Taxation Law

[By Ashish Kumar Jha] The author is a student at Gujarat National Law University. Introduction The recent acquisition of Ambuja Cements and its subsidiary ACC cement from the Swiss company has been in the limelight for a while. According to CEO Holcim, Jan Jenisch, the transaction worth USD 6.38 billion is totally tax-free. Since then, the structure of this tax-free transaction has perplexed everyone. This article tries to uncover the probable rationale behind claiming this transaction tax-free, and analyses how DTAA is used as an avenue for tax avoidance. For that, it is necessary to understand the ownership structure of both the groups, i.e. Adani and Holcim, at the outset. Ownership Structure This transaction involves Holderfin B.V., a Netherlands based company, as the seller, and Endeavour Trade & Investment Ltd., a Mauritius based company, as the buyer. Holderfin B.V., owned by Holcim Group, has a subsidiary company Holderind Investment Ltd. incorporated in Mauritius. Holderind Investment Ltd. holds 63.20% and 4.48% shares in Ambuja Cements Ltd. (India) and ACC Ltd. (India), respectively. Ambuja Cements Ltd. holds 50.05% shares in ACC Ltd. Endeavour Trade and Investment Ltd. is owned by Acropolis Trade and Investment Ltd., which is a subsidiary of Adani Group. Taxability of the Transaction under Income Tax (IT) Act, 1961 It is being claimed that this transaction involves the acquisition of a Mauritius based Company (Holderind Investment Ltd.) by a Mauritius based company (Endeavour Trade & Investment Ltd.). However, since Holderind Investment Ltd. derives its value from Indian assets, i.e. ACC & Ambuja cement, this transaction indirectly tantamount to a transfer of ownership of the Indian companies to a Mauritius based company. Recourse is being taken of Vodafone International Holding B.V. v Union of India (UOI) and Ors. where it was held that Section 9(1)(i) covers only income arising or accruing directly or indirectly or through the transfers of a capital asset situated in India and this Section cannot, by process of “interpretation” or “construction”, be extended to cover “indirect transfers” of capital assets/property situate in India. The Court explicitly mentioned that if a foreign company transfers the ownership of its subordinate company, which holds shares in an Indian Company, to a non-resident off-shore, it does not tantamount to the transfer of shares of an Indian Company. Therefore, according to this judgment, the transaction does not involve an Indian Company, and hence there is no tax liability. However, Explanation 5 of Section 9(1)(i) of the Income Tax Act introduced by the Finance Act, 2012 reads— “It is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.” In the present case, the capital asset of Holderind Investment Ltd. derives its value substantially from the asset located in India, i.e. ACC & Ambuja Cement; hence, it should be deemed to be situated in India, and the transaction should be taxable. Section 195 of the IT Act, 1961 mandates the person responsible for paying a sum chargeable to tax in India to a non-resident to deduct tax at source. Here, it was the duty of the buyer to deduct tax at the source since the seller is deemed to be situated in India. In the present case, the India-Netherlands Double Tax Avoidance Agreement Comes into play. India-Netherlands Double Tax Avoidance Agreement India and Netherlands have signed a Double Tax Avoidance Agreement (DTAA) which has prevailing power under Section 90(2) of the Income Tax Act, 1961. Section 90(2) of the IT Act, 1961 provides that the Provisions of IT Act shall apply to the extent they are more beneficial to that assessee; otherwise, the agreement entered into the by the government will prevail. In the Union of India v Azadi Bachao Andolan and CIT v PVLK Chettiar case, it was held that the latter would prevail in the case of conflict between IT Act, 1961 and DTAA. Article 13 of the DTAA contains the provision regarding the taxing right of the income in the nature of capital gain. The case, on the hand, falls under Article 13(5) of the DTAA, which gives the power to collect tax, under certain conditions, to that state only of which the alienator is a resident. The domestic law of the Netherlands does not prescribe levying tax on capital gains. Therefore, this transaction is claimed to be tax-free. Implication of Multi-Lateral Instrument (MLI) India and Netherlands both are signatories to the MLI. MLI entered into force in India on 1st October 2019. Netherlands is one of the countries that have notified tax treaty with India and have deposited their ratification instruments with the Organisation for Economic Co-operation and Development (OECD). Paragraph 1 of Article 6 of the MLI mandates the ratifying country to modify and include the texts “Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion and avoidance.” India and Netherlands DTAA contain similar wordings in the preamble to eliminate tax avoidance and tax evasion. Paragraph 1 of Article 7 reads, “Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining benefit was one of the principal purposes of any agreement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement”. In the present acquisition process, a holding company (Adani Group) incorporated in India through its off-shore special purpose vehicle is acquiring

