Tax Troubles of TechCo

Startups are the new blue-eyed boys and girls of the Indian government. It runs a nice shiny website to guide and register them, bestows sarkari recognition on many, waives patent application fees of some and also grants attractive fiscal sops to a chosen few. The Government even has a special capital fund for the startups. Ministers flaunt startup success stories on the floor of Parliament. When some sarkari measures such as taxing of super premium earned by companies upon issue of share capital were threatening to throw the baby out with the bath water, the Government responded swiftly to startups’ cries of help and tried to mitigate the unintended effects of what infamously came to be known as angel tax. The best part is that the Government even bans some of its pesky little officials in the local field formation to visit the startup offices on the pretext of any surveys or inspections.

All this and more government support is available if you are a very young, fledgling startup of a certain vintage. However, if you were born earlier than the cut-off date, then the Government continues to be as unfriendly as it can be. The unfortunate example of one such technology company that I have seen closely is a case in point.

 

About TechCo

TechCo was born in 2006. It was a global advertising technology platform for programmatic ads. It simplified the marketing technology ecosystem for small and medium segment advertisers by helping them to efficiently use their modest marketing budgets for internet reach. The Company was proudly headquartered in India, set up subsidiaries in the US and Singapore, attracted marquee investors and even turned profitable after the first few years of losses - a very common trajectory for any technology company. And all this took place without any notable supportive schemes of any Government. In fact, perhaps the successful run was because the Government kept itself away. Unfortunately, as is also very common with technology companies, it doesn’t take much time for the fortunes to change. Evolving technology, dynamic practices and changing regulations world-wide meant that TechCo’s business had turned a corner by 2015. It is at this turn that the Indian tax department suddenly got interested in the Company. 7 years hence, TechCo’s business is no more, it has no employees, its overseas subsidiaries closed long ago, but what remain in India are a plethora of unresolved income-tax and service tax cases foisted on the Company, unending litigation therefrom and huge tax refund dues pending from the Government.

 

Tax troubles of TechCo

Issue No. 1 – Withholding tax (TDS) on service fee paid to US subsidiary

There is ample jurisprudence in India regarding withholding tax on technical service fee paid to US residents. Most of the jurisprudence favours the taxpayers, clearly laying down that unless the technical service makes available technical know-how etc. to the Indian payer, there shouldn’t be any withholding tax. Still tax officers at lower level routinely demand TDS on such payments. In TechCo’s case, there is such demand for 3 years, with tax amounting to multiple crores of rupees. Since depositing at least some part of the demanded tax is the sine qua non for filing an appeal, TechCo had to cough up a lot of money just to be able to defend itself, even as its dwindling business meant cash flows were scarce.

Upon appeal, the Commissioner (Appeals) - the first level appellate authority - ruled against the Company. This was expected because the general experience is that this authority rarely sides with the taxpayer. When the matter reached the tax tribunal, it decided to remand the case back because it observed that both the assessing officer as well as the Commissioner (Appeals) had not even properly analysed the facts before reaching their adverse conclusion. It’s been more than a year since the tribunal passed the above strictures but the tax department is yet to look into the matter afresh.

 

Issue No. 2 – Salary and marketing expenditure considered to be capital in nature

As the technology and internet practices evolved, TechCo was trying to cope with the changing demands of its market. It unsuccessfully attempted to rework its product, incurring expenditure on research and development. However, the expected results didn’t materialize and therefore the whole project was scrapped. As if that itself was not demoralizing for the Company, the tax officer decided that all such expenditure had to be treated as capital in nature and hence disallowed it while computing its tax liability. Similarly, certain regular marketing expenditure was wrongly treated as capital in nature. The Company was slapped with a tax demand again running into crores of rupees. Again, TechCo had to shell out substantial sum before appeal, just to remain in the fight.

Here too, the Commissioner (Appeals) sided with the assessing officer. Fortunately, the tribunal categorically overruled the tax department. Optimistic of recovering its money from the taxman, TechCo patiently persevered for more than a year, only to discover recently that the tax department is now appealing before the High Court. Apparently, the tax officers will look very bad if they simply give up on this case, as the amount involved in significant.

 

Issue No. 3 – Taxing TechCo India as a representative of its US subsidiary

As if the main plot involving Issue No. 1 and 2 above was not engrossing enough, the tax department decided to have some more fun. It believes the US subsidiary of TechCo should also have filed its tax returns in India. Given that it did not and it is no more in existence, they have sought to treat its parent company - who has the misfortune of surviving only to fight tax cases - as a representative assessee. This despite the fact that this case mirrors the same matter they are contesting in Issue No. 1, wherein so far they have not been able to establish their case well.

