Budget 2016: Good news! World's upbeat about India's new tax structure

India, historically eyed by the colonialists as the ’golden goose’ is all set to spread its wings and soar high. India’s rank rose to 130 from 134 in the World Bank’s Ease of Doing Business Rankings 2016 and the current government harbours the ambition to place India among the top 50 countries in the next three years. But do foreign investors share the bullish sentiment which is being reinforced by the government through a plethora of big ticket reforms and leading initiatives. Probably yes; however, the underlying fear of a complex and unpredictable tax regime lingers on, deterring many potential investors even now.

Woes of the Indian tax system

Undoubtedly, India has a complex tax regime with an interplay of direct taxes interlaced with various tax holidays and exemptions, multiple indirect taxes at the central and state level, complex transfer pricing regulations and finally, a long drawn tax litigation process.

Adding to this, the Indian Revenue authorities in the recent past executed unreasonable and arbitrary acts shaking investors’ trust and confidence. These included imposing of Minimum Alternate Tax (MAT) on SEZ units and developers; ushering a series of retrospective amendments in tax laws to tax indirect transfer of shares and others resulting in widening the tax base, arbitrary action by transfer pricing officers alleging share premium as income; imposition of MAT on Foreign Portfolio Investors, etc.

On the dispute resolution front, unduly long duration and pendency of cases, inconsistent stands adopted by tax tribunals and the Authority for Advance Rulings (AAR), etc. have only added to the exasperation and confusion of the taxpayers.

Is India the only one

It is not fair though to single out India as the only complex and aggressive tax jurisdiction. Even developed countries, like the U.S., have an inherently complex tax legislation involving a myriad of federal and state specific legislations. In the Asia-Pacific region, China and Indonesia are other tax regimes which are riddled with complexity and unpredictability. Further, throughout the Asia-Pacific region (China, Australia, Indonesia, Philippines, Japan), tax authorities practice frequent and rigorous tax audits. While countries like New Zealand, Singapore and Hong Kong come across as simple and stable jurisdictions, growing economies in an attempt to increase their tax revenues often earn the reputation of being aggressive and unpredictable.

Speaking of India, it is the need of the hour to have a simple, stable and predictable tax regime. Borrowing leading practices from other jurisdictions such as having an effective tax audit process, reducing the scope for interpretation and discretion, mediation process, close tax compliance monitoring of large taxpayers, etc. may be studied and imbibed in the Indian context.

Reinstating investor confidence: Steps in the right direction

With an aim to create a favourable ecosystem for businesses and to encourage foreign investment, the government has launched various initiatives such as ‘Make in India’, ‘Ease of Doing Business’, ‘Start-Up India, Stand-Up India’, ‘Digital India’, etc.

From a tax standpoint, various steps have been taken to restore investor confidence and build transparency in the system. Providing clarity on indirect transfer of shares by making necessary amendments in the law, accepting the recommendations put forth by the AP Shah Committee and issuing necessary clarifications regarding inapplicability of MAT on FIIs, favourable High Court decisions on transfer pricing cases involving taxation of share premium, setting up of the Easwar Committee to provide recommendations for simplification of the Indian Income Tax law and keenness to implement GST towards having a uniform indirect tax regime, are some of the many steps in the right direction to build a friendly business and tax environment. Also, the consultative process adopted for drafting of legislations/regulations such as ICDS, POEM and GST, by inviting comments from the public and industry associations, can help instill transparency.

On the litigation front, announcements of two additional benches of the AAR in Delhi and Mumbai and an increase in the number of Dispute Resolution Panel (DRP) benches are welcome changes. The recently introduced Advance Pricing Arrangements (APAs), which are expected to bring down transfer pricing litigation significantly, has already gained popularity with over 20 APAs and 3 bilateral APAs already concluded thus far. The target is to close around 50 APAs by the end of March 2016.

The Finance Secretary recently alluded that the upcoming Budget would focus on rationalisation of tax exemptions. Reduction in the corporate tax rate from 30 to 25 per cent is in line with the general downtrend in headline tax rates by countries and shall aid in achieving global competitiveness. He also indicated that the budget would come out with a scheme to reduce tax litigation and relax the penalty provisions, the arbitrary use of which is the cause of various litigations.

The results and the way forward

The above steps augur well to achieve tax rationalisation, stability and simplification and help ensure that the much needed foreign investment comes into the Indian economy. Significant investment commitments in infrastructure, defence, railways, etc. by various countries such as the U.S., China, Japan, etc. bear testimony to the fact that the perception of India as an investment destination is steadily improving.

While the government has emphasised at various national and international fora that it intends to shed India’s image as an adversarial tax regime, a recent tax recovery notice from the department on the high profile indirect share transfer dispute currently sub- judice in international arbitration, comes as an unpleasant surprise.

The government clearly needs to tread with caution and establish consistency in policy and action to help ensure that the efforts made so far bear fruits and that the country can soar higher.

The article has been authored by Naveen Aggarwal, partner and head, North India at KPMG. The views and opinions expressed herein are those of the author and do not necessarily The represent the views and opinions of KPMG in India.
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