Where next will they cast the tax net?

Rashmi Guptey
9th June 2016

I respect the government’s desire to increase the tax net, curb black money, money laundering and build transparency in our tax system. What I don’t understand is why they make us a part of a guessing game with unheard of potential levies from time to time?

Here is why I say this:

The biggest storm in the history of the Indian tax law has been the retrospective amendment to, inter alia, section 9(1)(i) of the Income-tax Act (i.e. the retrospective insertion of Explanations 4 & 5) by the Finance Act, 2012, seeking to tax in India, a transfer of shares of a foreign company deriving its value “substantially” from Indian assets, i.e. an indirect transfer of shares of an Indian company.

Thereafter, to clarify the applicability of this retrospective amendment, the Finance Act, 2015 made certain amendments including laying down of criteria for ‘substantial value’, providing for taxability of only income attributable to Indian assets and introducing a reporting requirement for underlying Indian entities. Valuation rules and clarifications were awaited on this front until May 2016 which meant some more guessing.

On May 23, 2016, CBDT released draft rules outlining the manner of computation in respect of the Underlying Indian Assets. FMV of such assets is to be Price determined by a merchant banker or an accountant in accordance with internationally accepted pricing methodology plus liabilities, if any. The manner of computation of the Target’s Total Assets has also been defined. I wonder why coming up with the rules regarding valuation took so long? Especially because valuation based on an “internationally accepted pricing” doesn’t not seem like a very novel or new approach to valuation!  

Another such example is the Equalisation Levy of 6% that the Finance Act, 2016 (Act) introduced in respect of certain specified services involving payments exceeding INR 1,00,000 in the online marketing and advertising domain rendered by non-residents who do not have a permanent establishment (PE) in India. This is in the form of a withholding obligation. The draft rules have been notified very recently. What and who needs equalisation is still a question in my mind but this levy certainly means added administrative headache for an otherwise simple payout for an online marketing campaign or digital services.

The past week saw a string of articles stating that the Income tax department is in discussions to levy tax on start-ups that have seen a fall in valuations on the premise that the premium received by the company is their income. Section 56 has been in existence over 4-5 year now and largely impacts non SEBI registered domestic VCs and angel investors. We saw debates like “why should the tax department have a say in down valuations? “dip in valuations could be a pure business eventuality”, “there is lack of objectivity within the tax laws to defend the reasons behind a down round” etc...

Issues like definition of ‘royalty’, especially in the case of software (with respect to taxation and TDS), FPI related cases still being dug out for action by Income tax department cause a lot of heartache and uncertainty.

So amidst running businesses, dealing with operational challenges, businesses are expected to guess the next tax move. I still have immense faith in the current government and our regulators and I am hopeful that we move to a more predictable tax regime with no room for the excessive creativity.