Apparently, since the time Franklin Roosevelt introduced the idea of action agenda for a new government in its first 100 days, this practice seems to have become ‘de rigueur’ for any new government all over the world to unveil its progress card during the first 100 days of coming to power. On the back of stupendous expectations and a resounding mandate, the keenness to assess the new Indian Government’s performance in the first 100 days is even further accentuated. This article focusses on the direction of the tax policy changes and actions taken in this regard by the new BJP led Government at the Centre.
First and foremost, the Finance Minister has done well to reiterate time and again that India stands for a stable and non-adversarial tax regime to assuage the much frayed nerves of investors, foreign and domestic alike. His maiden budget presented in July also reinforced this thought process in most respects as explained below:
Alternative Dispute Resolutions (ADRs) – The FM has rightly accepted the need for further strengthening of ADRs and reducing the plethora of litigation clogging the judicial system in India. Thus, he has announced broadening the coverage of Authority of Advance Rulings (AAR) to domestic companies, as also increasing the number of benches in the country, strengthening of the Settlement Commission mechanism and plough back of APA to four prior years, which are all steps in the right direction. Similarly, the clarifications on range and multiple years’ data in transfer pricing will mitigate to some extent avoidable disputes in this contentious area of international taxation. However, Government needs to expeditiously announce on the ground measures to implement these well intentioned steps. For example, even the current AAR mechanism, though applicable only to non-residents and with a single bench in New Delhi, is practically non-functioning for over a year now and a huge number of applications are piled up with the AAR crying for an early resolution. This is especially ironic as Section 245 (R)(6) clearly provides that the AAR shall pronounce its advance ruling in writing within 6 months from the receipt of application and the efficacy of this mechanism is obviously best served only when the ruling is made available within a reasonable period of time for a proposed transaction. Similarly, whilst a tremendous amount of hard work and effort has been put in by the APA Authority in respect of nearly 400 applications filed before it, there are quite a few common issues which are pending resolution with the senior level tax authorities. While the conclusion of 5 APAs within a period of 12 months is commendable, thus showing the Indian APA program in a very favourable light, it would be great if some of the common issues which form part of the multiple APA applications are resolved expeditiously allowing for a far higher number of disposals.
Retrospective taxation – The Government’s resolve and commitment not to resort to retrospective taxation comes like a breath of fresh air injecting the much needed certainty in India’s tax policy. Government has also walked the talk by ensuring that not a single retrospective measure was introduced in their maiden budget. As regards the retrospective tax on indirect transfers, Government seems to have adopted a balanced approach. Thus whilst Government has not rescinded the amendment, it has set up a High Powered Committee (HPC) which will look into any new cases arising out of the said amendment. However, the fact that the legislation remains unchanged, it remains to be seen what the HPC can achieve in the face of a potential action by the tax officer under the extant law. Further, the clarifications regarding the threshold in the definition of ‘substantial interest’ and the fact that there will be only proportionate capital gains levied in proportion to the indirect interest in Indian assets also need urgent clarification.
Clarity in taxation – There has been a welcome announcement on a committee for regular interaction with the industry with a view to provide clarity of tax treatment on various issues sought by the industry. This should be implemented as soon as possible. Meanwhile, a couple of clarifications on taxation of Special Economic Zones (SEZs) and Alternative Investment Funds (AIFs) need further elucidation as they have not fully addressed the contentious issues with regard to the respective sectors. Further, considerable work has been done by the previously constituted Shome Committee on tax issues faced by various sectors in the economy. It would be useful to disseminate the outcome of this extensive deliberation held between the Shome Committee and industry and also issue the requisite clarifications arising therefrom.
Goods and Services Tax (GST) – Here again, Government has shown commendable resolve to positively move ahead of this much delayed but much desired piece of legislation. It remains to be seen how quickly Government is able to satisfactorily address the concerns of some of the State Governments and stitch together a workable GST worthy of implementation at the earliest.
Reform of Tax Administration – As is well known, detailed recommendations have been made by the Tax Administration Reform Commission (TARC) headed by Dr Shome with a broad reference to the organisational structure of the tax administration, performance evaluation, the indicators of need for accountability of tax officers, amongst many other commendable suggestions. Government should quickly come out with a road map for implementation of these recommendations as eventually tax policy is what taxpayers experience on the ground with the Tax Administration.
In conclusion, one is pleasantly surprised by the speed and scale of tax policy changes unveiled by the new Government in such a short period of time. What is now required is a resolute follow through for implementation of these announcements and the demonstrable focus on the reforms of the tax administration as recommended by the Expert Committee.