Issue Of Shares With Differential Voting Rights 

The issue of shares with voting rights is authorized under section 43 of  the companies Act 2013 read with rule 4 of the companies (share capital and debentures rules) 2014.

Section 43 envisages companies to create different classes of equity shares carrying different rights with respect to amount of profits by way of dividend and voting rights carried by such shares.For example when tata motors came out with a DVR issue under the nomenclature of class A shares,the voting rights were diluted to 1/10^th and the rate of dividend was 5% more as compared to the other category of  tata motors shares being traded on the stock exchange.However the variation with regards to rate of dividend differs on a case to case basis based on the objective sought to be achieved. in the example of tata motors,the voting rights were kept at 1/10^th so that meaningful vote can be exercised. Another example is that of Goggle,which has a dual stock structure whereby b class shares have 10 times the voting powers as compared to a class shares.the company’s two founders and CEO own about 90% of B class shares and together with other directors and executives control 60% of the votes with the objective of exercising significant managerial control.however it must be noted that such a structure is detrimental from a corporate governance perspective as it threatens shareholder’s democracy.

The companies Act 2013 at the time of its notification  made it mandatory that the provisions of  section 43 and section 47 which relates to voting  will apply to all the companies limited by  shares.it meant even private companies were required to comply with the stringent conditions related to issuing shares with differential voting rights. Structuring different economic rights for different class of equity shareholders had become difficult given the conditions that companies have to comply with under the Companies (Share Capital and Debentures) Rules, 2014. But the companies amendment act 2015 has provided exemption to private companies from complying with these requirements.startups looking to structure their business as a private company can take the benefit of this relaxation as the prefer promoter control along with flexibility in compliances.

Procedure for Issue Equity Shares with Differential Voting Rights

1. Check whether the Articles of Association of the company authorizes issue of equity shares with differential rights and if not, then amend the Articles of Association of the company.
2. Hold the Board meeting to issue the notice of general meeting for issuance of equity share with differential rights along with the explanatory statement u/s 102 of the Act with the contents.
3. Before issuing equity shares with differential rights as to dividend, voting or otherwise, ensure the following:

(i) the shares with differential rights shall not exceed twenty-six percent of the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time; (ii) the company has consistent track record of distributable profits for the last three years; (iii) the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares; (iv) the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend; (v) the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government; (vi) the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

4. If the company is listed with any of the recognized stock exchange, then within 15 minutes of the closure of the aforesaid Board Meeting intimate to the concerned Stock Exchange about the decision taken at the Board Meeting as per the listing agreement.
5. Pass the ordinary resolution in the general meeting.
6. If the company is listed, then ensure it obtains the approval of its shareholders through postal ballot as per rule 22 of the Companies (Management and administration) Rules, 2014.
7. Once the company makes any allotment, then its shall, within 30 days thereafter, file with the Registrar a return allotment in Form PAS-3, along with the fees as specified in the Companies( Registration Offices and Fees) Rules, 2014.
8. The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa.
9. In case of listed company, forward three copies of the notice and a copy of the proceedings of the general meeting to the stock exchange.
10. Complete all other proceedings for the issue of certificate of shares with differential voting rights making necessary entries in various registers. In case of a company whose shares are dematerialized form, inform the depositories about the same for credit to the respective accounts.
11. Intimate the details of allotment of shares to the Depository immediately on allotment of such shares.
12. Maintain the Register of Members under section 88 containing all the relevant particulars of the shares so issued along with details of the shareholders.

CONCLUSION: The procedure and compliances are directed towards sound corporate governance practices ensuring transparency amd proper disclosures.

In this blog post, Mr.Sreeraj.K.V, student of Government Law College, Ernakulam, Kerala writes an article on Professional ethics in law. This article covers the importance of professional ethics, its impact in the field of law, various duties and responsibilities of legal practitioners, concerned authorities to look into the matter as well as famous judgments regarding the said topic.

Professional ethics encompasses an ethical code governing the conduct of persons engaged in the practice of law as well as persons engaged in the legal sector.   All members of the legal profession have a paramount duty to the Court and to the administration of justice. The duties prevail over all other duties, especially in the circumstances where there may be a conflict of duties. It is important that legal practitioners conduct themselves with integrity, provide proper assistance to the court, and promote public confidence in the court system. In carrying out their duties, they are required and expected to deal with other members of the legal profession with courtesy and integrity.[1] Advocates, apart from being professionals, are also officers of the court and plays a vital role in the administration of justice.

