Need to look beyond DTC
Source: By Dinesh Kanabar: The Financial Express
Given that tax terrorism was one of the important poll planks for the BJP in the general elections, expectations had been rather high that the Modi government would expedite necessary corrections to India’s existing tax regime and deal with the fetters it has put on FDI.
The Union Budget FY15 had, as expected, only an interim measure as the government had just been voted to power and was coming to grips with the issues. Now, expectations are strong that the comings Budget will deal with the tax issues substantively and, hopefully, address them. In this background, taking stock of the tax-related developments in the first 100 days of the government is in order, to see if the needle points to the right direction.
There are some very positive developments which were ushered in by the last Budget. With the right implementation, these could provide a significant positivity on the tax front. The two key developments are the Authority for Advance Rulings (AAR) and the Transfer Pricing (TP) changes.
The extension of the AAR benefit to domestic tax payers is a very significant move. One of the key vagaries of Indian tax regime is the uncertainty of the outcome. Enabling the tax-payer to get an advance ruling, and thus be certain about the tax implications of a transaction is a major step changing the tax regime. Now, ensuring implementation of this is key. Multiple benches need to be constituted and appropriately staffed. More important, there is a need to adhere to the 6-month timeframe within which orders are to be passed. So far, the lone existing bench for AAR has been without a chairman for great length of time and it takes years to get an “advance” ruling!
The TP changes, too, are commendable. The roll forward of the Advance Pricing Agreements for four years and the introduction of range within which arm’s length price has to fall (as compared to the current provisions of arithmetical means) should substantially help abate litigation in this field. The Rules implementing the changes are awaited.
Coming to the misses, two key ones are: not pushing back the introduction of GAAR and not dealing with the retrospective amendment on overseas transfers. There is indeed no argument to say that GAAR should not be introduced. The issue is how to remove the subjectivity (and the attendant litigation) around it and have a constructive dialogue prior to its implementation. There is a need to consider a pushing back of GAAR by at least two years. Enough and more has indeed been said about the need to address the retrospective amendment issue.
Apart from retrospective application, there are a number of uncertainties in the way the Section 9 amendment has been worded. As a result, there is substantial uncertainty on the tax implications in India on global transactions. These need to be addressed urgently, without waiting for the outcome on the Vodafone matter. The Shome Committee recommendations in this regard need to be accepted and implemented urgently.
Ironically, the two recent circulars issued by the CBDT to ‘clarify’ issues seem to be creating more uncertainty on the tax front. The first circular is on the imposition of new conditions on the use of manpower on tax holiday undertakings and is likely to lead to considerable litigation on the subject. The circular seems to ignore the fact that the BPO industry has a common bench-strength instead of employing people for specific undertakings. The circular runs contrary to the recommendation of Rangachary Committee set up by the government. The second circular, relating to AIFs, again, is likely to create significant problems for taxation of domestic mutual funds. On the one hand, the Budget clarified that gains to FIIs would be characterised as capital gains and provided clarity of taxation to them. On the other, the circular on AIF is a huge negative for domestic mutual funds. There is a need to provide conditions for domestic mutual funds to earn capital gains and have a pass-through status.
The key expectation of the tax-paying community is that there is no high-handedness in the implementation of tax regime and the litigation on tax matters are concluded fast. A lot of work needs to happen in both the directions. There are several recommendations made in this regard which need to be implemented.
There is an acute need for a relook at revenue targets handed out to the tax officials, which result in aggressive assessments. There is a clear need to widen the tax base rather than being aggressive with existing tax payers.
There is then an overhang of the Direct Taxes Code (DTC) which has been twice redesigned. Each time the Bill has undergone a change, the original objectives seem to be lost sight of. The need of hour is to ease the implementation of the existing law rather than to bring in a whole new piece of legislation. Many of the changes proposed in the original DTC have already been incorporated in the existing Act. The balance provisions need to be renewed and, if found appropriate, brought in the existing Act rather than try and ‘simplify’ the law by a whole new Act of Parliament.
Finally, the government seems to be moving in the right direction on the implementation of GST. This is indeed a need of the hour and one hopes that the Centre and the states will converge to make this implementation happen. Overall, there is positivity about what has been achieved and the implementation of changes and the next round of tax reforms are awaited.