[By Vaibhav Kashyap] The author is a student at the National Law University, Odisha. Background The 101st Constitution Amendment was inserted to make the necessary constitutional changes to allow the functioning of the GST regime. The GST Acts brought about a long-standing change in the indirect taxation policy of the country. The main thrust point of these changes was the uniformity in the taxation structure of the country, popularly known as the “One Nation, One Tax” system. For the last five years, this objective was fulfilled through the recommendation of the GST council which was followed by the states earnestly, almost mandatorily. In fact, all the decisions except one were taken unanimously. But with the recent decision of the court in Mohit Mineral Pvt. Ltd. v. Union of India, the Supreme Court has clarified that the recommendation of the GST council is only recommendatory. This decision can have far-reaching consequences and has the potential to destabilize the whole GST regime. Facts of the Case In the present case, the respondent, Mohit Mineral Pvt. Ltd., was engaged in the business of importing non-coking coal into the territory of India from foreign countries. Consequent to the import of the goods, the appellant supplied the same to various businesses across India. The nature of the arrangement that the appellant had with the exporters was such that the exporter was liable to bear the freight charges on the goods. This arrangement is called CIF (“Cost-Insurance-Freight”) where the exporter pays the freight and insurance charges. On the other hand, in the FOB (“Free-on-Board”)  system, the importer pays the freight and insurance charges. Nevertheless, the respondent paid two types of taxes on the value of the freight: the customs according to the Customs Act of 1962 and the applicable IGST on the value of the goods. Before the enforcement of the GST Acts in 2017, the service tax on ocean freight was non-taxable. But through Notification 08/2017 and Notification 10/2017 issued by the Central Government, it was made taxable on a Reverse Charge Basis, meaning the recipient of the service would be liable for the payment of the tax. While the appellant did not dispute the payment of IGST when the transportation of goods was done on FOB basis, it contended that it was not obliged to pay the IGST on transportation done on CIF basis since both the recipient as well as the supplier were foreign entities. This, they contended, violated Article 5(3) of the IGST Act. Consequently, the respondents challenged the Notifications dated 08/2017 and 10/2017 as being ultra vires. Analysis The Nature and Recommendation of the GST Council Since the impugned notifications were issued on the recommendation of the GST Council, a question arose before the Court whether the recommendations of the GST Council were mandatory or recommendatory in nature. The appellant (Government) contended that the recommendations were mandatory in nature since the very basis of the GST regime was maintaining the uniformity in tax slabs across states. In addition, Article 279(11) of the Constitution provided for a dispute resolution mechanism and therefore it was contended that the recommendation was intended to be mandatory. The argument was that this provision could have only been inserted if there was a possibility of a  dispute arising between the states and the center. On the other hand, the respondents submitted that the recommendations were not mandatory in nature considering the federal structure of the constitution and also because such an interpretation would undermine the supremacy of the Parliament and State Legislatures. The court held that prior to the 2016 amendment to the Constitution, the union and the state had the “exclusive” right of taxation in their respective domains. Post the 2016 amendment, this exclusive right of taxation was converted into a “simultaneous” right. The court noted that Article 246A treats the states and center equally. Similarly, Article 279A mentions that the states and center should not act independently and are interdependent on each other. Also, the decisions of the GST Council are not unanimous and the center and states have been given varying levels of voting power. The court concluded based on these grounds that the simultaneous power of taxation has to be exercised in a manner to reach a workable fiscal model through cooperation and collaboration. The court rejected the argument that federal structure in India had a centralizing effect since the states had been provided exclusive power under the constitution. The nature of the recommendation of the GST Council is non-qualified and made without any explanation. Therefore, to say that the recommendations are mandatory would be far-fetched. The court noted that the word “recommendation” was used in a number of varying contexts in the constitution.   But the court noted that the word “recommendation” only has a “persuasive” value in accordance with the Supreme Court judgement in Manohar v. State of Maharashtra and Naraindas Indurkhya v. State of Madhya Pradesh. Finally, while several articles of the CGST Act and IGST Act provide that while the GST Council recommends is binding, these provisions have to be seen in the light of the legislative purpose of the legislation, which is the creation of a uniform system of taxation. No such provision has been inserted in the Constitution. Thus, even though a few recommendations are binding, it cannot mean that all the recommendations are similarly binding. Did The Impugned Notification Suffer from Excessive Delegation? The power of identification of goods or services where tax is payable has been delegated by the IGST Act under Section 5(3). This was contended to be “excessive delegation” since too much power was entrusted to the GST Council. The legislature should make the “essential basic framework” and the minor details can be filled through the process of delegated legislation. The legislature should not refrain from doing its “essential legislative function”. The Court held that the essential legislative function with respect to the GST laws was the rate of taxation, the levy of tax, taxable person, the subject matter of tax, and the

