Armed with a historic mandate, it is widely expected that the new government will hit the ground running in dealing with key challenges facing the country, with the revival of our economic growth likely to be at the top of this list.
Among the many components of our economy that need urgent attention, tax is undoubtedly one of the most critical. At a conceptual level, it is imperative for the new government to address the trust deficit between taxpayers and the department. The last few years have been particularly tough in this regard. Amidst the large volume of economic news emerging from India, the regularity with which tax matters have dominated the headlines is indeed surprising. The mind-boggling numbers involved in tax litigation, the frequency with which unbelievably large tax demands are made, the retrospective amendments, etc, have all contributed to this trend. This has led to a situation where our tax policies are viewed as one of the key negative factors influencing investment decisions by both domestic as well as foreign players.
Needless to say, rectifying this state of affairs should be at the top of the new governmentís priorities. While the need for systemic change is no doubt necessary, there are several low hanging fixes, which, if implemented, will send a positive signal to the investing community and help bridge the trust deficit.
The most important issue to be dealt with from a tax perspective will be the retrospective amendments made by the Finance Act, 2012. To a large extent, these amendments undermined Indiaís reputation as a stable and mature economy committed to the rule of law. Specifically, the amendments relating to indirect transfers should be made prospective. Given the importance of this issue, necessary legislative changes must be made immediately, as part of the forthcoming budget.
The trust deficit between the government and the taxpayers is most obvious when one considers the sheer volume and the quantum of tax litigation in India. In several areas such as transfer pricing, the number of disputes and the amounts involved are completely disproportionate to the volume of cross-border economic activity. The tax department too is a prolific litigator, with a very large number of routine orders being challenged by the department in appeal before the tribunal and the courts. This is an important area of concern cited by investors.
The objective of the new government in this regard should be two-fold. The first step would