 

Issue No. 4 - Penalty proceedings

                Tax department initiates penalty proceedings every time it makes any adjustment to the returned income. So proceedings were initiated in respect of all the years where the above issues are being contested. Nothing unusual about it. To be fair, these proceedings are often kept in abeyance if the taxpayer has filed appeals. Here too the Company was in for a bad surprise when it was suddenly imposed with a penalty for allegedly not having attended some hearing. More surprising was the fact that this penalty was imposed in respect of a year where the tax officer had no adverse findings and had actually accepted the returned income. For a change, this does not seem to be an outcome of human mischief but possibly a technical glitch in the computer system relied upon by the department. TechCo is only hoping that this bad surprise will go way as suddenly as it came.

 

Issue No. 5 – Reassessment (AY 2015-16)

                Even as the tax department has filed appeal against the tribunal’s order in respect of Issue No. 2 above, it also wishes to reassess TechCo’s income for that year. To that effect, it has issued notice to the Company. TechCo quickly responded, requesting reasons in writing (which is its statutory right) for such reopening of assessment. The department has not responded to the request yet.

 

Issue No. 6 – Service tax cases

                It is not only the income-tax department that has been tailing TechCo. Service tax officers have been interested too. Ignoring the fact that the Company only ran a technology platform that facilitated buying and selling of online advertising spaces, they have alleged that the Company itself was engaged in display of advertisement and therefore liable for service tax. Overall, they have raised demands amounting to crores of rupees and forced the Company to pay at least a portion while the appeals before CESTAT are pending.

 

How TechCo and its founders suffer

·    For a business that is permanently shuttered, TechCo has crores of its funds locked up in tax demands that it was forced to remit to the tax authorities. This amount in the hands of the founders might have helped them start afresh and fund their new startup that the Government would so keenly promote now.

 

·      To protect itself from any coercive steps that the tax authorities might take to recover the unpaid tax demands, TechCo is compelled to continue contesting the matters in appeal proceedings which take long years to conclude, incurring further costs for the Company.

 

·     Mired in so many cases and litigation, the founders are unable to focus on developing their new venture.

 

·       Wary of dealing with Indian system where tax authorities hold up everything long after the business is gone, the founders would think twice before setting up their next venture in India.

 

·      Life cycle of technology-driven companies can be quite short. If the wheels of tax justice are going to grind so slowly that these companies spend more of their lifetime fighting tax cases than they did doing business, India will never really be a great startup destination, notwithstanding all those initiatives of recent years.

A decade of dramatic developments in Indian and international taxation

Last decade has seen frenzied activity in the world of Indian taxation. Supreme Court’s celebrated verdict in the case of Vodafone came in 2012, only to be countered by the contentious retrospective amendment by Parliament, followed by battles invoking non-tax legal instruments such as Bilateral Investment Protection Agreement, to finally culminate recently in a rare retreat by the Government in the face of adverse international arbitral award. Advanced Pricing Agreements, Safe harbor, Thin capitalization provisions were all introduced in transfer pricing only in the last 10 years. Black Money law offered a window to errant taxpayers to atone for the past tax evasion. One of the stated objectives of controversial demonetisation of 2016 was to clean the tax closet of skeletons. Year 2017 saw one of the most sweeping changes in the form of GST, which took protracted negotiations with a score and a half states, constitutional amendments and remarkable political will to come through. Concepts such as General Anti Avoidance Rule, Place of Effective Management were codified and the tax treaties with Mauritius-Singapore-Cyprus saw their treaty shopping utility being consigned to history. Although the much-expected Direct Taxes Code never saw light of the day, the tax authorities managed to log into the online world and went faceless for assessments as well as appeals. Quite an astonishing set of changes in a span of just 10 years!

