Tax compliance is still a nightmare
Rules are tangled and dispute resolution is excruciatingly slow. The government’s trying but it’s a long haul
As Asia’s third-largest economy, India is a major investment destination. However, in recent years, the unpredictable tax regime has has been a major stumbling block to its potential. According to a recent World Bank study, India ranks a lowly 156 (out of 189) in ease of paying taxes.
The effectiveness of tax administration depends to a great extent upon the credibility of its dispute resolution mechanism. In India, it takes several years before a matter is resolved.
The differing interpretation of the law by taxpayers and the tax department, and the tendency of the government to make retrospective changes in the law further add to the uncertainty. It is estimated that more than ₹4 lakh crore is under dispute and litigation.
Right noises
The government did not make many policy changes to the tax regime. However, the finance minister sounded the right notes by stating that the government was committed to providing a stable and predictable tax regime that would be investor friendly.
The announcements and subsequent circulars stated that fresh cases relating to the indirect transfer of shares would be scrutinised by a high-level committee to be constituted by the Central Board of Direct Taxes (CBDT) before action is initiated.
Other proposed moves include the strengthening of the Advance Ruling machinery; proposed changes to the Transfer Pricing Regime, namely, the introduction of roll back provisions in the Advance Pricing Agreement programme; the use of range concept to determine arm’s length price and use of multiple year data; and setting up a high-level committee to interact with trade and industry on a regular basis to ascertain clarity in tax laws. These were positive steps, signalling the government’s intent.
The government’s recent decision not to contest the Bombay High Court ruling in Vodafone’s case relating to the transfer pricing adjustment on share issue and the amendments proposed in Budget 2015 are further proof of the intention to provide a non-adversarial tax regime.
Managing litigation
To provide clarity and mitigate disputes, amendments have been proposed to the provisions relating to the taxation of indirect transfer of shares. They include: specifying a threshold of 50 per cent of the value of all the assets transferred to be located in India to tax the gains; taxation of only proportional gains attributable to Indian assets/ shares; specifying the valuation date for computation of capital gains; and excluding small shareholders with less than 5 per cent voting/control in an Indian entity (direct and indirect).
Amendments have been proposed empowering the tax authorities to defer filing of appeals when a question of law on identical facts is pending before the Supreme Court. The application of General Anti-Avoidance Rules (GAAR), which is an anti-tax avoidance measure rather than a tax collection mechanism, has been postponed to April 2017 with investments made before April 2017 grandfathered. This should enable the government to iron out interpretational issues.
Some other important announcements to minimise scope for litigation include issuance of rules to claim foreign tax credit by Indian companies, clarification that an offshore fund would not create a permanent establishment in India by the mere presence of a fund manager in India, and exclusion of capital gains of FIIs from Minimum Alternate Tax (MAT) provisions.
On the tax policy and administration aspect, the intent to implement GST by April 1, 2016 is a welcome move. The announcement to implement the recommendation of the Tax Administration Reforms Commission should lead to procedural and structural reforms.
The wheels of change have been set in motion. But we need results on the ground.
