Going by the reigning government’s endeavors, the two most noble tax policy reforms of our times would be replacement of archaic Income tax Act, 1961, and revamp of multiplicity of indirect tax cascading lev-ies. The working group at the Ministry of finance true to its promise presented the revised draft of the Direct taxes Code last month’s concluding Monsoon session of the Parliament. The fact that media and tax fraternity didn’t make noise on the revised draft is suggestive of job well done. While in the run up to the Monsoon session, trade and industry was anticipating Parliamentary debate on the Code, decision to defer its application (from April ’11 to ’12) seems sensible as it gives breathing time to the Government to draft well thought and researched subordinate legislation. The landscape for GST implementation has progressed tad slower as politics is overriding economics, though the Central Government remains committed to timeline.
DTC: paradigm shift calls for attitudinal change
The Finance Minister while presenting the revised Code dimensioned industry’s expectations by announcing that the Code once approved by the legislature shall be implemented with effect from April 2012. Deferment of the Code is surely respite to the taxpayers to gear up for transition. It would allow sufficient time to the administration interact with the industry.
I continue to be apprehensive on the level of preparedness of the tax administration at the field officer level as the new concepts will entail adequate time for training of officers and first appellate authorities. An intelligent approach could be to throw open the subordinate legislation for public debate. It is clear by now that the new Code shall be introduced as a brand new legislation with material changes with respect to internationally accepted anti-avoidance provisions; a policy level shift that would require more than legislative nod, change on the tax administration’s part to brace itself to the impending change. The new Code also proposes Control Foreign Corporation (CFC), Advance Pricing Agreement (APA) and limited treaty override provisions, a first for the Indian taxation regime. Thus far, anti-avoidance rules (substance over form) and treaty override have been the judiciary’s prerogative; skeptics believe that codifying anti-avoidance rules could well turn out to be two-edged sword to taxpayers’ dislike, unless administration approaches the rules selectively, discreetly and judiciously. CFC shall impose an added tax burden on Indian MNC’s and APA shall lend certainty to MNC’s on their transfer pricing. A major expectation from the tax reforms agenda is likely reduction in tax compliance cost and endless litigations, a menace causing locking up of funds in frivolous tax demands contingent liability in financial statements and adding to overall burden of tax payers doing business in India.
The fact that proposed anti-avoidance rules draw upon heavily from international practices (e.g., Indian GAAR is conceptually based on South African rules; CFC and limited treaty override rules draw upon the international practices of mitigating ‘erosion of domestic tax base’), it is but imperative that implementation is aligned to mitigate unintended fallouts.
Undoubtedly, effective implementation would call for robust administrative guidance to taxpayers and administration, prior to sensitive and complex pieces of the new legislation find acceptance in the practice or land in Courts. I rest my hope on MOF’s unstinted endeavors to push through tax reforms within extended timelines.
GST: Still to see light of the day
While the direct tax reforms may appear taking shape, landscape of indirect taxes reforms is unclear and mired in battle between the Centre and states. The constitutional amendment for introduction of unified Goods and services tax (GST) is still to push its way through the government’s nod, as the working committee still has its task cut out to get the state and union governments to concur to the revenue sharing formula, and rates of central and state level GST levies. Centre’s desire to drop the veto power is a mature step as state governments (particularly those in opposition to the UPA) felt insecure for likely loss of authority. However, some states’ desire to have the committee empowered for coordinating efforts of the centre and state governments abandoned is unreasonable, as there ought to be an authority to coordinate a policy level exercise. Perhaps, a middle path could be to have the committee play its role for 5 years and after smooth transition into new regime, dilute its relevance. It is but certain that the Industry can’t afford to live in uncertainty due to a dead lock between the centre and the state.
I won’t be overtly pessimistic to believe that the tentative timeline for GST introduction (ie October 2011) appear ambitious, given the stalemate created by state governments. Drawing an analogy from government’s intention to introduce direct tax reforms on April 2012, it may appear indirect tax reforms may coincide with implementation of the DTC. If that is the intention, industry would welcome provided the FM gives an assurance.
Transition woes: painful days or years
Tax reforms are a noble policy shift and clearly trade and industry need to plan their existence around the proposed reforms. However, the industry is certainly feeling the heat of transition uncertainties – both on substantive as well as administration flank. Some simple illustrations, an infrastructure developer proposing to develop a power plant which would take few years to make it operational can only second guess the precision with which project tax outlays can be planned. From an income tax standpoint, FIIs and foreign investors are perched tentatively as the limited treaty override provisions under the DTC are not unambiguous. Would the banking industry have a GST regime, which aligns with EU practice are some of the open questions.
To strike balance between expectations and realities, it is important that the industry bears the transition uncertainties with pinch of salt hoping that the policymakers and legislature would not turn a deaf ear to their woes!
(The author is a Partner with BMR Legal, and was assisted by Sumit Singhania; views are entirely personal)
