Non-adversarial tax regime to refuel growth

Uncertain tax policies, pressure on revenue collection targets continue to be major pain points for all the stakeholders at large. Indian tax regime has been subject to long drawn litigations with disputes not achieving closure until it is decided by the Supreme Court of India. 

 

Further, the recent tax policies such as retrospective amendments to overturn favorable court rulings, introduction of ambiguous General Anti Avoidance Rules(GAAR), withdrawal of beneficial circulars coupled with delay in introduction of Direct Taxes Code etc. have aggravated the situation further and impaired reputation of India as an favorable investment destination. As a consequence, there is slowdown in employment growth, expansion plans and infrastructure development.

If one were to delve into the history of direct tax legislation in India, one would observe that it has witnessed more and more disputes rather than effective implementation. The quantum of tax demand embroiled in litigation and the number of tax cases which are pending before various appellate forums is just mounting every day with limited success in revenue collection.

 

Look at the emerging trend of tax disputes viz, denial of tax holiday benefits, indirect transfers, transfer pricing adjustments, tax treaty override, income characterization issues, constitution of permanent establishment of a foreign enterprise in India etc. which have diverted the focus of business and resources to tax mitigation and hygiene. 

 

Overcautious approach and zest to avoid any potential tax exposure in India have resulted in foreign vendors pushing for ‘net of tax contracts or business arrangements’ shifting the tax cost including disputes if any, on Indian enterprises. This has increased the cost of doing business for Indian entrepreneurs. This cost further escalates on account of ‘tax gross up’ provisions under the direct tax law for ‘net of tax contract’ situation making the business unviable.  

 

Tax policies and administration rather than being a deterrent, should attract investments and enable business. One of the major impediments faced by investors and business community in today’s time is lack of certainty and clarity over tax policies in India. The few positive steps taken by the government such as introduction of Advance Pricing Agreements, safe harbour norms for transfer pricing, constitution of tax reform committees to bring the Indian tax regime on par with global standards have only been met with limited success. There is still considerable apprehension in the minds of the investors concerning the tax regime in India.

 

With Indian economy recording a below 5% growth, the time has come for India to align its tax regime in line with global practices. The need of the hour is to nurture a simple, efficient and a non adversarial tax regime to regain the investors’ confidence thereby attracting investments and reviving the stalled economic growth process.

 

It would augment well for all, if the government recognizes this need for rationalizing the tax regime and takes necessary measures such as doing away with retrospective taxation, ambiguous provisions under the General Anti Avoidance Rules and simplification of the tax regime and administration.

 

Another important area to focus would be the dispute resolution mechanism. At present a dispute generally takes around 10 – 15 years to achieve finality in India. This time frame is significantly higher as compared to other mature tax jurisdictions. Therefore, it is imperative to revamp the existing dispute resolution mechanism for expeditiously resolving tax disputes. Also, there is a need to draw a policy framework with respect to clear guidance on litigating on issues which have been settled by the High Courts / Supreme Court to avoid multifarious litigation and cost associated with it. 

 

The Tax administration reform commission headed by Dr. Parthasarathi Shome in its first report to the finance minister has also been critical of the present tax administrative mechanism and has pointed out the growing dissatisfaction among stakeholders. The report advocates transforming the current adversarial approach to disputes into one that is more collaborative and solution-oriented.

 

Simplicity in tax laws and rules, with clear guidance on administration should be advocated so that there is no room left open for interpretation by either tax administrators or taxpayers. This would provide impetus in reducing tax litigation and result in business friendly tax environment.

 

With the new government taking guard at the center, there is a renewed expectation and optimism about the much needed reforms in the direct tax regime. It is but proper for the incumbent budget to set the ball rolling on the reformation process. The budget 2014 presents the government with a good opportunity to send out a positive message to the world at large about its willingness to walk the talk on providing a tax environment which is conducive for business.

 

It is hoped that budget 2014 will take into account the long pending legitimate demands of the investors for a non- adversarial tax regime and would contain policy initiatives that aim towards bringing certainty and clarity in the direct tax regime in line with global practices that would boost investor confidence and refuel the growth process.
 

Girish Vanvari is Co-Head of Tax, KPMG. With inputs from Nishit Shah, Senior Manager – Tax, KPMG in India