[By Brahm Sareen]  The author is a student at the University school of law and legal studies, GGSIPU.  Introduction: Recently, the multinational corporations (hereinafter referred to as “MNCs”) operating under the franchise agreement in India started facing scrutiny by the taxman over the royalty income which is a part of their intangible assets. These MNCs operate in India by allowing the Indian companies to operate their subsidiaries in their global brand name. With the growth in the transfer of these intangible assets, the states naturally started taxing these transactions making them a part of the broader economy[1]. However, in the past, these transactions had sparked controversy over the taxability of intellectual property rights (hereinafter referred to as “IPR”) in India. The conundrum of whether to categorize intangible assets as sale of goods or services along with defining the nature of the agreement remains unresolved. A recently similar question of law was dealt with by the Hon’ble High Court of Punjab and Haryana in a writ petition filed by Subway systems in India against the tax authoritie. In this case, Subway alleged that the Indian Taxman, without issuing an advance ruling notification, issued various summonses over the non-payment of taxes on their intangible assets and royalty. The question remains the same, as to whether MNCs be taxed on their intangible assets under the right to use, or the transaction be treated as a transfer of right to use or “deemed sales”? Therefore, delving into the aspects of the current IP taxation regime in India is important as the Indian taxation regime deals with these transactions differently. IPR tax regime in India: Before the advent of GST reforms in the taxation regime of India, there lies a long-drawn debate on the assignment and licensing of intangible property. However, a well-defined jurisprudential aspect in the IPR taxation regime still lacks as irregularities and discrepancies were all left on the judiciary to decide. In this sense, it is important to define an intangible property to further categorize it and identify the nature of the agreement and the transaction involved. According to section 2(11)(b) of the Income-tax Act, 1961, intangible assets include “know-how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature” excluding goodwill of a business. Delving into the question of whether these assets are goods or services, the CGST Act, 2017 shall be referred. According to section 2(52) of the CGST Act, 2017, goods include all types of moveable property other than money and securities. Going by this definition it is safe to assume that the supply of any moveable property is a supply of goods. In Tata Consultancy services vs. the State of Andhra Pradesh, the Hon’ble Supreme Court held that intangible assets can be called goods if they are capable of being abstracted, consumed, used, transferred, delivered, stored, or possessed. While on the other hand according to C.B.E &C Circular No.80/10/2004-S.T dated 17.09.2004, temporary transfer of IPRs will be termed as intellectual property services while the permanent transfer of such rights cannot be termed as service. This is because the holder of the intellectual property will no longer hold it in his/her possession and therefore, it will be dealt as sales of the intellectual property. This position of law is also defined by Section 66E(c) of the Finance Act, 1994 which states that temporary transfer or enjoyment or permission to use an IP is a part of services excluding permanent transfers of such property. Accordingly, if the intellectual property is dealt as goods then the transfer of such goods will be deemed sales according to article 366(29A) of the Indian constitution. The position of law, therefore, before the application of GST in India was based on the interpretation of the nature of the transaction, however current regime too has failed to give a conclusive end to the problem of taxability. Licensing v. Assignment Much of the debate on the rates of tax to be imposed on MNCs boil down to the nature of the transaction involved. Particularly, the argument lies in the categorization of such transactions. It is not the first time that this question of law is argued. For one reason, it can be sufficiently derived that the jurisprudence before GST had enough debate on the same. One such example is Commissioner of Sales Tax v. Duke and Sons Pvt. Ltd. While this case enumerates the difference between licensing and assignment, the same is ridiculed the moment it distinguishes the transfer of a trademark from the assignment of the same further stating that “permission in writing as required by law may be enough” to suffice transfer of a trademark. The whole jurisprudence behind the concept of “deemed sales” was reduced to permission in writing in this one single sentence. Further, the proposition in its judgment which distinguished assignment and transfer of right to use were against the settled position of law. Something to which an attempt was made by the court to reverse the same in BSNL vs. Union of India which had set out a clear test of exclusivity to identify the nature of the transaction. The BSNL judgment though has been rendered irrelevant with the advent of GST as tax is concurrent now, still laid down the exclusivity test that can be still applied. The Duke judgment as a whole gave a clear description of what the difference between assignment and licensing. It was held that the assignment of a trademark would mean the proprietor would be divested from his right to use the trademark whereas the same would not be the case in-licensing of a trademark. A license per se is an assurance to the licensee that the owner or the proprietor of the asset won’t initiate any legal proceedings against him if he uses the same. On the other hand, the assignment of an asset would simply mean the right over the asset being transferred to the assignee either wholly or partially. Where section 19 of the Copyright Act,

