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Tax: Acche Din Aane Waale Hain?

Published on Fri, Jul 04,2014 | 21:35, Updated at Tue, Jul 08 at 18:00Source : CNBC-TV18 |   Watch Video :

Will the first Modi Budget use tax policy to enhance ease of doing business in India, kickstart the investment cycle, generate revenue, boost savings & hasten reforms? ‘The Firm’ polled 19 experts and we asked them what will it take to kick-off ‘Acche Din’ for tax policy.

Problem number 1: We have to stop being known as the country that determines tax policy retroactively!
Solution number 1: Roll back the Vodafone linked, Section 9, capital gains, retroactive amendment!

S Gayathri, Senior VP & Tax Head, Essar
“One of the key things we have been talking about is restoring investor confidence. The very term restoration, as against bringing in new confidence, seems to suggest that what they are going to do is take corrective action and in this case which possibly would translate into bringing in some stability and certainty. There are two major issues there- the ones that you spoke about and while it has been said a 100 times before, it is worth repeating on this whole issue of retrospective amendments. So, essentially they have to look at it in two parts. One, when if ever, going forward, will such amendments ever be brought in. Two, most importantly, what they are going to do about amendments that have been put in place in the recent past. I believe that they really need to unwind those retrospective amendments as much inconvenient or embarrassing, as it may seem.”

KPMG’S Deputy CEO Dinesh Kanabar agrees and says retrospective amendments related to indirect transfer, royalty and fees for technical services must go and Shome Committee’s recommendations should be accepted.

Dinesh Kanabar, Deputy CEO, KPMG India
“The Shome Committee has given a number of very categorical recommendations like keeping small transfers out of the net, keeping listed companies out of the net. What I am hoping is a clear acceptance of the Shome Committee recommendations, that is one. Two, when I am looking at retrospective, I am not looking only at Section 9(1)(i). I am also looking at Section 9(1)(vi), Section 9(1)(vii) - the Royalties, the Fees for Technical Services definitions. India is welcome to put its position clear but prospectively and not retrospectively.”

Erstwhile government lawyer Mohan Parasaran has switched sides – he too says do away with retro changes!  

Mohan Parasaran, Former Solicitor General of India
“One, this government has got the mandate of the people. Two, the judgment of the Supreme Court in Vodafone is quite clear as far as a law is concerned. Three, even on retrospective amendments the recommendations of the Parthasarathi Shome Committee is also very clear and has been quite critical. Not only Shome Committee, there are so many other expert committees including the Federation of Indian Chambers of Commerce and Industry (FICCI) and other bodies, have been highly critical. Therefore, the government can take umbrage under these recommendations and can boldly come out and say that it has affected the sentiments of the investors and the foreign direct investments (FDI) and has consequently affected the economy and can very well do away with the retrospective amendments.”

Approximately Rs 5 lakh crore of direct tax claims and over Rs one lakh crore of indirect taxes claims are locked up in litigation. No surprises then that 11 of the 19 experts polled suggested an effective dispute resolution mechanism as the Budget fix to the image issue.

PwC’s Ketan Dalal suggests an arbitration and conciliation mechanism for tax disputes.

Ketan Dalal, Regional Managing Partner (West), PwC India
“There have been a large number of recommendations- many of those such as on structure and governance and people are long ranging recommendation, they will take time but the one which is relatively a low hanging fruit and which is something which industry and international investors badly want is on dispute management. So, I would not be surprised if there is some acknowledgment that something will need to be done about it and maybe in the next Budget which is February 28, 2015 there maybe something on dispute management. So, for example, could arbitration and conciliation be introduced as alternative dispute resolution mechanism. So that is indeed an expectation from this Budget.”

KPMG Dinesh Kanabar adds to the list a revamp of the AAR - Authority for Advance Rulings

Dinesh Kanabar, Deputy CEO, KPMG India
“One - a commitment in the Budget speech to say that there will be adequate staffing of the Authority for Advance Ruling. Two - amendment to the law to provide that the six month timeframe within which the disputes have to be ruled upon as being mandatory and not recommendatory. Three - constituting benches of the Authority for Advance Rulings (AAR), not only in Delhi but across locations. Four - extension of AAR to domestic taxpayers.”

Problem number 2: Kick-start the investment cycle. The private investment to GDP ratio has dropped to 12% levels! Can the Budget jumpstart that?  

Essar’s Gayathri says yes if tax incentives are offered to key infrastructure industries like power and SEZ benefits are restored.

S Gayathri, Senior VP & Tax Head, Essar
“Much has been said about the need to give a fillip to the infrastructure sector and the manufacturing sector amongst others and even within infrastructure, there has been a lot of talk about how the power industry needs a lot of impetus. So what I would like to see, for example with reference to power - along with the various measures that are intended to be taken - the tax holiday which for the generation of power keeps getting extended by a single year each year, is sort of prescribed for a bunch of 5-7 years. So that power generators know exactly what they need to do and within the larger framework of the helpful measures given, they can get their act together and reap the benefits. It is possible. Another area is Special Economic Zones (SEZs). There were all those incentives which were given initially but were quite rudely withdrawn at some point. The need of the hour is to restore most of them.”

