Tax policy challenges

A slowing economy is going to pose several challenges for policymakers, especially on the taxation front. Faced with narrow fiscal space to provide any form of stimulus, the Government is expected to go in for fiscal consolidation in a big way in upcoming budget.

In this interview, Deloitte partner, Ms Neeru Ahuja, discusses tax policy issues with Mr M . Lakshminarayanan , who is a partner with Deloitte.

What is your overall perspective on the tax environment, particularly on the tax collection front?

The widening deficit is a matter of grave concern to the Government and some of the measures taken by them to augment collections are well known to us. Tax scrutiny assessments have been stepped up and the transfer pricing officers have become hyper active and, have so far made adjustments in excess of Rs 50,000 crore to the income of the multinational companies operating in India.

How do you think India's tax-to-GDP ratio can be improved?

In India, the total tax collections, including the state collections, account for only 16 per cent of GDP, whereas it is as high as 37 per cent in Germany, 34 per cent in the UK and 24 per cent in the US. The slowdown has the effect of widening the Centre's fiscal deficit target to 5.5 per cent in the current year from the budgeted figure of 4.6 per cent.

The tax-to-GDP ratio can be increased by India only if tax policy changes are made to bring into tax net the large unaccounted income. While baby steps have been initiated by the government to tap the black money stashed abroad at the instance of the Apex Court, nothing substantial has come out of this. Or, probably, it is too early to predict? The tax ratio is unlikely to increase substantially unless the parallel economy in the form of black money is brought to books.

On increased reliance of withholding tax route for revenue mop up…

One of the most contentious regulations in the income-tax legislation relates to the with-holding tax obligations of the payers. There are varying rates for different payments and for non-residents, there are conflicting decisions.

Look at the case of Vodafone. They were the buyers and they did not make the profit on the sale of shares but they were hauled up by the revenue department for non-deduction of tax from the income arising to the seller of shares.

Fortunately, the Supreme Court has set aside the demand made on Vodafone, but assuming the decision was favouring the revenue department, Vodafone would have to incur an additional cost of more than $ 2 billion and there is no way it can get foreign tax credit for the taxes paid in India since this payment was not in relation to the income of Vodafone.

Huge amounts are disallowed by the assessing officers in regard to payments on which no deduction is made or lower deduction is made.

Finally, for the assesses who pay excess taxes in view of the tax deduction by their clients or customers, the refunds from the department do pose a huge challenge. Unfortunately, the laws treat the payer worse than the income recipient.

Will the Vodafone ruling create more certainty in our tax environment?

Among all negative sentiments we are surrounded by, the Supreme Court judgment in the Vodafone case is a positive development. For the last four years since the first notice was served on Vodafone, till very recently, confusion prevailed in the M&A space. In all the cross border deals, both the sellers and the buyers were unsure of their tax liability in India.

The Apex Court finally held that the Indian revenue authorities have no jurisdiction over the Vodafone transaction since it was an overseas deal and it was neither a sham transaction nor tax avoidant. The Court also overturned the Bombay High Court decision which dissected the transaction into shares held abroad and the assets held in India. This will be a welcome relief to similar deals where the Income-tax Department initiated recovery proceedings.

This decision of the Supreme Court has upheld the right of the tax payer to arrange his affairs in a tax efficient manner as long as they are within the framework of law except where the transaction smacks of colourable or artificial device.

Your views on the Direct Taxes Code Bill?

As mentioned earlier, the enactment of the Direct Taxes Code is getting delayed and no action is expected by April 1, 2012. The natural question there is: Whether the Government would bring in some of the proposals contained in the Bill into the Finance Bill 2012? Some of the harsh provisions are those relating to General Anti Avoidance Regulations (GAAR) taxing of the indirect transfers, CFC regulations, and so on. One positive amendment we are looking forward to is the Advance Pricing Agreement.

(Neeru Ahuja is Partner, Deloitte Haskins & Sells.)

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