1. Nikhil V Mehta Gray’s Inn Tax Chambers nm@taxbar.com 7 th March 2013 1

2.  20th January: Vodafone win in the SC decision  17th February: Indian Government files review petition  9th March: Parliamentary Standing Committee on Finance’s Report on the DTC recommends relaxations to the proposed Vodafone tax charge and the GAAR  16th March: Indian Budget contains provisions to tax offshore share sales with retrospective effect from 1st April 1962, and introduces the GAAR from 1 st April 2012  20th March: The Supreme Court dismisses the review petition  28th May: Finance Act enacted with retrospective changes: Committee’s recommendations ignored. Vodafone back in play. GAAR becomes law but from 1st April 2013  1st August: P. Chidambaram becomes FM  30 th September: Shome Committee’s Final Report on the GAAR  31 st October: Shome Committee’s Final Report on Indirect Transfers 2

3.  Uncertainty  Aggression of Tax Authorities  Independence of the Courts  Cautious Optimism with new FM 3

4.  Shell  Sanofi  Budget 4

5.  In 2009, injection of additional equity from Dutch parent into Indian subsidiary  Cash paid on basis of Rs.10.00 per share  In January 2013, Indian tax authorities claimed gross undervalue of shares and, using transfer pricing, valued shares at Rs. 183 per share  In US$ terms, the undervalue in total is @2.7bn: claim is for @US$ 1bn  Tax on FDI through transfer pricing 5

6.  In August 2009, 2 French Companies sold shares in a French holding company to Sanofi  The holding company held 80% of the shares in an Indian pharma company, SBL  The Indian tax authorities attempted to tax the sale as an indirect transfer of the shares of SBL  They further argued that the retrospective changes applied and overrode treaties  Sanofi, like Vodafone, was exposed because it failed to withhold tax from the purchase price 6

7.  Decision by the Andhra Pradesh High Court went against the tax authorities  Vodafone followed in part, including domestic and foreign case-law on tax avoidance (Tower MCashback referred to in judgment)  Tax authorities criticised for their arguments on looking through commercial substance of a bona fide JV company (“ambivalent or incoherent”) 7

8.  An odd approach to France/India treaty by Indian tax authorities to overturn France’s exclusive right to tax what was ostensibly a domestic French sale of shares  Application of extended meaning of “transfer” in retrospective provisions to “alienation” of shares representing “participation” in a company: Article 14(5) of the Treaty  Court clearly not prepared to contemplate that a domestic retrospective provision could override a treaty  No attempt to argue that what was taxable in France was not the same as what was taxable in India 8

9.  Focus on increasing the tax take without dramatic increases  Further measures to curb tax avoidance  For foreign investors, what’s not in the Budget is more interesting than what is in it 9

10.  Taxing the “super-rich” by increasing surcharges on income tax to following rates: 1.10% on individuals earning more than Rs. 1 crore per year (@£112,000): 42,000 taxpayers in this bracket 2.Also 10% on domestic companies earning more than Rs. 10 crores (@£1.12m) and 5% for foreign companies  Increasing withholding tax on royalties from 10% to 25% 10

11.  20% distribution tax on unlisted share buybacks with effect from 1 st June 2013  Tax residence certificates no longer conclusive for treaty claims (but no guidance on what else may be needed) 11

12.  Simplification of regulatory procedures  Investment in exchange-traded derivatives up to Rs. Exposure  Ability to put up corporate and Government bond investments as margin  Reductions in securities transaction tax on exchange deals 12

13.  Shome Committee Report’s recommendations accepted in part  Postponement to 1 st April 2016 confirmed but NB it applies from 1 st April 2015  Factors constituting an “impermissible avoidance arrangement” clarified  Approving Panel will have tax administration in minority  Procedural improvements 13

14.  “Property” deemed always to have included any rights relating to an Indian company including rights of management  “Transfer” expanded to include any way of parting with an asset, directly or indirectly notwithstanding that it is legally achieved by a direct transfer of foreign shares  But even foreign shares are deemed always to have had an Indian situs if they derive their value from Indian shares  Withholding by non-residents deemed always to have been necessary 14

15.  Despite endorsing the importance of certainty, the Finance Minister has remained silent in the Budget on the status of the retrospective changes: no mention of the Shome Committee’s recommendations  Something may come in the Direct Taxes Code Bill  An anti-climax 15

16.  Contradictions between Government pronouncements and Indian tax authorities’ conduct: attack on tax avoidance based on mindset of tackling tax evasion  Attack on mutinationals-India’s own version of Starbucks: transfer pricing a particularly thorny area  But the Courts continue to defend legitimate tax planning  Defensive tax planning pre-GAAR 16

17. Incredible !ndia 17