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The Unbearable Lightness of BJP's Tax Policy!

Published on Sat, Jul 12,2014 | 14:02, Updated at Wed, Jul 16 at 10:30Source : CNBC-TV18 |   Watch Video :

It depends on which measures you list- on the one hand you have the extension of advance rulings for residents and enhancement and extension in the investment allowance and relief on the FII taxation front and from there, the glass looks half full. On the other hand, no reversal in the retroactive amendments, no deferral of GAAR and in fact an increase in the dividend distribution tax- from there, the glass looks half empty.

Hello & Welcome to this special episode of The Firm on 'The Modi Budget'?

What did this first Budget tell you about the Narendra Modi led government's long term tax policy? To answer that question I am joined by Rohan Shah of ELP, Pranav Sayta of EY & Vineet Agrawal of JSW Steel.

Doshi: The first point I am going to make is about that 19.7% tax revenue growth estimate as aggressive as that of his predecessor Mr Chidambaram. Would you say that Mr Jaitley is hopeful or would you say that the days of aggressive tax demands are not yet over?

Sayta: I don't think the days of aggressive tax demands are over but I think they will be far better tempered than they were in the past; that is the honest feeling that I have.

Doshi: Any message from that?

Shah: Not for me. My situation is quite clear. If you see, he has done a lot of the things which are very pro-industry, very pro-manufacturer, employment. He is really genuinely hoping for buoyancy whether he is right or wrong. From my perspective, therefore, given everything else I don't think this is a signal that we will continue to have these adventures in terrible tax demands.

Doshi: Hopeful?

Agrawal: The target appears to be ambitious but certainly the directions which have been given for manufacturing sector specially and to the middle class, I am hopeful that the tax harassment days are over.

Doshi: Let us come to what for the tax fraternity has been the biggest disappointment and that is the half big solution to the baggage or the legacy problem of the retroactive tax amendments that were carried out by Mr Pranab Mukherjee when he was Finance Minister and there were many of them; it was not just pertaining to indirect transfers or Vodafone type of transactions. At that point in time, the Bharatiya Janata Party (BJP) was relatively silent. It did not vociferously oppose it but when it came to the election campaign they spoke of this as tax terrorism - all the retroactive changes that took place. When it comes to their first opportunity to fix this they have said we can't seem to do anything about the cases that are already under litigation. If new cases arise we will take them to a high level Central Board of Direct Taxes (CBDT) Committee. What does this tell you about their approach to regressive tax policies like retroactive tax amendment? When it comes to difficult decisions do they have the courage to take them?
FM Budget Speech: CBDT High Level Committee to scrutinize fresh cases arising out of 2012 retrospective amendment on indirect transfers

Sayta: Here clearly they have shown lack of that courage which they ought to have shown. I would have felt that would have given a very strong signal to the entire investor community nationally as well as internationally that this government signals a complete change in mindset to a regime of fairness, reasonableness, certainty, predictability and wants to regain the trust of the business community. That was a golden opportunity which has been missed.

The High Level Committee, I am not too sure, adds to any certainty at all because I am not too sure if there is Rs 500 crore demand or a Rs 2,000 crore demand which the Assessing Officer creates and sends for the suggestions and inputs of the expert high level committee- I am not too sure the Committee will have the ability, boldness, courage to be able to say that no, do not raise this demand where the law clearly says that a retrospective amendment is part of the law and that this demand is legitimate by the Assessing Officer.

So I would feel it is going to be extremely difficult for the High Level Committee to be able to take a call which is bold enough where unfortunately the Finance Minister has not been able to take that bold enough call. That is my feeling.

Doshi: What is this Committee going to do and this is the CBDT Committee- it is drawn from the same tax bureaucracy that thought that the retroactive amendments were a good thing to do and that have raised all these high pitched demands in the recent past few years. So they are going to turn around on their brothers now and say look we did this like six months ago but now we are going to stop?

Shah: This is really the one issue which is most troublesome and let me just explain two factors, one is most of the demands which ought to have been raised on this issue have been raised.

