Having inherited some significant legacy tax issues, the Indian government, headed by Prime Minister Narendra Modi, has been busy in bringing about some important tax changes. Will they yield the results sought to be achieved?
Non-adversarial tax regime
There is significant litigation on account of disagreements relating to various deductions and exemptions; different interpretations by field officers, appellate authorities, and courts; transfer pricing regulations; and interpretations of treaty provisions. The introduction of the Advance Pricing Agreements (APA) regime, and its rollback for five previous years, should significantly reduce the transfer pricing related litigation.
The APA regime should also provide a meaningful solution to the issues pertaining to transactions relating to intangibles, advertising, and marketing, and publicity expenses. Issuance of directives to the field officers to accord a fair and reasonable treatment to the taxpayers in selection of cases for scrutiny, recovery of tax demands, and review of appeals to the Supreme Court and the High Court, are steps in the right direction. A recent notification issued by the Central Board of Direct Taxes (CBDT) lays down an institutional mechanism to resolve taxpayer’s grievances arising from high-pitched scrutiny assessments.
The taxpayer can approach a Local Committee (LC) which would ascertain the adequacy of the reasons, examine whether additions are backed by sound reason, whether the provisions of law are grossly misinterpreted, and well established principles have been ignored. If it is established that unreasonable high-pitched additions have been made by the tax officer, the LC would send a report to the Principal Commissioner, who will then take suitable administrative action against the officer.
In his Budget Speech 2015, Finance Minister Arun Jaitley announced a reduction in the rate of corporate tax from 30 per cent to 25 per cent over the next four years, along with corresponding phasing out of exemptions and deductions. Pursuant to this, the CBDT has issued a press release, giving the roadmap for a phased removal of the deductions and had invited public comments. While the 25 per cent corporate tax rate is fairly competitive, it is desirable that the overhaul of taxation regimes, is accompanied with the removal of additional surcharge and education cess too, for ensuring clarity in the tax rates.
The phasing out of the profit and investment linked deductions should increase the tax base and reduce litigation. However, initially this phasing out, especially in respect of research and development (R&D) activities, could have a dampening effect on additional investments and commitments, unless some compensatory provisions, such as special intellectual property (IP) regime along with tightened IP laws to boost investments in such activities, are introduced. India would do well to consider such a regime which would have an impact at multiple levels.
Committee to simplify the IT Act
The constitution of the 10-member committee under the chairmanship of Retired Justice R V Easwar to identify ambiguous and poorly drafted provisions in the Income Tax Act (IT Act) which are open to multiple interpretations leading to litigation, is a welcome step towards addressing the root cause of tax disputes. While an initial set of recommendations is expected by January 31, 2016, it would be vital to see the extent to which the government transforms the recommendations into law. It would also be critical to ensure that the recommendations are implemented holistically to avoid any anomalies.
Non-taxation of rural rich farmers owing to exemption of agricultural income remains a very sore issue for a large section of population, especially the salaried class, who perceive this as largesse to such rich farmers at their cost. Admittedly, taxation of agricultural income is a politically sensitive issue and would require constitutional change since only the states have the power to legislate on it. However, one expects and hopes that the siphoning off of taxable income as agricultural income would be addressed as a trickle-down effect of the control over cash economy.
A serious debate and study is required, since a significantly large section of population dependent on agriculture is exposed to the vagaries of weather and lack of support for their economic reward. While several steps in the right direction can be perceived, there is a long way to go and the good news is that the government seems conscious about it.
Clearly, vital reforms with well drafted provisions and clear procedures and processes are needed to deliver an efficient and equitable tax administration at the ground level. More accountability of the government machinery, fairness and clarity would also change the mind-set of the taxpayer in complying with the law.
Some of the immediate measures that the government should consider in this direction are: to lay down clear policy on stay of demand in a judicious and considerate manner based on the merits of the case; more taxpayer-friendly withholding tax process and procedure, especially when it applies to non-residents; not having place of business in India; clearer and fairer compliance regime; and dealing with dual residency of individuals in the increasing global scenario.
(Daksha Baxi is Tax partner, and Ankit Namdeo, is associate, at Khaitan & Co)