Accordingly, the set of rules that governs their professional conduct arise out of the duties that they owe to the court, the client, their opponent and other advocates. Rules on the professional standards that an advocate needs to maintain are mentioned in Chapter II, Part VI of the Bar Council of India Rules. These Rules have been provided under section 49(1)(c) of the Advocates act, 1961.

Rules on an advocate’s duty towards the Court.

• Act in a dignified manner

An advocate must behave in a dignified manner during the time of his case as well as while acting before the court. He should conduct himself with self-respect. Whenever there is a ground for a complaint against a judicial officer, the advocate has a duty to submit his grievance to the proper authorities concerned.

• Respect the Court

Advocate must show his respect towards the Court. He/she has to keep in mind that the dignity and respect towards the judicial officer is essential for the survival of a free community.

•  No communication in private

Advocate should not communicate in private to the judicial officer in any matter pending before the court. Advocate should not influence the decision of a court in any matter through illegal or improper acts such as coercion, bribe etc.

• Refuse to act in an illegal manner towards the opposition

An advocate should not act in an illegal manner towards the opposing counsel or opposing party or the opposing counsel. He should use his best effort to restrain his client from acting any illegal, improper manner or any unfair practices towards the judiciary, opposing counsel or opposing party.

• Refuse to represent clients who insist any unfair means of practice

An advocate shall refuse to represent the client who insist on using unfair or improper means. He shall be dignified in using his language in correspondence and in arguments in the Court. He shall not scandalously damage the reputation of the parties on false grounds during the pleadings.

• Appear in proper dress code

Advocate should be present at all times in the court only in the proper dress code prescribed by the Bar Council of India Rules and the dress code must be presentable.

• Not represent the establishment in which he is a member

An advocate should not appear in the court, for or against any establishments in which he is a member. But this rule does not apply in the case of appointment as an ‘Amicus curiae’ or without a fee on behalf of the Bar Council.

• Not appear in matters of pecuniary interests

Advocate should no act on behalf of any matter in which he has a financial interest. He should not accept a brief from a company in which he is a Director.

• Not stand as surety for the clients

Advocate should not stand as a surety for his client, or certify the soundness of a surety that his client requires for the purpose of any legal proceedings.

Advocate’s duties towards his client

• Bound to accept briefs
• Not withdrawn from service
• Not appear in matters in which he himself is witness
• Full and frank disclosure to the client
• Uphold interest of the client
• Not suppress any material of evidence
• Not disclose any information of his client and himself
• Not receive any interest in actionable claim
• Not charge depending on success of matters.
• Keep proper accounts etc.

Advocate’s duty towards his opponent counsel

• Not to negotiate directly with opposing party

Advocate should not in any way directly communicate with the opposing party regarding any matter of the case except through the advocate representing the party.

• Carry out legitimate promises made

Advocate should do all best possible legitimate promises made to his party, even though not reduced to writing under the rules of the Court.

Other duties include:

• Not advertise or solicit works
• Sign board and name plate must be of reasonable size
• Not promote unauthorized practice of law.
• Obtain the consent of the fellow advocates for the vakalat in the same case.[2]

Advantages of having a codifies professional ethics

• Means of social control. It will keep new perspectives to the profession according to the social requirements and expectations. The dignity of the profession will be required to be maintained in maintaining the public confidence in it.
• Ethical codes prevent interference of government in their matters through its agencies. If a degree of standardisation is needed, it will keep Governmental interference outside.
• Ethical codes are important in developing higher standards of conduct. The code also brings about a sense of judgement towards the profession
• The existence of the code will have great educative, corrective and appreciable value for both the lawyers and the common men.[3]

Authority Concerned

1. State Bar Council and its Disciplinary Committee

 Section 35 of the Advocates Act deals with the provisions regarding formulation and functioning of Disciplinary Committee under the State Bar Council. Under this, If any legal practitioner, if found guilty of any kind of professional misconduct, after providing an opportunity of being heard, may make any of the following orders:

• Dismiss the complaint or where the proceedings were initiated at the instance of the State Bar Council, direct that the proceedings be filed;
• Reprimand the advocate
• Suspend the advocate for a period as it may deem fit
• Remove the name of the advocate from the State roll of advocates.

