Tax norms aimed at shell companies only, says Hasmukh Adhia

Revenue Secretary Hasmukh Adhia
While Budget 2017-18 has exempted category I and II of foreign portfolio investors (FPIs) such as banks, asset management companies, government-related entities and portfolio managers from indirect transfer provisions, there was anxiety among other categories such as corporate bodies and trusts that they will come under the norms. Revenue Secretary Hasmukh Adhia tells Arup Roychoudhury & Indivjal Dhasmana that many others will also be exempt from these norms. Edited excerpts:


Private equity players and those holding stock options are worried that the government is after them following imposition of long-term capital gains tax (LCGT) if securities transaction tax is not imposed on them  after 2004. Are their worries genuine? 


We are not targeting genuine allotment of shares made by listed or unlisted companies. This provision has been brought in for “khoka (shell)” companies misusing the provisions of LCGT by investing in unlisted companies first and then artificially jacking up their prices, then listing it and getting benefit of LCGT.


But, how will the concerns of private equity players and others be addressed?


These will be tackled because we have powers to exempt certain kinds of transactions. We will use that power. Nobody needs to worry about this. Let people write to us, whatever are the genuine class of investments that we need to exclude, we may make a final list and exclude them. Most of the start-up investments coming through FDI (foreign direct investment) route will be exempt from the requirement of paying securities transaction tax at the time of purchase for availing long-term capital gains and also domestic investment made in eligible start-ups.


On indirect transfer of assets as well, the Budget has exempted FPIs category I and II, but not others. Others are worried...


Here again the idea is very clear that it is only the intention of indirect transfer provision of 2012 to tax those gross transactions where transfer of Indian assets takes place outside India.  If it is a small investment made by investors in India-based funds and once that investment changes hand abroad, we don’t want to tax them. If it is an investment in listed securities, then obviously capital gains tax will be paid if Indian securities are sold in portfolio. So valuation of portfolio will take care of that. According to that valuation, if somebody has to pay tax again, it’s not fair. All those transactions will not be part of this tax. With proposed amendments, FPIs I and II will be excluded. Also, by notification we will be excluding many others. Basic principle is as long as tax liability is taken care of in Indian transactions, secondary transactions of investors need not be taxed for capital gain again.


You came out with clarifications on place of effective management (POEM) and the general anti-avoidance rules (GAAR) quite late. While POEM is already effective, GAAR will be introduced from next financial year.  Industry is not ready for such changes...


We have been discussing GAAR for five years. Only frequently asked questions (FAQs) were issued last month. FAQs will keep coming even after GAAR is introduced. The finance minister had categorically said in the last year’s budget that GAAR is coming from April one, 2017. With regards to POEM, we have put draft clarifications in the public domain in June itself. Then, the second round of revised draft was put in the public domain.


Isn’t there a bit of subjectivity in GAAR clarifications as these say they will not override bilateral tax treaties if limitation of benefit (LoB) clause sufficiently addresses anti-avoidance issue?


There are two clauses. First one is that “is it an impermissible avoidance arrangement”. That is a question you have to ask. Second is the principal purpose test. Is the principal purpose a genuine investment or only avoiding tax?  Normally, LoB should take care of that. 


The Budget has cut corporation tax on micro, small and medium enterprises by five percentage points. But, bigger companies are not given that relief. According to a road map announced by the finance ministry, only one Budget is left to announce a similar cut for bigger corporates. Will that be announced?


We won’t be able to give any specific promise. But, yes it will be done gradually. The finance minister had also said we plan to phase out all exemptions and gradually reduce corporation tax. We decided to phase out some exemptions from April 1, 2017. We have also grandfathered them. So, benefits from phase out of exemptions are not going to come to the government immediately. So, the question is do we reduce corporation tax by increasing personal income tax, or indirect taxes or do we wait to see when we can afford to do that. 


But, what about investments that may not come due to higher corporation tax rate vis-a-vis our competitors?


Last year, the finance minister had said any new companies coming in manufacturing and availing no exemptions, will be taxed at 25 per cent from the first year itself. So, new investments are not going to be affected. One per cent reduction in corporation tax rate for all companies will be a Rs 19,000- crore hit for the exchequer.


Growth in corporation tax next year is only marginally higher than that in the current year. Does it mean that corporates will continue to be sluggish in the coming year as well?


Main players in corporation tax are financial sector companies. You know banks are not doing well. We don’t expect that they will suddenly pick up in the next year. So our estimates of corporation income tax are modest.


Finance Minister Arun Jaitley rolled out statistics to show we are a tax non-compliant society. However, the Budget did not address the issue of increasing tax base. Why is it so? 


Demonetisation was itself a big enough announcement to make people alert about it. It is one-time accounting of cash that people are holding. The statistics cited by the FM more than justified the need for demonetisation. People have found ways to get around, but we will reach out to them with the help of data. Some people want to remain outside the tax net and use cash as a medium and they will continue to do so unless you discourage use of cash for many transactions. With restrictions on cash transactions, all high-value spending through cash is not possible now. More than anything else, these are signals that the government has been giving consistently that we are not going to allow any tax evasion. Now people have understood and are declaring more income now, as shown by our advance tax collections.


How will you enforce prohibition on Rs 3 lakh-plus cash transactions?


Any transaction of cash will always involve two parties. Either of them can file a complaint with the income-tax department. A penalty on such transactions is equal to value of transactions. However, there is no jail term.


The FM in his Budget speech said there were 10.9 million accounts with Rs 2-80 lakh and 148,000 accounts with over Rs 80 lakh after demonetisation. How are you planning to nab the black money holders here?


They have tried to put money in fragmented accounts, but we put together and put them in single accounts. These are all big cases in the first phase. In the second phase, the investigation department will grill down to any level if there is an attempt to evade tax by putting deposits in multiple accounts.


Is it true that you are asking businesses to not pay salaries over Rs 10,000 in cash?


If you want to get any deduction on expenses, including salary, allowable under income tax, then you have to pay by cheque any amount over Rs 10,000. Earlier, it was Rs 20,000, we have made it Rs 10,000. You can make sundry expenses up to Rs 10,000.

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