Doshi: Very few new demands but let us not forget that this Committee is only restricted to indirect transfers - only Section 9 issues. All the other retroactive amendments on royalties etc have been completely ignored in this Budget. This Committee will not even extend to those.

Shah: Let us stay focused on indirect transfer. There is not too much left. So what the significance of this Committee is at the threshold is the question. Second what can the Committee do? One, it effectively turns around and says issue the demand in which case you perpetuate something which you are saying philosophically you are not in agreement with or like all good Committees, it does nothing and buries the issue because it does nothing or it drops the demand. If it drops the demand you have two sets of assesses-  those who are unfortunate enough to have got a demand before this date in which case they have to suffer in court and others who you take care of because they come behind a certain date. Now, that a lot of people will critique as being arbitrary.  

So what this Committee can do and what its role will be is one question mark. However, the bigger issue- when you say that I leave these past disputes to court- you are not really addressing the key factor which was that all of the angst was caused because you raised these demands. You choose not to deal with this at all but quite honestly you can't sidestep it. All these matters will come in court, you as Ministry of Finance must direct your law officers what they should argue. So now what will you do? Either you tell your law officer, go there and defend this in which case you are perpetuating this or you tell your law officer keep quiet and accept and we will lose matter after matter. Is it not better then to have a policed statement to say this is how I want you to deal with it?

Today you are going to have these matters fought out in at least six or seven different courts. Each of them could conceivably give a different sort of viewpoint. However, you ultimately have to have one consistent briefing for your law officers and to me the question is what will you tell them? So you can't really sidestep it in the manner that you are today claiming to.
Doshi: Let me ask you this- the belief is that only new cases will go to the Committee. Let me for one moment say what if all cases were to go to the Committee, even those in litigation, the Committee is still powerless. So this committee is only a face saving, time buying exercise?

Agrawal: I don’t give any credence to the Committee at all because what this Committee is going to do, they have already taken a decision. This bureaucracy has already taken a decision.

Doshi: Why restrict the Committee only to those cases arising from the retroactive amendments on indirect transfers, why not look at all the other retroactive amendments that were done that year?

Agrawal: My question is why the head of the department - the Minister himself can’t give a policy statement? To say we are not going to follow these cases is very simple rather than referring it to a Committee. It doesn’t make any sense; ultimately it is cost on the exchequer.         

Doshi: What does this tell you about what this government’s ability is to take hard decisions against those moves made by a previous government which they have opposed tooth and nail in their election campaign?

Agrawal: You have coined the word tax terrorism.

Doshi: I didn’t.

Agrawal: You have referred to this. I will divide this into two parts. One is the retrospective amendment business and second is aggressiveness of the tax administration, which was seen during last two to three years when they were asked to get that kind of tax revenues.

Doshi: They made no mention of the Shell case either.

Agrawal: They are two different aspects. Now the focus of this discussion has gone towards the retrospective amendments but what about the aggressiveness of the tax administration? How do you want to control that? What kind of policy statement you are making? What kind of amendments you are making in the Act?

Doshi: You make no comment on Shell; even Vodafone is involved in that issue of share capital.

Shah: To come back to the retrospective amendment on indirect transfers. Personally, I don’t feel the last word has been said on it and I would keep my eye on two things. One how he is really going to reform this whole settlement process because it is still work in progress and maybe he is going to reform it in a manner that some of this could actually go there- that’s one thing I would keep my eye on.

Doshi: The existing cases and the existing litigation as well as the new cases? Then why not say the Committee will look at all cases?

Shah: The issue is once he drafts what he must on settlement, it may be flexible enough to take in all these cases. All I am saying is I don’t think the last word is said on this. So keep your eye on the settlement process. Second, keep your eye on how they plead in court.  

Doshi: I want to bring up a decision that he has taken this Budget, which is the Fiat case which had to do with manufacturing and which the government won in the Supreme Court. He has realized the difficulty it is putting industry at and he has issued instructions that reverse effectively what the Supreme Court judgement impact would be helping industry in that. So, you have the courage to go against what the Supreme Court has said in your executive decision making. Here the Supreme Court has ruled against the retroactive amendment made by a previous government and yet you have not found the courage to do anything about it immediately. Is it courage, is it time buying, is it wait there will more on this, is it they don’t have the gumption to take the difficult decisions, they don’t want to turn their back to the large amounts of revenue that this could yield, they want to piss off the tax bureaucracy- what is it?

