Fixing I-T Act more than just implementing DTC
Given how confusing India’s tax statute is, cleaning it up has been something that is long overdue, and we are not even talking of the mess created by the retrospective taxation or the plethora of transfer-pricing cases. So, finance minister Arun Jaitley has done well to announce the setting up of a 10-member panel headed by Justice R V Easwar (retd) to rewrite the Income Tax (I-T) Act. The panel can draw upon a lot of the work done for the Direct Taxes Code (DTC) in FY09 since, once you remove most exemptions as the DTC planned, many of the complex sections in the I-T Act will go—that will also reduce the size of the tax statute considerably, apart from improving tax collection efficiency. In the case of personal income tax, the DTC recommended removing all exemptions while restructuring the slabs—income above Rs 25 lakh was to be taxed at the maximum 30% rate instead of current R10 lakh and the top rate for companies was to be 25% in place of today’s 30%. Many of these, like reducing the corporate tax rate while reducing exemptions, are already part of the finance minister’s agenda.
But rewriting the tax code is a lot more than just removing exemptions. While the panel will not be looking at existing disputes—some of them have been referred to the AP Shah panel, but not all—what it can do is to issue guidelines on how to deal with them in the future; how taxmen deal with assessees is often a bigger problem than the statute itself. The guidelines could say, for instance, that share transactions like Shell and Vodafone should not be subject to transfer-pricing; ditto for business reorganisation of the Cairn type—while these are cases that come to mind immediately, the type of cases will change from time to time. At the end of the day, it is important to recognise that a modern I-T law has to be an evolving one, so there has to be a mechanism that deals with this. Some of the best-known global names in business have been avoiding taxes in their home country by imaginative structuring —that is what the OECD’s Base Erosion and Profit Shifting (BEPS) was all about. The ideal tax code has to take this into account—how do you stop tax theft while, at the same time, not harassing assessees? This is where processes need to be put in place and rules established to guide the taxman. Advance Pricing Agreements (APAs) are an obvious way out, the recent direction to use the median rate instead of the mean rate when it comes to transfer-pricing comparisons is another good step. Similarly, with BEPS mandating that MNCs have to state their value addition in various countries, the taxman will have better information to be able to deal with transfer pricing cases. Also, as Parathasarathi Shome, former advisor to the finance minister, has suggested, it is important that every tax proposal be accompanied by a SWOT analysis—why has the tax been proposed, what does it hope to achieve and what are the benefits/problems associated with it. After even the best tax regime, there will always be tax disputes, so an important part of the statute—completely missing today—is a well-developed no-faults dispute resolution mechanism to enable quiet settlement of contentious cases.