By Seema Kejriwal, Partner, BMR Legal Advocates
A clear pattern in India’s tax landscape is now hard to miss—the Supreme Court (SC) has, in several cases, overturned high court rulings that favoured taxpayers. While a SC verdict brings finality, it exposes a larger structural concern. Businesses continue to operate under laws whose scope is wide, interpretation often varies, and impact becomes clear only after years of litigation. In such an environment, long-term investment and commercial planning inevitably suffer.
At the same time, a stable tax policy cannot mean drafting laws with broad, catch-all provisions. A law that can technically apply to almost every situation but is enforced only in some creates unpredictability. Selective enforcement, whether intentional or incidental, adds a layer of arbitrariness fundamentally at odds with sound tax policy. Similarly, circulars that heavily favour the administration tend not to be used by taxpayers, yet they influence audit positions on the ground. This makes them ineffective as guidance and distortive in practice.
The experience with India’s safe harbour rules is a case in point. Introduced to calm high-pitched transfer pricing assessments, they were intended to provide a simple, low-dispute path for routine transactions. But the rigid conditions and unrealistic margins have kept most taxpayers away. Recent efforts to widen eligibility are welcome but they don’t address the core problem. If the safe harbour is misaligned with commercial reality, companies will avoid it while the revenue department may continue to treat it as a de facto floor.
On the other hand, detailed operational guidance has historically worked better. The Central Board of Direct Taxes’ (CBDT) 2013 circulars for R&D centres helped resolve long-standing confusion on how Indian captive units should be characterised. The rollout of Place of Effective Management regulations to tax passive offshore income of non-resident firms controlled from India showed similar restraint, with clear carve-outs, particularly the turnover threshold of `50 crore, preventing unnecessary scrutiny. These examples demonstrate that clarity and specificity reduce disputes without eroding the tax base.
The SC’s decision in the Tiger Global case has, however, raised a new concern—the status of CBDT circulars themselves. By holding that older circulars may no longer apply if the legal landscape has changed, it has introduced uncertainty for businesses that have long relied on such guidance. A straightforward clarification from the CBDT that a circular remains valid until explicitly withdrawn would go a long way in restoring predictability. Understandably, some circulars have outlived their importance and should be withdrawn with an explanation.
The upcoming Budget also presents an opportunity to address provisions where broad drafting creates avoidable friction. One example is India’s withholding tax mechanism for payments to non-residents. Buyers often face a heavy burden of deduction on payments to non-residents even when treaties clearly grant relief, leading to extended negotiations and transaction delays. A clear circular outlining situations where withholding is not required will meaningfully ease investment flows.
Transfer pricing is another area in need of sharper boundaries, especially in the new Income Tax Act. The concept of “control”, which underpins several definitions, remains abstract and subjective. Courts had historically linked it to concrete indicators like shareholding to avoid unnecessary disputes; but a recent SC ruling has not only created a new frontier for tax and transfer pricing disputes in India but may also create precedence for Indian brands seeking to grow global franchises.
Employee Stock Ownership Plan taxation remains an area of practical difficulty. Today, companies issue a wide range of instruments like phantom units, restricted stock units, reverse-vesting shares, etc. A CBDT circular explaining valuation and timing of taxation for each would help global firms implement consistent, compliant employee incentive plans. Most high court matters decided in favour of taxpayers are now awaiting the apex court to hear the revenue’s case, which the taxpayers would be expected to defend.
Across emerging sectors, regulation hasn’t kept pace with rapidly evolving business models. Gaps remain—for instance, unclear rules on digital lending algorithms, emerging battery-storage frameworks, tax treatment of crypto assets, and classification of platform-based digital services. Giving businesses a clear, safe pathway that protects them from penalties when genuine interpretive differences arise would go a long way in building confidence across emerging industries.
As the Economic Survey reminds us, investors do not benchmark a country against its own past; they compare it with all other available opportunities. Change in goal posts—be it by way of law, administrative practices, or reversals of lower court decisions—often rattle them. Perceptions of tax certainty, administrative fairness, and regulatory clarity matter as much as headline policy reform.
India’s tax system does not lack legal provisions. It lacks predictability and periodic guidance or its consistency. Courts can close disputes, but they cannot build the confidence needed for new investment. That responsibility rests squarely with policy. If the Budget focuses on narrowing overly broad definitions, issuing practical circulars, and removing avoidable friction points, it can create the tax environment global investors look for—fair, clear, and dependable. That is what will ultimately strengthen India’s position as a preferred investment destination.