Well-timed call to modernise direct tax law
The law, at present, is replete with a complex web of cross-references, often causing confusion
The clamour for simplifying tax legislations gets louder as a new government, in its interaction with businesses and the civil society, holds out a promise of a non-adversarial tax regime.
The reform of indirect taxes has been in the making, awaiting the roll-out of the goods and services tax (at present, held up by a political impasse), but a comprehensive review of direct taxes is overdue. With India rapidly emerging a preferred gateway for global investors, the government’s move to constitute a 10-member group, led by Justice R V Easwar, to review the Income Tax Act, is well-timed. The group is expected to recommend a process for the modernisation of the law. The detailed roadmap rolled out by the Central Board of Direct Taxes (CBDT), the apex tax administration authority, to rationalise exemptions is also laudable. It ought to provide certainty to taxpayers.
A few themes clearly emerge to prompt a recalibration of the law’s architecture.
In its present shape, the law is replete with a complex web of cross-references, often causing confusion because of the overriding effects of its competing provisions. It is necessary to get rid of the inconsistent non obstante clauses and retrospect provisions, introduced to override established jurisprudence.
Equally important is the need to realign incentives for businesses. The CBDT’s proposal to provide uniform sunset milestones ought to simplify the existing regime, before the sunset kicks in on 1 April, 2017.
The relevance of minimum alternate tax (MAT) should be reviewed once the rates have been brought down to 25 per cent. The proposal to review tax accounting standards, an instance of rushed legislation, is a welcome move and should logically form a part of the comprehensive review.
Second, legislative measures are required to dispense with the inconsistent set of rules that have emerged over time on account of conflicting jurisprudence. Binding jurisprudence, particularly laid down by the Supreme Court, must be given legislative effect with a rider that only under exceptional circumstances will Parliament exercise its constitutional powers to override the judiciary.
For example, the debate on the tax rate applicable for capital gains on the sale of listed shares of a company was sought to be resolved by Delhi High Court in the Cairn ruling by upholding the 10 per cent rate. Yet, the tax administration has applied the ratio selectively, on the pretext of the strict principle of judicial discipline that does not accord binding effect to the high court ruling upon non-jurisdictional adjudicating authorities.
There is also incessant controversy on the taxability of non-resident oil field service contractors. Even before the apex court upheld the deemed basis of taxation for such taxpayers, a plethora of court rulings espoused a similar ratio. Yet, the tax administration clung to disputing taxpayers’ claims. There are instances where key terms are either not defined, or definitions are laid out for specific purposes causing overlaps in interpretation.
The framework for merger and acquisition (M&A) taxation requires an overhaul, keeping pace with the emergence of increasingly complex structures and the need to promote business reorganisations. The taxability of earn-outs and non-compete consideration has long been a sore issues. The conversion of one class of shares (preference shares) into another (equity) ought not to be regarded as a taxable event. However, without an explicit dispensation, such routine transactions can cause expensive tax disputes. The lack of tax exemption for gains on the sale of shares offered in an initial or a follow up public offer tends to create a bias in favour of retail investors, and makes the promoters’ exit expensive. A majority of these distortions can be steamrolled by carrying out substantive amendments.
Third, the need for reforms in the functioning of the dispute resolution forums cannot be overemphasised, particularly, of the first credible judicial forum – Income Tax Appellate Tribunal. Though the National Tax Tribunal law was struck down as unconstitutional by the apex court, the need for consistency in high courts as a forum for resolution of tax disputes cannot be overlooked.
Outcomes of the OECD and G20-led BEPS works have underlined the significance of robust anti-avoidance measures in the domestic law to pre-empt the erosion of the tax base. It is hence incumbent upon the legislature to provide teeth to the general anti-avoidance rule and indirect transfer tax, without comprising the 3Cs of a tax regime – certainty, clarity and consistency. India must begin to embrace sophisticated alternate dispute resolution forums, such as conciliation and arbitration, to allow speedier dispute resolution. This necessitates a change in the stance that India has held at the G-20 forum, citing sovereignty issues. India’s concern on this issue may be exaggerated, as we do have a clause for arbitration in our investment treaties. Thus, it needs to review its position, and consider permitting mediation as an alternative.
Finally, administrative reforms point towards the government’s endeavour to evolve a taxpayer-focused approach – treating the tax payer as a client. It is important that the tax administration embraces a consultative approach to rule-making. Such a change in attitude can go a long way in pushing up India’s attractiveness as a preferred investment destination.
