses by thrusting a higher duty on importers of such vehicles. Given that many sectors are reliant on trucks to transport goods, the helping hand here is expected to lift a number of accompanying sectors.

Jaitley also sought to facilitate cheaper technol ogy transfer to small businesses by more than halving the rate of income tax on royalty and fees for technical services to 10%. By proposing to re cast excise duty structure on certain goods, the FM has tried to boost the manufacture of products such as tablet PCs and leather footwear.

Despite Modi's ambition to make India a manufacturing hub, the current situation is not pretty.Manufacturing actually declined from 18% to 17% of the GDP, according to the new GDP data, while manufacturing exports have remained stagnant at about 10% of the GDP.

The government seems keen to make amends.Jaitley said the government will launch a National Skills Mission to consolidate skill initiatives spread across several ministries. In the works is also a scheme called Deen Dayal Upadhyay Gramin Kaushal Yojana to enhance the employability of rural youth.

Now, less than 5% of the potential workforce get formal skill training.

The budget has taken note of the difficulties of small businesses in accessing credit. The proposed Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of `20,000 crore and credit guarantee corpus of `3,000 crore and tax breaks for Alternative Investment Funds are expected to provide relief on this front. The only sector that failed to match the hype on Make in India was defence. "As against the likely expenditure of this year of `2,22,370 crore the budget allocation for 2015-16 is `2,46,727 crore," said Jaitley.

Defence analysts said the 11% increase in outlay is too modest to achieve the government's ambition on greater self-sufficiency in making defence equipment, including aircraft. India's military will not have much money to expand its arsenal significantly, given that a substantial chunk of this money will go to meet operational expenditure.

Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG, said the industry expected "infrastructure status" for the sector in order to attract tax incentives and to meet the capital requirements. "That has been a disappointment," he said, adding that overall, there is nothing to write home about in defence.

At least one manufacturing sector was left disappointed, too. Mehul Choksi, chairman of the Gem & Jewelry, Luxury & Lifestyle Forum of industry lobby Ficci, said though the FM has announced a slew of measures to curb black money, he has ignored one of the biggest issues faced due to smuggling of gold. "The impact of this `unofficial' supply of gold of about 180 tonnes is valued at about $10 billion, leading to a loss in foreign exchange inflow of a similar amount and a loss in revenue of over $ 1 billion on account of customs duty," he said.





Govt Willing to Walk the Talk Through Higher Public Investments ANIL AGARWAL GROUP CHAIRMAN, VEDANTA RESOURCES

Mar 01 2015 : The Economic Times (Mumbai)

by Invite - Govt Willing to Walk the Talk Through Higher Public Investments

ANIL AGARWAL GROUP CHAIRMAN, VEDANTA RESOURCES





Budget 2015 is the right enabler to achieve growth

India is one of the world's fastest-growing economies. However, it operates far below its potential. Over the past few years, investments have slowed and there is an urgent need to revive the economy.

I believe the first full Budget of the new government is the right enabler to achieve growth. Special focus on infrastructure, both social and physical, would have significant benefit for our nation.

It is heartening to note that the government is willing to walk the talk through higher public investments. Higher public investments will be a catalyst for higher private investments and support a swift recovery, as private spending is key to long-run growth.

Manufacturing is a key policy objective of the new government, which identifies this sector as the engine of long-run growth. To this end, Budget 2015 has announced a series of cuts in customs and excise duties.This has the potential to promote domestic manufacturing and `Make in India' for creation of more jobs. Even as we embark on a high economic growth trajectory, our special emphasis should be on social infrastructure to bring the marginalised and poor sections of society into the mainstream. This is because 21.9% of our population is living below the poverty line. We are in the bottom 25% of all countries on the Human Development Index, and bottom 20% on the Gender Inequality Index.

Women account for nearly 48% of India's population. Thus, focus on women should be a priority for any budget.The vision of each house in the country having clean drinking water and a toilet by 2022 is commendable. There is a very close interdependence between water, sanitation, health, nutrition, and human well-being. We view water as a central resource for a sustainable India world's youngest nations and it is blessed with a demographic dividend. It is important for us to harness this immense potential. Thus, it is heartening to see that the government will soon launch a National Skills Mission. It is a step in the right di and are in the process of playing a very transformational role. We are successfully executing a crucial pilot in the state of Rajasthan and working together with the government and the community to improve water access and availability, and as a result transform lives of rural communities.

I ndia is one of t he rection and numerous initiatives on skill development will help improve employability and generate greater employment opportunities.

Numerous social security measures, particularly the universal social security system, announced in Budget 2015 will have far-reaching benefits for all Indians and poorer sections of society.

To conclude, the new government has pursued pro-growth initiatives and I believe Budget 2015 will continue the impetus to further boost economic growth and re-establish investor confidence.

The government is well positioned for a swift and efficient execution of pro-growth initiatives. Not only will this help bring in more capital and employment, it will significantly benefit society at large and help achieve aspirations of millions of Indians.





