On September 25, Prime Minister Narendra Modi kicked off the ‘Make in India’ campaign in the presence of a large number of business leaders.

Clearly tax policy will play an important role if we want to attract big-ticket investments. After the not-so-happy experience of several large taxpayers in the last few years, the new government responded by announcing a number of positive measures (for example, use of inter-quartile range to calculate arm’s length pricing under transfer pricing provisions instead of arithmetic mean) in its first Budget.

Some more steps

However, more steps are needed to boost investor confidence.

We need to simplify laws and remove unnecessary regulations to bring down the cost of compliance. Introduction of rational safe harbour norms under transfer pricing (TP) regulations for the manufacturing sector, and dispensing with some of the documentation can bring significant relief to taxpayers. Similarly we can scrap domestic TP regulations.

As originally envisaged in the Direct Taxes Code Bill 2009, India needs to gradually reduce the corporate tax rate to 25 per cent from the present level of 30 per cent (excluding surcharge). This will make the manufacturing sector competitive.

The concept of Special Economic Zone (SEZ) was introduced in 2005 to promote the export of products made in India through various concessions under direct and indirect tax laws. Though a tax holiday for units in the SEZ is still available, the introduction of Minimum Alternate Tax (MAT) on book profits and Dividend Distribution Tax (DDT) on income distributed as dividend led to a virtual paralysis of the scheme. We can revive manufacturing in SEZ by eliminating MAT/DDT altogether or by imposing a token levy.

Often, the taxpayers in India have to deal with conflicting views of tribunals/courts on a variety of topics. This leads to endless litigations which can easily be avoided if the Central Board of Direct Taxes (CBDT) or the Central Board of Excise & Customs (CBEC) intervenes and issues circulars or clarifications to bring finality on interpretations.

Reforms commission

In August 2013, the previous government set up a Tax Administration Reforms Commission (TARC) under the chairmanship of Parthasarathi Shome. The committee presented its first report to the new Finance Minister earlier this year. The recommendations of the TARC include enhancing “customer focus”, lowering compliance costs and strengthening dispute resolution processes.

The Government must defer the General Anti Avoidance Rules (GAAR), due to kick in from April 1, 2015, by at least three years. Ideally, GAAR should be introduced only after the tax administration reforms are complete.

One of the most significant reforms for which the business community is waiting since 2010 is implementation of the Goods and Services Tax (GST). As GST will subsume most of the indirect taxes at the central ( excise duty, service tax) and state ( VAT, stamp duty) level, it will also improve the ease of doing business considerably by bringing down the incidence of multiple taxes. The Government has set a target of 2016 to launch GST, and this time we must make it happen.

The writer is Head of Tax (South Asia), Siemens Ltd

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