FM contradicts FDI and tax policies: Seeks to promote FDI with bearish tax provisions

It is unfortunate that the government has taken upon itself to undo and nullify legal precedents by amending the I-T Act that may prove beneficial to foreign investors from tax perspective

The finance minister, in his budget speech on Thursday, stressed on the importance of foreign direct investment (FDI) in India and also acknowledged that the Indian economy is a challenge.


However, whilst there is no denying on these facts, the question is do the actions of the finance minister justify his words? Contrary to lauding FDI as ‘imperative’ in his speech, the amendments made in Section 90A of the Income Tax Act (I-T Act) may turn out to be retrograde and retroactive.


In the previous budget of 2012-2013 the then finance minister Pranab Mukherjee had given a sizzler to foreign investors by making a retrospective amendment to Section 9 of the I-T Act to nullify the principles laid down by the Vodafone Case1. The retrospective amendment to Section 9 of the I-T Act meant that income from an asset or capital asset shall be deemed to accrue in India if being share or interest, it derives, directly or indirectly, its value substantially from the assets located in India. This amendment not only did become a point of debate worldwide, but also has been, along with other reasons, considered responsible for decline of 43% in FDI inflows for the period April–November 2012 when compared to the corresponding period of the preceding year.


However, the sanctity of the Azadi Bachao Case2 was maintained and treaty benefits to avoid double taxation of the foreign investor. Chapter IX of the I-T Act provided the following relaxations and benefits to a non-resident assessee:

  1. Where a Double Taxation Avoidance Agreement (DTAA) exists between India and the jurisdiction of the non-resident assessee, The I-T Act would apply to the non-resident assessee to the extent the provisions are more beneficial to such assessee.
  2. If a non-resident assessee has a residency certificate of the other country, he could claim tax relief under an agreement under principles of double taxation avoidance rules under Chapter IX of the I-T Act.

As a result of the chaos created by amendments the I-T Act pertaining to non-residents or provisions affecting non-residents, the Shome Committee was set up to advice the government on implementation of the amended provisions of the I-T Act. Several recommendations were made by the Shome Committee in its final report3, wherein recommendations on Section 9 of the I-T Act, inter alia, included:

  1. Adoption of a threshold of 50% of underlying assets in India, for taxation of capital gains on indirect transfer together with proportional basis of taxation of the same;
  1. Exempt tax on capital gains for a non-resident person on account of transfer of shares or interests in a foreign company where a DTAA has been entered into with the country of residence of the non-resident unless DTAA provided otherwise or provided for right of India to impose such tax;
  1. Exempt transfer of share or interest in a foreign company or entity under intra group restructuring, where such transfers are not taxable in the jurisdiction of such a country;
  1. Define what would constitute deriving ‘”alue substantially from the assets” for the purposes of the Section 9.

Key expectations from the Budget 2013-2014


Considering the havoc created by the previous budget (of 2012-2013), there were high expectations from the Budget to carry out a damage-control as well as provide clarity on various aspects on taxation. Some of the key expectations were:

  1. The ambiguities in relation to taxation of indirect transfer would be cleared, such as exclusion of limited partners (LP) from taxation where distributions are made to them after the exit.
  2. Exemptions may be carved out of the strict provisions of Section 9 of the I-T Act.

What happened: The Finance Bill, 2013 failed to do what it sought to do


The Budget Speech gave a prima facie view that the government would make tax provisions favourable to foreign investors so as to encourage foreign investments. However, a look at the fine prints of the Finance Bill, 2013 (Bill) brought back the hard reality of the government, yet again, seeking to nullify Supreme Court decisions that favour foreign investors by amendment of laws.


Silence on Section 9


Where on one hand, no clarification was issued on Section 9 of the I-T Act, thereby maintaining status quo of the provisions, and continuing the endless debate and litigation, on the other hand “un-called for” amendments to Sections 90 and 90A of Chapter IX of the I-T Act, that deals with Double Taxation Relief, have taken away the principles deciding the conclusiveness of treaty benefits which had evolved over the years by the courts of India through strenuous, time consuming, much discussed and deliberated arguments.