International tax scene

While all this was happening in India, international tax scene was no less dramatic. Globalisation of the last few decades, accompanied by communication revolution saw exponential rise in digital ways of doing everything, including business. While digitalization of economy brought great convenience to consumers and immense wealth to companies and their shareholders, it also facilitated a great deal of tax avoidance. The antiquated framework of the international tax rules was not upgraded enough to respond to the complexities and opportunities of the new online world. When questioned by the US senate members about his company’s tax planning strategies which seemed a bit underhand to tax authorities, Tim Cook, the head of Apple, unapologetically proclaimed that his company was playing by the existing tax rules. Too bad, if those rules left the tax authorities feeling deprived. This was unacceptable and governments had to act. They also needed to augment revenues to address fiscal pressures in the aftermath of global financial crisis. In 2013, G20 – a group of 20 nations that make most of the biggest economies of the world – decided that tackling tax avoidance should be a priority. By 2015, the Base Erosion and Profit Shifting Package of 15 actions was adopted by G20, Action 1 dealing with the digitalization of the economy.

Key problems

Digitalisation cum globalization has mainly created two problems for the century-old tax system based on source-residence based taxation rights. First: Existing system provides that the profits of a foreign company can only be taxed in another country where the foreign company has a physical presence, commonly known in tax jargon as permanent establishment. In the digitalised world, it has become possible to conduct business in any country without much substantial presence on the ground. The biggest example of this would be companies like Google which can sell their services directly anywhere in the world to anyone who has an internet connection. So how can a country bring a Google into its tax net when the Company has little physical presence on ground yet millions of users? In other words, whether the source of today’s multinational enterprise’s (MNE’s) income lies more inside a country where its customers are or where it conceptualises and creates services for those customers? Second: Compared to physical assets like plant and machinery and inventory, it is easy to move around intangibles like brands, copyrights, patents across countries. Just like water finding its way to low-lying area, such new age assets find home in low-tax countries and companies can shift those easily. Further, it is difficult to pin down the ownership, control and management of an MNE to a particular country. In this age of jet travel, video conferences and multi-national staff, it is not unthinkable for an Isreali registered company listing on a US stock exchange, holding its intangible assets in Switzerland, while making most of its money from customers in Asian countries. Which country should then have residence-based right to tax profits of such an MNE? Some countries have taken advantage of this confusion, offering irresistible tax regimes to MNEs, weaning them away from their home countries as well as market jurisdictions. For instance, US-origin technology giants have used Ireland as a base for their non-US business from countries like India. Effectively, Ireland encroached upon the revenues that would have ordinarily belonged to either India or the US or both.

OECD estimates that the above problems cause countries to lose between US$100-240 billion annually in tax revenue, which is equivalent to 4-10% of global corporate income-tax revenues.

Solution proposed

136 out of 140 member jurisdictions of the OECD/G20 Inclusive Framework on BEPS, representing more than 94% of global GDP, reached a political agreement recently on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy as well as a Detailed Implementation Plan. Tables below summarise the key aspects of the Two-Pillar Solution:

Pillar 1: Market jurisdictions get more taxing rights		Impact in India
Objective	More allocation of taxing right to market jurisdictions, i.e., countries where goods or services are used or consumed	No more requirement of permanent establishment in India to capture business profits of foreign companies
Taxpayers covered	MNEs (other than those engaged in extractives and regulated Financial Services) with ·         Global turnover >20 billion euros ·         Profitability >10%	About 100 biggest and most profitable MNEs get covered by this threshold rule
Countries covered	Those from which the above MNEs derive at least 1 million (250,000 in case of small countries with GDP<40 billion) euros in revenue	If Indian revenue of any of the above 100 MNEs is <1 million euros, India will miss out on any allocation in respect of that MNE
Reallocated tax base	25% of profit in excess of 10% of revenue, using revenue based allocation key	E.g. While Alphabet, parent of Google will get covered, Amazon, because of its <10% profit margin, may escape the net
Computation of tax base	Using financial accounting income, with a small number of adjustments; Losses allowed to be carried forward	No need to prepare separate tax accounts only for this purpose
Dispute resolution	Mandatory and binding mechanism to be set up and followed by countries to ensure tax certainty to the above MNEs	Provides tax certainty to MNEs, though their tax compliance and cost may increase
Administration	Streamlined tax compliance through a single entity
Obligation of market jurisdictions	Remove all unilaterally imposed digital services taxes for all companies and commit to not introduce new	Equalisation levies imposed under Section 165 (@6% on online advertisement etc.) and under Section 165A (@2% on ecommerce supply and services) of the Finance Act, 2016 will have to be abolished by India for all companies, not just the MNEs covered by Pillar 1.
Method of implementation	Through a Multilateral Convention (MLC)
Timeline for implementation	Text of the MLC and its Explanatory Statements to be finalised and signed in 2022; Entry into force and effect in 2023	FY 2023-24 may be the first year to compute MNE’s tax dues in India under Pillar 1.