In the case of Nortanmal Chauaisia v. M.R.Murli[4], the Supreme Court held that the term Misconduct has not been defined under the Advocates Act. Bu the term envisages breach of discipline, although it would not be possible to lay down as to what would lead to misconduct or indiscipline, which is wide enough to include wrongful act or omission, whether done intentionally or unintentionally. It also means improper behaviour, intentional wrong doing or deliberate violation of a rule of standard of behaviour.

Conclusion

The professional ethics can also be stated as the duties that has to be followed by an advocate during the course of his profession. These are moral and the very basic courtesy which every person in this field should know. An advocate who does not work with sincerity, who do not follow the rules of conduct, is said to have violated the code of ethics of this profession. The fundamental aim of legal ethics is to maintain honour and dignity of the law profession., to ensure the spirit of friendly co-operation, to ensure honourable and fair dealing of the counsel with his clients as well as to secure the responsibilities of the lawyers towards the society.

[1] Retrieved on: http://www.lsc.sa.gov.au/dsh/ch02s01.php

[2] Retrieved on:  http://www.barcouncilofindia.org/about/professional-standards/rules-on-professional-standards/

[3] Retrieved on: http://www.internationalseminar.org/XIII_AIS/TS%201%20(B)/19.%20Ms.%20Naina%20Jain.pdf

[4] Nortanmal Chauaisia v. M.R. Murli 2004 AIR SCW 2894 retrieved on: http://www.internationalseminar.org/XIII_AIS/TS%201%20(B)/19.%20Ms.%20Naina%20Jain.pdf

In this blog post, Anusha of Dr. Ram Manohar Lohiya National Law University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the applicability of Dividend Distribution Tax.

A dividend is usually a distribution of the profits of the company to its shareholders. When a corporation earns a profit or surplus, it can re-invest it in the business (called retained earnings), and pay a fraction of the profit as a dividend to shareholders.

Dividend Distribution Tax (hereinafter ‘DDT’) is an additional amount of tax (under S.115-O Income Tax Act, 1961) to be paid, in addition to the income tax chargeable in respect of the total income or even if there is no income tax payable on total income computed in accordance with Income Tax Act, 1961 (hereinafter ‘the Act’), by every company which declares, distributes or pays dividend to its shareholders for a particular assessment year. It is to be noted that DDT is applicable only on domestic companies and foreign companies are exempted from it.

DDT is also relevant to mutual funds wherein any dividends which are declared by the fund houses are exempt from tax in the hands of investors and is levied at 25% on dividends paid by money market mutual funds and liquid mutual funds to all investors. However, in debt mutual funds, Asset Management Companies (AMCs) pay DDT from the distributable income at the rate of 28.33% (including surcharge and cess, for Individuals and HUF investors). There is, however, no DDT charged for equity mutual funds.

Effective Rate of Dividend Distribution Tax:

S.115-O(1) of the Act provides for dividends to be charged at 15%. Such dividend includes interim dividend and it can be paid out of either current or accumulated profits.

Effective rate of DDT, however, can be calculated as tax on distributed profits at 15% + surcharge at 12% + education cess at 2% + SHEC (secondary and higher education cess) at 1% of the amount of dividend. Thus, the effective rate of DDT comes out to be 20.358%.[1]

Tax on dividend amount received from subsidiary company:

With a view to remove the cascading effect of DDT in multi-tier corporate structure, the Finance Act, 2013 had provided for the benefit of reduction of dividend from a foreign subsidiary to a domestic company. Also, dividend received by any company from its subsidiary which has been subjected to DDT shall be liable to be reduced from the amount of dividend distributed by such recipient shareholder company. Hence, now the dividend received by the domestic company from its foreign or domestic subsidiary is reduced from dividend declared, distributed or paid by the domestic company and DDT is levied on the reduced amount.

S.115-O(1A) of the Act was substituted by the Finance Act, 2013. The amount referred to in S.115-O(1) of the Act shall be reduced by,

• The amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,

• Where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or
• Where such subsidiary is a foreign company, the tax is payable by the domestic company under S.115BBD of the Act on such dividend;

Provided that the same amount of dividend shall not be taken into account for reduction more than once.

• The amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of S.10.

 

No tax on dividend by domestic company to business trust:[2]

No tax on distributed profits shall be levied under S.115-O of the Act in respect of any amount declared, distributed or paid by the specified domestic company (domestic company in which a business trust has become the holder of whole of the nominal value of equity share capital of the company) by way of dividends to a business trust (which either holds 100% of the share capital of the SPV or holds all the share capital other than that which is required to be held by any other entity as part of any direction of any Government) out of its current income on or after April 1, 2016.

