The Confederation of Indian Industry (CII) wants the Parthasarathi Shome Committee to recommend that controversial amendments to the Income Tax Act be made effective prospectively instead of retrospectively from 1962 in the Finance Act, 2012. It also asks for overhauling these provisions.
The Shome Committee is expected to give its report tomorrow on the retrospective amendments as well as the final recommendations on the General Anti-Avoidance Rules (GAAR).
The Federation of Indian Chambers of Commerce and Industry (FICCI) asked the committee to raise threshold of tax benefits from Rs 3 crore to Rs 5 crore to attract GAAR, besides exempting family settlements from its purview.
In the Finance Act, the government amended the Income Tax Act retrospectively from 1962 to bring overseas deals of acquiring Indian assets under the tax net. The amendments follow the Supreme Court decision that the tax department did not have jurisdiction to tax Vodafone for acquiring a majority stake in Hutchison Essar (Now Vodafone India) through complex 11 billion dollar overseas deal.
“CII requests that this provision after providing the necessary clarifications be made effective prospectively,” a note from the Confederation of Indian Industry to the panel said.
However, CII's recommendations mostly relate to the retrospective amendments in relation to foreign institutional investors (FIIs).
The chamber said FIIs play an important role in the Indian capital markets and contribute significant portion of liquidity in both debt and equity markets.
CII said portfolio investors are concerned that the new tax provision could subject the sale of their investments to multiple taxation.
The provisions seeking to tax offshore transfers could be applied to tax the gains on the redemption of fund units where the fund is invested directly or indirectly in Indian securities, it said.
"Hence, a portfolio investor including private equity, venture capital funds, FIIs etc. could be exposed to multiple levels of taxation on the same gain--once on sale of investment in the offshore funds and again on the sale of investment of the said funds in Indian companies," the chamber said.
The chamber also wanted the committee to clearly define what is meant by "deriving substantial value in India" on the basis of which retrospective amendments were brought.
"This is a major cause of concern for global offshore funds investing directly or indirectly into India," it said..
The chamber also wanted the panel to accept the Parliament's Standing Committee’s recommendations that the amendments should not apply to indirect ownership of “small shareholdings” of Indian companies.
CII said this recommendation was intended to ensure that the indirect transfer rule would not affect portfolio investments in listed securities.
A small investment could be defined as an interest of 10 per cent or less of an Indian listed company in keeping with the 10 per cent investment limit for each FII.
For debts held by FIIs, such as government bonds and listed corporate bonds, these should be within the prescribed limits set by the Securities and Exchange Board of India (SEBI), the chamber added.
Ficci's feedback was on the draft GAAR report submitted by the panel. Besides raising the threshold of tax benefit for invoking GAAR, the chamber wanted that GAAR should exempt arrangements of a normal business or family settlements.
The panel has not pointed out any specific measure on this aspect.
The panel set up by prime minister Manmohan Singh in July this year and headed by renowned tax expert Parthasarathi Shome in its draft report had called for deferment of GAAR by three years.
The Union Budget had proposed to introduce GAAR from this year itself, but it was subsequently deferred to April 1, 2013, following adverse reactions to the proposed new regime. The committee wanted it deferred until 2016-17 financial year, that is, 2017-18 assessment year.
The panel said wherever specific anti avoidance rules (SAAR) are there, GAAR should not be effected. In this regard, the committee wanted that benefits under tax treaties should be dealt with revisiting those treaties and not through GAAR. However, according to FICCI, the committee did not specifically mention beneficial ownership under SAAR.
As such, it wanted the panel to clearly state that wherever beneficial ownership like those related to dividends, interests etc is provided under the tax treaties, GAAR would not be invoked.
Later, scope of the Shome panel was expanded to examine the issue of retrospective amendments to the Income Tax Act, which have already been enacted into law.