Column: Eliminate uncertainty, reduce litigation

Jun 23 2014, 02:48 IST
Comments 0
SummaryMost high-pitched assessments arise from a lack of understanding of business facts & incorrect application of law

A significant part of fulfilling the ‘good governance’ promise is to address major tax issues that have affected India’s image as an investment destination. The unifying theme in this case is elimination of uncertainty and reducing litigation that can be achieved only by addressing multiple issues—some more urgently than others.

Retrospective amendments are like changing the rules of the game after the game has begun and, indeed, as in Vodafone’s case, after the game has ended! Investors all over the world place a premium on predictability and certainty. It must be clarified in this Budget that the retrospective operation of law seeking to tax the indirect transfer and enlarge the meaning of royalty and international transaction will have only prospective operation.

The Indian tax policy requires the supply of technology and services from overseas to Indian businesses to be taxed. The rate of withholding tax on such technology payments is 25% of the gross amount, typically borne by the Indian businesses as the supplier cannot absorb such high taxes. This makes the technology acquisition costlier by over 33% of the actual price, making technology adoption difficult. On the other hand, given the lower customs duty rate, the product using that technology can be imported much cheaper. This discourages manufacturing in India.

Given the problems faced in infrastructure, special economic zones (SEZs) could provide reasonable infrastructure facilities to encourage setting up of manufacturing units. Because of imposition of taxes on SEZs and anomalous duty structure on domestic sales, it has not taken off. The current rule needs to be revised so that the duty on the domestic sale, in any case, does not exceed the duty on value addition made by the SEZs or the lowest customs duty prescribed for import of such products in any FTA. This would ensure that supply to the domestic market from the SEZ manufacturing unit is not disadvantaged compared to import.

Companies that need to invest in their Indian subsidiaries by infusing equity are also hesitant to do so after seeing the tax litigation atmosphere in the country, a prominent example being the Shell case where large adjustments were made to taxable income based on valuation adopted for infusing equity. In most countries, the differential arising out of the difference of opinion on the valuation at which a parent company invests in its own subsidiary is not treated as taxable income. Legislation to amend section 56 and eliminate taxability

Single Page Format
Ads by Google

More from Edit & Columns

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...