FM pitches for low taxes; says taxpayers partners, not hostages

Says tax authorities told not to file frivolous appeals, govt did not contest high court orders favouring Vodafone and Shell

Finance Minister Arun Jaitley reiterated his promise of a modern tax system, with low and globally competitive rates. And, assured foreign investors against any action with retrospective effect, saying taxpayers will be seen as “partners and not as potential hostages or victims".

He admitted there were concerns about retrospective taxation, harassment and arbitrariness in tax administration, especially relating to cases of transfer pricing.

He said all this in an address to the Peterson Institute for International Economics, Washington DC, on Thursday (Friday morning India time).

“These are not expressions of intent and we have translated them into action," he said, adding several steps had been taken to reduce litigation, and the tax authorities been asked not to “file frivolous appeals in a routine manner”. To buttress his point, he noted the government did not contest the high court orders in favour of Vodafone and Shell.

“Tax policy and administration should incentivise compliance," said Jaitley. “They should be administered fairly, transparently, with minimum discretion, with no harassment of taxpayers but also ensuring that tax evasion is dealt with firmly."

Adding: “The tax net should be wide, so that all citizens feel they are part of government but rates should be low because taxes, after all, are seen as forcible transfer of money from citizens to the state.” The minister said India was on the way to have a much more modern taxation system, with a series of administrative measures, along with legislative reforms, initiated by the government.

Jaitley, in Washington for meetings of the International Monetary Fund and World Bank, exuded confidence that Parliament would pass the necessary constitutional amendment bill for a national goods and services tax in the next three weeks. He said the GST Council, with representation from all states and the Centre, would decide on a revenue-neutral rate. “We will aim to keep the rate competitive and close to international levels and minimise exemptions," he said. The government aims to implement the GST by April 1, 2016.

“We are acutely conscious that capital chases destinations with the cleanest tax systems and competitive tax rates. The Asean average corporate tax rate is 21-22 per cent. Accordingly, the corporate tax rate will come down from 30 to 25 per cent within four years, beginning 2016," he said.

Jaitley also said the government had put in place a mechanism for allowing foreign investments in Alternative Investment Funds (AIFs), a long-standing demand of the US financial services sector.

He added income of the AIF would have a ‘pass through’ status. Similarly, the capital gains regime for real estate investment trusts (REITs) and infrastructure investment trusts had been rationalised, with the rental income earned by REITs having also been given a ‘pass through’ status.

Capital gains of foreign portfolio investors would not be subject to Minimum Alternate Tax. To promote offshore funds, it has also been proposed that the activity done through an eligible fund manager located in India will not constitute a business connection for being taxed in India.

On the controversial issue of retrospective taxation, he said a high-level committee had been set up to ensure fair treatment of such transactions. Beside, changes had been made to the transfer pricing method for taxation of research and development centres, from a profit-split to a cost-plus method, while introducing safe harbour rules with specified margins on a broad spectrum of sectors, without any limit on transaction values. The government has also introduced Advance Pricing Agreement provisions to give taxpayers the option to seek tax certainty in such transactions, said Jaitley.

“To reduce litigation, several measures have been taken. The mechanism of Dispute Resolution Panels has been put in place, the scope of Settlement Commission and Authority for Advance Rulings has been expanded, with opening of new benches of AAR."

He said the Tax Administration Reforms Commission had made a number of recommendations on a schedule for needed structural changes in tax administration. “The recommendations are being examined for implementation," he added.