Will the largely optimistic mood translate into progressive tax laws for India It is time to wait and watch! The key topic of countless discussions and, in some senses, non-debate, revolve around removing uncertainty in tax laws. That is the crux.
There are a few primary asks from the professional communityall of which focus on doing away with the uncertainty in tax laws. The first is that the General Anti-Avoidance Rule (GAAR) be deferred. Second, it is hoped that retrospective nature of indirect transfer provisions be made prospective. Currently, there is also reasonable uncertainty on the computation mechanism for determining the cost of acquisition and the period of holding for taxation of indirect transfers. Clarifications in this area would be greatly welcome.
One of the other focus points for the government would be to push a progressive growth agendaSEZs and infrastructure development will play an important role in this. In order to encourage units in SEZs, it is essential to make them completely tax-free for a certain period of time including exemption from the Minimum Alternate Tax (MAT).
On the infrastructure development front, the scope is tremendous and, unfortunately, overdue. Tax incentives will certainly provide a much-needed impetus to this segment. While there is tax holiday available for this sector, income earned is still subject to MAT. Related to this, the tax holiday for the power sector also needs to be extended for units commissioning in the current financial year. With the advent of the new Companies Act, 2013, some of the provisions require realignment in the tax law.
l Tax treatment for outbound mergers. The tax law needs to provide guidance in cases where there is a merger of an Indian company into a foreign company. This is now permitted as per the Companies Act, 2013.
l Deductibility of expenditure in respect of corporate social responsibility (CSR) in accordance with the Companies Act, 2013, needs to be addressed.
l Tax treatment of a One Person Company as introduced by the Companies Act needs clarifications.
l Other procedural amendments pursuant to changes in the corporate law.
l The concessionary tax rate applicable for dividends received by an Indian company from a foreign company should be extended to encourage Indian companies to repatriate dividends to India.
No discussion around pre-Budget expectations would be complete without focusing on transfer-pricing regulations. More than 60% of the audit cases have suffered transfer-pricing adjustments. Taxpayers are hoping for an efficient dispute resolution mechanism that will address the concerns of the taxpayers as well as increase Indias attractiveness as an investment-friendly jurisdiction. It is hoped that a combination of regulatory and administrative reforms would achieve the desired purpose.
In India, arms length price (ALP) is determined as the arithmetic mean of the range of prices/margins leading to disputes in majority of the cases. Adoption of the internationally-accepted concept of inter-quartile range of such prices/margin points will be a step in the right direction.
At present, assessing officers refer every cross-border transaction above the threshold of R15 crore between associated enterprises to a transfer-pricing officer (TPO). Selecting cases based on the monetary threshold leads to overburdening of TPOs. A risk-based assessment paradigm would greatly reduce compliance and administrative burden for taxpayers as well as tax authorities.
Very few taxpayers have opted for these provisions in the last year after safe-harbour norms were notified. It is recommended that the percentage of safer-harbour mark-ups be calibrated down in line with business realities. Lowering the safe-harbour percentages would encourage more taxpayers to opt for it.
It is recommended that the number of officers trained in international taxation be increased, especially in transfer-pricing. The Dispute Resolution Panel (DRP) mechanism can be made more efficient with the panel members having a full-time role. A mutually-acceptable solutionvoluntary settlement mechanismcan be introduced at this level to reduce cases going to tax tribunals and courts.
At present, taxpayers have the option to opt for an APA for a maximum period of five future years. An option of rollback of APA for the past years litigation depending on the facts and circumstances of each case would encourage more taxpayers to opt for APA and reduce past disputes.
The existing provisions enable competent authorities in India and some of the treaty-countries to resolve transfer-pricing disputes. However, this clause is absent in Indias treaties with countries like France, Germany, Singapore and South Korea, among others. In order to leverage the full advantage of the APA programme to all taxpayers, it should be clarified that as long as there is an article for mutual agreement procedures under a tax-treaty, bilateral APAs may be permitted even if the treaty may not contain a specific article to that effect.
With the Budget round the corner, it is hoped that the new government ushers in transparency, certainty and an approach that is forward-thinking, investor-friendly and growth-focused. It is also hoped that while the immediate introduction of GST may not be possible, the FM lays down a concrete roadmap for its early implementation.
The author is partner, Deloitte Haskins & Sells LLP