[By Aishwarya Mehta & Kaustubh Bajpayee] The authors are students at the Maharashtra National Law University, Nagpur.  INTRODUCTION Over and Over again, income tax officials find it difficult to ascertain whether a specific receipt is capital in nature and thus exempted from tax liability, or is a revenue receipt and thus, taxable. This imbroglio can be imputed to the fact that the Income Tax Act, 1961 does not lay down any explanation of the expressions “capital receipt” and “revenue receipt”. Hence, in cases where the monetary transaction does not fit appropriately into any provision of the Income Tax Act, 1961, there is a difference of opinion between the income tax officials and the taxpayers every time. On one side, the tax authorities try to expand the sphere of capital gains specified under Section 45 of the IT Act, 1961 by incorporating several transactions under its grab. Adversely, on the other side, the taxpayers assert that the transaction should pertain to capital accounts and thus are non-taxable. Lately, in the case of Aditya Balkrishna Shroff v ITO, the Mumbai bench of the Income Tax Appellate Tribunal (“ITAT”) expatiated on the tax implications of gains solely due to foreign exchange fluctuations on repayment of personal loans. The crucial points from the order are mentioned below. FACTS In the course of the audit assessment, the Assessing Officer (AO) observed that according to the Annual  Information Return (AIR) and capital account of the Assessee (“Aditya Shroff”), he received Rs. 1,12,35,236. When the assessing officer scrutinized this entry further, the assessee elucidated that he had furnished an interest-free personal loan of USD 2,00,000 (INR90,30,758) to his cousin in Singapore when the foreign exchange rate was 1 USD=INR 45.14. The Assessee also explained that the remittance was made under the Liberalized Remittance Scheme (LRS) provided by the Reserve Bank of India in 2004. The cousin paid back the amount of USD 2,00,000 (INR 1,12,35,326) on May 24, 2012, when the foreign exchange rate was 1 USD=INR 56.18. The assessee explained that due to fluctuation in the foreign exchange rate, the amount received on repayment of the personal loan was more than the amount originally advanced and hence, the receipt is non-taxable. The assessing officer observed that the variance of this transaction was of an income nature and thus taxable. Further, the AO instituted penalty proceedings against him for not disclosing the correct income. The assessee filed an appeal against this order. The appeal filed by the Assessee before the Commissioner of Income Tax was set aside and the order of the AO was approved on the pretext that only a rupee loan is admissible under the regulations of the Foreign Exchange Management Act (“FEMA”). Thus, the gain received by the assessee should be considered as income from other sources. Discontented with the decision, the assessee filed an appeal with the ITAT. ISSUE Whether the gain received on a personal loan solely due to foreign exchange fluctuation is a capital receipt or included in the nature of income? DECISION The ITAT recognized the appeal and held that the gains received on personal loans solely due to foreign exchange fluctuation are to be considered a capital receipt on the following grounds:- The authorities can’t modify the nature of receipt by expanding the scope of the expression- “income”, which is taxable as per Section 2(24) of the IT Act, 1961. As per Section 2(24)(vi) of the IT Act, 1961, it is coherent that only such capital gains are taxable as specified under Section 45. Hence, all other capital receipts falling outside the scope of this section are non-taxable. It is indubitable that the repayment of interest-free personal loans is capital in nature. This perspective of authorities can be considered as putting the cart before the horse- as the subordinate authorities determined the head of income under which the transaction should be taxed, without ascertaining the nature of the same. The transaction was purely personal in nature and the gain on the personal loan was solely due to the foreign exchange fluctuation. Even if FEMA sanctions the loan in Indian rupees only, it is not the responsibility of income tax officials to identify whether the loan was permitted in concurrence with the provisions of FEMA. However, non-conformity under FEMA is inconsequential to the analysis under Income Tax Act. CRITICAL ANALYSIS This order illuminates that any gains on repayment of interest-free personal loans solely due to the forex fluctuation cannot be considered taxable income in the hands of the recipient. Nevertheless, the ITAT could have referred to the case of Sutlej Cotton Mills Ltd v. Commissioner of Income Tax, West Bengal, where the supreme court laid down a test regarding tax liability of gain/loss solely due to foreign exchange fluctuation. The Supreme court held that:- “any gain/loss attributable to appreciation/ depreciation in value of the foreign currency would be trading profit or loss if the foreign currency is held by the on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature”. The ITAT applied the same test in the case of  Havells India Limited v ACIT, where the taxpayer received foreign exchange gain on redemption of shares in the foreign subsidiary. The bench held that the gain on exchange was just an outcome of repatriation of the consideration received in Euro, to INR. Hence, the forex gain cannot be considered a fraction of the consideration received on redemption of shares. CONCLUSION The judgement of the ITAT, Mumbai came when the economic fallout from the pandemic continued to cause hardship for a few fragments of the society. During COVID-19, a number of rich individuals imparted financial assistance to their NRI folks who were outrageously distressed. This decision has fortified that all the receipts in the capital sector are taxable only when they are specified in

