As foreign investors in European capitals and their tax advisors read the news flash that the Indian Cabinet had decided not to pursue further litigation in the transfer-pricing cases concerning Vodafone and Shell India after the Bombay High Court decided in the companies’ favour, the common refrain last fortnight was: Has the Vodafone tax issue been really solved? Many investors mistook this decision with a repeal of the retrospective amendment in the tax laws introducing taxation of indirect transfers in India, a move that shook investor confidence in 2012.
When clarified that the taxation of indirect transfer of shares continues to remain unclear and unresolved, investor disappointment was evident.
On February 28, the finance minister has another chance to resolve several of the controversies that have dampened capital flows in India.
Three key announcements will be watched by investors, both domestic and international, with keen interest. First, will India remedy the wrongs of the past by bringing progressive changes to the transfer-pricing laws as promised in the Finance Bill, 2014, articulating the principles for taxation of indirect transfers, defer the introduction of GAAR and enable the workability of Real Estate Investment Trusts and their equivalents for infrastructure trusts? Second, will the finance minister elaborate on the tax administration reforms and introduce much-needed taxpayer services? And finally, will the finance minister ensure that there is no new experimentation with bad laws, such as the fringe benefit tax and banking cash transaction tax, which were hastily mooted and then withdrawn? Stability and clarity are the key tenets that investors seek in tax framework.
In respect of taxpayer services, there have been a few attempts in the previous decade, most of which have culminated in noble intent with little change experienced by taxpayers, both corporates and individuals. In July 2014, the finance minister stated in his first budget speech that “high level committee to interact with trade and industry on a regular basis and ascertain areas where clarity in tax laws is required”. The committee has since been set up but no discernible interaction has happened nor any outcome is known to the larger public. The recommendations of the reports of the Tax Administration Reforms Commission (TARC)—the first released May 2014—need to be acted upon. India is not alone in seeking to improve its tax payer services. For example, the US did enact a law and backed it with an institutional body, Office of the Taxpayer Advocate, to assist taxpayers in resolving problems with the Internal Revenue Services, identity areas of problems, propose changes in the administrative practices and identify potential legislative changes to mitigate problems of tax payers. The mandate is to be “voice of the taxpayer”. Importantly, this body files an annual report with the US Congress highlighting the key taxpayers issues with recommendations for resolution. In the upcoming budget, it would need to be seen whether the finance minister would announce any steps towards implementing the recommendations of TARC—for example, empowering a tax ombudsman, educating tax officers on complex tax matters, facilitating regular consultations between the tax administration and stakeholders and moving on merit-based tax assessments, etc.
Insofar as tax experimentation is concerned, new ideas are emerging from the recent advancements made in the world of international taxation led by OECDs Action Plans on Base Erosion and Profit Shifting (BEPS) and tax transparency; curiosity lingers around whether this budget will stake steps in the direction of implementation of BEPS action plans which could demonstrate India’s support to such global tax initiatives.
Coming back to the Vodafone dispute, which is one of the over 3.5 lakh tax disputes at various forums in both direct and indirect taxes, involving nearly $100 billion, several steps would be helpful—some with immediate relief and others will mitigate future disputes. Although, alternate dispute resolution means such as Authority of Advance Ruling (AAR), Advance Pricing Agreement (APA), Settlement Commission and Mutual Agreement Procedure (MAP) under the tax treaties are currently available as dispute resolution alternatives, these have not been able to curtail litigation in an efficient and timely manner. In order to curtail transfer-pricing litigation, the government may focus on strengthening the APA programme, the introduction of realistic safe harbour provisions and certain other amendments in the transfer-pricing provisions. These measures would certainly help in speedy resolution of tax disputes, the current situation also demand a political will and resolution from the government to interfere and take immediate action on sensitive issues which have a bearing on the confidence of the investors—similar to the recent decision taken by the Cabinet of not appealing against the Bombay High Court judgment in the case of Vodafone and Shell India.
These actions on the part of government are imperative to improve India’s ranking in ‘ease of doing business’.
The prevailing slowness in translating policy announcement to practical and workable action needs to be remedied. For example, on the transfer-pricing part, changes in the budget 2014 with respect to roll-back of APA provisions, introduction of a range concept for determination of arm’s length price and allowing use of multiple-year data were welcomed, however the government is yet to implement such measures. The upcoming budget could focus on laying modest and implementable policies which balances the revenue considerations of containing the fiscal deficit as well as allow the investors to grow in a tax-friendly environment, but ensure implementation in a smarter and effective manner.
By Gokul Chaudhri
Assisted by Puneet Gupta, associate director, BMR & Associates LLP
The author is partner, BMR & Associates LLP
