Six pointers on the Narendra Modi govt progress
The Financial Express
National Tax Leader, EY India
When Narendra Modi assumed charge two years ago, amongst the plethora of expectations was the ability of his government to considerably streamline the design and implementation of tax laws and usher in much-needed clarity, certainty and predictability. These expectations were a consequence of some of the actions taken by the previous government on retrospective taxation and high-pitched tax assessments. The maiden Budget presented by the finance minister soon after assuming charge laid out the intentions of the emerging tax policy of the Modi government, but was thought to be short of bold and decisive measures expected on the back of a popular mandate. Since then, the government has covered considerable ground and has shown remarkable resolve and progress on the tax policy front.
Corporate tax rates and phasing out of incentives: The finance minister has provided a clear roadmap for progressive rationalisation of nominal tax rates from 30% to 25%, and weeding out various incentives in the next 3-4 years, with grandfathering provisions duly built in. However, there is an urgent need to clarify removal of all kinds of legacy surcharges, as effectively there is a 3-4% increase in tax rates due to various surcharges.
Another cascading levy is the dividend distribution tax (DDT), which has seen a creeping increase to nearly 20% now. For a profitable dividend paying company, the effective corporate rate increases significantly due to applicability of DDT. Now that a special 10% rate for high dividend earning individuals has been introduced in the previous Budget, there is a case to explore reverting to the classical system of dividend taxation, namely tax in the hands of shareholders at appropriate slab rates with calibrated thresholds, so as not to burden small shareholders. Overall, this will result in reduction of unnecessary tax burden on dividend paying companies without unduly burdening small shareholders.
The other sticky levy is the minimum alternate tax (MAT), which too has seen a gradual increase over the years to nearly 20% now. Since the roadmap already provides for reduction in corporate tax rate to 25% and phasing out of incentives, a similar clarity on phasing out of MAT coinciding with the phase out of incentives is needed.
Tax simplification and certainty: In the second year of this government, we have seen significant uptick in the number of issues being clarified by the Central Board of Direct Taxes, thus providing much-needed certainty. For example, the long-standing dispute on characterisation as an Association of Persons in case of a consortium executing engineering, procurement and construction contracts has been set to rest. The confusion between characterisation as business income versus capital gains in the case of investment portfolio has also been clarified.
On the administrative front, a salutary measure has been brought in, whereby upon payment of 15% of tax demanded upon assessment, the balance amount will be automatically stayed if the taxpayer has preferred an appeal against the assessment. Similarly, the prevailing practice of selecting almost all cases for special transfer pricing scrutiny—threshold turnover limit was so low that most cases fell above the limits—has been substituted with a “risk-based evaluation,” resulting in far fewer cases to be selected with greater emphasis on qualitative rather than quantitative factors.
Recently, detailed guidelines for determining the applicability of tax on indirect transfers have been issued. Further, comments with specific examples have been invited for issuing necessary clarifications on General Anti-Avoidance Rules. We now await the final rules for Place of Effective Management and Control, which, hopefully, will address some of the practical concerns of Indian multinationals with global operations. All in all, one can see a firm resolve to clarify contentious issues and a high degree of responsiveness to do so in a balanced manner.
Ending the Mauritius conundrum: The controversy of capital gains tax exemption under the Mauritius-India Double Tax Avoidance Agreement has been festering for over two decades. Finally, this government showed the courage and vision to resolve this uncertainty by providing for a calibrated phase out of the capital gains tax exemption without impacting gains on past investments. Contrary to fears expressed often, there hasn’t been any significant negative impact on capital markets. Compared to the earlier aborted attempt to levy MAT on foreign portfolio investors, the government has handled the treatment and communication of the Mauritius treaty amendment far better.
Non-adversarial tax regime: There has been a serious attempt not to rake up fresh issues based on “creative” interpretations, which unfortunately happened quite frequently in the past. Thus, for example, the government decided not to appeal to the Supreme Court against a favourable Bombay High Court order on non-applicability of transfer pricing on issue of shares. However, there still remain pockets of high handed tendencies, manifested in some high pitched assessments both in direct and indirect taxes. Especially, in service tax area, there have been instances of this approach for which an early course correction is necessary.
Dispute resolution mechanisms: While the progress achieved in disposal of cases by the Advance Pricing Authority is commendable, there is a need to accord continuity of tenure to ensure seamless functioning and confidence building with applicants. Similarly, the Authority for Advance Ruling has started functioning more productively and, here too, there is a need for continuity to ensure timely disposal of long-pending applications before changes are made by appointing new judges.
Tax administration: Whilst there is a significant improvement in the mindset and approach in certain aspects of tax administration, many problem areas still appear to be unresolved. For example, timely grant of corporate tax refunds is still an issue with assessing officers wanting to ensure that adjustments in subsequent years will offset the refunds due for prior years. Also, timely grant of lower or nil TDS certificates continues to be a challenge in most cases. The same is the case with timely grant of appeal effects for favourable rulings, though there is a legislative amendment partially addressing this issue.
While the arc lights and cameras came on pretty much on Day 1 of the new government, it was but natural that the arrangements for the appropriate ecosystem took some time, and now we are beginning to see a great deal of action on the tax policy and administration fronts. Like the proverbial box office hits, let’s hope that these well-intended efforts result in hitting the bull’s eye with optimal tax collections for the government with minimum pains to the taxpayers.