A day before the Budget session of Parliament resumes, Finance Secretary R S Gujral defended the proposed retrospective amendments to the Income Tax Act, and asked why Indian industry was speaking on behalf of those routing investments through tax havens. He tells Vrishti Beniwal & Indivjal Dhasmana individual salaries are not the subject matter of the GAAR (General Anti-Avoidance Rules). Edited excerpts:
The government has assured industry on retrospective amendments to the Income Tax Act and the GAAR, but the industry, both foreign and domestic, is not buying the argument. Is there an impasse between the two over these proposals?
The retrospective clarifications that pertain to Vodafone-like transactions do not impact Indian industrialists at all. So, why are they taking up the cause of foreign businessmen seeking to avoid capital gains tax through tax havens?
These foreign investors bring foreign direct investment (FDI) into their sectors.
Why should FDI not come directly into the country? Why should it be routed through tax havens? Indian industry groups need to do some soul-searching on why these are supporting things that really tantamount to routing FDI through tax havens. The basic point is these are not retrospective substantive amendments; these are clarifications. Earlier, with the same statutory provisions, the tax department had been levying tax on such transactions and some of those companies have paid the tax. In March 2007, when the payment had to be remitted, both Vodafone and Hutchison were advised by the tax department that their transaction was liable to tax. However, in their own wisdom, Vodafone took a call and remitted the payment without withholding the tax. Now, what the officers, while raising the demand, have also mentioned is according to their information, an amount higher than the final one paid by Vodafone was offered by some other party (to Hutchison). Perhaps the difference reflects the tax amount. One can seek to conclude Vodafone, in its agreement with Hutchison, took advantage of a lower price and said any responsibility of tax was on its account. That is why Vodafone is fighting so hard. Otherwise, in normal business transactions, if a person is a buyer, he will put a clause that if any tax is levied, the seller would be liable to pay. Clearly, it is an issue in which they took a gamble that perhaps they would be able to avoid tax, and whatever they avoid, becomes their profit.
When the Supreme Court has turned down the tax demand on Vodafone, the executive and the legislature are resorting to strong-arm tactics. How fair is this criticism?
Tax was levied on a large number of companies, not just on Vodafone. Bombay High Court upheld that, but the Supreme Court said in its view, the current provisions did not provide for taxation of such transactions. Now, the executive has sent it back to Parliament, asking it to take a call. If Parliament says its legislative intent was always this, it is only a clarification. Earlier assessments that have been finalised are not going to be reopened because of retrospective amendments. Genuine double taxation avoidance agreement countries don't get affected in any way. Cases in which they use tax havens, and then try to just sell a share of a company from one country to a third; why should they have that structured arrangement? In the US and the UK, such transactions are taxed.
Do you find industry apprehensions on the GAAR justifiable because this affects them as well?
GAAR apprehensions have been raised by foreign institutional investors (FIIs), private equity (PE) investors and the domestic industry. The GAAR is not directed towards any particular country or investor. It refers to any arrangement through which tax in normal course would have been levied; but through that arrangement, tax is sought to be either made zero or reduced. It then becomes impermissible and subject to tax. Statutory provisions very categorically say the GAAR would be applicable to income with effect from April 1, 2012. So, in respect of past income, the matter is closed. FIIs say if these are impermissible and now seek to become permissible, the wording of one of the clauses indicates if the whole or part tax benefit is obtained, it shall be deemed to lack commercial substance. We have told them this is not the government's intention. Both things have to be there—one is getting a tax benefit and second, it is lacking commercial substance and one of the four clauses (in the Rules). If it is a genuine establishment in that place and is actually trading from there, we will not look into the aspect that it had moved there only to avail of tax benefit. There is no question of the GAAR getting attracted; then it will be the treaty and if under that they don't pay tax, so be it. We will clarify that in the Rules—what is permissible and what is not. The other issue investors raised was assuming these are impermissible today and if they were willing to pay tax, would the GAAR still be invoked? Their fear is if the GAAR is invoked, it is not just the tax, but interest plus penalty. We told them if we pay due tax, the GAAR does not come into effect. We will try and clarify this aspect, too, in the Rules. In the beginning, they said we should not be asked to pay any tax. We said sorry, that is not acceptable to the government. The issue of PE investors is different. They have also been operating from countries in which they are not paying tax. Usually, they invest in unlisted securities. Tax provisions for listed and unlisted securities are different. FIIs generally invest in listed securities. PE investors pointed out that present tax rules provide a situation through which FIIs are taxed for unlisted securities sale at 10 per cent, while PE investors are taxed at 20 per cent. Earlier, they were not concerned because they were paying no tax. We will try and see the best manner through which that concern can be addressed.
How would you address the concerns of domestic investors?
