Revive the tax-dispute resolution forum

Written by Santosh Tiwari | Updated: Jun 3 2014, 10:29am hrs
There are very few things which went right in taxation during the second half of the UPA-II regime. One of them would certainly be the forum for addressing tax-related issues, under Partahasarathi Shome, adviser to the then finance minister, P Chidambaram. The deliberations and results clearly show that the new finance minister, Arun Jaitley, must revive the forum at the earliest because the most effective way to tackle tax litigation is resolving the issues before they assume the proportions of a confrontation between the taxpayer and the taxman.

The Shome-led forum was constituted in July 2013 for exchange of views between industry groups and government on tax-related disputes and it had officials from both, the Central Board of Direct Taxes and the Central Board of Excise and Customs, on board. It met every Wednesday and held 18 meetings in total during August-September 2013, identifying 29 issues in direct taxes and 47 issues in indirect taxes for removal of obstacles and issue of clarifications or amendment in the procedures.

A number of administrative issues have been resolved since, through relevant circulars and instructions issued by the two boards, and the revenue department is expected to bring in the suggested legislative changes on various issues in the upcoming budget.

So, the forum has already provided critical inputs for the budget. How effective it can prove to be in handling tax-related issues and restoring confidence in the industry, which has been dented considerably because of the high-pitched transfer pricing adjustments and unnecessary litigation, can be gauged from the outcome of the forums decisions.

One of the problems faced by the foreign companies is a lack of clarity on whether a foreign company not having a permanent establishment (PE) in India is liable to pay minimum alternate tax (MAT) or not. According to a ruling by the authority for advance rulings (AAR), MAT needs to be paid even if there is no PE in India. This is against the provisions of the double tax avoidance treaties which say MAT cant be levied if there is no PE in India. This has led to confusion. The Shome-led forum suggested that the government abide by the treaty norms and clarify its stance. This could be one of the steps in the full budget for FY15 to be presented in July.

Then, there is the issue of taxation of software products. At the forum, the industry brought to the notice of the revenue department that the 10% tax rate for the first sale of software products was acceptable at the initial stage as the margins are high enough to sustain tax at a higher rate here, but the margins decline in the subsequent sales and the 10% rate cant be borne. The forum agreed with the argument and suggested that the government look at the methods to address this, probably by reducing tax rate for software products in subsequent sales. Meanwhile, the income tax department has issued instructions to its officials to provide certificate for lower deduction or no-deduction of tax at source within the stipulated time of one month. This will help them in the short run but the income tax department will have to ultimately bring in the necessary changes to address the problem.

Taxability of the share of a member of an AOP (Association of Persons) under MAT has also been an area of concern. For such entities, tax liability is that of the AOP and whatever money accrues to the shareholders is not taxable as the income has already been taxed once, and it cant be taxed again. But under MAT, tax has to be paid on book profit of the shareholders also. This is a confusing situation and needs to be clarified in the Budget. It was decided at the forum that it needs to be specified that AOP shareholders income cant be taxed.

Apart from other major areas on which the income tax department has already issued circulars to solve the problems, the forum also led to clarity on availability of depreciation allowance/tax deduction in relation to the cost incurred for development of roads/highways in case of BOT contracts. Section 80IA of the Income-Tax Act deals with deduction in respect of profits and gains derived by an undertaking or enterprise engaged in developing, operating and maintaining any infrastructure facility, industrial park, etc. There was a question whether in the case of another company taking over the project, the income tax benefits will be available to the new entity handling it or not. The department has clarified on May 6 that the benefits will continue for the specified period even after acquisition.

In indirect taxes, the areas of concern taken up by the forum included those pertaining to the CENVAT credit, scrutiny and audit of service tax records and point of taxation for the life insurance services, among others.

The worrying part is several of the forums suggestions are still pending with the two boards. While there is a need to revive the forum, it is also a necessity to ensure that tax departments dont scuttle the decisions taken. The new set-up must institutionalise the window and have an inbuilt mechanism to guarantee action on its recommendations.