A word of caution here. Remember the past experience. Promising a non-adversarial and conducive tax environment is easy but implementing it is going to be difficult, especially the overhaul of dispute resolution mechanisms, which is also part of the agenda.
But before sprucing up dispute resolution mechanisms, the government needs to take steps to expeditiously resolve the issues that have vitiated the business atmosphere in the last two years. This would require a strong resolve to break away from the past, mirrored in the taxmans high-handed approach and high-pitched adjustments to the income of the MNCs in transfer-pricing (TP) cases.
The backdrop is that of mistrust and confrontation, with a spate of TP additions remaining unabated at a total of R2,17,300 crore during FY09-14; the R20,000-crore Vodafone tax case pertaining to the 2007 acquisition of Hutchison assets in India has taken the foreign arbitration route after several twists and turns; cellphone-maker Nokia is on the verge of getting into arbitration after it was not allowed to include its Chennai plant in its $7.2 billion deal with Microsoft; and tax disputes with 200 US companies are stuck over an acceptable profit margin for settling them through the mutual agreement procedure (MAP).
The safe harbour margins are high, at 20-30%, so there are few takers, and the advance pricing agreements (APAs) cant move at the required pace in the absence of adequate workforce.
So, the entire approach to taxation needs an overhaul. Take the TP cases. The latest orders (in FY14) have come for FY10. With the demands for the previous years already in litigation, the income-tax department officials will stick to their arguments and positions in future orders as well if there is no change in the thinking.
Why it is a prerequisite is evident from the FY14 TP orders themselves. Despite Prime Minister Manmohan Singh and finance minister P Chidambaram promising a taxpayer-friendly administration to foreign investors on several occasions, the latest orders are on the same lines as they were in the past few years.
Total additions have gone down by just R10,000 crore in FY14 from R70,000 crore in FY13. Shell India was slapped with an adjustment of R15,559 crore mostly for share transfers in FY09for FY10, the addition to its income is R3,137 crore.
Then, the TP office (TPO), in its January order, has made a R3,434 crore addition to Vodafones income in FY10, citing another retrospective amendment in the FY12 Finance Act.
Vodafone issued 5.6 lakh shares to Vodafone Tele-Services India Holding Limited, Mauritius, in two tranchesone on July 16, 2009, at R7,110 and another on January 24, 2010, at R6,447 each. The TPO has valued each share at R60,445 for calculating additions.
In Shell Indias case, there are two types of adjustments, one for the work done by the company in India and one for share transactions of the type Vodafone did. The company issued 4.78 crore shares to Shell Gas BV on December 24, 2009, at par value of R10 per share, but the TPO has valued each share at R187.96.
Clearly, the government needs to first specify a mechanism for share valuation in international transactions based on the global best practices to solve these cases. Only then the investment scenario is going to get better.
Assessment of technology transfers and R&D work done in India is another area of concern. After being told it understated its income by R5,135 crore for the period FY06-09, Microsoft is now facing another order this year saying that the company understated its FY10 income by R400 crore, or around 33%.
The point to understand here is, in all these cases, if the companies would have known that such additions would be made to their income, they would not have entered into these transactions.
The income-tax department has now about seven months time before it starts making fresh TP adjustments. Clearly, if they are told to find ways to wind up the existing cases amicably before going for fresh orders, it will help both the taxman and the companies.
Further, MAP talks with the US are stuck because India is pushing for a 18% profit margin for solving disputes while the American authorities are sticking to a 12-13% rate. While the Central Board of Direct Taxes is looking at lowering the safe harbour margins to make them attractive, it would not be a bad idea to accept the US proposal for a lower rate to solve the existing cases.