Start with scrapping the retrospective amendments
As the finance minister gears up to deliver his first full-year budget, the expectations of the business and investment community are high. This is tempered with an equally high level of anxiety, apprehension and nervousness. The good news is that the government is conscious of the feelings of the investors and businessmen and will, in all probability, address the anxiety in an appropriate manner.
India slipped to the 71st position— in a list of 144 countries—losing 11 places in the global competitiveness list published by the World Economic Forum (WEF) in September 2014. Among the BRICS countries, India ranked the lowest. Some of the factors behind India’s slide are tax rates, tax regulations, policy instability, bureaucratic functioning, etc. Given this backdrop, many foreign investors are circumspect about investing in India.
In the past few months, the government has identified specific sectors where substantial actions need to be taken to achieve overall growth.
There is an overall consensus that infrastructure and manufacturing need urgent attention to enable them to keep pace with some of the other sectors (e-commerce, telecom, technology). The government has made several intermediary announcements enabling these sectors. The Make-in-India initiative, aimed to boost the manufacturing sector, is one such example. Tax reforms are the nerve centre fuelling the economy.
The general expectation is that the government will relook or a revise some of the major tax policies announced in the past or are in the pipeline. Such policies include the general anti-avoidance regulations, which are to come into effect from April 1, 2015. This may lead to a deferral of the implementation of these regulations.
However, the biggest thorn is the retrospective amendment on taxation of indirect transfer. In Budget FY15, the finance minister had said that a committee would examine all pending cases which would fall within the ambit of indirect transfer. This was in the direction of reforming the provision, but it has fallen short of the expectations at large. The need to look up to the government for guidance regarding the computation of taxable income and tax arising on indirect transfer remains.
With the advent of the new Companies Act 2013, there is a need for covering tax treatment on outbound mergers (merger of an Indian company with a foreign company). There is also the need to get guidance on the tax treatment of a one-person company introduced by the new Companies Act.
It is essential to reconsider the threshold limits under several tax provisions, for example, the threshold limit for conducting tax audit, claiming exemption in respect of conversion of a company into LLP, etc. The application of this to specified domestic transfer-pricing transactions need to be refreshed as some of these limits are outdated. While the tax holiday is available under the shelter of SEZ, the income is still subject to minimum alternate tax—another ask would be about remedying this.
It is also essential to calibrate the safe harbour percentages, as well as amending the definition of software R&D by deleting reference to ‘supply of source code’ and provide more clarity on the related definitions.
In indirect tax, the present structure is fraught with multiple taxes and taxable events. The multiplicity of these taxes and their structure also leads to tax cascading. A taxpayer is required to deal with multiple authorities for a single line of business with increased compliances amidst prevailing ambiguities.
The indirect tax laws have failed to keep pace with technology, digitisation and the ever-changing economic and business environment. A typical example is India’s fledgling e-commerce industry. The present indirect tax laws, especially the state VAT laws did not anticipate e-commerce business situation or fulfilment model.
From an indirect tax perspective, the manufacturing sector has to pay excise and customs duty, VAT, service tax, local levies, etc. These multiple levies have resulted in tax-cascading and has led to significant increase in cost of production. Infrastructure is a capital-intensive industry, with significant interest of the government from a social security and employment generation perspective. The sector requires clarity in terms of indirect tax laws, easier land acquisition laws, faster approvals and reduced face-off with authorities. Today, start-ups and entrepreneurs are required to obtain multiple registration and undertake compliance which take up a lot of productive time which could instead be used for business development. The government may consider providing relief in the form of simpler tax and compliance norms and waiving off audits for the first 5 years of business.
A lot of the problems in the indirect tax ecosystem could be resolved with the introduction of GST. One of the biggest taxation reforms in India, the GST will convert the country into unified market, replacing most indirect taxes with one tax. With the 122nd Constitutional Amendment Bill being tabled in the Lok Sabha in December 2014, it is fervently hoped by the industry that Budget 2015 will spell out some solid measures and give a roadmap to the implementation of the GST.
It is time for the government to capitalize on its success by introducing tax reforms to address some, if not all, of the above asks.
By M Lakshminarayanan
The author is partner, Deloitte Haskins and Sells LLP. Views are personal