 

Pillar 2: Limiting tax competition among countries		Impact in India
Objective	Providing a minimum tax on corporate profits, putting a floor on tax competition among countries	Indian parent gets to tax income of its foreign subsidiary if it has been subjected to lower than minimum tax in the other country; When India is a source  jurisdiction, it gets to impose limited source taxation on certain related party payments of interest, royalties etc. subject to tax below a minimum rate in the payee jurisdiction
Taxpayers covered	MNEs (other than Government entities, international organisations, non-profits, pension funds, investment funds that are Ultimate Parent Entities) with consolidated group revenue of at least 750 million euros (other than international shipping income)	Indian MNEs having global group revenue of INR 6500 cr will get covered
Countries covered	Low tax jurisdictions (i.e., where the effective tax rate of the MNE’s constituent entity, calculated with reference to financial accounting income is less than 15%)	E.g. Indian MNE’s subsidiary in Mauritius, where its Effective tax rate is lower than 10%
Countries excluded	Jurisdictions where the MNE has revenues of less than 10 million euros and profits of less than 1 million euros	E.g. Indian MNE’s subsidiary in Dubai where the revenues and profits are below these thresholds
Computation of tax base	Using financial accounting income, with a small number of adjustments; Losses allowed to be carried forward	No need to prepare separate tax accounts only for this purpose
Method of implementation	·         Two interlocking rules (Income Inclusion Rule or IIR and Undertaxed Payments Tax or UTPR, collectively called Global anti Base erosion Rules or GloBE Rules) to be adopted by members countries in their respective domestic law ·         A treaty based rule called Subject To Tax Rule or STTR to be inserted in bilateral treaties through a multilateral instrument (MLI)	IIR is similar to Controlled Foreign Company (CFC) rules in some countries. India had once considered adopting CFC rules, but didn’t.   Now, India will include the IIR and UTPR in its domestic tax law based on a model text developed by the OECD-G20   India will become signatory to the MLI
Timeline for implementation	·         Model GloBE rules to be developed by November 2021 ·         MLI to be developed by mid-2022	FY 2023-24 may be the first year to compute MNE’s tax dues in India under Pillar 2.

 

Emerging Risks in Tax - Published in Director Today (December 2018, Page 87)

Tax regimes are changing everywhere, and why

The world of taxation is seeing unprecedented upheaval. Not just in India, which ushered in GST last year and is looking to have a new income-tax law soon, but across countries old precepts of taxation are being revisited, revamped or replaced. Tax authorities, armed with increasing number of information exchange agreements, global reporting standards and power of computing and data analytics, are pursuing taxpayers with more vigour.

The need for this change was gaining attention as the world trade came to be dominated by multinational enterprises. Owing to their sprawling operations and markets spread across the globe and because tax systems of countries were rarely aligned or talking to each other, the multinationals were able to cut their tax bill by exploiting tax arbitrage opportunities and lax disclosure requirements, helped by the willingness of some jurisdictions to offer them a ‘havenly’ abode. The abuse was exacerbated when internet started taking over the world, facilitating remotely controlled yet seamless operations, circumventing traditional barriers to trade and blurring national borders. These developments threw taxmen in a tizzy. The basic rules of taxation (like place of residence and place of source of income) carried forward from the 20^th century were proving to be inadequate to address the challenges of taxation in the burgeoning global and digital economy. For instance, where should a company providing computer reservation system to airline industry be taxed if its users are all over the world, its computer server located in Germany and the corporate headquarters based in Spain? Or how can a search engine company be forced to pay tax in India, without having any physical presence or staff on ground in India even though Indian users could access its global website from here, using telecommunication infrastructure provided by a third party? How was it possible to catch and tax a Luxembourg based online retailing company for its sales to UK-based buyers when it didn’t have a single shop there? The old tenets were simply not geared to determine taxation in the new technology-driven reality of business.