Exemption from DDT has been provided on distribution made by SPV to business trust (REIT and INVITs). As per the current legislation, dividend received by a business trust from a special purpose vehicle (SPV) is subject to DDT at the SPV level but the same is exempt in the hands of the business trust. This exemption is restricted to payments made out of current income after the date when the business trust acquires the requisite shareholding in the SPV.[3]

No DDT for unit of an International Financial Services Centre:[4]

No tax on distributed profits shall be levied on a company, being a unit of an International Financial Services Centre (IFSC), deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends on or after the April 1, 2017 out of its current income either in the hands of the company or the shareholders.

Exemption to shareholders:

The Dividend Distribution Tax is levied at the time when company distributes, declared or pays any dividend to its investor/shareholders. Hence, the amount of dividend received by the shareholders of such a company is not included in the total income of the shareholder because such dividend is exempted under S.10 (34) of the Act. Therefore, dividend received from domestic company is not taxable in the hands of the shareholders.

However, deemed dividend received under S.2 (22)(e) of the Act from an Indian company or any dividend received from a foreign company is taxable in hands of the shareholder as per normal income tax slabs.

But a surprising change has been the introduced by the Finance Minister in Budget 2016. A new dividend tax[5] is to be levied in the hands of an identified class of shareholders, i.e. those who receive dividend of more than INR 10 Lakh in any financial year (being an individual / Hindu Undivided Family (HUF) / firm)[6]. This is a new tax apart from the existing dividend distribution tax which is levied in the hands of the company paying dividend.[7]

Exemption to Special Economic Zones (hereinafter ‘SEZ’) revoked:[8]

Until the financial year 2010-2011, Dividend Distribution Tax provisions were not applicable to SEZ developers. However, this benefit has been taken away by the Finance Act, 2011 with effect from June 1, 2011. So, even SEZ developers are required to pay DDT on dividends declared, distributed or paid on or after June 1, 2011.

Time limit for payment of Dividend Distribution Tax:

DDT has to be paid to the credit of the central government within 14 days from the date of declaration, distribution or payment of any dividend whichever is earliest by the principal officer of the domestic company.

As per sub-section (4) of S.115-O of the Act, the tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividend. Therefore, no further credit shall be claimed by the company or by any other person in respect of the amount of tax so paid.

Also, no deduction under any other provision of the Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to Dividend Distribution Tax.

 Amendments proposed in Budget, 2016:

1. No Dividend Distribution Tax for Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvIT). Any amount of dividend distributed by Special Purpose Vehicles (SPVs) to the REITs and InvITs would not be subject to Dividend Distribution Tax (DDT) subject to condition that:

• Such SPVs must be 100% owned by REIT and InvIT; and
• Such amount of dividend should be paid out of current income and not from accumulated income.[9]

2. To promote growth of IFSCs into world class services hub, no DDT is to be levied on a unit of an International Financial Services Centre:[10]

3. No tax to be levied on dividend by domestic company to business trust:[11]

4. Dividend tax to be levied on individuals whose income from dividends is or exceeds INR 10 Lakh in an assessment year.

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References:

[1] ‘India Tax Profile’ (KPMG, June 2015) < https://home.kpmg.com/content/dam/kpmg/pdf/2015/10/india-2015.pdf> accessed 29 August 2016.

[2] Allirajan Muthusamy, ‘Budget 2016: Why a new additional tax on dividend income may not hit promoters much’ The Economic Times (Mumbai, 2 March 2016)

<http://economictimes.indiatimes.com/articleshow/51221423.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst> accessed 29 August 2016.

[3] ‘Budget 2016: Key Tax Proposals’ (Trilegal, 2 March 2016)

<http://www.mondaq.com/india/x/470606/tax+authorities/Budget+2016+Key+Tax+Proposals> accessed 28 August 2016.

[4] ‘The Finance Bill, 2016 Direct Tax Highlights’ (DSK Legal)

<http://dsklegal.com/pdf/2016/Direct_Tax_Highlights_2016_DSK_LEGAL.pdf> accessed 28 August 2016.

[5] S.7, Finance Act, 2016.

[6] Budget 2016 (n 3 ).

