 "Ten-point plan for Finance Minister Jaitley")
The power of ten is slowly become a catch phrase for the new government since Prime Minister Narendra Modi unveiled his 10-point agenda. Now, that Finance Minister Jaitley has assumed chargeA at North block, he is faced with an unprecedented set of expectations. The first important deliverable for the new administration will be to roll out a credible budget. Here is my wish list of 10 bold announcements.
Retrospective laws must go
A lot has been spoken about the adverse impact retrospective amendments have had on business in general, and sentiments of foreign investors in particular. The issue is not just about the Vodafone settlement; the impact is deep rooted. Economists have unequivocally criticised such amendments as retrograde and regressive, especially in times when the macro-economic growth requires a rush of foreign direct investment and financial investments. It's imperative for the FM to give a hard look at instances of retrospective amendments, in the light of repercussions such legislative moves have caused. Reversal of amendments would send out a strong message to the investors' community and shall reaffirm the government's pro-investment stance.
Transition to GST
Whilst the idea of implementing GST features prominently in the National Democratic Alliance's economic agenda, challenge in pushing through constitutional amendments and eliciting irrevocable consensus between the Centre and states for a compensation formula are tricky. The FM will be expected to announce a sunset date for the transition with options that should a mandate for constitution amendment not fructify, what would be his government's plan B.
DTC - to be or not to be?
Direct Taxes Code (DTC) had been touted as another significant tax policy reform in the past decade. The FM should have a decisive view as to the need for enacting DTC, especially after the extant legislation has undergone a material makeover in the past three budgets to embrace noble pieces of new legislation in the form of GAAR (General Anti Avoidance Rule), APA (Advance Pricing Agreement), Safe harbour rules, etc. If DTC still finds its relevance, it should undergo a compressive review.
GAAR must be deferred
The introduction of GAAR has been intensely debated. It is now widely speculated if the legislated law will indeed apply from April 2015 and if it does, how? Attempts to administer a sophisticated law of this nature has pitfalls. I expect the incumbent FM to take a close look at Chapter XA in the Income Tax Act and assess if the tax administration is geared to handle a mature legislation of this nature. Further, India is part of an ongoing multilateral dialogue as part of OECD BEPS Action Plan which advocates general avoidance rules like 'multi-purpose test' to be incorporated in tax treaties. Shouldn't India align its domestic law?
Reform Tax Dispute resolution mechanism
Indian Transfer Pricing disputes contribute 70 per cent of the world's litigation. At an administrative level, empowering the officers to take bold decisions by not subjecting them to vigilance enquiries, audits etc., coupled with alienating them from tax collection targets will go a long way in bringing an attitudinal change at the field level. Reforms at the judicial level will mean, streamlining the functioning of metro tax tribunals with a focus on capacity building and improvement of infrastructure. There is a strong case for speedier resolution and consistency of High Court decision by implementing the National Tax Tribunal bill of 2005.
Tax Administration reforms
Our tax policy has historically focused on legislation with limited to no-focus in reforming the administration, and hence implementation of law has been tardy. A host of recommendations of the Tax Administrative Reforms Commission (TARC) await the new FM. Whereas the benefits of implementation will accrue in the medium to long-term, key recommendations of the Commission will deal with a mechanism to increase tax compliance, penetration to enhance tax-GDP ratio, reduce litigation, embrace the concept of taxpayer services, integrate operations of the direct & indirect tax administrations and improving efficiencies by upgrading IT infrastructure.
Black money - bringing back what's ours
This featured prominently in NDA's election manifesto and it followed up immediately by constituting the Special Investigating Team. The ball is now in SIT's court to conduct a fair investigation and with most officials of SIT forming part of the FM's administrative oversight of the departments they represent, he will be expected to play a pivotal role. This will not be an easy exercise to administer given that it's not only a tax issue but the ramifications could be across a host of other economic laws.
E-Governance in tax administration
The two arms of the administration - CBDT and CBEC - should invest in their IT infrastructure. For streamlining assessment procedures, both the arms should be empowered to formulate rules for exchange of documents and correspondence with taxpayers. This will pave the way for virtual assessment proceedings, conduct of field audits etc., enhancing the taxpayers' confidence.
Fiscal discipline
Last estimated at 4.6 per cent of the GDP, there needs to be a long term plan to systematically reduce the fiscal deficit. I anticipate that the FM will announce a time-bound target under the Fiscal Responsibility & Budget Management Act.
Broad-based developmental measures
Lastly, I expect the FM to announce measures to catalyse growth in infrastructure, banking, education and health sectors amongst other key sectors. Tax holidays and benefits to SEZs may need calibration as key aspects of law on levy of MAT and DDT necessitate rethinking. To herald the much awaited banking sector reforms, the government should consider allowing wider private capital participation in PSBs, by opening up to the capital market and embracing transparency in the functioning of our banking system. The FM has his task cut out as the economy is waiting to embrace growth-fuelling measures and significant policy reforms.