The concern of domestic investors is there should not be unbridled power with the assessing officer, so that he should not trouble genuine taxpayers. One is the issue of listing certain areas which would be impermissible for domestic people. We will try and list some examples in the Rules. We will build adequate safeguards so that the rules are not misused. One issue is who would have the onus of burden of proof to show the GAAR is to be invoked. So far, the provisions indicated that for all aspects, the onus was on the assessing officer. However, one aspect in which it was not predominantly for the avoidance of tax was on the assessee. They said the full burden should be on the department. We will address the issue. Second, the approving panel currently comprises three officers. A concern has been raised that there should be an independent person outside the tax department. We will look into that. They said the concerned jurisdictional commissioner should not be there. We will take that into account. Moreover, if the panel says the GAAR has to be invoked, the assessee still has a right to appeal before ITAT. Honestly, it is not easy for an assessing officer to come to a conclusion that there is an impermissible arrangement.
Will the GAAR be applicable to salaried taxpayers?
Fears that individual salaries could draw the GAAR are blatantly incorrect. If extra benefit is given to an employee and that individual does not show it as part of his salary, this can be detected even today. Similarly, disallowance of certain expenditure by a company could be handled even today.
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If a vehicle is taken on a company lease and the employee gets tax deduction on easy monthly installments, is it an issue under the GAAR?
It is not an issue under the GAAR. That can be tackled under existing income tax provisions.
Do you think that because of coalition politics, economic reforms have taken a backseat and going forward it would be difficult to pursue these measures?
It would be unfair to say that no decisions are being taken. If you see this current budget, do you think these tough decisions have been announced in earlier budgets at all? If you see in terms of measures proposed to tackle black money, current account deficit, fiscal deficit, raising of revenues, do you think all these difficult measures are indicative of decisions not being taken? Basic point is, as the Finance Minister has said in a coalition government you have to take partners on board for certain decisions. Certain decisions, therefore, have taken little longer. FDI in multi-brand retail got stuck on that issue. So be it. But that does not mean that decisions are not being taken. If you take power sector, mining, external commercial borrowings, have these steps ever been taken on this scale? Simultaneously, the Finance Minister said legislative measures, say pertaining to pension, insurance reforms would be pushed and got through. So, it is unfair to say that no decisions are being taken. The Finance Minister has said that after the budget, he would work on building a consensus on diesel, LPG and may be better targeting of kerosene.
Petroleum Minister Jaipal Reddy has already ruled out de-regulation of diesel prices. In that context, how could consensus be evolved?
I don't want to respond to this. This is an aspect which would be decided by an Empowered Group of Ministers.
What about Goods and Services Tax (GST)? The Centre has not so far been able to convince states to come on board. The issue of compensation for their revenue loss to cut in Central Sales Tax (CST) rates has further complicated the issue.
We have not received a report on Constitution Amendment Bill from parliamentary committee so far. Clearly, if broad political consensus is not available, then passing the bill and getting ratification from half the states would not be that easy. CST compensation is small component of that. The Finance Minister had said I must see the light at the end of the tunnel. If GST is not going to come, government of India cannot pay CST compensation endlessly. The basis of CST compensation was that --CST and GST are incompatible. CST is from originating state, and GST is a destination based tax.
Critics have questioned the budget numbers. They have cast doubts that you will be able to rein in subsidies at 1.9 per cent of GDP this fiscal, cut fiscal deficit to 5.1 per cent, raise Rs 30,000 crore from disinvestment. Similarly, there are apprehensions on revenue targets, spectrum proceeds, and overall economic growth at 7.6 per cent this fiscal.
The Finance Minister was very emphatic that we have to be realistic about budget numbers. We have taken a conscious decision not to cut plan expenditure to rev up growth in rural areas and raise demand there. The increase on plan expenditure for this fiscal is pegged at 18 per cent vis-a-vis budget estimates of 2011-12 and over 22 per cent vis-à-vis revenue estimates. This will boost growth. On indirect taxes, last year we have grown by close to 15 per cent, on direct taxes, target was 19.1 per cent and we have grown by slightly less than 12 per cent. In this fiscal, we have been more realistic. Direct taxes, we have targeted only 13.8 per cent vis-à-vis revenue estimates, on indirect taxes, we have targeted 15 per cent, which we feel are reasonable. Disinvestment figure, last year was Rs 40,000 crore. If, the government were to fudge figures, don't you think it was very easy to peg it at Rs 40,000 crore again or Rs 50,000 crore. If, it was made Rs 50,000 crore, fiscal deficit would have come down to 4.9 per cent, if Rs 40,000 crore, then 5 per cent. Very reasonable figure has been kept, if anything on pessimistic side at Rs 30,000 crore. Spectrum was the figure given by the telecom department. They have made a good assessment.