The tax changes proposed are likely to curtail litigation, encourage investment
The taxation proposals of the finance minister were keenly awaited. But will there be grandstanding with an attempted rewriting of the tax laws or will the proposals be all about minor tweaks? Is the focus on change and if so will that be reflected by defined sectors rewarded with tax holidays and the like or would it seek to undo the several wrongs of the past?
Well, the speech and the accompanying text has made several dimensions clear, most of which reflected a keen desire to deliver a pragmatic and forward-looking agenda for tax, both direct and indirect tax laws. First, the focus on the big reform—GST has been set an ambition time-line of April 2016 and an increase in service tax to 14% to scale up for convergence to GST. Aligned to European experience, recognise that corporate tax rates need to be lowered to attract capital and investment, and hence an accompanying scale down of corporate tax rate to 25% over the coming four years.
Coming to the next theme, it is important to get investors to invest and hence bury all the stuff that causes investors to fret and fear the adversarial tax environment. This includes the troublesome GAAR which has been the subject matter of endless debate and working committees since 2009. Honestly, other than attempting to do a treaty override, and that too focused on a singular tax treaty with Mauritius, experts doubt if GAAR had an immediate purpose or outcome. Or the recent tax notices that got served to FIIs that their capital gains were liable to minimum alternate tax (MAT). A few overzealous transfer pricing officers had also sought to tax share issuance by Indian subsidiaries to their parent entities, a move that was rightly struck down by the Bombay High Court and subsequently the Union Cabinet wisely accepted the decision and ensured the litigation ended. To nip such controversies in the bud, the Finance Bill has proposed explicitly a provision to ensure that MAT is not levied on capital gains of FIIs which have been subjected to securities transaction tax (STT). GAAR has been deferred by another two years and, when operational, it will be prospective—the finance minister has kept to his word that this government will not seek retrospective taxation. The pass through of Alternate Investment Funds and fixing the anomalies that held up the Real Estate Investment Trusts that were announced last year equally reflect the desire to have capital flows and investment vehicles for funding to be functional.
The announced demise of the much-worked-upon Direct Taxes Code (DTC) and the repeal of the near irrelevant wealth tax is a welcome move, clearly reflecting Modi’s vision of abolishing unnecessary laws and needless changes to legislations. The finance minister has sought to offset the revenue loss and perceived advantage to the rich from the abolition of the wealth tax with an increased surcharge of 2% on the super-rich (earning a taxable income of more than R1 crore). In terms of DTC, a large part of the new proposals have been incorporated in the current law, including a change in the residency test for foreign companies. As per the new rule, a foreign company having its place of effective management at any time during the year would be considered as a tax resident of India—the earliest test required the control and management to be in India, throughout the year. This provision in DTC has been viewed critically by the foreign investors and will see a similar reaction this time as well.
The indirect transfer tax regime introduced with retrospective effect by the previous government, in consequence to one of the fiercely fought tax controversy, is finally looking certain with the much-needed clarifications provided in the Budget—with 50% test prescribed for determining the substantial value, basis of valuation and the proportionate basis of taxation. However, as these amendments would take effect prospectively, the question remains—would past litigations continue or would these come to rest? The lower rate of royalty and fee for technical services for non-residents (from 25% to 10%) is a welcome move, reducing the hardship imposed on the taxpayer by the outgoing government. As a part of aligning Indian taxation with international tax practices, the Budget also clarified that the presence of fund managers in India would not lead to the constitution of its permanent establishment in India—boosting the fund managers to have their base in India. The fine-print is not as appealing as the statement held out by the finance minister. For individual taxpayers, the aam aadmi, while the tax slab remains unchanged, the finance minister has provided marginally higher deduction for health insurance premium, transportation allowance and such time tax rebates.
The minister, realising that the pending litigation in India is at an all-time high and magnified over the period of time, has made an attempt to curtail litigation—with the tax officers provided an option to not appeal before the tax tribunal on the matters pending for adjudication before the Supreme Court or the High Courts for the same taxpayer, till its final disposal. With an objective to curb black money, a new law is proposed to be introduced which would have stringent penalty and prosecution norms for perennial offenders.
What now needs to be observed is the effective implementation of government policies and initiatives on the ground to enable the ‘ease of doing business in India’.
(With inputs from Puneet Gupta, associate director, BMR & Associates)
By Gokul Chaudhri
The author is leader, Direct Tax, BMR & Associates. Views are personal