Year 2015: Govt showed intent to bring certainty in tax laws

The National Democratic Alliance (NDA) government came to power with the promise of putting an end to what many called the tax ‘extortion’ regime of the previous government. The year 2015 was the first full year for the government to walk some of its talk on tax reform.

Though the government didn’t start the year on the right note with its Budget botch-up on the issue of applicability of Minimum Alternate Tax (MAT) on foreign institutional investors, it redeemed itself later by announcing some positive steps towards tax reforms.

As we near the end of 2015, we look back at some of the major tax-related announcements made and measures taken by the government during the year.

Not challenging Vodafone judgement: The government sent a positive signal to businesses by not challenging a Bombay High Court decision favouring Vodafone in the Rs 3,200-crore transfer pricing case.

This was the first major taxation policy decision taken by the government that raised the hopes of businesses, which had termed the UPA-II policies as tax terrorism.

MAT goof up: The government, however, undid much of the positive sentiment it created after the Vodafone decision when it botched up the issue of MAT on FIIs. The government announced in the Budget non-applicability of MAT on profits made by FIIs from 2015/16. However, it did not clarify its stand on MAT on profits made in previous years.

The government later said that since the issue was in court, it would go by what the court decides. This raised the fear of retrospective taxation of gains made by FIIs, and shook the equity markets.

After much hue and cry, the government finally made amends, and in September came out with a clarification saying that the MAT provisions would not be applicable to a foreign company, which does not have a permanent establishment or place of business in India. The government had amended the law with effect from April 2001.

Black Money Act, disclosure window and its failure: Many tax experts and corporates termed it as a hurriedly ‘drafted’ law, which was more an attempt to fulfil a pre-poll promise that BJP made.

The law, which has strict provisions of 60 per cent tax on foreign assets, and jail terms of 10 years of imprisonment in case of wilful evasion, has been termed very strict and even impractical.

The law had a provision of a limited disclosure window that ended on 30 September this year for people with unaccounted foreign assets to come clean. However, despite the initial government claims of a very positive response to the window, assets only worth Rs 4,200 crore were disclosed under the window.

The Black Money Act didn’t win the government many admirers. Even some of its traditional supporters (of its economic policies) got ticked off by the law. Recently, Jayant Pai, the former Infosys CFO and a member of the Kelkar Committee on tax reform, termed the law a joke.

He says that by just passing a legislation and expecting people who have black money, to come forward and disclose it, is a wrong approach.

Corporate tax reform: In a major announcement this year, the government said in the Budget that it would start reducing corporate tax from 30 per cent to 25 per cent in a phased manner in the next four years. Along with reducing the corporate tax, the government has also promised to remove many exemptions currently extended to corporates.

It recently announced the roadmap for phasing out the exemptions. According to the roadmap, profit-linked, investment-linked and area-based deductions for both corporate and non-corporate taxpayers would be phased out. The government also proposed to not modify the sunset date, the date after which the exemptions cease to exist, for tax incentives or exemptions that have such sunset dates. For those exemptions that have no sunset date, they would cease to exist after 31 March 2017.

“The proposal to reduce the corporate tax rate from 30 per cent to 25 per cent along with phasing out of tax exemptions is a welcome move as it was directed towards providing a simplified tax regime and may help in reducing litigations and disputes arising on account of exemptions and deductions claimed by the taxpayers,” says Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP.

However, not everyone – especially sectors that are enjoying lower tax levy – is happy with the government’s decision to phase out exemptions. Even some tax experts believe it is not feasible for government to do away with all the tax exemptions.

Nidhi Goyal, Managing Director, Tax and Regulatory Affairs, Protiviti India, says: “Different ministries – civil aviation, defence, etc – are demanding tax benefits for their respective sectors to grow. Therefore, I don’t see all tax incentives going away.”

Panel for simplification of tax laws: The government has formed a panel for simplification of taxes. Among the objectives of the panel are studying and identifying the provisions/phrases in the I-T Act that are leading to litigation due to different interpretations and the provisions of the Act for simplification (of language) and identifying laws that are impacting the ease of doing business.

With the formation of the panel, it is believed that the government has dumped for good the UPA government’s much-touted Direct Taxes Code (DTC). While most industries and corporate bodies have welcomed the move to form a panel for simplification of tax laws (and dump the DTC), some tax experts believe that the panel’s mandate is very narrow and it cannot undertake the task of bringing structural changes in the tax laws as was envisaged under the DTC.

Transfer pricing: This is one issue that has resulted in the most tax litigations in India. The government has taken a few steps to bring more clarity on the issue and reduce litigations. As a first step, it notified in March this year the roll-back provisions under advanced pricing agreements (APAs), under which pricing agreements can be applied to the four previous years.

Later in the year, it notified the use of range concept for determination of arm’s length price (ALP) and use of multiple year data for analysing a comparable company for related party transactions. So far in 2015/16, the government has signed 31 APAs.

GST: As a step forward to one of the biggest tax reforms – the Goods and Services tax (GST) – a committee headed by Chief Economic Adviser Arvind Subramanian has submitted a report on possible tax rates under GST to the finance minister. The committee recommends a three-tier tax structure with the revenue neutral tax rate of 15-15.5 per cent.

However, passage of GST remains an uncertainty given the political hurdles created by opposition parties. With the winter session of the Parliament as good as over without even discussing the GST Bill, experts believe that the hopes of implementation of GST in 2016/17 remain distant.

“It seems the GST would be deferred for another year, even if they manage to discuss the bill in budget session,” says Goyal of Protivity.

A mixed bag year

Though the year 2015 remains a year of mixed bag for tax reforms, the government has shown the intent in bringing about certainty in tax rates. It’s decision to keep foreign companies (with no permanent establishments) out of the MAT, not challenging Vodafone decision, etc are clear indications that the government wants to reduce tax litigations and change its tax extortionist image.

“The government must be commended for doing a lot of groundwork this year, which is now beginning to pay off with a significant change in the sentiment of the taxpayers. The taxpayers now feel assured that there will be no jarring legislative change, which will be forced upon them all of a sudden,” says Rahul Jain, Partner, Nangia & Co.