Final straw that broke the back, and how

Financial crisis of 2008 made governments around the world take serious note of their taxman’s growing haplessness. Governments needed money to fund bailouts and provide stimulus to reeling economies without running dangerously high budget deficits. Tax revenues had to be upped and quickly. International intra-group arrangements of multi-national companies came under intense scrutiny. Head honchos and tax consultants were summoned and grilled in senate and parliamentary committee hearings. Laws like Foreign Account Tax Compliance Act (FATCA) were passed and multilateral agreements such as Common Reporting Standard (CRS) for automatic exchange of information on bank accounts were signed. Some countries introduced new levies such as diverted profit tax to counter the use of aggressive tax planning techniques of multinational enterprises to divert profits to low tax jurisdictions. There was a concerted effort to tackle the menace of base erosion and profit shifting (BEPS). Action plan was drawn up and agreed upon to plug the loopholes in the present tax systems. A multilateral Instrument (MLI) was signed that can now potentially override thousands of loophole-ridden bilateral tax treaties between countries. Events like panama papers leak and their revelations about rampant tax evasion by the high and the mighty have only strengthened the popular support for the war against tax evasion and avoidance.

While all of this was happening on the world scene, India saw its fair share of tax action internally too. The much celebrated Vodafone case, the Supreme Court’s landmark judgment on it and the anti-climax of parliament’s retrospective amendment of the law are all the developments that took place in less than last 10 years. In last 4 years alone, India saw a couple of black money unearthing schemes, hugely disruptive actions such as demonetization (one of the stated objectives of which was to hit tax evaders), changes to much-abused provisions of tax treaties with Mauritius and Singapore, deregistration of thousands of shell companies suspected of being used for money laundering and tax evasion purposes.

What should you watch out for

On the backdrop of these momentous changes in the tax landscape in a short span of time, what should directors of the board of Indian companies expect in the coming years? Is their personal exposure under tax law in case of contravention by the companies they oversee? Here is a quick guide –

New income tax law is coming

 

The central government (the present one as well the previous) has clearly been keen on replacing the 57-year old tax law that has become unwieldy and complex. It deserves to slip into retirement soon. However, any change brings uncertainty and turbulence for a while, like GST is causing presently (for instance, with respect to anti-profiteering provisions). If all goes as per the plan, new direct taxes code may be the biggest tax reform of the next government that will assume office in May 2019. In a year’s time from now, you might be looking at a draft of the new proposed law. If the recent tax related activism globally is any indication, in all probability it would be safe to assume that the company under your charge would face more rigorous reporting and compliance requirement (like under the GST regime). You may soon want to re-examine your company’s processes that deal with income-tax matters.

 

New anti-avoidance concepts could bite

 

Even before replacing the statute entirely, parliament has already made several changes to the old law in the last few years, making available sharper teeth or wider traps to the taxman.

 

General Anti Avoidance Rule (GAAR) has been incorporated in the law with effect from 1 April 2018. GAAR gives power to the tax officer to treat certain arrangements entered into by your company as impermissible for tax purposes. While the actual use of this rule is not observed yet, tax practitioners expect this to become a fertile ground for disputes in the coming years. If your company is about to enter into any transaction or take step that might appear lacking in commercial substance or is unusual, and results in obtaining a tax benefit, it may be picked up for scrutiny. Be prepared to spend more time in evaluating and approving proposals that look like tax structuring.

 

The concept of Place of Effective Management (PoEM) is brought in to catch foreign companies in the Indian tax net if they are effectively controlled and managed from India. This can increase your group’s tax outflow in here in respect of your overseas subsidiaries that do not have active business, even if they do not actually remit any profits to India. The detailed rules in this regard are still work-in-progress but this new tax provision promises to add to complexity, and therefore the litigation risk.

 

Newly visible information can be used for questioning

 

More information that will now be visible to Indian tax officers due to country-by-country reporting mandate under transfer pricing provisions will be keenly analysed by them. Expect more questions and attempts to boost the tax base in India on the basis of that information. Intangibles could be the new battleground, for garnering more share of tax for India. DEMPE will be the buzzword. It stands for Development-Enhancement-Maintenance-Protection-Exploitation of intellectual property (IP). If an Indian company has a role in one or more of DEMPE functions for a particular IP, the taxman here would want a commensurate income from that IP to be offered to tax in this country, even if the ownership lies elsewhere. Indian tax officer is getting more savvy with data analytical tools and rich data generated by deposits after demonetization and the GST network.

 

Appellate commissioners likely to grow even more unsympathetic

 

Many law-abiding tax payers already feel that they get a raw deal from the first level appellate commissioners who are more prone to tow the revenue’s line even when the taxpayer has a sound case. If recent press reports are to be believed, the Government is mulling over linking CIT(A)’s performance appraisal to the number of orders they pass in favour of the department. This is really bad news for honest taxpayers whose appeals on genuine grounds are now even more likely than before to not get a fair treatment at least until the tribunal level.
 