Retrospective laws must go
A lot has been spoken about the adverse impact retrospective amendments have had on business in general, and sentiments of foreign investors in particular. The issue is not just about the Vodafone settlement; the impact is deep rooted. Economists have unequivocally criticised such amendments as retrograde and regressive, especially in times when the macro-economic growth requires a rush of foreign direct investment and financial investments. It's imperative for the FM to give a hard look at instances of retrospective amendments, in the light of repercussions such legislative moves have caused. Reversal of amendments would send out a strong message to the investors' community and shall reaffirm the government's pro-investment stance.
Transition to GST
Whilst the idea of implementing GST features prominently in the National Democratic Alliance's economic agenda, challenge in pushing through constitutional amendments and eliciting irrevocable consensus between the Centre and states for a compensation formula are tricky. The FM will be expected to announce a sunset date for the transition with options that should a mandate for constitution amendment not fructify, what would be his government's plan B.
DTC - to be or not to be?
Direct Taxes Code (DTC) had been touted as another significant tax policy reform in the past decade. The FM should have a decisive view as to the need for enacting DTC, especially after the extant legislation has undergone a material makeover in the past three budgets to embrace noble pieces of new legislation in the form of GAAR (General Anti Avoidance Rule), APA (Advance Pricing Agreement), Safe harbour rules, etc. If DTC still finds its relevance, it should undergo a compressive review.
GAAR must be deferred
The introduction of GAAR has been intensely debated. It is now widely speculated if the legislated law will indeed apply from April 2015 and if it does, how? Attempts to administer a sophisticated law of this nature has pitfalls. I expect the incumbent FM to take a close look at Chapter XA in the Income Tax Act and assess if the tax administration is geared to handle a mature legislation of this nature. Further, India is part of an ongoing multilateral dialogue as part of OECD BEPS Action Plan which advocates general avoidance rules like 'multi-purpose test' to be incorporated in tax treaties. Shouldn't India align its domestic law?
Reform Tax Dispute resolution mechanism
Indian Transfer Pricing disputes contribute 70 per cent of the world's litigation. At an administrative level, empowering the officers to take bold decisions by not subjecting them to vigilance enquiries, audits etc., coupled with alienating them from tax collection targets will go a long way in bringing an attitudinal change at the field level. Reforms at the judicial level will mean, streamlining the functioning of metro tax tribunals with a focus on capacity building and improvement of infrastructure. There is a strong case for speedier resolution and consistency of High Court decision by implementing the National Tax Tribunal bill of 2005.
Tax Administration reforms
Our tax policy has historically focused on legislation with limited to no-focus in reforming the administration, and hence implementation of law has been tardy. A host of recommendations of the Tax Administrative Reforms Commission (TARC) await the new FM. Whereas the benefits of implementation will accrue in the medium to long-term, key recommendations of the Commission will deal with a mechanism to increase tax compliance, penetration to enhance tax-GDP ratio, reduce litigation, embrace the concept of taxpayer services, integrate operations of the direct & indirect tax administrations and improving efficiencies by upgrading IT infrastructure.
Black money - bringing back what's ours
This featured prominently in NDA's election manifesto and it followed up immediately by constituting the Special Investigating Team. The ball is now in SIT's court to conduct a fair investigation and with most officials of SIT forming part of the FM's administrative oversight of the departments they represent, he will be expected to play a pivotal role. This will not be an easy exercise to administer given that it's not only a tax issue but the ramifications could be across a host of other economic laws.
E-Governance in tax administration
The two arms of the administration - CBDT and CBEC - should invest in their IT infrastructure. For streamlining assessment procedures, both the arms should be empowered to formulate rules for exchange of documents and correspondence with taxpayers. This will pave the way for virtual assessment proceedings, conduct of field audits etc., enhancing the taxpayers' confidence.
Fiscal discipline
Last estimated at 4.6 per cent of the GDP, there needs to be a long term plan to systematically reduce the fiscal deficit. I anticipate that the FM will announce a time-bound target under the Fiscal Responsibility & Budget Management Act.
Broad-based developmental measures
Lastly, I expect the FM to announce measures to catalyse growth in infrastructure, banking, education and health sectors amongst other key sectors. Tax holidays and benefits to SEZs may need calibration as key aspects of law on levy of MAT and DDT necessitate rethinking. To herald the much awaited banking sector reforms, the government should consider allowing wider private capital participation in PSBs, by opening up to the capital market and embracing transparency in the functioning of our banking system. The FM has his task cut out as the economy is waiting to embrace growth-fuelling measures and significant policy reforms.
Mukesh Butani is Managing Partner, BMR Legal. Views are personal.