India Tax Insights – eighth edition
Achieving a balance between providing a taxpayer-friendly environment and enhancing the tax base – a challenge for the Government
Rohit Agarwal, Head of India Tax, Vodafone India Ltd.
Q1. What are the top three initiatives of the Government in the last two years in the tax policy and administration?
The Government has taken a number of initiatives, seemingly with the intent to bring more clarity and certainty on the tax front. One of the key initiatives is the measures taken by the Government to reduce tax litigation and improve the overall tax environment in the country by providing clarity and certainty regarding litigious tax issues — such as deductibility of bad debts, amendment to Rule 8D and stay of demand where appeal is pending before Commissioner (Appeals).
Another key initiative is the focus on increasing consultation with the stakeholders and calling for their participation before laying down rules/regulations. For example publication of draft PEOM guidelines and draft buy-back rules, and the constitution of committees to provide recommendations on different issues after consultation with the public are all positive steps toward increasing the participation of the stakeholders in formulation of the tax rules/regulations.
The Government has also made visible efforts to widen the tax base and reduce the opportunity for tax arbitrage and tax leakage by increasing the scope of collecting online information about transactions. The Black Money Act, Income Declaration Scheme etc. are also significant initiatives of the Government to increase the tax revenues.
Q2. Which are the areas where the Government could have focused a little more?
The Government appears to be quite focused toward improving the overall tax environment and has taken positive initiatives toward this objective. However, there are a few areas where the Government can focus more in order to get better results. One such area would be to provide early resolution of tax disputes, preferably by providing a machinery for the resolution of disputes at early stages and disincentivizing repetitive litigation by tax officials on matters/issues that have been held in favor of the taxpayers. There is substantial litigation still, across both direct and indirect taxes in India, where faster action would help and go a long way in reducing the tax litigation.
Another focus area could be to ensure a more pragmatic and holistic approach while undertaking tax audits, which will help to build confidence of the taxpayers.
Q3. Do you think the Government has kept its promise of moving toward a predictable and non-adversarial tax regime?
The Government has clearly taken many steps in the recent past to provide clarity and certainty and to avoid unwanted tax litigation. Various committees have been formed to understand the issues faced by the taxpayers and to come up with appropriate recommendations to the Government to resolve these issues, which is a clear step toward providing a stable, clear and more predictable tax regime. However, there is a lot to be done toward improving the overall tax environment in India, more particularly toward providing a non-adversarial tax regime. The first step could be to build safeguards to protect taxpayers in case of high-pitched tax assessments resulting in huge unwarranted tax demands and pressure for recovery thereof.
Q4. What are the key challenges that the Government faces in improving the tax climate in India?
There are many challenges — a long list indeed. However, I would like to highlight two main ones, which in my view, if addressed appropriately, will take us a long way. The first would be the actual implementation of the policy initiatives that the Government is undertaking, which would determine the real success of these policies. The second would be alignment of the positions taken at the tax administration level with the overall policy framework of the Government. The gap between the intent and objective of the policy and the actions taken at the administration level needs to be bridged.
Q5. How do you see the implementation of BEPS Actions in India as well as globally contributing to tax uncertainty for corporates?
BEPS, as it is commonly known, is an abbreviation for Base Erosion and Profit Shifting. The whole idea of the project undertaken by OECD at the behest of G-20 nations was primarily to ensure that taxes are paid where the economic activity is taking place. Last year, OECD released 15 Action Plans, which are primarily recommendatory in nature or establishing minimum standards.
The next step is for the governments across the world to initiate changes in their local laws to be in line with the OECD recommendations in the BEPS project. To bring about changes in various countries at the same time is a big challenge. Additionally, disparate tax rules and regulations in different countries could lead to uncertainty and possible double taxation.
BEPS is a significant change across the world and the existing tax environments. Corporates need to be aware of this change and start taking immediate proactive steps such as proactive evaluation of legal and contractual structures and ensuring that they are aligned to actual business operations in various jurisdictions. Further, documentation would be a key going forward as it is the only way to demonstrate that appropriate taxes have been paid in each country; therefore, there would be additional documentation requirements for corporates. There will also be increased reporting obligations, which would require corporates to ensure that reports from their accounting systems are generated in a timely and accurate manner. This would also increase the use of automated software and data analytics techniques to enhance the quality and usefulness of the reports.
While BEPS is a welcome initiative, the different ways in which various countries will implement these rules and recommendations may lead to enhanced and more complex litigation, particularly because the disputes would largely revolve around attribution of profits. The corporates would, therefore, need to reach out proactively to the tax authorities and engage with them to gain certainty and to avoid/resolve potential disputes.
Q6. From your experience, are there any international best practices which the Government should consider introducing for a more tax payer–friendly environment?
Certainly there are many international tax practices from where we can take a cue, though not all would be relevant for India — we need to be very mindful of the overall tax environment in India. One important aspect that the Government should consider is the need for a drastic change in the traditional system of carrying tax audits. The move to a limited assessment procedure is a welcome step in this direction.
Q7. While on the one hand the Government seeks to introduce taxpayer-friendly measures, but on the other there is a need to strengthen tax enforcement. Are these twin objectives at conflict and do you see the need for a trade-off between the two?
I would agree that this is a big challenge for the Government. On the one side, the Government is committed to provide a tax payer–friendly environment and on the other side, the Government depends in a large way on the tax revenues collected by the tax administration. Considering that the Government wishes to do both, it is a big challenge to effectively maintain a balance between the two, but I do not see any conflict. Both these can be achieved together and a possible way would be definitely to broaden the tax base. Today, a very low percentage of the Indian population pays taxes (India has a 7.4 crore taxpayer base according to recent news reports), which can be broad-based further. Having said that, the Government is taking measures in this direction and, if executed effectively, these will not provide a friendlier tax environment, but also strengthen tax enforcement.
Q8. At a conference of tax administrators, the Prime Minister outlined a five-point agenda for the tax department called RAPID (Revenue, Accountability, Probity, Information and Digitization). Which of these points do you think should be the top priority for the tax department?
To my mind, all five are important. Accountability would be one agenda on priority as it can take us a long way in ensuring a better and friendly tax environment. If we get more reasoned orders, it will reduce the overall litigation and provide upfront certainty to taxpayers, build confidence in them and eventually help the Government in achieving its overall objective of increasing revenues from tax and broadening the tax base.
Digitization is another key aspect, be it for the Government or corporates. Digitization will help the tax administration reduce the load on the existing teams and enhance their deliverables. Through data analytics, tax officials can also objectively identify cases for scrutiny instead of picking up scrutiny cases year on year, on a repetitive basis.
Q9. In the last couple of years, the tax department has taken a number of steps in e-governance by moving toward online tax return filing and processing as well as launching a pilot for online assessment. What other e-initiatives do you think the tax department should consider?
The Government is moving in the right direction in using the online platform. It needs to be ensured that the existing e-initiatives stabilize well, the glitches are completely removed and the online portals are made more user-friendly. Based on the success of the pilot project, the scope of online assessment may be enlarged as it will take away unwarranted efforts and energy put in by both the Government and corporates in recurring tax audits and would help them focus on bigger and important matters.
Another area would be to provide an online mechanism for the transfer of tax credits relatable to the amalgamating/de-merged company to the amalgamated/resulting company and electronic verification thereof by the tax administration. This would save the efforts and time wasted by corporates in claiming these credits in case of merger/de-merger transactions.