Much has been and would be written about the impact of demonetisation and GST on the economy, on the need for stimulus and for a popular Budget. At the same time, we have to identify what are the pain points in the tax regime from the perspective of ease of doing business and what measures can be taken and which all can be avoided.
What’s to be avoided?
Inadequate revenue collection led to the abolishment of the Estate Duty in 1986, and a similar move was also taken with the Wealth Tax a couple of years ago. Recently, a surcharge was introduced on the super-rich and a tax is levied on shareholders also for higher dividends. Against this background, the idea of a possible reintroduction of the Estate Duty seems bad and would be like killing the hen that lays golden eggs, as it would reduce the capital available to future entrepreneurs which could create jobs and growth.
The idea of a new direct tax law is also bad at this stage. Already, corporates and professionals have yet to settle with some of the major reforms recently undertaken, including the ICDS, IndAS, Companies Act 2013, GAAR, Principal Purpose Test (PPT) and GST. Any introduction of a new direct taxes law would further increase uncertainty.
With the implementation of OECD/G20 BEPS (Base Erosion and Profit Shifting) recommendations, the wind is blowing in a different direction for treaty shopping and other evasion devices. PPT would become operational in Indian tax treaties in due course. It is imperative that tax officers do not have the discretion to invoke PPT and the process for invoking GAAR provisions is made applicable to PPT as well.
The approach of public consultation is very useful as it enables stakeholders to react to the new proposals. The latest are the draft rules for Country-by-Country Reporting filing, which prescribe March 31, 2018, as the due date for a March 2017 filing. Insertion of Section 94B came as a surprise as interest payments were not perceived as a BEPS concern, while the Equalisation Levy, which is said to be an interim measure, does not respect treaty obligations as required by the BEPS report. Hopefully, the next Finance Bill will not have any surprises related to BEPS measure.
The 2015 Budget speech proposed reduction of the corporate tax rate to 25% over a four-year period. Currently, only the new companies (set up after March 2016) and small companies (turnover less than `50 crore) are taxed at 25%.
Consolidation has started in the insurance sector. The rule for taxation of life insurance companies is outdated as the regulatory regime has completely changed after IRDAI came into existence. This is required to be updated to avoid litigation. Tax deduction for premiums paid by individuals for certain non-life policies would increase insurance penetration and help the industry.
Attempts are being made to identify the manner of recovering taxes from foreign portfolio investors after GAAR provisions are invoked. To provide certainty, what is essential is that more examples are given explaining when GAAR will and will not be invoked.
The demonetisation story appears to be far from over, as new skeletons tumble out. As per reports, certain companies opened accounts in hundreds or even thousands for depositing and withdrawing cash. This will keep tax authorities busy for quite some time.
If provisions curtailing layers of companies can be inserted, so can the concept of group taxation. This could bring in more efficiencies.
The International Financial Services Centre
Discussions about the second IFSC in Mumbai could impact growth of the first one—the Gujarat International Finance Tec-City (GIFT City). This could send confusing signals and MNCs could delay decisions. To enable the Indian IFSC to compete with other regional IFSCs, the Indian centre must offer a comparable tax regime applicable to regional IFSCs.
Goods & services tax
GST is undoubtedly the largest reform in recent times. Any reform of this size cannot be expected to work perfectly from the first day and there are bound to be teething troubles. Last week’s announcement would provide relief to small and medium enterprises. The government is clearly in a listening mode, which is more than indicated by the authority’s stance that it is advisable to file representations rather than writ petitions.
The GST law brings in new concepts and language. The very basis of taxation is changed to ‘supply’. Resultantly, the guidance available from several age-old judicial precedents may not be relevant. The route often preferred by taxpayers is to obtain advance ruling from AAR. Under the provisions of the Income-Tax Act, the bench of AAR comprises of very senior persons—an experienced judge of a high court or the Supreme Court, persons qualified to be member of CBDT, and an additional secretary from the government. As against this, under GST, one officer from central tax and one from the state would be members of AAR. This could have an adverse impact on the quality of rulings and put more pressure on the judiciary in the form of increased writ petitions. The AAR mechanism under the GST law should be activated soon and brought on a par with the one under direct taxes and the issues need to be addressed quickly.
Effective July 1, 2017, the supplier has the obligation to comply with anti-profiteering provisions. For this purpose, the authority is yet to become operational. The absence of methods and procedures to determine compliance with anti-profiteering provisions make compliance difficult and creates uncertainties. These need to be provided soon.
Radhakishan Rawal, Partner, Deloitte Haskins & Sells. Views are personal.