An unfinished agenda

As the government rolls out a red carpet for investors to ‘Make in India’, the tax proposals in Budget 2016 will be keenly watched by India Inc. With tax receipts comprising approximately 85 per cent of the total revenue receipts, the finance minister has a formidable task of striking the right balance between widening the tax base and ushering in certainty and simplicity in the tax regime.

The government has set up the Income Tax Simplification Committee (ITSC) headed by the retired justice Easwar to suggest changes in direct tax laws to move towards a simpler tax regime. The committee has recommended several taxpayer-friendly measures such as deferring the contentious Income Computation and Disclosure Standards (ICDS) provisions, rational enforcement of tax demands, streamlining withholding tax provisions and making the process of refunds faster.

The finance minister can also address the issue of stay of demand, a frustrating issue for taxpayers. The dispensation of PAN requirement for foreign taxpayers not engaged in regular business activities in India would go a long way in reducing hardship and the compliance burden. Even for resident taxpayers, PAN can be used as a common business identification number for various tax laws. At present, there separate identification numbers are required for I-T, service tax, VAT and other laws.

Some guidance With a view to bringing certainty in tax laws, the I-T department has started the process of issuing guidance to its officers on tax positions to be adopted on contentious issues. It may consider taking this practice further by publishing ‘position papers’ in the public domain. This would help tax officers adopt uniform positions. Public consultation before introducing new guidelines and circulars is also a welcome step. An effective tax policy is only as good as the tax administration; the administration can be further strengthened by aligning tax audits and assessments based on industry segments. This will help field officers pass more qualitative assessment orders. Effective dispute resolution is key to achieving a simple and fair tax regime. The I-T department’s decision to not file an appeal against the Bombay High Court’s ruling on the share valuation matter testifies to the government’s commitment to address the issue of efficient dispute resolution.

While administrative decisions such as non-filing of appeals below the ₹10 lakh threshold will reduce pending litigation, setting up a central unit to review all cases proposed to be litigated by the tax department will be a game-changer. A central body with expert legal professionals will certainly help identify weak cases not fit for litigation. This will also strengthen the merits of the department’s case at lower appellate levels to enhance the eventual success rate.

Bolstering the mechanisms The existing mechanisms can also be strengthened to usher in the desired change. The Authority of Advance Ruling (AAR), a forum frequently used by foreign investors to get certainty on taxability of a transaction, is functioning with significant pendency.

The non-formation of additional benches of AAR, even though approved by the government almost a year back, has only added to pending lists of applicants. Widening the scope of the current Settlement Commission to include tax-withholding matters and doing away with the condition of pre-payment of taxes will render this forum more effective.

The time is ripe to explore alternative dispute resolution mechanisms similar to the Fast Track Settlement Scheme (FTS) in the US to deal withthe backlog of tax appeals. Other international best practices such as joint audits for direct and indirect taxes and consolidated group filing may also be introduced to minimise litigation and achieve consistency and coherence in tax positions.

There is a long way to go before we realise the benefits of the reforms agenda rolled out by the Centre. While the offshoots of simplifying the tax laws are palpable, greater success can be achieved by implementing structural reforms, as this will pave the way for improved investor sentiment, ease of doing business, and a sustainable growth trajectory.

The writer is a partner and head of tax at KPMG in India. The views are personal

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