[7] Nishith Desai, ‘India Budget 2016: Worth An Oscar Or Two, But Not A Clean Sweep!’

<http://www.mondaq.com/india/x/470560/Capital+Gains+Tax/INDIA+BUDGET+2016+WORTH+AN+OSCAR+OR+TWO+BUT+NOT+A+CLEAN+SWEEP> accessed 27 August 2016.

[8] Rupesh Jain and Puneet Kundra, ‘Indian Income Tax Law – A Brief Guide’ (Vaish Associates Advocates)

<http://www.mondaq.com/pdf/clients/457368.pdf>  accessed 26 August 2016.

[9] Manoj K Singh, ‘Key Highlights of Union Budget 2016-17’ ( Vol IX Issue III, Indian Legal Impetus, March 2016) <http://singhassociates.in/UploadImg/NewsImages/Vol%20IX%20Issue%20III.pdf> accessed 27 August 2016.

[10] The Finance Bill (n 4).

[11] Allirajan (n 2).

In this blog post, Ankita Bhattacharjee, a BBA LLB (Hons.) student from Alliance University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the General Anti-Avoidance Rule and it’s functions.

ABSTRACT

The concept of General Anti- Avoidance Rules (GAAR) has been implemented under tax law whose principles were based entirely on the judicial precedents. Under this article we shall observe the concept or the theory of GAAR and its functions.

INTRODUCTION

“The tax which every individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of tax gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by means of terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favors the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, manner of so great importance that a very considerable degree of inequality, is not near so great an evil as a very small degree of uncertainty.” –  Adam Smith[1]

From the above expression given by Sir Adam Smith, he made it very clear in understanding that how the tax-policy makers should be clear and certain while preparing and framing the rules and guidelines while drafting the taxation policy. Such draft should be made keeping in mind to deliver it to the ordinary citizens of the country and also such guidelines and rules should be stringent enough to develop a fear-factor within the citizens. There is an unrestricted power that gives the control over the tax- policy makers to investigate, extract any tax-payer if found guilty or suspicious on the grounds of escaping tax payment. When it comes to the provisions given  under Direct Tax Policy Code Bill,2010 mentions under its salient features how there should be ‘flexibility’ in language, manner in which there should be reduction in the scope for litigation, to eliminate the regulatory functions and to provide stability.[2]

THEORY OF GAAR

The clearest issues in tax collection today emerge over which, under our current duty law, decide the distribution of income between various purviews. In any case, there is another set of limits that is of real certainty in any collection today emerge over which, under our current duty law, decide the distribution of income exchange of tax collection which comprises of the limit between illicit avoidance and lawful evasion and also the limit between what is in some cases named “adequate” and “unsuitable” evasion of tax.[3]

There is an expansive accord among lawmakers around the globe towards the requirement for a strong hostile to tax evasion structures which separate or distinguish between real assessment moderation and duty shirking. The presentation of GAAR, in a perfect world always tries to place controls over duty evasion without impinging on the privilege of the business to adequately relieve the duty sway on its business inside satisfactory lawful limitations.

The execution of GAAR around the globe has not been without what’s coming to its difficulties; nations, for example Australia, South Africa, etc. have had past experiences managing an arrangement of hostile to tax evasion rules. Their experiences recommend that GAAR does not give a simple arrangement. In any case, above all, none of the locales have called it quits in spite of misfortunes; however, have rather come back with more up to date and more grounded renditions of the rules wherever the firsts arranges have been crushed. The main genuine answer for shirking is to have a significantly more rule based duty framework which permits tax payers to work with a level of sureness that is required for organizations to work and develop.[4]

FUNCTIONING OF GAAR

1. FUNDAMENTAL REASON

GAAR would be summoned in the event of “impermissible evasion game plans”. An impermissible evasion course of action alludes to a plan whose fundamental reason for existing is to acquire a tax break. Further notwithstanding the primary reason one of the four supplementary tests[5] is additionally required to be met. However, where the principle intention is built up to be non-assess then one is not required to demonstrate that none of four supplementary tests are met.

