Promoting tax terrorism

Written by Santosh Tiwari | Updated: Sep 4 2014, 06:22am hrs
The Central Board of Direct Taxes (CBDT) has set up the committee, announced in the Budget, to take the final call on the new cases to be taken up under the 2012 retrospective amendments related to indirect transfers. The so-called high-level committee will include joint secretary (FT&TR-I), joint secretary (TPL-I) and commissioner of income-tax (ITA), with the director (FT&TR-I) as its secretary.

And what will this panel do Lets look at what the income tax

(I-T) department has outlined before we get into what it actually means for the industry and the uncertain atmosphere that has followed the introduction of the retrospective amendments primarily brought to tackle the Vodafone case after the Supreme Court ruling against the income tax department.

It is another matter that many feel the loss probably had more to do with I-T department's poor preparation than with other aspects, but that is part of history now and it is better to focus on the questions about the mandate of the new committee.

Here is what the CBDT says: Henceforth, in all fresh cases where income on account of retrospective amendments to the provisions related to indirect transfer is considered to accrue or arise before April 1, 2012, the Assessing Officer shall be required to seek prior approval of any proposed action in this regard from the Committee. The Committee shall, after providing an opportunity to the taxpayer, issue appropriate directions to the Assessing Officer in a time-bound manner. The Committee would be required to submit periodic reports to the CBDT. The CBDT may intervene in the working/deliberations of the Committee, as and when required.

In sum, what a junior income tax official (read assessing officer) will do in a particular case will be decided by a panel of his seniorsthat's all of it. Ask the CBDT officials in private and they will tell you how different the view of two I-T officials could be in a particular case if there is revenue involved.

It is next to impossible for an

I-T official to decide/suggest not to take up a case or forego revenue. If that would have been possible, the tax demands to the tune of more than R4 lakh crore would not have been under dispute and under litigation before various courts and appellate authorities, despite the poor track record of the I-T department in winning cases.

That being the case, it is not difficult to infer whether this committee will be a solution or will just add to the problem, or will merely be a tool in the government's hand to keep the retrospective tax confusion under control, till a way out is found.

The move is certainly not going to help improve the tax atmosphere. If the government would have been serious about tackling the uncertainties emerging out of the retrospective amendments, this panel would have included independent tax experts, and legal and industry representatives also.

The short point here is if there is a dispute between the tax department and the taxpayer, especially in the cases like indirect transfers, someone from outside should arbitrate and not the

CBDT itself which has formalised the norms.

The worrying part is that the NDA government policymakers appear to have fallen into the hands of the tax officials who forced the retrospective amendments during the UPA regime.

What needs to be done with the indirect tax transfer cases has already been suggested by the Parthasarathi Shome panel and application of these recommendations will solve a large part of the problem and help remove uncertainty. Why should CBDT be allowed to monopolise the handling of indirect transfer cases after so much of chaos, which the BJP manifesto termed tax terrorism!

The Shome panel concluded that retrospective application of tax law should occur in exceptional or rarest of rare cases, and with particular objectivesto correct apparent mistakes or anomalies in the statute; or to apply to matters that genuinely need clarifications, i.e., to remove technical defects, particularly in procedure, which have vitiated the substantive law; or to protect the tax base from highly abusive tax planning schemes that are designed solely to avoid taxes and are without economic substance. It clearly said that the retrospective changes in law should not be done to expand the tax base and they should be introduced only after exhaustive and transparent consultations with stakeholders who would be affected.

On indirect transfer provisions introduced by the Finance Act, 2012, the committee said that they are not clarificatory in nature and, instead, would tend to widen the tax base. It recommended that these provisions, after introducing clear definitions suggested by the panel, should be applied prospectively.

Besides suggesting that in all the cases taken up under the retrospective amendments, the interest and penalty should be waived, the Shome committee also recommended that, for deciding on the indirect transfers, a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value from the assets located in India being more than 50% of the global assets of such company or entity.

The UPA government constituted Shome panel after retrospective amendments spooked the investor badly, but evaded implementing its recommendations. The BJP government has promised to end tax terrorism in its manifesto but has also avoided tackling the tricky issue directly, and till it finds a sustainable and acceptable solution to the ill-conceived retrospective amendments, its task remains incomplete.

By creating a committee comprising only CBDT officials to handle indirect transfer cases, the government has sent a negative signal. It has to understand though the industry and investors have reposed faith in the new government, they may not remain patient forever.

This is the right time to reconstitute the industry-tax-forum, earlier headed by Shome, to develop a transparent tax framework that will replace the high-handed one currently in place, in the next budget.