Tax regimes can be a complicated process. What we are trying to achieve is a breakdown of the Indian Tax Regime so it can be clearly understood. We shall start with the advantages of the system.
Highlights of the investor friendly tax law: Moderate Corporate tax rate of 33.99 percent, tax holiday for infrastructure sector and for export sector in Special Economic Zones weighted deductions for in-house Research and Development activities, Dividend Distribution tax of 17 percent coupled with exemption of dividend in the assessment of the investor are some of the provisions that reflect the investor friendly attitude, coupled with strong economic considerations in framing the tax legislation. Furthermore, exemption from long-term capital gains tax on sale of listed securities and tax-neutrality of corporate reorganisations and business combinations are significant advantages.
Tax administration a bottleneck: However, the truth also concerns the Tax Administration. Quite often, what is intended by the law is undone by the administration. For example, a long term capital gain claimed exempt by an investor gets assessed as business profit leading to creation of tax demand and its coercive recovery, pending adjudication by appellate authorities.
Retrospective legislations and frequent amendments in tax law: A disturbing trend in Indian tax legislation is that of making retrospective amendments in the law for nullifying the effect of judicial decisions, including the decisions of the Supreme Court, such that the Tax Departments interpretation of the law gets statutory recognition and the tax-payer is asked to pay taxes for the back years, even though he had been successful earlier.
Another challenge is the number of amendments that take place every year in the tax laws that make the law less stable and more uncertain. In the past three years there have been (approximately) 380 amendments to the Income tax Act. Of these, 153 were retrospective amendments and 26 were made with a view to nullifying the effect of judicial ruling.
The parliament’s power to legislate retrospectively has been upheld by courts with a caveat that such retrospective legislation is not unreasonable. But to challenge an amendment as unreasonable a tax-payer has to take the issue to a law court in a Writ Petition. Whilst one may show courage to fight the administrator, few are courageous enough to challenge the legislature.
Our firm’s approach in tax matters: At Bansi S. Mehta & Co. we prefer to work out a structure or a solution that minimises tax uncertainties.
For unavoidable uncertainties, we advise the client to seek an Advance Ruling. But as Advance Rulings are binding, we advise it only if there are no effective down-side risks and the intent is to get the matter resolved so as to achieve certainty. If time is not a constraint, extensive lobbying through Chambers of Commerce and Professional Societies is also preferred, as that seems to maintain pressure to some extent. Direct representation is the least preferred route and in that respect we generally fore-warn the client against the administration’s proclivity to issue instructions that, in fact, reduce the potential for success in appellate proceeding.
Recent changes:
Introduction of Dispute Resolution Panel for foreign companies in all cases where transfer pricing issues are involved. DRP is a collegium of three commissioners. Before the assessing officer passes a final assessment order and raises a demand, the DRP moderates his draft order. Any order passed pursuant to the directions of DRP is appeallable directly to tribunal, thereby eliminating one appellate layer. This is indeed a welcome step. But since the commissioners to be appointed are not to act full time members of the DRP and would continue to discharge administrative functions as commissioners of income-tax, the independence that a quasi-judicial forum ought to have is suspect.
b. Publication for public comment of a proposed new Bill – Direct Tax Code Bill (DTC). This proposal, presently for public discussion and debate, is heavily criticised. To illustrate, its proposal that a provision of the law or of a Tax Treaty with another country whichever is later in point of time shall override the other which essentially means India’s power to unilaterally modify a treaty by amending the domestic law at will. The DTC also seeks to bring tax transactions of the type involved in Vodafone’s $120bn buyout of Hutchison’s stake in Hutch-Essar and similar cases. It also seeks to levy a minimum corporate tax of two percent on gross assets irrespective of whether the company has earned profits or has incurred losses. The DTC, ideally, should attempt a convergence of taxable income and the profits determined post implementation of IFRS (likely in F.Y. 2011-12). Instead, the DTC’s proposed concept of income is a step backward. One only hopes that these proposals are not passed in their present form and that international organisations do play their part in lobbying against such a retrograde step.
There is also a movement towards amending various tax treaties by bilateral negotiations. Those in priority are Indo-Swiss DTAA for expanding the scope of exchange of information and Indo-Mauritius DTAA which presently provides for certain capital gain exemption in India.
Public perception of the tax administration: The public perception of the tax administration is to be aptly seen in the observations of our Supreme Court in its decision in the case of CWT v. Arvind Narottam (1988) 173 ITR 479 (SC) in the following words:
It is true that tax avoidance in an under-developed/developing economy should not be encouraged on practical as well as ideological grounds. But the question which many ordinary taxpayers very often in a country of shortages with ostentious consumption and deprivation for the large masses ask, is does he with taxes buy civilization or does he facilitate the wastes and ostentiousness of the few. Unless wastes and ostentiousness in the government spendings are avoided or eschewed, no amount of moral sermons would change people’s attitude to tax avoidance.
One would have expected a change in this since lowering of tax rates, boosting tax treatment for infrastructure sector, retention of capital gains exemption for investors in the capital market that have helped India in the pursuit for growth.
It is a plausible inference that the policy objectives are not seen by the administration as enjoining on them the duty to implement the law conformably to the objectives and this is evident from the recent past.
The bane, if I may add, is the unstated preference of the administration to play a role that is adversarial in nature.