Given that GAAR by definition can’t be totally objective, it is critical for the citizen to archive every one of the variables that were considered to finish up the principle reason. In our perspective one ought to record the all targets achieved behind any course of action, choices assessed and the premise of choice or dismissal of the choices considered. The minutes of Board or Advisory group gatherings, benefit projections and plausibility studies could substantiate the citizen’s claim. Given that direction will always advance extra minutes, one ought to begin reporting business focal points close by the duty preferred standpoint of the choices considered, especially in those circumstances where the tax reduction will collect more than quite a while.[6]

2. SAAR v. GAAR – Concurrent appropriateness

The IT Act accommodates several Specific Anti Avoidance Rules (SAAR). They target particular territories of expense shirking. If there should be an occurrence of contention between general provision and particular provision courts in India have set down than particular provision nullify general provision. Withdrawing from this proverb the GAAR provisions expresses that GAAR would apply “notwithstanding, or in lieu of, some other premise of assurance of expense risk”.[7]

3. GAAR supersede on Settlement

The arrangements set out that in circumstances where GAAR is summoned any Duty bargain benefits asserted by the citizen would be denied.

Let us consider a situation where in GAAR is summoned and the undesirable tax advantage being asserted by the citizen is denied. Presently post this treatment by the duty powers, the impermissible evasion agreement can never again be viewed as impermissible. One would need to know whether Assessment settlement advantage is still not accessible for this “treated” game plan. Say in the event that GAAR is conjured and part of the gear value paid to the remote guardian gets re- described as Royalty. Presently, in such circumstances after the duty results have been resolved under GAAR, would the useful withholding expense of 10% gave in the Tax treaty would had applied to such Royalty or withholding 25% determined under the IT Act would need to be done.[8]

4. Relevance to existing speculations or structures

Resistance has been given just to pay from exchange of speculations made before August 30, 2010, i.e. date of presentation of Direct Expenses Code Bill 2010. Consequently, regardless of the fact that the same structure or course of action is utilized by the citizen to course advance ventures post August 31, 2010 that would be liable to GAAR tests.

The various existing and proposed plans will be liable to GAAR tests. With regards to the ventures from Mauritius, Singapore and so forth made before August, 30 2010, salary from exchange of such speculations will keep enjoying Duty Settlement benefits without going through the rigorous of GAAR.[9]

5. Wide powers on tax authority

Wide powers have been bestowed upon the tax authority to invalidate the tax cut being looked for by the citizens. This incorporates lifting of corporate veil, clubbing or neglecting elements, regarding capital receipts as income, obligation as value and so on. Here again it can be seen that the force of re-portrayal of obligation into value has been given, regardless of the nonattendance of any formal merger to tenets in India. Nonetheless, the tax authority officer who issues a notification charging that GAAR ought to apply to a course of action needs to give itemized thinking behind his conviction.

The other significant protection is that a GAAR Board which would be involving a High Court Judge, Magistrate of salary expense and a Researcher of notoriety would survey the cases. The bearings issued by this Board would tie on citizen and tax authority powers. Courses of events have likewise been set down for every progression in this procedure.[10]

CONCLUSION

Undoubtedly it is obvious that GAAR is setting down deep roots in Indi. However, in the light of the tumultuous relationship between the tax authority and the common citizens, it should be guaranteed that of an expansive checked instrument for badgering, GAAR turns into a limited focused device for the particular checking of aggressive tax avoidance plans.

While on the other hand the Finance Minister acknowledgment the portion of the suggestions is an appreciated stride, all the more needs to be done to mollify and shield the enthusiasm of the authentic financial specialist in India. The unwinding in capital increases charge for instance, will maybe be advised as a component of the forthcoming spending plan to be exhibited in the not so distant future.

Whatever be the destiny of GAAR, given the scenario, it appears to be clear notwithstanding, that we are moving gradually yet most likely towards more substance based authentic tax arranging or planning.

REFERENCES

1. a)      Income Tax Act ,1961
2. b)      Adam Smith, The Wealth of Nations, Volume 5-2.26.
3. c)    Department of Revenue, Ministry of Finance, Government of India, Discussion Paper accompanying the Direct Taxes Code, August 2009. <http://www.itatonline.org/info/?dl_id=98>
4. d)    Arkay & Arkay, Chartered Accountants, GAAR: THE PAST, PRESENT AND FUTURE. 2013

www.arkayandarkay.com/wp-content/uploads/2013/01/GAAR-PAST-PRESENT-AND-FUTURE.pdf

2013. e)    Keith Brockman, Strategizing Multinational Tax Risks, 2013.

http://strategizingtaxrisks.com/2013/10/20/indian-gaar-10-important-features-to– watch-out-for/

[1] Adam Smith, The Wealth of Nations, Volume 5-2.26.

