IMPLEMENT SUGGESTED ADMINISTRATIVE REFORMS
19 January 2016
In the New Year, the Indian economy seems to the last man standing in a crumbling global economic environment. Interestingly, the numbers, the GDP, the balance of payments, inflation and all the important parameters point to a healthy economy. However, very few would agree that all is well with ground-level change still eluding business.
From a mood of unprecedented expectations that preceded last year’s Budget, Finance Minister Arun Jaitley this time has to contend with anxiety, coupled with a sense of dejection at the pace of reforms. One of the key challenges is whether the big promise on non-adversarial and efficient tax environment will actually be delivered.
Clearly, a lot needs to be done. In the past quarter of 2015, the OECD introduced final drafts on important global tax issues which, one would apprehend, would start a chase of unilateralism that the world is not ready for; it could also be a trap that India could very well fall into with the ‘noble’ intention of protecting its tax base. If this indulgence seeps into the Indian tax system in this Budget, it is bound to further alienate foreign investors.
India has the ignominious title of being one of most tax-litigating country in the world. The Alternate Dispute Mechanism i.e. the advance pricing agreement touted to relieve taxpayers from long-drawn transfer pricing disputes suffers from a demand-supply mismatch. The demand of dispute resolution is far in excess of delivery, in the process numbing the effectiveness of the process. A similar fate has befallen the Authority of Advance Ruling, which also is battling a backlog that is beyond the promise of delivery. Now joining the queue are hapless overseas investors who acquire global companies but who have a footprint in India. They are now accountable to tax authorities under the ‘indirect transfer’ provisions which seek to tax those acquisitions that derive substantial value from Indian assets.
The Indian tax system has a legacy of compliance on tax issues. It is still expected that foreign companies obtain PAN, and file tax returns for income that are subject to withholding tax such as fees for technical services, royalty or even if it earns an exempt income. Moreover, such companies that do not even have a place of business in India are required to comply with TDS provisions. Clearly, the objective of improving the scorecard on ease of doing business in India needs more serious attention.
While saving taxes in a legitimate manner is a constitutional right, the argument for an efficient and transparent tax regime is equally compelling. The dividend distribution tax remains a bugbear for foreign investors who are unable to claim credit for such taxes in their home jurisdiction. On the other hand, Indian firms investing abroad suffer from not being in a position to avail full credit, as such credits are available by following a country-by-country approach which is inefficient when foreign sourced income is derived from a number of countries.
The goal of ‘Make in India’ to become a success also hinges on whether tax steroids are provided to deserving sectors. In the welcome zeal of reducing the corporate tax rate, the process of phasing out of exemptions and deductions across the board would be insensitive to the needs of sectors such as infrastructure — a vital backbone of the economy, but where gestation period is longer. So also there is merit in the case of the healthcare sector which depends hugely on the investment by the private sector.
The beginning of this fiscal saw the introduction of Income Disclosure and Computation Standards by the CBDT with a sense of urgency that belies the objective of fairness. The introduction of 10 mandatory ICDS, which apply to all taxpayers with effect from 1 April 2015, is bound to make life of taxpayers complex. As such, the holy purpose of ICDS was to provide clarity to taxpayers on contentious issues arising out of accounting treatment followed by taxpayers adhering to guidance provided by the Companies law and Accounting Standard Board.
Instead, it has been used as a revenue generating tool by taxing income which has actually not been earned. It denies genuine expense deduction that throws pragmatism aside and adds to significant compliance cost and a looming litigation zone.
The onus of assuming the noble cause of social responsibility became a mandatory requirement for corporates with the introduction of the Companies Act, 2013. The obvious incentive is to allow deduction of expenses incurred, thus making the government a willing partner in this initiative. However, the Income Tax Act cherry picks only some part of expenses such as contribution to the Prime Minister’s Relief Fund as tax deductible expenditure; and denies the benefit to companies that contribute to their own trust or foundation. Clearly, this is at cross purposes with the intention of CSR.
Lastly, it is common belief that if we seek a change, it has to come from within first. The Tax Administration Reform Commission had submitted its final and fourth report on important reforms in February 2015. The Committee made several laudable recommendations to improve the tax administration. The report also carried candid case studies of how the tax authorities indulge in avoidable litigation and refuse to abide by the law of precedence. It is time that these suggested administrative reforms are implemented.
It is not unusual to read that the ministers of the present government routinely hold audience with the business community in a bid to keep their ear to the ground. As concerned citizens and well-wishers of India, we can only hope that this Budget delivers on some of the vexatious issue of taxation. As always, we remain hopeless optimists.
This article was published in BW Businessworld issue dated 'Jan. 25, 2016' with cover story titled 'A Make Or Break Budget'