BMR’s Managing Partner Bobby Parikh expects tax incentives to generate employment    and the abolishment of minimum alternate tax or MAT.

Bobby Parikh, Partner, BMR Advisors
“If I was to look at incentives and what can happen or what the government could consider, it would be to sort of look at ways in which employment generating investments are given tax benefits and there are provisions which exist in the Income Tax law for these benefits. The question is of extending these provisions or amending these provisions and adapting them to be able to direct the benefits to the areas that they would most like benefits to go to. So infrastructure investments have tax holidays, those holidays ought to continue. What had happened more recently was that although there are tax holidays, the government brought these sectors under Minimum Alternate Tax (MAT) and therefore while the companies or undertakings may or may not be making money, they are still liable to MAT, which is at a fairly high level. So I think the wish list extends from a complete abolition of MAT or if not abolition of MAT to making it considerably less onerous than what it is right now.”

PWC’S Ketan Dalal takes cue from BJP’s election manifesto and expects tax incentives for R&D.

Ketan Dalal, Regional Managing Partner (West), PwC India
“In the manifesto, there is a very specific point on tax incentives for research and development geared towards indigenization and innovation. Having put that in the manifesto, clearly the government has something in mind; so there is an expectation. Today you do have tax incentives for research and development but they are relatively ring-fenced. So either an increasing in the quantum- so their weighted deduction being more for example or broad-basing the scope of the research and development is an expectation clearly from this Budget.

Mohan Parasaran says more corporate investment will be prompted by more private consumption which can be boosted by higher individual tax exemption limits

Mohan Parasaran, Former Solicitor General of India
“Exemption limits might be increased for the middle income sector but for the higher income brackets, possibly they may increase the income tax rates.”

Ketan Dalal is focused on boosting the housing sector with a higher interest deduction limit for housing loans

Ketan Dalal, Regional Managing Partner (West), PwC India
“On the housing front, there is a 1.5 lakh limit only for interest reduction and I think there is an expectation that that limit will be increased; especially given that the manifesto lays a lot of thrust on low cost housing and even for low cost housing the 1.5 lakh limit is very small.”

India’s domestic savings rate stands at a 9 year low and 67% of all household saving go to physical assets. We asked whether the government is likely to introduce any new investment instruments to channel private savings towards sectors like infrastructure. But nobody’s expects that.

India is also desperately in need of revenue. 3 solutions – higher taxes, widen base and dig out the black money!

Senior Tax Counsel Dinesh Vyas says the government should do more than just await the special investigative team report on black money.

Dinesh Vyas, Senior Advocate
“Certainly for such an important issue which was a major election issue, the first budget by itself should be regarded as the appropriate event or appropriate occasion for the new government to make a policy statement. Now this policy statement in my opinion should not just regard Committee being set up or investigation being set up as enough. It must be followed with a very strong action oriented program which must be laid down before the parliament and before the nation and then only we will feel that there is a vindication of the position which was taken earlier.”

Bobby Parekh disagrees and says he expects the Budget to say very little on the black money issue as the SIT has already been set up.  

Bobby Parikh, Partner, BMR Advisors
“Given the fact that the Special Investigation Team (SIT) has just been established I don’t know that the Budget will contain anything which discusses an amnesty scheme or anything of that kind. I would imagine that the government would want the SIT to do more work and then figure out how they want to deal with that and there are philosophical debates on the appropriateness of amnesty schemes – that it is a big issue in itself and when the last amnesty scheme was introduced, there was an undertaking given by the then Finance Minister to the Supreme Court that there would be no amnesty schemes that would be announced by the government. I am a little skeptical of amnesty schemes being brought in. I would think that the government will let the SIT do its work and apply existing laws to be able to see how they can recoup tax revenues which rightly belong to India and which India may not have collected.”

That brings us to Problem no 4: Reform. Some of it urgently needed like GST; not so urgently needed – DTC and the one item Corporate India wishes away forever - GAAR

BMR’s Bobby Parikh expects the budget to clarify a GST implementation timeline and address backend infrastructure issues.

Bobby Parikh, Partner, BMR Advisors
 “What everyone will be looking for is some kind of a statement from the finance minister to set out what his plan is for Goods and Services Tax (GST) and in what kind of a timeline he sees this becoming a reality and some sort of discussion on what the process is likely to be to reach agreement with the States and to take things forward and what the status is as well on the infrastructure backend for being able to implement the law. Out of everything that we are discussing, if there is one thing which can have the most substantial impact on the economy, on fiscal consolidation, on ease of doing business, of making the market more integrated - GST is the most significant fiscal reform that the government can make.”

Mohan Parasaran agrees that the government should push for GST implementation.