[2] Department of Revenue, Ministry of Finance, Government of India, Discussion Paper accompanying the Direct Taxes Code, August 2009. <http://www.itatonline.org/info/?dl_id=98>

[3] Arkay & Arkay, Chartered Accountants, GAAR: THE PAST, PRESENT AND FUTURE. 2013

www.arkayandarkay.com/wp-content/uploads/2013/01/GAAR-PAST-PRESENT-AND-FUTURE.pdf

[4] Ibid.

[5] As per section 96 of the IT Act – An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it:

(a)     Creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;

(b)     Results directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

(c)      Lacks commercial substance or is deemed to lack commercial substance in whole or in part; or

(d)     Is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

[6] Keith Brockman, Strategizing Multinational Tax Risks, 2013.

http://strategizingtaxrisks.com/2013/10/20/indian-gaar-10-important-features-to– watch-out-for/

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Ibid.

In this blog post, Anjali Karmarkar, a fourth-year law student at Calcutta University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes how income is taxed on transfer of intangible assets.

According to Wikipedia, Intangible Assets are those which “lack physical substance. It includes patents, copyrights, franchises, goodwill, trademarks, trade names, the general interpretation also includes software and other intangible computer based assets. Contrary to other assets, they generally—though not necessarily—suffer from typical market failures of non-rivalry and non-excludability.” Intangible assets have been claimed to be one of the most imaginable contributor to the disproportion between company value according to their accounting records, and company value according to their market capitalization. Bearing in mind this disagreement, it is important to comprehend what an intangible asset truly is in the eyes of a certified public accountant. Numerous efforts and attempts have been made to define intangible assets:

Preceding to 2005 the Australian Accounting Standards Board allotted the Statement of Accounting Concepts number 4 (SAC 4). This announcement did not make available an official definition of an intangible asset but did provide that tangibility was not an indispensable distinguishing characteristic of asset. International Accounting Standards Board standard 38 (IAS 38) which defines an intangible asset as: “an identifiable non-monetary asset without physical substance.” This description is an addition to the formal standard definition, or as a definition, of an asset which necessitates a past event that has given power and rise to a resource and supply that the object or an entity which has a control and from which forthcoming economic benefits are necessarily expected to flow. Consequently, the extra requirement and obligation for an intangible asset under IAS 38 is identifiable. This principle or the criterion, as said otherwise, requires that an intangible asset is distinguishable and separable from the entity or that it arises from a contractual or legal right. The Financial Accounting Standards Board Accounting Standard Codification (as per Wikipedia) 350 (ASC 350) describes an intangible asset as an asset (advantage or an ability), other than a monetary or financial asset, that lacks physical substance.

Globalisation and increased opposition are knocking new types of compressions or pressures on companies and, by extension and further postponement, on the areas that rely solely on their accomplishment. Elasticity or the other term, ‘Flexibility’, the ability to adapt immediately to market expansions and pro-activism in generating future markets are the allocates of this new generation of markets. In response to amplified and enhanced competition and rivalry, companies create and seek to develop “soft” production factors, i.e. factors connected to individual knowledge that can be commonly grouped in what is known as intangible assets (IA).

There is a steady increasing interest from academic world that is, the academic market, policy-makers and the corporate marketplace, commercial environment and its engulfed surroundings, in the influence of intangible assets on financial or economic processes of the twists and turns of globalisation. These assets can be well-defined as “non-material factors” that subsidize to innovative performance in the production of goods or the provision of service area, or that are anticipated to produce future economic reimbursements or benefits to the entities or individuals that regulate their disposition. Their link to globalisation is emphasized and highlighted by the very critical and crucial role of international activities in the development and endurance and survival of SMEs.

Intangible Assets : Intangible assets are nonphysical resources that add forthcoming and future value to a company that holds the same. Intangibles are classified into two categories: limited-life and unlimited-life. Limited life assets consist of goodwill, intellectual property, licenses, copyrights and patents. A trademark, on the other hand, doesn’t expire or get demolished and is characterized as an unlimited-life intangible asset. Intangible assets can’t be demolished or destructed by natural consequences like wind or fire, but they can be lost over a period of time. A company that enjoys a great reputation and a character as an honest, ethical firm may lose that characterization if the new management lowers the standards of service.

