For tax terrorism stain to go away, India has to resolve disputes quickly

The chief executive officer (CEO) of Safran, the French multinational aircraft engine manufacturer, raised quite a few eyebrows at the handover ceremony near Paris of the first Rafale fighter jet. In a presentation to the Indian delegation, led by Defence Minister Rajnath Singh, the CEO reportedly said that India should provide an attractive business environment and not ‘terrorise us’ with its tax and customs rules. Soon after, getting into a damage-control mode, the company clarified that the CEO was “misheard’’ and that he was speaking against a penalising tax and customs regime.

The Rafale jets come fitted with engines manufactured by Safran. The company also announced plans to invest $150 million in India towards training and maintenance.

Tax experts say while the Safran CEO’s comments could be a ploy to bargain for some tax concessions, they, however, concede that India is yet to fully allay fears in the mind of foreign investors of any flip-flop in tax positions. Experts feel this is a fallout of the inconvenience that several MNCs had to face on account of tax litigation arising due to changes in tax policy and retrospective amendments in tax laws. “The Vodafone, Shell and Cairn cases still resonate in international conversations. These were further accentuated in the issues around surcharge on FPIs, which has now thankfully been put to rest,” says Girish Vanvari, founder, Transaction Square, a tax consultancy firm.

Over the last four-five years, the government has taken several steps to make the country an attractive investment destination for foreign investors. Several steps have been taken to reduce tax litigation at various fora by withdrawing cases below certain tax thresholds.

Many experts feel the focus of tax reforms has to now shift to tax administration. “The rate of tax is indeed an important aspect and the new tax regime introduced under the Ordinance makes India extremely competitive on the tax front. That said, the tax administration and the implementation of the tax policies are equally, if not more, important aspects of a tax regime,” says Dinesh Kanabar, CEO, Dhruva Advisors.

Hitesh D Gajaria, partner and co-head of tax at KPMG India, says: “There is a need for positively nudging the tax administration levels to be even more taxpayer-friendly.”

According to Kanabar, the Indian tax regime has two drawbacks. “First, the uncertainty due to the fact that each tax officer interprets the law independently and, often, inconsistently,” says Kanabar. It is difficult for a taxpayer to be sure as to what will be the outcome in a given situation. 

The second issue that taxpayers face relates to the time taken to resolve any tax dispute. “Each large matter takes anywhere between 10 to 15 years to reach a final resolution,” says Kanabar. He points out even in the system of advance rulings, it takes anywhere between four to five years to get a ruling. The way forward, feel many experts, is to have a central team to give guidance on the interpretation of tax laws and treaties.

Experts are of the view that there is a need to provide for a mechanism to settle disputes without getting into prolonged litigation. Gajaria feels the government should come out with a fair dispute resolution or a settlement scheme. This will help to end uncertainty in the minds of investors, he adds.

“With the government trying to overhaul the tax regime, it would not be wrong to say that ‘tax terrorism’ is on the wane in India,” says Rakesh Nangia, managing partner, Nangia Advisors (Andersen Global). Experts say the focus should be on execution and speedy dispute resolution. A quick translation of political intent into policy action through credible measures should help change this perception, adds Vanvari.

Recent measures to simplify the tax regime

• Monetary ceiling limit for filing of departmental appeals has been enhanced

• Retrospective amendments have been brought about to withdraw and dismiss existing appeals by the tax department that fall below new monetary limits

• The CBDT regularly issues circulars and clarification for rationalisation of tax provisions, simplification of procedures, and speedy resolution of grievances

• The Indian judicial system has been penalising careless/unscrupulous tax officers

• India slashed the corporation tax rate for domestic companies significantly