Penalty and prosecution

 

The penalty provisions of the income-tax law have been changed recently, replacing the concepts of ‘concealment’ and ‘inaccurate furnishing of details’ to ‘underreporting’ and ‘misreporting’. While the changes appear to be well-intentioned, the actual understanding of these and implementation by field formations would be key in making future penalty proceedings fairer. Also, in last few years, there has been a marked increase in tax officers’ propensity to initiate or threaten to initiate prosecution against principal officers of companies, which can include directors. This partly was due to the government’s desire to send a strong signal on its anti-black money actions. Unfortunately, it is also the honest and law-abiding taxpayers with no mala fide tax claims who often end up taking bullets during such measures.
 
Are there any personal risks for directors?

 

A principal officer of a company can be held liable for that company’s contraventions under Indian income-tax law. A director, if she is connected with the management or administration, is covered by the definition of the term principal officer. Where an offence has been committed by a company and it is proved that it was committed with the consent or connivance of, or is attributable to any neglect on the part of any director, such director shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

 

Where any tax due from a private company under liquidation in respect of a tax year cannot be recovered, then, every person who was a director of the private company at any time during the relevant tax year shall be jointly and severally liable for the payment of such tax. However, in case he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company, such dues cannot be recovered from him.

 

Tax officers have power to enforce attendance of any person and examining him on oath. They can also require any person to furnish information in relation to any tax proceedings. Failure to attend or furnish information as required can result in a penalty.

Link to my article in Economic Times (co-authored with Harish HV) published today (3 December 2015)

http://epaperbeta.timesofindia.com/Article.aspx?eid=31815&articlexml=By-Invite-The-Real-Cost-of-Biz-Failure-03122015011044

Ghost of Vodafone exorcised, at least partially

After almost 3 years of ambiguity, the Indian government finally proposed to clarify how it intends to tax the income arising on indirect share / interest transfers. It may be recalled that the Explanation, introduced in 2012 but made applicable retrospectively from 1961, sought to tax in India any income arising from transfer of shares in a foreign company if those shares derived their value substantially from assets located in India. This was to counter the Vodafone type cases in which no tax was paid in India on some mega acquisitions as the shares changed hands outside India at a holding company level. The Government having lost its case before the Supreme Court had decided to change the rules of the game with retrospective effect. What it did not do was to clarify what it meant by ‘substantial value’.

To illustrate, if shares in a company M in Mauritius (which is a holding company of Company I in India) are sold, will this sale be taxable in India even if M derived only 25% of its value from the Indian holding and the rest from its investments in other countries?

In view of the ambiguity, investors and their advisors involved in an M&A deal were often forced to take a conservative stand and considered a transaction to be taxable in India even when the foreign holding company derived as little as 20%  of its total value from Indian holdings. This meant protracted negotiations when it came to withholding of tax arising upon transactions, onerous indemnities given by the sellers and a general feeling of a tax sword hanging on everyone’s head.

Now Finance Bill 2015 proposes to define ‘foreign company / entity shares / interest deriving substantial value directly or indirectly from assets located in India’ as only those where the fair value of such Indian assets  -

1.       Is valued at Rs. 10 crore or more; and

2.       Represents at least 50% of the total assets owned by the foreign shares / entity

The value for this purpose will be a fair value of the Indian assets, without reducing liabilities, as on the end of the accounting year concluded just before the date of the transaction. If however, the book value of assets of the foreign company / entity on the date of transfer exceeds the book value at the accounting year end by 15%, then the fair value on the date of the transaction will have to be considered.

To illustrate, Company M in Mauritius holds assets in India and China and their respective fair values are 8 crore and 42 crore on 31 March 2015. There are no other assets held by M. If shares in Mauritius company were sold on 1 April 2015, there would not be any India tax arising as the value of India assets is less than 10 crore and they also do not represent 50% or more of the total assets of M, which add up to 50 crore.

Further, even if the above thresholds were breached, i.e., Indian assets amounted to more than 10 crore and represented more than 50% of value of all assets held by M, the selling shareholder of M would still not have to bother about Indian tax, as long as they do not, and did not hold at any time in last 12 months preceding the date of transfer:

a)      the right of management or control in M; or

b)      voting power or share capital or interest exceeding five per cent in M.

The proposed explanations would bring a much awaited solace to the M&A scene in India, in cases where deals involve indirect transfer of shares / interest in Indian companies.