– By Rakesh Nangia, Aravind Srivatsan, and Sumita Ramakrishnan
India with its ambition of accelerating to a $5 trillion economy and as President of G20, is expected to set the tone on several key aspects such as climate change and clearly tax tops the agenda. In this context, Budget 2023 would be keenly watched in terms of policy announcements that support the domestic industry as well as make a compelling case for foreign investors to stay invested in India.
Log jam before the courts
Successive economic surveys have pointed out high litigation and uncollected taxes when compared to demand as a point of concern. It is also noteworthy that many international taxation disputes tend to be settled in favour of taxpayers at higher forums through a significant passage of time. The year gone by witnessed frenetic activity on interpretation of tax laws before the Indian Supreme Court (‘SC’). One would recall the previous year entertained several Writs on the administration of faceless assessments.
The SC invoked its power bestowed under Article 142 of the Constitution to uphold in government’s favour that the irregularities arising from re-assessment notices issued under old law while the new law was operative, was curable and allowed under 90,000 show cause notices to survive and be tested under the tenets of the new law.
The SC also had occasion to spell out what constitutes ‘charitable purpose’ eligible for tax exemption and what activity/ies would inter-alia be treated a commercial or business income and spelt the law on ‘taxation of trusts’. The SC upheld in Northern Operating system that the GST liability would arise on secondment of expatriates to India under a certain model of deputation invoking the principle of substance over form despite India being the economic employer, leaving the question open on whether a service PE would also arise on expatriate deputations.
In an important ruling of Checkmate services, involving deduction wrt employee portion of social security contribution or Provident Fund (‘PF’), the SC inter-alia decreed that any contributions made post the due date prescribed under the PF statute would be ineligible for tax deductions despite a rule in the tax law which sought to restrict these claims on a prospective basis.
Courts to rescue, yes but sparingly
Periodic guidance on interpretation of tax law which is the norm globally would go a long way in ensuring stable positions being taken by the taxpayer and promote better compliance and avoid recourse to courts especially on matters which affect investors across the board. Having upfront guidance and participation in new laws also allows investors to factor their cost of doing business into their business plans! In an era where a minimum deposit of taxes needs to be made irrespective by the taxpayer against an assessment order, streamlining common positions on tax law within the faceless assessment scheme framework is also likely to bring down litigation.
Looking ahead
With India stepping up its global profile as a trusted partner by exporting vaccines through the pandemic and now as President of G20, India will continue to play a major role on the administration of tax laws which are globally consistent to re-assure new set of Global investors, who stand today at the doorsteps waiting to see if India can be integrated into the world’s supply chain, as the ‘preferred partner nation’.
A new regime of taxpayer engagement (Co-operation over confrontation)
The Bali declaration in July 2022 wherein India along with 15 nations committed to implement a co-operative tax compliance regime, usher a new era where tax payer services is taken to a different level with voluntary participants to such a program (to be designed), which follows an OECD template, would allow participants to have faster audits, waiver of penalties, ability to file updated tax returns and access to five star tax payer services such as timely processing of refunds.
Revival of AAR & LTU
One would expect mechanisms such as Advance ruling, APA to get a make over and re-introduction of dedicated taxpayer services for Large Taxpayers (‘LTU’) in the ensuing Budget of 2023!
Breather for MNC to get their plans ready to manufacture in India
The concession on tax rates for new manufacturing companies at fifteen percent (Section 115BAB available interalia only until March 31, 2024) is a significant admirable effort by the Govt to attract manufacturing led investments and its continuation for at least two more years will allow investors standing at the fence to come in. Spelling a road map and simplifying tax compliance which respects and rewards honest tax payers, provides upfront clarity on significant tax positions (such as interalia equalisation levy, mark ups to be reported in India, issues under SLP before SC) through timely circulars, binding advance rulings.
Last mile improvements
With technology making a sea change in tax administration, the experience of taxpayers is basis their engagement with the taxpayer portal or CPC as it is commonly called. With the Govt acknowledging the feedback of taxpayers that the CPC poses significant challenges and the operation of the portal and its interface with Assessing officer, posing significant challenges to a improved tax payer experience, one expects a clear mandate to revamp the present system and ensure the stated intent of permitting to taxpayers to receive faster refunds and closure of assessment proceedings.
Concluding thoughts
The policy actions over the last few years have kept up the commitment to the taxpayers by reducing the corporate tax rates to an attractive level. Corporate India has also laid out their plans to embrace the call for self reliance and have contributed to record direct tax collections. If progress can be made on simplification of compliance, reduction in litigation through periodic guidance and embracing global best practices on taxpayer engagement, the long term growth in tax collections and investments into India is Given.
(Rakesh Nangia is the Chairman & Aravind Srivatsan is the Tax Leader at Nangia Andersen LLP; and Sumita Ramakrishnan is the Associate Director at Nangia Andersen LLP)