Among the many components of our economy that need urgent attention, tax is undoubtedly one of the most critical. At a conceptual level, it is imperative for the new government to address the trust deficit between taxpayers and the department. The last few years have been particularly tough in this regard. Amidst the large volume of economic news emerging from India, the regularity with which tax matters have dominated the headlines is indeed surprising. The mind-boggling numbers involved in tax litigation, the frequency with which unbelievably large tax demands are made, the retrospective amendments, etc, have all contributed to this trend. This has led to a situation where our tax policies are viewed as one of the key negative factors influencing investment decisions by both domestic as well as foreign players.
Needless to say, rectifying this state of affairs should be at the top of the new governments priorities. While the need for systemic change is no doubt necessary, there are several low hanging fixes, which, if implemented, will send a positive signal to the investing community and help bridge the trust deficit.
The most important issue to be dealt with from a tax perspective will be the retrospective amendments made by the Finance Act, 2012. To a large extent, these amendments undermined Indias reputation as a stable and mature economy committed to the rule of law. Specifically, the amendments relating to indirect transfers should be made prospective. Given the importance of this issue, necessary legislative changes must be made immediately, as part of the forthcoming budget.
The trust deficit between the government and the taxpayers is most obvious when one considers the sheer volume and the quantum of tax litigation in India. In several areas such as transfer pricing, the number of disputes and the amounts involved are completely disproportionate to the volume of cross-border economic activity. The tax department too is a prolific litigator, with a very large number of routine orders being challenged by the department in appeal before the tribunal and the courts. This is an important area of concern cited by investors.
The objective of the new government in this regard should be two-fold. The first step would be to decrease pendency by increasing the number of judges and by reducing delays through mandatory time-bound disposal of tax disputes. The second would be to take steps to eliminate the culture of litigiousness that prevails today. To this end, mechanisms for settlement of disputes should be provided under the law and strict internal guidelines should be laid down for filing of appeals by the department. The strengthening and expansion of the advance ruling mechanism will also help in this regard.
Another important area that needs urgent intervention is the gap between tax policy and implementation. A simple example would be the India-Mauritius treaty. As per the law laid down by the Supreme Court and by the CBDTs own policy circular, the benefits of the treaty continue to be available. However, at the ground level, treaty benefits are subject to routine challenge. A similar situation exists in the case of tax holidays, which are often denied at the ground level. If investor confidence is to be restored, it is imperative that this dichotomy between tax policy and its implementation not be allowed to prevail.
Lastly, two other items must also form part of the governments tax agenda. The first should be the quick implementation of the GST. The need for greater involvement of states in decision-making has been frequently cited during the election campaign. One hopes that this will help resolve long-festering issues surrounding the GST. The other issue on which urgent action must be taken is that of black money. The precedent offered by the UK and Germany in their dealings with Switzerland, in particular, could form the basis for a long-term solution in this regard. Under this approach, account holders who do not agree to names being provided to the government of India would suffer a tax on the accumulated balances and the income earned thereon.
To sum up, what is required is for the new government is to adopt a pragmatic and trust-based approach to taxation. While the collection of revenues is undoubtedly important, this must not be pursued with single-minded devotion, regardless of the consequences to economic growth and investor confidence. A trust-based partnership between the taxpayers and the government will be the best way to help put India back on a high growth trajectory.
The author is deputy CEO, KPMG in India