As we approach end of another eventful year, I have penned key highlights on policy, administration and judicial developments. The two most significant highlights were the revised Direct Taxes Code (DTC) which was subsequently introduced as a bill in the Monsoon session and delay in implementation of GST.
DTC — lot of ground covered
The revised version seems to have calmed the nerves (of tax payers) by doing away with draconian provision on levy of Minimum Tax on gross assets, rationalization of capital gains provisions and safeguards for invoking General Anti-avoidance (GAAR) & treaty override provisions. The Bill is presently with the Standing Committee chaired by former Finance Minister Sinha. Though, there are limited insights into the deliberations of the standing committee, I anticipate a smooth passage. A pertinent question is if the Bill will be presented in the budget session starting February 2011. Given that the Parliament would be burdened with other legislative business and tabling of Finance Bill, 2011, I am circumspect if the DTC bill will come up before the 2011 monsoon session. In the interim, North Block machinery would be working full stream to finalise and release set of rules and administrative guidance, which shall form an integral part of the code. A public debate on such subordinate legislation is indicative of Governments desire to solicit views of the tax payers at every stage. An attitudinal change is visible insofar as the approach of the administration responsible for DTC roll out is concerned. There is a conscious effort by the DTC team to listen and respond to barrage of questions in many recent forums. Though, the officials recognise the importance of drafting skills to avoid un intended interpretation and safeguards for exercise of executive powers, tax payers are wary on how the law would be interpreted at the field level and are apprehensive about excessive powers delegated to the officers. In my view, this will be our biggest challenge.
Besides interpretation of new regulations such as GAAR, CFC ,several provisions on business income have undergone material changes. It is unclear if under the DTC, judicial interpretation given by the Courts under the extant law would be followed. This has led most tax experts (and administrators) to debate whether we should have a new code. Instead, should India consider amending the prevailing law. Whilst, it is not my intention to trigger a debate on this issue, it is imperative that the policy makers preserve at least the principles of Apex Court judgements.
GST has long way
As regards GST, though, the deferral has been disappointing, the question that continues to haunt tax payers is - when will it happen and do we have a definitive date? It is clear that politics is dominating economics and tax payers are paying for the uncertainty. Just like coalition political parties have a “common minimum program” framework of ruling, it is time that our Parliamentarians adhere to a common reforms agenda. This will ensure that important and unquestionable reforms such as GST are not held hostage to political agendas. Delay of GST is harming India’s image and is clearly a case of bad economics and bad politics.
On a positive front, I continue to be an optimist and expect that 2011 will be a defining year for GST reforms and hopefully pave way for 2012 roll out. To make this into reality, it is critical that the Centre and the States need to reach a consensus by resolving differences. It is the Governments obligation and taxpayers right to know in advance the contours of the proposed GST which will enable them to plan and structure business operations. The industry & trade expect to know the precise structure of proposed GST, taxes that have to be subsumed , status of exemptions and exceptions, if any, point of taxation etc. Compromise from an ideal GST/VAT structure as it prevails in the EU and other Common Wealth countries would lead to multiple rates, classification disputes and cascading levies.
Tax dispute assumes center stage !
The judicial highlight of course was the Mumbai High Court Vodafone ruling. Though, the Vodafone dispute still has to play out in the Apex Court in 2011, the taxman seems to be laughing his way to the bank having earned a deposit of Rs. 2,500 crores ( USD 550 Mil) and bank guarantees for the balance demand of Rs 8,500 crores. Though, the Indian law does not provide for “out of court” settlement of tax disputes, the proportionality theory propounded by the High Court has opened a window for such approach. My worry on uncertain tax position for tax payers with similar transaction structure continues and is uncalled.
In general, tax disputes in India are assuming unreasonable proportions. Tax directors of global MNC’s are paranoid about it and find the approach of the tax administration unreasonable. We deserve a speedier and efficient dispute resolution mechanism. The functioning and efficacy of newly legislated Dispute Resolution Panel (DRP) come under intense criticism in 2010.. We need attitudinal changes and legislative amendments to ensure that the DRP accomplishes stated objectives. I have been a strong advocate of mandatory tax arbitration under tax treaties. There is an incorrect perception (in minds of our policy makers) that India would surrender it’s sovereign right by adopting arbitration clause with its treaty partners for resolving tax disputes that entail cross border transactions. Mandatory arbitration requires change in our tax treaty policy and sooner than later, India would embark this path – the question is when?
Indian economy will become a major source of global growth and the volumes of trade and investments in the next 10 to 15 years will grow exponentially. This would mean that MNC operations in India will grow and so would Indian MNC’s become more active on international stage. Our domestic tax policy and international tax agreements will encounter challenges in getting a balance between a business friendly environment and getting a fair share of the international tax base together with dealing with abusive and aggressive tax planning structures. Vodafone dispute and GAAR regulations are an outcome of such phenomenon. Our policies have to reconcile with such conflicting objectives, otherwise, in future, we shall rank amongst the most litigative nations.
In closing, I would like to say that the administration and judiciary shall miss the wisdom of three important personalities, who in their respective role made valuable contributions to evolution of tax policy and jurisprudence - Mr SSN Moorthy ( unless he gets an extension), Chairman, CBDT for his willingness to travel, meet and listen to the tax payers. Mr Vimal Gandhi, President, Income Tax Appellate Tribunal for reshaping the functioning of Indian tax tribunals in past seven years that he lead the institution; and Justice PV Reddy, Chairman of Advance Ruling Authority who in his three year stint demonstrated outstanding clarity of Indian judiciary on complex cross border issues. We shall all miss their wisdom
(The author is a partner with BMR Legal and views are entirely personal)