Chapter IX amended to nullify Azadi Bachao Case


The amendments to Section 90 and 90A provide for the following:

  1. Provisions of Chapter X-A (General Anti Avoidance Rules) of the I-T Act shall apply irrespective of whether or not a DTAA exists between India and the jurisdiction of which the non-resident assessee is a resident and even if such provisions are not beneficial to such non-resident assessee. This provision has been inserted to be effective from 1 April 2016.
  1. The certificate of residency of the non-resident assessee in any other country, with which India has an existing DTAA, shall not be sufficient to claim any benefit under such DTAA. In the absence of insertion of any applicable date for this provision (inserted as Section 90(5) in the I-T Act), it implies that the provision would become effective from the date of the Bill, i.e. 1 April 2013.

Ambiguity on applicability of Section 90(5)


While by reasonable implication, it could be said that the provision shall be applicable with effect from the date of the Bill, viz. 1 April 2013, on an extended argument, it could be argued that determination of residential status is something that can be done every assessment year and there is no res judicata as far as residential status is concerned. This would mean that even if some assessee has been treated as resident in previous years, the tax officer can re-agitate the residential status issue in the current assessment year on the strength of the new provisions. It has been consistently held by the courts of India that every statute is prospective unless it is expressly or by necessary implication made to have retrospective operation. However, in case of Thirumalai Chemicals Vs Union of India & Ors.4, the Supreme Court held that in the absence of any express provision, while substantive law always becomes effective prospectively, a procedural law would have a retrospective effect.


Following principles, however, have been set out while determining the extent of the retroactive procedural laws:

  1. A procedural statute should not be applied retrospectively where the result would be to create new disabilities or obligations or to impose new duties in respect of transactions already accomplished. A statute which not only changes the procedure but also creates new rights and liabilities shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication.5
  1. The rule of retrospective operation is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. This principle is based on the maxim “nova constitution futuris formam imponere debet non praeteritis” i.e. a new law ought to regulate what is to follow, not the past.6

GAAR: Rebuttable presumption


Chapter X-A has been replaced by a set of new provisions which, inter alia, provide that a rebuttable presumption shall exist that any arrangement entered into by parties has been entered into to obtain tax benefit. Further, previously the considerations on period of time of arrangement, payment of taxes under the arrangement and exit route (including transfer of any business or activity or operations) was provided under the arrangement were to be taken into account while determining whether arrangement lacks commercial substance, the amendment clarifies that such considerations are only “relevant but not sufficient”.


Clearly, not only has the government undone and nullified the principle set out in the Azadi Bachao Case, a tax residency certificate of Mauritius held by a non-resident assessee shall be conclusive to give benefit under the DTAA between India and Mauritius, it has also applied a rebuttable presumption under Chapter X-A that any arrangement entered into by parties has been entered into to obtain tax benefit.




The Government of India, even though has publically acknowledged the unquestionable role played by FDI to boost the India economy, it has continued to make “un-called for” amendments to the I-T Act to further, and yet again, bring within its garb the income of non-residents derived from India. Such amendments not only prove repulsive to the foreign investors but also severely hammer down India as an investor friendly country.


It is left best to the government to justify how the above amendments seek to achieve and encourage FDI in India, which seeks to be ‘imperative’ in the finance minister’s own words, especially considering that no other special benefits have been extended to lure foreign investors into India. It is unfortunate that the government has taken upon itself to undo and nullify legal precedents proving beneficial to foreign investors from tax perspective by amending the I-T Act. Interesting that what could not be fought out in the courts by the government is being carried out by amendment of the I-T Act!