Given that tax terrorism was one of the important poll planks for the BJP in the general elections, expectations had been rather high that the Modi government would expedite necessary corrections to India’s existing tax regime and deal with the fetters it has put on FDI.
The Union Budget FY15 had, as expected, only an interim measure as the government had just been voted to power and was coming to grips with the issues. Now, expectations are strong that the comings Budget will deal with the tax issues substantively and, hopefully, address them. In this background, taking stock of the tax-related developments in the first 100 days of the government is in order, to see if the needle points to the right direction.
There are some very positive developments which were ushered in by the last Budget. With the right implementation, these could provide a significant positivity on the tax front. The two key developments are the Authority for Advance Rulings (AAR) and the Transfer Pricing (TP) changes.
The extension of the AAR benefit to domestic tax payers is a very significant move. One of the key vagaries of Indian tax regime is the uncertainty of the outcome. Enabling the tax-payer to get an advance ruling, and thus be certain about the tax implications of a transaction is a major step changing the tax regime. Now, ensuring implementation of this is key. Multiple benches need to be constituted and appropriately staffed. More important, there is a need to adhere to the 6-month timeframe within which orders are to be passed. So far, the lone existing bench for AAR has been without a chairman for great length of time and it takes years to get an “advance” ruling!
The TP changes, too, are commendable. The roll forward of the Advance Pricing Agreements for four years and the introduction of range within which arm’s length price has to fall (as compared to the current provisions of arithmetical means) should substantially help abate litigation in this field. The Rules implementing the changes are awaited.
Coming to the misses, two key ones are: not pushing back the introduction of GAAR and not dealing with the retrospective amendment on overseas transfers. There is indeed no argument to say that GAAR should not be introduced. The issue is how to remove the subjectivity (and the attendant litigation) around it and have a constructive dialogue prior to its implementation. There is a need to consider a pushing back of GAAR by at least two years. Enough and more has indeed been said about the need to address the retrospective amendment issue.
Apart from retrospective application, there are a number of uncertainties in the way the Section 9 amendment has been worded. As a result, there is substantial uncertainty on the tax implications in India on global transactions. These need to be addressed urgently, without waiting for the outcome on the Vodafone matter. The Shome Committee recommendations in this regard need to be accepted and implemented urgently.
Ironically, the two recent circulars issued by the CBDT to ‘clarify’ issues seem to be creating more uncertainty on the tax front. The first circular is on the imposition of new conditions on the use of manpower on tax holiday undertakings and is likely to lead to considerable litigation on the subject. The circular seems to ignore the fact that the BPO industry has a common bench-strength instead of employing people for specific undertakings. The circular runs contrary to the recommendation of Rangachary Committee set up by the government. The second circular, relating to AIFs, again, is likely to create significant problems for taxation of domestic mutual funds. On the one hand, the Budget clarified that gains to FIIs would be characterised as capital gains and provided clarity of taxation to them. On the other, the circular on AIF is a huge negative for domestic mutual funds. There is a need to provide conditions for domestic mutual funds to earn capital gains and have a pass-through status.
The key expectation of the tax-paying community is that there is no high-handedness in the implementation of tax regime and the litigation on tax matters are concluded fast. A lot of work needs to happen in both the directions. There are several recommendations made in this regard which need to be implemented.
There is an acute need for a relook at revenue targets handed out to the tax officials, which result in aggressive assessments. There is a clear need to widen the tax base rather than being aggressive with existing tax payers.
There is then an overhang of the Direct Taxes Code (DTC) which has been twice redesigned. Each time the Bill has undergone a change, the original objectives seem to be lost sight of. The need of hour is to ease the implementation of the existing law rather than to bring in a whole new piece of legislation. Many of the changes proposed in the original DTC have already been incorporated in the existing Act. The balance provisions need to be renewed and, if found appropriate, brought in the existing Act rather than try and ‘simplify’ the law by a whole new Act of Parliament.
Finally, the government seems to be moving in the right direction on the implementation of GST. This is indeed a need of the hour and one hopes that the Centre and the states will converge to make this implementation happen. Overall, there is positivity about what has been achieved and the implementation of changes and the next round of tax reforms are awaited.
No comments:
Post a Comment