[By Anshika Agarwal & Shubhi Singhal] Anshika Agarwal is a student at GGSIPU, Vivekananda Institute of professional studies, New Delhi and Shubhi Singhal is a student at the National Law Institute University, Bhopal.  Introduction Taxability of income arising from the indirect transfer of assets situated in India has been a subject matter of disputes for quite along. The issue has once again come into light with the introduction of the Taxation Laws (Amendment) Bill, 2021by the Finance Ministry on 5 August 2021. It was on 13 August 2021 that the said Bill received the President’s assent and the Taxation Laws (Amendment) Act, 2021 was notified. The said Act seeks to amend the Income Tax Act, 1961 (hereinafter “principal act”) and the Finance Act, 2012, thereby, cancelling the retrospective tax liability arising from the indirect transfer of the assets located in India. This means that all the tax demands raised for transactions relating to the transfer of Indian assets before 28 May 2012 will be nullified. The amendment can be perceived as a resolution mechanism in ending the far stretched Vodafone and CAIRN Energy tax disputes. The article aims to analyse the events leading to the introduction of the Taxation Laws (Amendment) Act and its overall impact. Laws Prior to the Finance Act 2012 and Their Repercussions  The principal Act of 1961 vide its Section 9 enlisted certain incomes, that were deemed to have arisen or accrued in India, to determine the scope of the taxability of the total income. As per Section 9(1)(i), incomes arising from or through an indirect or direct transfer of any capital asset or any property situated in India or any business having a connection in India will be deemed as income arising in India. The said transactions will be taxable for all the three categories of persons, i.e., Resident ordinarily resident (R-OR), Resident Non ordinarily resident (R-NOR) and Non-Resident (NR). The Vodafone Dispute The said provisions were, however, unclear to an extent that they failed to resolve the questions with respect to the taxability of income arising from the transfer of shares of a foreign company income. The said issue was first raised in 2006 when a foreign-based company Hutchison Telecommunications International Limited (hereinafter “HTIL”) transferred its foreign subsidiary’s share capital to Vodafone International Holdings. The said transaction entitled Vodafone to a controlling interest of 67% in Hutchison Essar Ltd., an Indian based joint venture. It was in 2007 that the cause of action arose when Vodafone failed to deduct tax from its gains arising from the indirect transfer of Indian assets to HTIL. On account of this non-compliance, a due notice was served by the Income Tax Department to Vodafone. The matter went up to the Supreme Court and was finally decided in the favour of Vodafone. Judicial Approach to the Vodafone Dispute In this case, i.e., Vodafone International Holdings B.V v. Union of India, the apex court ruled that since Section 9(1)(i) does not cover indirect transfers of capital assets/property situated in India and the said transfer being an indirect one could not be charged under the head capital gains. Therefore, in the present matter, Vodafone was not liable to deduct tax from its gains arising from the purchase of a 67 per cent stake in Hutchison Whampoa for $11 billion. The Court further observed that the expression “through” in Section 9 does not mean “in consequence of”. To circumvent the implication of the above decision, the Indian government came up with The Finance Act, 2012 which amended Section 9 of the principal Act. Laws as per Finance Act, 2012 The 2012 Act inserted Explanation 4 and Explanation 5 to Section 9(1)(i). The ambiguity that arose in the Vodafone case regarding the interpretation of the expression “through” was clarified by inserting Explanation 4 to Section 9(1)(i). It stated that, the expression “through” shall mean and include, and shall be deemed to have always meant and included, “by means of”, “in consequence of” or “by reason of”. By doing so, the Act imposed a retrospective tax on the indirect transfer of capital assets. This implies that an asset or a capital asset shall be deemed to be and shall always be deemed to have been situated in India if they derived their value “substantially” from the assets located in India, either directly or indirectly. Therefore, any capital gains arising from the transfer of such assets being any share or interest of an offshore company as well as the transactions that took place between 28 May 2012 and 1962 will be taxable. The CAIRN Dispute With the commencement of the said legislation, issues with respect to the tax liability of the transactions undertaken prior to 28th May 2012 began to surface. A similar transaction was entered into by CAIRN UK Holdings Limited (hereinafter “CUHL”), a UK-based company. CAIRN India Holdings Limited (hereinafter “CIHL”), a non-Indian wholly-owned subsidiary of CUHL was established in 2006 in New Jersey, USA. Further, CUHL transferred the shares of 9 of its subsidiaries to CIHL. In the same year, another wholly-owned subsidiary named CAIRN India Limited (hereinafter “CIL”) was established in India. Eventually, CUHL sold shares of CIHL to CIL and a subsequent IPO offer was issued by CIL proposing 30% of its stocks to the Indian share market. As a result, CUHL experienced a gain of approximately Rs. 6,101 crores. Though quite late, this whiff of money being pocketed by CUHL reached the eyes, nose and ears of the Income Tax Department in January 2014 and a preliminary assessment of ₹10,247 crore as tax liability was imposed. Arbitral Proceedings in the Matter of CAIRN and Vodafone After failure on the part of Indian courts to settle the disputes, Vodafone and CAIRN approached the Permanent Court of Arbitration in Hague, Netherlands. Herein, the court granted relief in favour of Vodafone and CAIRN ruling that the retrospective tax application of the Indian government is inconsistent with the “fair and equitable” provision envisaged under Article 3(2) of Bilateral Investment Treaty (BIT), entered

