Right steps required to improve tax climate

Written by Girish Vanvari | Updated: Sep 3 2014, 05:32am hrs
With the completion of the first 100 days of the government, many are attempting to measure its performance in terms of improving the economic climate and, particularly, the tax environment. A lot was expected by industry from the governments first Budget, including deferral of anti-avoidance provisions, repeal of retrospective amendments, and tax concessions to SEZs. While some would say the Budget was short of expectations, the finance minister undertook a balancing act with certain hard decisions and took measures to provide short-term boost to the sluggish economy.

Tax reforms have continued post-Budget as well with the Modi government moving to rationalise and streamline the tax environment. Be it the CBDT creating additional posts of Commissioners (Appeals) to speed up legal disposal of tax cases, or its instructions to tax officers to maintain appointments with taxpayers to dispose off tax cases earlyall are meant to release tax revenues locked in disputes at various forums and mitigate the trouble to taxpayers.

The government has been receptive to look at its own acts, and make amends as necessary. This is evident from the fact that one of the changes to the Finance (No 2) Bill 2014, related to reduction of period to consider unlisted shares as short-term capital asset, where the period of ownership was less than 36 months (from existing period of 12 months), and the way it was presented in Finance Bill, this would have applied retrospectively from April 1, 2014. Based on feedbacks, Finance (No 2) Act 2014 removed this anomaly by applying these provision effective July 11, 2014.

In order to move quickly on the most controversial amendments relating to indirect transfer of shares, recently CBDT has set up a four-member committee (headed by a joint secretary) that will decide on IT cases prior to April 2012 (affected by retro-amendment) within 60 days of receiving them from the assessing officer. On a different note, certain issues of clarity have also been addressed by the judiciary. The Delhi High Court, in DIT vs Copal Research Ltd, has held that capital gains arising on transfer of shares of a foreign company would not liable to tax in India if shares of such company derive less than 50% of their value from underlying assets situated in India.

Modis invitation to global companies, during his Independence Day speech, to set up manufacturing bases in India and his efforts to increase ties with strategic partner nations like Japan, if implemented properly, would significantly boost manufacturing sector in India and help raise additional resources through taxes. In addition to this, the Special Investigation Team (SIT) constituted by the government to scrutinise black money stashed by Indians in foreign jurisdictions is a welcome step that may help India mobilise further tax resources.

Equally promising are the discussion and interactions of members of the government at various industry forums, wherein they have indicated that the government is not averse at deferring the implementation of GAAR and commerce ministry efforts to look into the removal of MAT and DDT presently applicable to SEZs, to make them more attractive for foreign investors.

While 100 days is too short a time period to measure outcomes of these efforts, one can say that the intent and enthusiasm that some of these actions have created has had a positive impact on the public and investor community at large. Even though the various measures taken by the government indicate the willingness and efforts to provide a conducive tax environment, all these moves are towards consolidation of the existing regime and do not reflect any transformational changes in the tax system. These changes, no doubt, have helped increase the FII investments in the Indian markets, but if India has to attract long-term capital in the form of FDI, it would have to take the right steps to improve the tax climate so that it facilitates capital formation. Some of these, as mentioned above, may include providing boost to the SEZ sector, clarity on GAAR implementation, removal of retrospective amendments and a certainty on tax laws over the lifetime of investments.

Assisted by Arinjay Jain, director, Tax, KPMG in India

The author is partner & co-head, Tax, KPMG in India