SC’s Fiat Judgment
Excise duty to be charged on higher value than actual transaction value in cases where goods were sold below cost
Finance Bill, 2014
Overcomes SC decision in Fiat case. Says in case of goods sold at discount, assessable value is the transaction value if no other consideration paid to manufacturer

Sayta: So, I would feel on Fiat of course it is a wonderful decision that the government has taken.

Doshi: We applaud them for it but why not show the same courage for other things?

Sayta: The revenue that probably it could yield and the political sensitivity of it.

Doshi: What political sensitivity?

Sayta: The fact that a retrospective amendment has been made already, the fact that probably some taxpayers might already be looking at shelling out some amount of taxes.

Doshi: There is a talk that one taxpayer, the largest one of them, came to the table willing to pay the tax amount but not willing to pay the penalty and the interest rate.

Sayta: The way I look at it is probably it’s a very short-term view point. It might have been much better to be willing to give up that particular tax but show very clearly where we stand in terms of a country in terms of credibility.

Doshi: What does this tell you about this government’s ability to take difficult decisions?

Shah: First of all, you mentioned fear and from that perspective therefore they are not averse to taking the hard decision; that is established. The issue is as far as this retrospective amendment is concerned, they are all aware it has gone up to the Prime Minister. He said so himself that they believe that this is sensitive. What he said was that these old cases can take their own cause. If he had said it is still work in progress, we are going to look at what is the best way of dealing with this because if you do that in enough time your message is wrong and at the same point in time, whether it is the fact that Vodafone may pay you or not pay you, ultimately on this one issue, which was the most singular most important issue he had to take a call between cash and credibility and I wish he had taken the call on credibility. I am just hopeful it will still come.

Doshi: I am not saying no; maybe it can still come in the next Budget.

Sayta: I am losing hope. It can come and if it comes, I will be the happiest person but I have doubts.

Doshi: Are you hopeful it will come in the next Budget?

Agrawal: No, I am not hopeful. I think this is the last word.

Doshi: I want to now bring to you the issue of how they viewed litigation. So, they have done a couple of really good things- for instance, extending advance rulings to the domestic taxpayers, the clarification they brought about in transfer pricing, expanding the scope of the Settlement Commission which will help reduce litigation to large extent. On the other hand some new rules with regards to pre-deposit which will really hurt assesses in a bad way, no mention of the Shell case which we have already brought up. What is their approach to litigation, what are you drawing from this Budget?

Finance Bill, 2014
Advance Rulings can be sought by resident taxpayers for liabilities of defined limits

Finance Bill, 2014
Introducing the ‘range’ concept for determination of Arms’ Length Price  
Finance Bill, 2014
Allowing use of ‘multiple year’ data for TP benchmarking study
Finance Bill, 2014
APA applicable to ‘international transactions’ done in 4 yrs preceding the year in which APA is entered into

Finance Bill, 2014
Settlement Commission’s scope extended to cases where assessee has not filed the prescribed returns

Agrawal: You give something but you hold on some more things. Basically for domestic taxpayers if you are extending APA and the authority for advance ruling also but there have been historical cases where government itself has appealed against AAR rulings. Then what is the credibility of AAR and how many domestic taxpayers will make use of this then.

Doshi: Maybe he couldn’t fix all of that in this Budget – let’s give him credit for that. Maybe those things will come later on. He did really have only 45 days.

Agrawal: You could have done it. Then domestic appeal process, frivolous demands are being raised, high pitch demands are being raised, and appeals are not being disposed off.

Shah: I think there is enough of a message even now.

Doshi: Saying what?