[By Muskaan Desai]  The author is a student at the National Academy of Legal Studies and Research, Hyderabad. Cryptocurrency in India has been an unregulated area with a lot of uncertainty. The legality and taxability of cryptocurrencies have been contentious issues. The Central Government, through its draft Cryptocurrency and Regulation of Official Digital Currency Bill, has sought to ban private digital currency and introduce a Central Bank Digital Currency which will act as a nationalized digital currency backed by the rupee. Though the bill was set to be introduced in the Lok Sabha during the Monsoon Session, it did not get listed for debate. It needs to be seen as to how the implications of GST will change with the introduction of regulation on cryptocurrency. Current Position As of today, there is no clarity as to the taxability of cryptocurrency under GST or under which category of supply it would fall. Though the SC in its judgement in Internet and Mobile Association of India v RBI reversed RBI’s order of disallowing trade of cryptocurrencies through banks, it still remains unregulated and unrecognized by RBI. Therefore, it is clear that cryptocurrency does not come under the ambit of money under CGST. The trade of cryptocurrency is akin to that of securities on stock exchanges, i.e., though it does not fall under any of the categories mentioned in the definition, the provision is an inclusive one and includes any such marketable securities of like nature, under the ambit of which cryptocurrency can be brought. However, it is decentralized and not regulated by any security market regulator, thereby not falling under S.2(h) SCRA. Therefore, it is neither money nor security and hence can be brought under the ambit of ‘goods’ under the CGST Act. Under S.2(52), CGST Act goods include movable property excluding money and securities. The movable property includes both tangible and intangible property. Assuming that there is no controversy about cryptocurrency being a movable property and an intangible asset, it could be brought under the definition of goods under CGST. In this case, the exchange between supplier and recipient can be taxed separately undersupply of goods. The CBIC has also proposed to impose a GST of 18% on overseas cryptocurrency exchanges. Cryptocurrency is made taxable under the slab of 18% which includes Capital Goods and Industrial Intermediaries among other items, hence pointing towards an intention of CBIC of bringing its trading under the ambit of supply of goods. The CBIC now seeks to regulate the cryptocurrency domestically by bringing its mining and charges paid to intermediaries for facilitating its trading under the ambit of supply of services. It is interesting to note that the cryptocurrency exchanges which act as intermediaries have already been collecting GST from their customers for the supply of services. Hence, despite cryptocurrency not being regulated either by RBI or through a statute yet, it is sought to be regulated through an indirect tax regime. Future Context With the central government seeking to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, it becomes pertinent to analyse the repercussions that it will have on the taxability of cryptocurrency through the introduction of CBDC. It is also pertinent to appreciate that despite the bill not being tabled during the current monsoon session, the RBI seeks to introduce a Central Bank Digital Currency independent of the bill. The Bill seeks to ban private cryptocurrencies and introduce a centralized digital currency backed by the rupee and regulated by the RBI. This move has received both praise and criticism but the practical repercussions of it are yet to be seen. The bill, under S.2(1)(a), defines digital currency as “Cryptocurrency, by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having an inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes”. This definition is very broad in nature and seeks to cover any digital currency, irrespective of whether it is generated through cryptographic means or shares the same concerns of cryptographic currency. In this article, the focus remains only on cryptocurrency. The bill does not have any provisions with respect to taxation of digital currency under direct or indirect tax regimes. However, the above definition of cryptocurrency under the draft bill clarifies that the currency would have an inherent value in a business transaction, i.e., its trading can be categorized as a business activity. If it is accompanied by a consideration, it falls under the definition of supply under S.7 of the CGST Act. Through analysis, CBDC could either be taxed as services or exempted from GST depending on the context of a transaction. Money– The introduction of a nationalized currency would require amendments to various acts, including the RBI Act and FEMA to bring it under the scope of a legal tender. In any case, the mere recognition of CBDC by RBI would lead to cryptocurrency being identified as ‘money’ under S.2(75) of CGST Act and hence its trading would be exempt from the scope of supply of goods nor services. However, according to S.2(102) explanation 2, a related transaction involving a consideration other than money (cryptocurrency in the current context) is still taxable as a service. Hence, if trading of cryptocurrency is facilitated by an intermediary, the consideration paid can still be brought under the scope of supply of services and taxable under CGST. Securities– The recognition of digital currency by RBI could bring it under the scope of securities under S.2(101) CGSTAct which relies on S.2(h) SCRA. As discussed above, the trade of cryptocurrency has the characteristics of trading securities under the stock exchange.

