Aligning tax with the times

Written by Girish Vanvari | Updated: Mar 18 2014, 00:47am hrs
The aggressive approach of Indian tax authorities on transfer pricing and international tax matters underlines the governments intention of taking strong action to defend its tax base. When it comes to taxation of cross-border transactions, Indias inclination to widen the source-based tax rules is clearly demonstrated by the retrospective amendments, introduced in 2012, relating to indirect transfers which widened the scope of royalties.

The 2012 retrospective amendments in tax law for software, equipment leasing and telecom transactions were never intended to override the relevant treaty provisions, wherever the treaty provisions are beneficial. However, it appears that these amendments were a shot in the arm for the taxman in denying treaty benefits despite the judiciarys view to the contrary. in several cases. Transactions hitherto considered as pure service arrangements from a tax perspective, like cross-border telecom services, are dragged into tax net under royaltiesfollowing the amendmentsignoring the beneficial treaty provisions. The challenge escalates when the Indian payers are held to be in default of not withholding taxes and expenses are not allowed. Even a conservative approach to withhold taxes irrespective of the treaty provisions may not resolve the issue since such taxes may not be creditable in the home country leading to significant leakages. This leads to significant uncertainty on tax positions, resulting in litigation.

Another area of concern for foreign investors is the lack of an effective dispute resolution policy and mechanism resulting in several cases getting held up at the courts for years. While the government introduced the fast-track Dispute Resolution Panel, the forum has not proved effective in international tax and transfer-pricing disputes and acts as a gateway to the tribunals.

To address industry concerns over increasing tax disputes and uncertainty, the government had introduced various reforms. However, whether these reforms have been successful in restoring investor confidence with much-needed clarity and certainty on various issues is debatable. The business community is looking forward to the advance pricing agreement (APA) regime introduced by the government in 2012 as an effective dispute resolution mechanism. The fact that around 150 APA applications have been filed pan-India in the first year of introduction is a testimony to its popularity amongst MNCs. Having said that, it would be interesting to see the manner in which such applications are eventually disposed-off. The government also notified Safe Harbour rules in September 2013outlining circumstances where the transfer price of taxpayer would be accepted by tax authorities. The rules, however, have received a tepid response due to very high markups.

The finance minister has indicated the governments focus to move towards technology-driven tax administration to meet the objective of tax base expansion. However, the government needs to have a strong administration team to support tax collection and provide faster services to tax payers. There is need to speed up inter alia rectification and refund processing, issue of withholding tax certificates, appeal effect orders, etc, to improve the quality of services. Setting up of the Tax Administration Reforms Commission by the government is a step in the right direction. The cabinet decision to recruit around 20,000 tax officials over the next few years is also expected to provide the necessary manpower to service the increasing tax base.

India continues to face headwinds in economic growth and the situation is expected to remain same during the next 8-12 months. In the backdrop of a sluggish economy and policy indecisiveness, corporates are adopting a cautious approach towards fresh investments and new projects. In this dynamic and challenging business environment, clarity and certainty in tax policies and an efficient tax administration is the need of the hour which can enhance Indias image as an investor friendly jurisdiction. A bold step towards bringing clarity on certain debatable international tax and transfer pricing issues would reduce tax litigation and provide certainty to the foreign investors. As the political scenario in India heats up and general elections are round the corner, corporates are hoping that tax reforms remain as one of the prime agenda in election manifestos of political parties and a stable government at the Centre brings back India on the path of reforms and growth.

Sujay Paul, director, tax & regulatory services, KPMG in India, also contributed to this article

The author is co-head of tax, KPMG in India.

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