Shah: Because he has taken steps of all of what you have mentioned - AAR, Settlement Commission. He has also tried to resolve some issues through legislation. So, everything he has done in TP is with a view to try and reduce litigation. Also the indirect tax, let me just put this in perspective- he starts by saying that there are too many stay applications which is taking time of the appellate authority. So I will do away with it. It is part of his process to try and move litigation on and reduce litigation. What was not thought through is the factor that by doing this issue of saying statutory pre-deposit, given that they are so many adventurous demands, the cost of this has to be paid by an assesses and that cost at some stage could be very excessive.

Finance Bill, 2014
Interest rate on delayed payment of service tax: 18-30%
Finance Bill, 2014
Indirect tax litigation: Assessee to pre-deposit 7.5% of amount involved at 1st appeal level & 10%  at 2nd appeal level subject to Rs 100 million cap

Doshi: He applied his mind to transfer pricing, APA roll back - all of that is fairly complex, but he didn’t apply his minds to pre-deposit? Who wrote this Budget, the tax bureaucracy wrote it or the Finance Minister wrote it?

Shah: There are aberrations; there are aberrations which should have been avoided but I don’t think they defeat or dilute the thrust of the work.

Doshi: Besides litigation, I also wanted to bring up his approach to corporate taxation and I am not being critical of this. I am trying to lay out the disparate parts. You extended investment allowance, you extended it and expanded it to Small and medium enterprises (SMEs); great move. Then you go and increase Dividend Distribution Tax (DTT), you do good things for Foreign Institutional Investor (FII) taxation, but you say nothing on Minimum Alternate Tax (MAT) which industry has been struggling with even though you want to revive exports, manufacturing, increase jobs- all of that. Maybe you don't have the ability to give away the revenue, I fully understand that situation. You have got all of this- does it tell you anything about what their clear long-term corporate taxation policy is going to be? Is it going to be stable and if you say yes it is going to be stable then I will say look the second part of the speech had several changes in customs and excise duties. So what does this tell you of about this government's approach to corporate tax policy or taxes that impact corporation?

Finance Bill, 2014
Increase in effective Dividend Distribution Tax due to grossing up
Finance Bill, 2014
Investment allowance extended to 2017 and expanded to investments of Rs 25 cr and more in a year in plant & machinery

Finance Bill 2014
FII sale of shares to be taxed as capital gains

Sayta: By and large, in terms of corporate tax rates and in terms of the tax policy, it is positive, it will be pro-growth- that is the message at least I am getting. There are aberrations, dividend distribution tax is one and the way in which it was brought about was certainly not very gracious. He could have straightaway said three percent increase in the DDT. So that admittedly is an aberration and I would probably say that is one aberration but other than that it is a pro-growth tax policy that I see from this government. Stable rates, reasonable tax rates is what will come. I don't think we should expect too many freebies over a long period of time and that is probably what it should be but I do think that it will be pro-growth, pro-employment certainly.

Doshi: How do you see this from the corporation point of view?

Agrawal: I also look at it as a fairly stable corporate taxation regime.

Doshi: You are not terribly disappointed about MAT?

Agrawal: No, I am not at all disappointed on that but what I am disappointed is the CSR expenses have not been made tax deductible.

Finance Bill 2014
Corporate CSR spends not tax deductable

Doshi: It wouldn't quite be charitable if you expect the government to pick up a part of the bill.

Agrawal: It could have been avoided. In fact it could have been left to the courts rather than bringing it and taking a u-turn on your own policy. As the head of Parliamentary Standing Committee, Mr Yashwant Sinha had himself recommended that it should be allowed as deduction.

Doshi: That was a Standing Committee discussion.

Shah: The invisible impact of that will also be that now that you don't get a tax deduction. You will also suffer on that in terms of CENVAT. They will not give you CENVAT for these expenditures.

Agrawal: Let it be left to the court rather than making it explicitly disallowable.

Doshi: Are you for a broad strategy of policy on corporate taxation?

Agrawal: Yes, it is growth oriented Budget and in fact the impetus which has been given to the manufacturing sector plus employment generation- that is commendable.

