India: Intangible assets; buyback taxes; and GST
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India: Intangible assets; buyback taxes; and GST

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Gains arising from the transfer of capital assets situated in India are taxable in India. However, determining the tax treatment of intangible assets in an Indian context poses several challenges because of the limited guidance on this issue.

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Rakesh Dharawat

Hari Gangadharan

Niraj Bagri

India's taxing right over intangible assets

Gains arising from the transfer of capital assets situated in India are taxable in India. However, determining the tax treatment of intangible assets in an Indian context poses several challenges because of the limited guidance on this issue.

The only direction available on the topic is from an advance ruling issued in the case of Foster's Australia Ltd. (Foster's Australia Ltd., In Re. 2008 (302) ITR 289 (AAR)). In this case, certain trademarks and brands belonging to an Australian company were transferred to SABMiller. India's Authority for Advance Ruling said that such trademarks, brands and logos, which were an integral part of the business of Foster's India, were situated in India. Accordingly, it concluded that the gains from such transfers were taxable in India. The ruling was challenged before the Delhi High Court by way of a writ petition (Cub Pty Ltd. (formerly known as Foster's Australia Ltd.). v. Union of India (WP(C) 6902/ 2008) decided on July 25 2016).

The High Court set aside this ruling and held that:

  • The Parliament could have, by a deeming fiction, provided for the location of intangible capital assets, which do not have a physical form. Since no such provision has been made, the principle of mobiliia sequuntur personam (i.e. that personal property held by a person is governed by the same laws that govern that person) would have to be followed;

  • The residence of the owner of an intangible asset would be the closest approximation of the location of such intangible asset. This internationally accepted norm would apply in the absence of any modification under local legislation; and

  • Since the owner of the intangible assets involved was an Australian company (i.e. not located in India) such assets could not be taxed in India.

Though the principles laid down in this decision are rendered in the context of logos, brands and trademarks, they could have a bearing on the tax treatment of other intangible rights.

India releases draft rules on buyback tax to determine amount received

India's Ministry of Finance released draft rules on July 25 to determine the amount of tax payable when a company repurchases unlisted shares under section 115QA of the Income-tax Act 1961.

The buyback tax was introduced in 2013 on Indian companies undertaking buybacks of unlisted shares. This tax is levied at the rate of 20% (plus surcharge and cess) on the difference between the consideration paid by the company on the buyback of its shares, as reduced by the amount received by the company for the issue of such shares.

To provide clarity on how the "amount received on issue of shares" is to be determined, the government has issued draft rules that cover several situations, with effect from June 1 2016. Specifically, it provides that:

  • The amount received would include share premium received upon issue of the shares;

  • In the case of an amalgamation (i.e. a merger), the amount originally received by the amalgamating company will be the amount received by the amalgamated company (i.e. the surviving company) in respect of shares issued upon amalgamation; and

  • In case of a demerger, the amount received in respect of shares issued by the resulting company would be the amount received for the original shares divided in the proportion of book value of assets transferred to the net worth prior to the demerger.

India GST – the destination-based consumption tax is finally in sight

In India, the Federal government and the States have separate powers to levy tax on goods and services. While the Federal government levies excise duty on the manufacture of goods and service tax on the provision of services, the State governments levy sales tax/VAT on the sale of goods. For several years, transactions like construction and intangibles had varied interpretations that often resulted in both the Federal and State governments seeking to tax them. Also, some of the taxes could not be set-off against each other, entailing a cascading impact. Thus, interplay of various taxing authorities often resulted in a distorted market in which business decisions were often being driven by tax considerations rather than commercial imperatives.

After several years of consensus building between the Federal and the State governments, the Bill seeking to amend the Constitution of India, paving the way for a uniform tax on goods and services, was passed unanimously by the upper and lower houses of the parliament (the GST Bill). This will be a game changer as it intends to simplify tax laws and create a single integrated market.

Design of the proposed law

Goods and services tax (GST) will subsume a plethora of indirect taxes like excise duty, service tax, VAT, various surcharges and cesses.

It is proposed that every transaction, which is undertaken within a State will attract a central GST (CGST) and State GST (SGST). Inter-state transactions would attract integrated GST (IGST). It is expected that there will be a uniform rate of CGST and SGST. The IGST rate would be the sum of CGST and SGST.

Rate, threshold limits, and exemptions

Discussions on the proposed standard rate of GST are still underway. As per various reports, the standard rate could be expected to be in the vicinity of 18%-20% with a provision for a lower rate of 12% on merit goods like medicines, capital goods, etc. and a higher rate of around 40% on demerit goods like luxury automobiles, aerated beverages, etc. There is a proposal to keep the threshold limit of INR 1 million ($15,000) beyond which GST will become applicable. Also, continuation of current exemptions under various laws is being debated, as the idea is to trim the exemption list and reduce the effective rate of GST.

Moving on to the next stage

With the consensus of all political parties, the GST Bill needs to be ratified by a majority of the States in their legislative assemblies before it finally receives Presidential assent. A council of representatives of all stakeholders, both from the Federal and State governments, will be constituted to brain storm and reach consensus on the above issues. Several of them would have already been discussed in the forum of an Empowered Committee, which was created with the same representation, several years back. Hence, the consensus may evolve quickly. The necessary legislation would then be enacted by the Federal and the State governments.

The government is also creating a robust IT platform, which will help move to a paperless environment for returns and also help ensure compliance.

Next steps

Needless to say, companies have to gear up to understand the implications on their businesses which could involve revisiting their pricing strategy, fine tuning their supply chain network, and adapting their IT system to generate the desired reports, which will be required for filing returns, among others.

The implementation of a unified GST regime in India will help transform the landscape of indirect taxes and eliminate the cascading effect of indirect taxes.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com), Hari Gangadharan (hariharan.gangadharan@dhruvaadvisors.com) and Niraj Bagri (niraj.bagri@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 22 6108 1000

Website: www.dhruvaadvisors.com

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