Valuation of Intangibles : Estimating the value of equipment and inventory is a relatively straightforward process. Estimating the intangible value is much more subjective. Since 2002, national accounting standards require companies to report the value of their intangible assets on their balance sheets, but it’s often unclear to analysts how the numbers are derived. However, how the items are categorized on the financial statements has a major consequence on the future tax legal responsibility of the company.

Capital Gains Tax : When a company holds an investment which stands lengthier than one year or more, it will qualify for a favourable capital improvement tax thus creating the legal responsibility of the company, which has a thoroughgoing rate of fifteen percent rate; the regular tax has a maximum thirty five percent rate. Many intangibles are usually taxed at the favourable capital gains rate. Nevertheless, if the intangible was remunerated, it is usually taxed at a higher rate. Amortization permits the cost of the intangible to be subtracted and deducted as an expense which is over 15 years. If the intangible has an expected and anticipated advantageous life expectancy longer than fifteen years, it probably isn’t amortized.

The assessment and calculations of the value of intangible assets originates tax lawyers and economists a lot of trouble which is caused due to the valuation of the intangible assets. And when assets cross county borders, situation gets worse. The surprising result is that a substantial number of international enterprises use a transfer pricing method for the valuation of intangible assets that appears not to fulfil with regulations of either home or host tax authorities. Even though this is a matter of the greatest practical concern in the real world situation, the notion of persistence of unfluctuating growth and development of the problematic area clearly raises theoretical question. These dimensions considers the valuation of intangible assets from both perspectives, theory and practice, building its practical recommendations on a sound theoretical analysis of the appropriateness of transfer pricing rules for intangible assets as well as on the appropriateness of transfer pricing valuation standards and methods for the financial and economic reality of multinational or international enterprises.

With professional understanding into the difficulties inherent in the current controlling as well as supervisory and regulatory approaches to valuing intangible asset transmissions within multinational enterprise networks, the author combines three strands of current concerns, namely:

1.      “research into the theory of the multinational enterprise, intangible asset valuation, and international transfer pricing;
2.      comparison of transfer pricing policies when intangibles are involved; and
3.      the ongoing policy discussions on the subject among international organizations, tax authorities, and taxpayers.”

(Source : http://www.inderscience.com/info/ingeneral/cfp.php?id=2527)

The price-setting characteristics of multinational enterprises of the question that lies why intangibles are valued; the indefinability of economic fairmindedness standards when every circumstance is dissimilar these are among the stimulating questions raised in this book. As both a thorough summary of the most important ideas, philosophies and key public policies in its particularly specific field and an illuminating and more effectively clarifying demonstration of recommendations as well as topics and questions for further research, International Transfer Pricing and The Valuation of Intangible Assets will greatly bestow advantageous results on the international taxation professionals and specialists, whether in business, government, or academia.

Interesting situations and questions arise under different laws as the mentioned intellectual property rights located in India are transported and trans missioned by a foreign enterprise or a company. In most cases, the documentation and credential for the transfer takes place outside the borders of India or places where the jurisdiction presides and the transmission may take place amongst two entities, which are residents of foreign countries, thus deeming it an international situation of intellectual property.

The various tax implications of such a transfer or assignment mentioned above are complex and have resulted in court cases by various enterprises due to rising complexities, which will increase over the approaching years as supplementary and more such transactions are achieved and assessed in international deals, which takes place as mentioned above. Under section 2(14) of the Income-tax Act, 1961, the term ‘capital asset’ is well-defined to mean property of any kind held by an assessor whether or not connected with his business or profession.

The definition of ‘capital asset’ clearly states that this expression has been allocated a wide connotation according to the given circumstances. “Property of any kind” undoubtedly includes intellectual property, which is but a species of intangible property. Trade marks, brand, goodwill, technical know-how relating to the production of goods and services would all qualify to be treated as capital assets within the meaning of section 2(14) of the Act.

Though tax accountability and legal liability that could only be with respect to two items, viz, trademarks and other brand intellectual property, there was no lawful foundation for apportionment on the ground that the situs of the possessions transferred was virtually in another place. As soon as once the revenue was deemed to accrue or arise in India on account of transfer of capital assets situated in India, the entirety of the consideration received in respect of such transfer had to be treated as the gross income.

Source: The Financial Express; The Economic Times; InderScience Publishers.

Websites: http://smallbusiness.chron.com/business-transfer-tax-intangible-assets-35195.html

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