[By Sanskriti Srimali and Dushyant Sharma] The authors are students at Institute of Law, Nirma University. “Never let a serious crisis go to waste.”                                                          –Rahm Emanuel The economic jitters induced by the pandemic are still reeling around the globe. Post pandemic economic recovery has taken the centre stage at a global level. Undoubtedly, governments, around the world, have to be the front-runners to revive the global economy. However, looking at the figures of global debt which now stands at a record $281 trillion, the task of revamping the global economy would not be a cakewalk. The authorities have to search for new avenues to generate revenue or start scrutinizing existing ones to deliver sustainable public finances. Governments throughout the world generate revenue by collecting taxes via corporations as well as individuals therefore tax rates of each jurisdiction play an important role and can be a game-changer in the coming times. Tax avoidance and evasion have been part and parcel of every country. Multinational firms detest paying their fair share of taxation. They’ll do everything they can to take advantage of loopholes and reduce their tax liability. Since the 1990s, the world has seen an explosion of profit shifting to tax havens. Many companies have established offices in countries with low or no tax rates, such as the Cayman Islands, Bermuda, and Bahamas which are also known as tax havens as they provide a 0% tax rate to increase FDI and employment. Countries compete with each other to get the attention of big well-established companies by lowering the tax rate. To put an end to this race to the bottom, the US government came up with a bold proposal: a global minimum tax rate of 21% which was revised to 15%, keeping the idea unchanged. Before going into the details concerning its implementation and how it would fill the empty coffers of the government around the world, it is imperative to understand the origin and proposition of the idea of having a global minimum corporate tax. Each country has the power to decide its tax rate without taking into consideration the interest of others. This notion began to change with the advent of globalization and further through digitization which knows no territorial boundaries. However, the response of the countries was far too slow when compared with the rampant growth of the digital economy. As a result of this, a large chunk of profits earned by MNEs remained untaxed for a good amount of time. The emptied coffers of the governments after the 2008 global financial crisis, forced the G20 and OECD countries to reform the international tax system. In pursuance to it, OECD proposed an action plan to address ‘Base Erosion and Profit Shifting’, containing 15 actions that were approved by G20 nations in Russia in 2013. At the same summit, the OECD recognised that the developing countries have been more hit by the tax abuse of multinationals. However, the plan of actions failed to yield results owing to the lack of coordinated efforts, unilateral actions by the member countries among others. So the OECD came up with BEPS 2.0 blueprint in November 2020. The blueprint emphasised two pillars to overhaul the international tax system which is as follows : Pillar 1 – The proposal aims to introduce a formulaic element to apportion some of MNE’s profit to the jurisdiction where the sales occurred. The scheme mandates the filing of self-assessment by the MNEs. After filing, the home country would engage in calculations and allocations. To effectuate such a proposition, several existing tax treaties would have to be amended. This proposal gives the major bargaining power to a bunch of developed nations which are home to most of the MNEs. Also, in lieu of the meagre tax revenue, the proposal wants the recipient countries to roll back their unilateral action like- Equalization Levy (EQL) in the case of India. Given such roadblocks, a global consensus would be hard to achieve let alone the implementation. Pillar 2– This pillar intends to lay down a certain set of rules to impose a minimum tax rate of 15% on all companies irrespective of where they are headquartered or where they work. So suppose if a company is headquartered in a country that imposes a tax rate of 10% which falls below the proposed rate of 15% then the other country from which the parent company operates would come and take the rest i.e. 5%. This would not only disincentivize the MNE to shift their operations to low tax jurisdictions but will also encourage the low tax jurisdictions to increase their tax rate to the minimum global standard. But is this as good news as it sounds? Unfortunately not! This proposal is plagued by two difficulties first lies in implementation and the other, the major concern, is the distribution of the tax collected among the participating countries. Under the OECD proposal, the G7 countries which account for 10% of the world’s population would gain more than 60% of the additional revenues. The imposition of the Income Inclusion Rule (IIR), which allows the ultimate parent country of the MNEs to impose a top-up tax to achieve minimum effective rate would override other provisions in the blueprint, like UTPR and STTR. They have only been included so that the IIR might not sound unfair to the source country. The use of IIR as the main norm, clearly signifies that a major chunk of the pie would go to MNEs ultimate parent country. The most favourable option that could act as a breakthrough in the current hiatus is the Minimum Effective Tax Rate which is also being endorsed by the World Economic Forum, Tax Justice Network and UN FACTI panel recommendation. This proposal is the modification of GMTR and dispenses with the idea of giving priority to home countries of MNEs over source countries where real activities occur. This proposal works on the following pillars which are described below : Transparency: Under this, the MNEs have to

