All the world loves an efficient taxman

It’s the beginning of the new year, a time when governments and businesses once again attempt to gaze into the future to predict the direction of the economy.

The year gone by was characterised by government and central bank intervention as the US and Japan resorted to an easy monetary policy, contributing to a low-interest rate regime kick-starting growth. The European Union finally seems to be emerging from a phase of high debt and low growth.

As the global economy shows a few green shoots, the outlook remains shaky for India. With the past characterised by a slow policymaking process and persistent high inflation rendering monetary policy ineffective, the Government resorted to providing growth impetus through fiscal subsidies and incentives.

As expected, growing reliance on fiscal measures has taken its toll, the latest data showing that fiscal spending during April to November accounted for 94 per cent of the budgeted fiscal spending for the entire financial year. With spending on an upswing, the responsibility for fiscal consolidation falls squarely on the tax policy.

Any tax policy requires uniform laws and an efficient tax collection mechanism. In a global economy dominated by capital, an uncertain tax regime will only repel capital. The Vodafone dispute and retrospective amendments have signalled rising ambiguity for investors worldwide.

Further, it does not bode well that in such an uncertain policy environment, the tax authority contends that the infusion of share capital by Shell Group into its Indian subsidiary is liable to transfer pricing norms.

The tax collection mechanism has been marred by a rise in litigation. For the period ending 2012, more than Rs 2 lakh crore was locked in litigation.

Not only does this add to negative investor sentiment, the amount represents capital which could have been productively deployed elsewhere.

As investors increasingly look cautiously at the India story, the Government has started taking corrective measures. Recourse from double taxation and transfer pricing disputes has been provided through the Mutual Agreement Procedure (MAP) and Advance Pricing Agreements (APA). Nearly 55 per cent of the respondents in a survey were happy with MAP and more than 140 APA applications have been filed, indicating success for these measures.

A recently constituted Tax Administration Reform Commission further aims to reform the tax policy and collection mechanism by inviting suggestions from the public and experts alike.

There is growing realisation that with corporations transcending boundaries in scale and operation, tax policy reform is no longer a purely domestic issue. Governments world over are increasingly coordinating on issues of tax administration and collection, and seeking global best practices. Take, for example, the UK, the Netherlands, Italy and Australia, which offer a mechanism to offset tax losses within an economically consolidated group.

With domestic transfer pricing regulations already in place, it would augur well for India to do likewise, as Indian business groups increasingly become a labyrinth of holding and subsidiary companies.

Adoption of best practices too is pertinent as India looks to emerge from the twin problems of high tax rates and low tax base. The OECD countries seem to have bucked this trend by lowering the corporate and personal tax rate and focusing on the efficacy of tax breaks with a view to minimising them.

Although the proposed Direct Taxes Code incorporates this thinking, it would further prove beneficial to incorporate in the existing legislation and the DTC an investment-linked tax incentive scheme with explicitly stated sunset clauses.

An unambiguous and uniform tax system promotes a positive investor sentiment. The Goods and Services Tax (GST) heralds such uniformity by unifying fragmented Value Added Tax legislations at the State level into a federal code.

An example of efficient use of tax policy is the Philippines, which threatens the competitive advantage India enjoys in the outsourcing sector by offering strategic sops such as tax holiday and low tax rates.

As highlighted in a recent OECD report, 56 per cent of stimulus measures worldwide are tax related, proving the efficacy of tax policy in promoting the overall economic growth.

Vanvari is Co-head of tax, and Shingari is Director, International Tax and Regulatory, KPMG in India.

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