Fix tax targets for realisation, not on-paper accrual
As recommended by Tax Administration Reforms Commission (TARC) under Parthasarathi Shome, for taxation, the appellate functions must be housed separately from the field functions, in order to have fair and judicious orders passed. Indian Revenue should be divided into two distinct sets—the operational side and the technical/adjudication side. The quasi-judicial positioning of the tax officers is a practice that must end. The technical side, which undertakes the litigation functions, should work closely with the Tax Research Unit (TRU) and international tax organisations to stay updated on the latest trends in tax practices. Further, the tax office should be able to come up with a solution, rather than just creating tax demands and allowing the case to move through various judicial bodies in search of a resolution.
Artificially high tax targets for the field functionaries, sans rationale and realistic estimation, will end up as tax collection accruals rather than actual realisation. The collection targets should be in line with the growth projections of trade and industry, including services, and should not be fixed on the basis of paper calculations to showcase the management of fiscal deficit.
The government should engage with the taxpayers at the policy formulation and implementation stages. The government should identify and discuss the tax disputes even before they become tax cases. There should be a strong interface (comprising consultants and other experts) between industry and revenue for resolving the disputes that arise out of interpretation of statutes, wrong submissions and subsequent reversals, interest levies and penalty proceedings and the deferral of the tax collection process in the case of sick/bankrupt companies. An inclusive and constructive dialogue between the taxpayer and tax administration is very critical to create the trust and mutual understanding of tax position as well a transparent approach before the issue becomes a problem.
The dispute resolution bodies should have officers who are not involved in collection to be more effective. Other measures for a better tax regime would be an expansion of the Authority for Advance Rulings so that orders can be passed on a timely manner, including advance pricing agreements in bilateral treaties so that MNCs can opt for this route. The Mutual Agreement Procedure entered into should hasten the review process and the agreements executed to keep in check the numbers of transfer-pricing disputes.
The settlement commission is predominantly used for settling disputes on “undisclosed incomes”. It should position itself as a conciliatory office in resolving tax disputes at any point of litigation rather than just when the order is pending before the tax officer at the first level.
The General Anti-Avoidance Rules should be made stringent so that there is no scope for the taxpayer to enjoy unacceptably aggressive tax positions. When a transaction lack commercial substance and set up to enjoy the tax benefits under the domestic law, then it should be marked as “an impermissible transaction” and penalised. Uncovering this is possible only if an ‘exchange of information’ clause in all the treaties signed. The reporting requirements in the filing of tax-returns should be expanded for alignment with the BEPS under the OECD framework. We should be mindful of the fact that excessive legislation to prevent abuse should not stifle the genuine investments and cause a dampening of the investment sentiment.
Some of the important, identified routes of tax avoidance, as per the BEPS, are digitally-sourced incomes, artificial avoidance of permanent establishment status and transfer-pricing disputes relating to intangibles. India should take note of the Australian tax guidelines on intangibles when dealing with these complex transactions. A clear guidance note on certain complex tax transactions should help the taxpayer as well as tax administration. ‘Substance over form’ should be the mantra and the proper justification of the transactions—whether inbound or outbound—must be made mandatory.
A sharply-defined tax regime is also needed for the Make-in-India initiative to be effective. For this, internationally-accredited quality certification should be made compulsory and be incentivised. An economic order quantity (EOQ) approach for exports—either pooled or government-guaranteed—must be negotiated for deciding if incentives apply. A minimum floor price and value addition, too, must be mandated.
Some of the policy matters that need be consider are:
* the need for transferable, duty-free scrip/redit schemes for export of goods and services;
* the need to recognise that the 20%-MAT on SEZs was an U-turn in tax policy, and that this has to be done away with;
* 100% exemption for manufacturing of renewable energy technology and its use in other manufacturing segments.
To expand the tax base, information technology needs to be used extensively and the banking platform should be streamlined. This is the only way to bring the unorganised sector into the tax net.
A simplified uniform tax rate rather than complex multi-layer structure should be in place. The tax deduction at source (TDS) monitoring cell should act as the main source of information to make taxpayers accountable for their incomes disclosed. It is hoped that the finance minister adopts a “carrot and stick” approach in the budget to reform taxation.
The author is a tax practitioner