Tax anomalies

While planning new levies in the forthcoming Budget, the finance minister would do well to review the present system of taxation and get rid of anomalies in it. Apart from the plethora of tax incentives that need to be removed (this paper carried a report of a research study which estimated that Rs 54,560 crore was lost annually on this account), many taxes appear perverse in their application. A good example is the tax summons issued after it was decided that the burden of paying service tax could be shifted on to the person receiving the service, whereas ordinarily it is the provider of the service who pays. This has been compounded by extending the purview of the tax beyond India's borders. Thus, shipping companies are now being asked to pay service tax on the services they have received in (say) Rotterdam port, since it is clear that Rotterdam will not pay the service tax as it has no presence in India. Ships from other countries, which receive the same service at Rotterdam, are not asked to pay the tax, but Indian ships are""even when the ship concerned may be heading from Rotterdam to New York, and therefore does not enter Indian jurisdiction. The equivalent of this would be the employee of an Indian company who receives a taxable service in London being asked to pay service tax on that service to the government of India, merely because he is an Indian company's employee. The absurdity should be self-evident.

What this means is that ships registered in India are put at a disadvantage in an international business. If the tax is burdensome enough, it will encourage ship owners to register their ships in countries that offer flags of convenience (like Liberia and Panama). The net result will be stunting the growth of the Indian shipping industry, because of a tax illogically applied. Indeed, shipping companies complain that the taxman is now asking them to furnish old documents to see if there's been any evasion in the past""because the new rules are being applied with retrospective effect.

This, it may be recalled, is also what happened in the case of export benefits like the duty exemption passbook (or DEPB) scheme where tax officials kept chasing exporters until the Prime Minister gave an assurance that this would be stopped till a solution was found. Another area that the finance minister needs to take a close look at covers taxes levied by state governments and their impact. The telecom industry already faces a potential Rs 10,000 crore threat if the Supreme Court upholds a decision to allow the levying of sales taxes on services. In the case of other items, while there is a sales tax/VAT on the supply of goods to local industries, there is no such tax on imports""a BPO company buying local furniture would therefore be at a tax disadvantage compared to someone who imports the furniture. Add the plethora of other local duties, and the scales get tilted in favour of imported supplies in an era of falling import duties.

Part of the problem lies in the fact that there remain a plethora of taxes in the country as opposed to a single VAT rate in places like the EU""and so the tax set-offs remain incomplete in India. Another related problem is that, since Indian tax laws do not have elaborate foreign tax credit provisions, including the mechanism to claim underlying foreign tax credits, Indian companies find it beneficial to invest overseas through overseas subsidiaries than through their Indian entities. In a situation where outward FDI from India is beginning to match inward FDI in scale, this is yet another anomaly that needs to be rectified.