FIRING ON ALL CYLINDERS Budget promises rapid construction of roads, ports, UMPPs, airports & green energy projects with the help of massive public funding while weeding out delays and corruption

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - Adding Muscle to the Core

Himangshu Watts





FIRING ON ALL CYLINDERS Budget promises rapid construction of roads, ports, UMPPs, airports & green energy projects with the help of massive public funding while weeding out delays and corruption

Infrastructure development is poised to take a giant leap as the Budget promises rapid construction of highways, ports, ultra mega power plants, airports and renewable energy projects with the help of massive public funding made possible by delaying fiscal belt-tightening.

Analysts expect foreign direct investment, which has been lukewarm towards Indian infra structure, to flow into the sector. The optimism stems from the belief that the promised transparent auction and absence of uncertainty over clearances will calm overseas investors, who often say it is difficult to compete with local firms that are adept at navigating bottlenecks and roadblocks.

With projects worth `8.7 lakh crore stalled due to difficulties in clearances, litigation, poor performance of contractors or financial difficulties, Finance Minister Arun Jaitley said the major slippage in the past decade has been on the infrastructure front."There is a pressing need to increase public investment....with private investment in infrastructure via the public-private partnership (PPP) model still weak, public investment needs to step in, to catalyse investment," he said.

The minister focused on steps to fund infrastructure and rule out delays and corruption ­ steps which analysts said can lure foreign companies to invest in Indian projects. A key initiative is the "plug-and-play" model, in which projects will be offered after securing all clearances. Jaitley said he expects `1 lakh crore investment in five ultra mega power projects (UMPP). India Ratings said domestic companies may not participate enthusiastically in these projects due to weak lending and equity sentiment in the sector. "However, this could boost the foreign interest in the sector which will bring in the required equity and more technological inputs for timely implementation and enable efficient operation of these projects," the agency said.

Shubhranshu Patnaik, senior director with Deloitte, said land acquisition for giant projects may be an issue."Committing to bid out five UMPPs is creditable but it isn't clear how soon this can be done, given the need to acquire land for the plant and mines," he said. The Budget proposals include a massive expansion and acceleration of road-building by completing 1 lakh km of highways already under construction and another 1 lakh km of new projects, which will boost demand for inputs, including cement and steel.

Jaitley also promised tax-free bonds for various infrastructure projects and the setting up of the National Investment and Infrastructure Fund, which will have an annual flow of `20,000 crore to it. "This will enable the trust to raise debt and, in turn, invest as equity, in infrastructure finance companies such as IRFC and NHB. These companies can then leverage this extra equity, manifold," Jaitley said. Further, PSUs will raise capital expenditure by `80,444 crore to `3,17,889 crore in 2015-16. "In fact, all told, investment in infrastructure will go up by `70,000 crore in 2015 16, over 2014-15 from Centre's funds and resources of CPSEs (central public sector enterprises)," the minis ter said. Jaitley also said the government plans to in troduce a Public Contracts (Resolution of Disputes) Bill to resolve disputes, which have delayed many projects.

Analysts and industry executives said that the steps announced in the Budget will boost infrastructure investment and improve business sentiment, even as they added that they will keenly watch how effectively the promised measures are implemented.





LISTING GETS EASIER - Tax on REIT Income Passes to Investors

Mar 01 2015 : The Economic Times (Mumbai)

LISTING GETS EASIER - Tax on REIT Income Passes to Investors

Sobia Khan & Kailash Babar

Bengaluru | Mumbai:





Finance minister Arun Jaitley proposed to make the path slightly easier for Real Estate Investment Trusts (REITs) to list, allowing pass-through on rental income and doing away with capital gains tax issue for the sponsors.However, the capital gains tax will be applicable for direct transfer of real estate to these trusts.

REITS are vehicles for real estate companies to sell down income-producing assets in the market to investors and use the cash to invest in other projects. If an asset is directly owned by the trust, its income will be taxed at the unit holders' hand and the trust need not pay tax. A domestic investor will be taxed at 10% for this while a foreign investor will pay tax as per India's tax treaty with that country . If the asset is held through a special purpose vehicle and not directly, dividend distribution tax (DDT) will be applicable. The industry was seeking removal of DDT, but the FM has not accepted this request.

The move may boost REIT listing in India, allowing faster and smoother exits to investors in a sector hit by funding constraints. REITs own properties, and their rental income is distributed among investors. In developed markets, REITs enjoy special tax considerations. For investors, they offer high dividend, along with a liquid option, to invest in real estate.

The government, in its Budget last year, had unveiled proposals to encourage REITs and Infrastructure Investments Trusts. While several developers have shown interest, no REIT is listed in India, partly because of lack of clarity on taxation.

"A large quantum of funds is locked up in various completed projects which need to be released to facilitate new infrastructure projects to take off," Jaitley said on Saturday while presenting the Budget. The sponsors can list REITs by paying securities transaction tax, he said.

Some of the developers who may benefit are DLF, Embassy Property Developments, RMZ Corp, K Raheja Corp and Unitech.

"Promoter-level capital gains tax on migration to REITs has been rationalised, which should kick-start the REIT industry , although minimum alternate tax on the migration to discourage promoters may immediately initiate the process," said Bhairav Dalal, associate director, tax & regulatory , PwC India.