5 Hitendra Vishnu Thakur v. State of Maharashtra, (1994) 4 SCC 602

6 Zile Singh v. State of Haryana, (2004) 8 SCC 1





Vinay Joshi

4 years ago

Hello, Ms. Soma Bagaria,

Greetings! [yes from an unknown a person to an unknown a person. Traditional custom.]

Your statement is not in conformity with comprehension of the Union Budget 2013.

Kindly make it known, March 1, CBDT has issued an amendment to its circular/ [notice Feb 28th as per Finance Bill 2013] superseding it’s earlier re: sub-clause 5. [as a matter of fact the explanation as per 2012 memorandum was only incorporated in FA’13. Nothing added, ambiguous, now clarified. No ambiguity? Why last one year nothing heralding on TRC?

Why Feb 29, indices were up, 94 / 285, Nifty / Sensex resp? Most markets in green!

Feb 28th, addressing the Press Conference FM, HAD explicitly made it clear DTAA two conditions – TRC & other, the beneficiary entity as two separate conditions.
FinMin, Sec, had also issued a statement & press release in the evening.[28th]

It’s but obvious that for interest income, dividend or royalty payments the beneficial owner claim DTAA benefits. We’ve had enough on PN’s!

Further, in the said p/confer, he had also clarified on transfer pricing, specifically referring to Shell & the aspect of interpretation of certain sections, thus, & hence, voluntarily, FinMin has referred it to AG.
[in my opinion issuing shares to the parent holding co.& the price is out of the ambit of taxation scrutiny.]

PC has also stated that Vodafone has offered conciliation, aspects will go to the Cabinet & accordingly it will go for conciliation’. UNQUOTE.

If Vodafone was not wrong, they would not have gone for conciliation, they have spent hundreds of millions of Dollars on UK & Indian advisers.

Should they not sue the advisers? Give one good reason.
PwC affiliates an example when senior partners languish in jail cause of their misdoings.

Ms.Soma, as is the practice, aided by financial, taxation & legal Indian experts, for their MNC/TNC/FII clients, the beneficiary is unknown to tax authorities & regulators, MERE, TRC suffices?
You answer it, let it go if you so can’t!

40% investments routed thro’ Mauritius, SUPOSSEDLY LIKELY to come under scrutiny, markets tanked, FII’s net sold 1.32KCr [28th], WHY THE FEAR?

Was the market booming on Shome committee report? Suddenly lost pace.

To me, it’s evident that tax advisers had not properly advised its clients that for certain jurisdictions, according to DTAA that India has, certain jurisdiction would require it.

Are you not aware that some entities as FII’s with its interlinked entities from different nations invest less than 10% in co’s, combined want to defeat FDI regulations? Such entities will be scrutinized. Why markets tank? Why fear?

Ok, you are mentioning SC judgement, but fail to understand the earlier CBDT circular, which the SC ratified on TRC, WHICH EXPANDED powers with regards to such arrangements.

Accordingly, such arrangements in such treaty jurisdictions can be questioned by the competent tax authorities in India or even other authorities. Even in case of Mauritius, the authorities are EMPOWERED to QUESTION & EXAMINE the commercial aspects as per DTAA.
What’s the fear? Wrong taxation advice?

Has the Budget not provided on GAAR with more independent panel representation?
This area was overlooked by most tax experts & legal eagles.

First & foremost, Income Tax Act, not ‘procedural statute’ as called by you.

It’s not your want!? Excuse me.

Genuine NRI’s investments NEVER, EVEN with 80% holding – repeat – never ever face taxation/legal/ DTAA problems.

Starring e.g Mr.Naresh Goyal, Jet Airways! Many more I can cite.
Answer, if you must! Their tax advisors & legal experts are perfectly doing their jobs.

Ms.Soma, I CONGRATULATE MR. PC! Hailing from Harvard, he has staked his reputation, committed to CAD & fiscal deficit albeit ‘growth & investment path’.

There was stark & glaring example of Europe’s economic suicide or US laxity.

HE has performed a complex balancing act.