[By Prerna Mayea and Harshal Sareen] The authors are students at the Institute of Law, Nirma University. Many events have been witnessed recently, such as the G7 nation’s approval and the United States’ proposal for Global Minimum Corporate Tax Rate [“GMCTR”] which shows that a global movement towards a comprehensive overhaul of the global tax system has gained traction. In a study by the Tax Justice Network, countries lose $475 billion to tax havens and $245 billion owing to corporate tax avoidance. Due to the upheaval caused by the Covid-19 pandemic, the economies of some countries are on the brink of depression. The countries across the globe have suffered a loss of $79.69 billion. The US has therefore proposed a worldwide minimum tax rate of 15%. Introduction  GMCTR implies a global minimum tax rate that corporations across the world must pay, regardless of the country they are based. This initiative can be considered as a global response to ensure that tax is paid by the corporations where they operate since multinational corporations often tend to show reluctance while paying taxes on their earned profits. In order to do so, corporations exploit the loopholes in the taxation laws and opt for a worldwide practice known as Base Erosion and Profit Shifting (BEPS), where large corporations incorporate themselves in lower-tax countries like the Cayman Islands and Ireland (tax havens) to avoid high tax in the countries where they operate. As a consequence, it deprives a country of its revenue from taxes. Consequently, the taxation regime needed to be revised in light of such problems. Therefore, to counter this tax avoidance and reinvigorate the battered economy GMCTR has gained attention recently. This can be a much-awaited decision since it would fix up the loopholes pertaining to cross-border taxations and restore economic stability to a pandemic-ravaged world. Therefore, with the prospect of introducing GMCTR it is imperative to analyse its impact upon the Indian Taxation system. In this post, the authors seek to discuss the opportunities as well as the issues that India might face with the introduction of GMCTR. Indian Taxation Scenario Before delving into the implementation of GMCTR, it is important to take note of the present taxation scenario in the country. Like other developing and developed nations, India is also not immune to the tax losses arising on account of companies exploiting the loopholes in the taxation laws. Tax losses in India have been estimated at over $10 million. This problem was also realized by the Indian government and it took bold steps to curb the problem of tax evasion. In 2016, the government introduced an equalization levy to tax the income of multinational e-commerce companies engaging in regular transactions with companies in India, irrespective of their place of permanent establishment. It also implemented the General Anti-Avoidance Rule (GAAR) in 2017 to keep a check on transactions aimed at avoiding tax. India has also proactively engaged with several countries in the Double Taxation Avoidance Agreement (DTAA), provided under Section 90 of the Income Tax Act 1961, with a focus to provide relief on dual incidence of taxation on the same declared asset in two different nations. Relief from double taxation has also been provided to non-resident Indians on income accrued through foreign retirement benefits accounts in the federal budget 2021. Implementation of the GMCTR can be seen as a positive step to further reduce any tax evasions in the country. It will also provide India a strong footing in the G20 summit scheduled in July 2021, to renegotiate its DTAA which has not been signed by several countries for years. Impact on Foreign Direct Investment  Various multinational corporations invest in different countries which leads to the generation of employment opportunities and efficient utilization of national resources. In order to attract these businesses, a country uses its sovereign power to regulate corporate taxes in order to attract global corporations. Therefore, in September 2019, India had reformed the corporate tax rates by slashing it down to 22% (for existing companies not seeking exemption) and 25% (for existing companies not receiving exemptions), and 15% for newly incorporated companies. This was done to give a boost to the crippling economy and attract new investments in the country. Further, the corporate tax was also much lower in other countries like 25% in Vietnam, 17% in Singapore and 25% in China. By reducing its rate, India was also now in a position to give competitive position to attract foreign investors. The move yielded positive results and India witnessed the highest inflow of Foreign Direct Investment (FDI) in the financial year 2020-21, amounting to $81.72 billion. On a positive note, India’s tax rate for domestic companies was fixed at 22% (plus 10% surcharge and 4% cess) by the insertion of Section 115 BAA, Income Tax Act, 1961, thus being higher than the global minimum corporate tax rate, India can continue to attract FDI. Further, it has been argued that apart from lower tax rates, India also provides a conducive environment for foreign investments due to good quality of labour at competitive rates, several relaxations and incentives, vast growing internal market and private sector as well as technological and innovation capabilities. Therefore, it can continue to attract FDI without any significant adverse impact. However, it is feared that with the introduction of a GMCTR, investment opportunities for developing and under-developed countries will be eroded to a great extent. With severe economic disparities around the globe, the introduction of GMCTR will mean that countries that choose to offer low corporate tax rates will lose their competitive edge against giant global economies. Implementation Challenges  Since every coin has two sides, the introduction of GMCTR along with the opportunities also poses several challenges. It is very likely that GMCTR would pose several implementation challenges in India. The foremost challenge is getting the majority of nations on board. Further, with the implementation of GMCTR, if the government revenues are impacted negatively, it will create a barrier in providing necessary social services and