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:
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:
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:
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:
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:
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
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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
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.