‘The Trust Factor’, is positive outlook of FII/FDI.

He was not shy but BLUNT to state ‘to be frank, foreign investment is an imperative’.

Ms.Soma, pragmatic a statement, fully knowing the concerns of foreign investors, which he envisages to address, most foreign observers & investors commended it.

FYI, by end March or so Mauritius Minister visiting India to carry on the negotiations.

You will be flabbergasted to know that in Dec’12, the HITACHI, board meeting – entire board – was held in Delhi! WHAT was the purpose?

CONCLUSION - PC has achieved much by doing little, prudence triumphs.

Ms. Soma, please read the above with due diligence, await your earliest reply, if any.


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Pantaloon continues to groan under debt-fuelled expansion

The Kishore Biyani-owned enterprise continues to struggle despite increased revenues during the third quarter. Pantaloon can neither reduce its debt to increase cash flow nor increase it fund expansions as in the past. Is it condemned to a slow death if it is not taken over?

Even though Pantaloon’s sales increased 9.6% year-on-year (y-o-y) to Rs3,170 crore for the quarter ended December 2012, interest and debt continue to remain a key concern for the retailer. The interest burden of the company is so high that as much as 95.8% of its earnings before interest and tax (EBIT) is the interest component. The company recorded Rs163.50 crore of EBIT whereas its interest component was Rs156.70 crore. This wasn’t any different from the Rs158.20 crore of interest in the same quarter last year.

The company’s consolidated debt for the quarter has reduced by little less than a percent y-o-y. Consolidated debt stood at a whopping Rs6,990 crore as on December 2012, down from the Rs7,150 crore  as on June 2011. According to an Edelweiss report, “Interest burden though contained, continued to weigh heavily on profit. The sequential reduction is primarily attributable to lower cost of debt on account of renegotiation of interest rate.” Pantaloon somehow manages to survive by renegotiating its interest rates with banks.

The December quarter has been characterised by high interest rates (it was cut only in January) and a slowing economy. Consumers were reluctant to spend that much. Same store sales (SSS) weren’t all that impressive. According to Edelweiss, SSS growth, for the three months ended December 2012, was at 12.7% in lifestyle retail while value retail SSS grew at 5.1%. Weak performance continued in home retail with a decline of 3.4% y-o-y SSS growth. Furthermore, the Edelweiss report said, “Though gross retail space addition was 0.41mn sq ft, net addition was a mere 0.02mn sq ft owing to some store closures.”

Check some of our articles on how Pantaloon’s debt burden was killing it:
Pantaloons growth is expected to come under pressure due to massive debt

Will Pantaloon Retail now slow down starved of debt diet?

The company is currently undergoing a ‘restructuring’ programme to rid of its gargantuan debt. According to Edelweiss, the demerger of the Pantaloon retail format is likely to come through by March 2013. The realignment process into three separate entities is likely to be completed by September 2013. These developments will further help reduce debt by Rs2,800 crore, according to Edelweiss. Last year, to survive, it agreed to sell the Pantaloons Format Business (PFB) stores to Aditya Birla Nuvo for Rs800 crore.

All this is ironical. Kishore Biyani, the promoter and high-profile figure behind Pantaloon Retail came up with a self-promoted book called “It Happened in India” which highlighted the achievements of Pantaloons and his rise from humble beginnings. It was supposed to be an inspiration to many but readers who are well aware and well versed with the company’s numbers will think otherwise. In the book, it is mentioned that he wants to capture every Indians’ wallet share, from the ultra-rich to the lower middle-class. It is with this one-track mind that he singularly focused on borrowing massive amounts of money and piling up loans, hoping to be the next ‘Wal-Mart’. Rather than worry and create a robust business model that could be built over time, he was in a hurry and wanted to build an empire in no time. Of course, this strategy was suspect all along and has backfired. After all, retailing is a low margin business, a drawback that can only be overcome only with a strong customer pull. And Pantaloon has not created any connect with its customers.


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