Mohan Parasaran, Former Solicitor General of India
“They will definitely lay down a road map because the government has now clearly taken a call with regard to the legislative competence. They have said that both the States and the Union have got the legislative competence and they will lay down the road map with regard to the respective areas on which the Union and the States can levy the taxes and share the burden and they will actually proceed to make a beginning levying GST this financial year.”

As for the DTC, there is little or no enthusiasm for a new tax law.  9 out of the 20 experts polled say the Code needs much fine tuning specially in areas where the Standing Committee’s suggestions have been rejected such as doing away with STT, raising slabs for Income Tax exemption and threshold for substantial assets of foreign companies for tax purposes.

Senior Tax Counsel Dinesh Vyas says that the government needs to consider the recommendations of the Standing Committee before moving forward on DTC.

Dinesh Vyas, Senior Advocate
“As far as Direct Taxes Code (DTC) is concerned the position of the present government is not known clearly in my opinion and we are all aware that the select committee which was set up by the parliament in the last regime was headed by Mr Yashwant Sinha - a senior leader of the party now in power. That committee had raised, and I will say rightly so, certain important issues and they are still in the limbo of uncertainty. The very important issue, say, for example the provisions regarding the General Anti Avoidance Rules (GAAR). It appeared earlier that they were very harsh and they required to be somewhat diluted. Second, the taxation of foreign companies. There were so many provisions which were artificial, presumptive in nature and which therefore are keeping away the foreign investment. So on DTC what is the position of the present government that is what is expected in this Budget.”

Last year, the government had notified the General Anti Avoidance Rules or GAAR – it’s to become effective April 2016 for business arrangements with a tax benefit exceeding Rs 3 crore. 12 experts out of the 19 polled say we’re just not ready and expect a pushback.  

Dinesh Kanabar, Deputy CEO, KPMG India
“GAAR was pushed back by two years again at the recommendation of Shome Committee which had recommended pushing it back by three years and the reasons which were given was a healthy dialogue between the revenue and the tax payers and number two training of the tax gatherers i.e. the revenue officials so that they know exactly and are able to come out with a fair degree of rules so as to remove the degree of subjectivity which is inherent to GAAR. None of that has happened in the last two years. If it has not happened in the last two years, it is a time which is wasted and gone and which is why I strongly recommend that it be pushed back.”

The final expectation on the reform front is the acceptance of TARC’s suggestions. Set up in August last year, the Tax Administration Reform Commission- chaired by Parthasarathi Shome- has recommended a common Board for both direct and indirect taxes, setting up of Independent Evaluation Office to monitor revenue officials & overhaul of recruitment of tax officers and delinking their performance evaluation from revenue collected.

Dinesh Vyas, Senior Advocate
“The accountability has been a demand which has been made for several years in the past because as far as the assessing officers are concerned there is no accountability virtually to anybody. Mindless high-pitched assessments are being made. The assesses are told that look we have our own budgets to meet and therefore don’t blame us for creating these high-pitched assessment. We are sure that you will win an appeal in the Tribunal or in the High Court but as far as we are concerned our hands are tied. Because there is no accountability as far as the officers are concerned, this situation has arisen and this is a very serious situation because as a result of the high-pitched assessment demands are created. To deal with such artificial demands, which cannot be sustained in future before higher authorities, you have to fight. But then while you fight before the Tribunal or in the High Court, the income tax department creates a pressure for paying up of the amount. As a result on account of the unaccountability, high-pitched assessments are made and that creates an industry issue. It is therefore very necessary to keep these powers is check. There has to be checks and balances.”

That, in short, is what tax experts hope the Modi budget will do. We had several more responses that we’d like to share with you.

Khaitan’s Executive Director Daksha Baxi is hoping for a rationalization of the transfer pricing regime- more specifically exclusion of capital account transactions from TP application. JSW Steel’s Taxation Head Vineet Aggarwal is hoping for a provision that makes CSR expenses tax deductible. ALMT Legal’s Aliff Fazhelbhoy is expecting a reduction on short term and long term capital gains tax on sale of unlisted shares.

In 5 days from now, we’ll know if ‘acche din’ for tax policy are indeed here!

Below are some more responses by Sudhir Kapadia of EY India, Nishith Desai of Nishith Desai Associates, Daksha Baxi of Khaitan & Co, Rupak Saha of GE, Ameet Patel of SKP, M. Lakshminarayanan of Deloitte India,  Aseem Chawla of MPC Legal & Vineet Agrawal of JSW.

M Lakshminarayanan
Budget 2014: 'GAAR's Time Has Not Come'
Sudhir Kapadia
Budget 2014: Address Dual Taxation
Aseem Chawla
Budget 2014: 'Raise The Basic Exemption Limit'

Ameet Patel
Budget 2014: Tax Clarity For FPIs

Nishith Desai
Budget 2014: 'Shift To Accrual Based Budgeting'

Rupak Saha
Budget 2014: 'Address Shome's TARC Report'

Daksha Baxi
Budget 2014: 'Need A 5-Yr Roadmap For Tax Policy'

Vineet Agrawal
Budget 2014: 'Bite The Bullet & Reverse Retro Amendments'


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