Doshi: Let me bring up his silence on tax reforms if I can broadly call it that. So he said Direct Tax Code (DTC) is under review. He neither said that we are going to push it nor that there is timeline to it or anything like that. For Goods and Services Tax (GST) he said we hope to bring in the legislation this year, but that’s all he said. He didn’t put any firm timelines in place; I am not sure you want to criticise him for that. No word on General Anti Avoidance Rule (GAAR), no word on the deferral of GAAR, maybe he hasn’t gotten around to thinking about it as yet or maybe he said that he doesn’t want to defer it. I am in the camp that maybe GAAR is required. No mention of the Tax Administration Reform Commission (TARC)- so is this Budget any indication of how the BJP views tax reform. Is the BJP getting cold feet on tax reform or are these early days, can’t tell yet?

Finance Bill 2014
Reviewing DTC + GST legislation hopefully this year + Silent on GAAR & TARC

Shah: Early days, but if there were signals, I would say that the signals are positive. So you didn’t get word and letter from the TARC, but if the thrust was to try and eliminate or reduce tax litigation, there are clearly steps towards that. Is it exactly a reflection of what the TARC says - no, it is a huge document; it came out in the very early part of June.

So, thematically has he picked up some of the important concepts? I do think they are there and reflected. Has he taken the letter in spirit? No, but what we ultimately want is that those concepts actually come through and they are so important and alive in is mind that you will get the administration to act on them and that’s really the key issue.

Doshi: Cold feet on reform?

Sayta: I would feel I would give the government more time on your reform point. They have done a good start in this Budget.

Doshi: So you are not disappointed by a lack of firm timeline on GST or lack of the deferral of a GAAR or you are hopeful that it will come in February next year?

Sayta: I am not, because it is real tough call. Lack of deferral of GAAR, they have taken a conscious decision, right or wrong, not to defer GAAR.

Doshi: You think so?

Sayta: I think so. Second in regard to reforms on manufacturing side - they have given for investment allowance. They have not given for minimum alternate tax (MAT) or special economic zones (SEZs) but again it is a conscious decision they probably need more time.

Doshi: Do you think he did things in half measures. For instance what he has done with Real Estate Investment Trust REITs is welcome but they haven’t gone the whole hog and cleaned up on what the capital gains taxation would be on the transfer of asset from the SPV to the trust- all of these are things that have come up and people are saying that have done half the work they haven’t finished it. Maybe its just too early right now and maybe it will come in February?

Finance Bill, 2014
Pass through status for REITs for tax purpose

Agrawal: Let’s give them some time; it is only 45 days.

Doshi: What would you take away as this government’s approach to tax policy based on the Budget that you heard on the Thursday?

Agrawal: This Budget was a larger policy statement than only taxation. Let’s talk about overall growth perspective which Mr Modi has been talking about. So let’s give them time for tax policy, the signals have been out. Yes it is going to be an investor-friendly, tax-payer friendly policy. Some minor things they have done in fact they have been hidden. I will give you one beneficial aspect like in search assessment, there was something which was being misused over a period of last 10 years - a third party search assessment which has been plugged this time, very hidden but it has been done.

Doshi: A benefit?

Agrwal: A benefit has been given; so these are the small things.

Doshil: That’s what most surprising. There are small things that they have gone to and fixed and yet where they could have made the big bold statements, they have claimed lack of time or saying inability to come to grasps with the issue - what is it or are we just jumping to judge?

Shah: We are all easy to draw the gun and shoot, but the one miss amongst all of the good things is definitely been that we had a great opportunity to re-establish credibility and much of that was tied into retrospective amendments and in not being definitive about that, we have done ourselves no good. As opposed to everyone else on this panel, I believe the door is not shut. I believe that he is wise enough to know that this is important and he will somehow try and fix it.

Doshi: If you were to take away what this government’s tax policy will be based on Thursday’ Budget, what would that be?

Shah: Very supportive of manufacturing, employment, investment. In terms of the time spent, 80 percent of his time went on those issues but we are trying to judge this Budget on the 20 percent of time which he spent on tax.

Sayta: I would feel it is a well intentioned Budget, but I didn’t see enough boldness in this particular Budget to be able to get that feel that it is definitely there.


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