Central Board of Direct Taxes (CBDT) chairperson Rani Singh Nair discusses the tax department’s efforts to become more efficient in curbing evasion, fraud and treaty abuses, while being more sensitive to the genuine concerns of the taxpayers, in an interview with KG Narendranath and Siddhartha P Saikia. She explains how information flows among various jurisdictions have become much more spontaneous and why no country wants to be an outlier in the global movement towards greater transparency. The official further explains how a large (and growing) repository of data has come in handy for the tax officials to nail evaders rather easily. “We want to make tax laws which are clear, easy to implement and give certainty to the taxpayers,” she says. Excerpts:

Apart from conventional mechanisms for dispute resolution — the AAR, DRP, Settlement Commission — newer means like Advance Pricing Agreements (APAs) and Mutual Agreement Procedure (MAP) are now being used to avoid/settle tax disputes. But many MNCs that have received hefty tax notices seem to opt for international arbitration.

The Income Tax Act provides for a dispute resolution scheme, which over the years has generally been very fair to the taxpayers; if there is under-payment, you pay whatever addition (with interest) made by the department up to the point of assessment and then no question of (further) interest, prosecution or penalty. In the interest of reducing litigation, we have of late enhanced the threshold for filling second appeals. Last year, we withdrew a large number of appeals: some 7,000 from the Income Tax Appellate Tribunal and 4,000 from various High Courts.

The mechanism of mutual agreement procure (MAP) is also yielding good results (several US-based companies have signed for MAP and the India-US Double Taxation Avoidance Convention). Japanese firms too (have signed recently). MAP allows for amicable resolution of issues across the table, with the tax authorities of both countries participating. It can go a long way in addressing the issue of double taxation and finding a common ground between the tax authorities and taxpayers on the import of treaty provisions.

Besides, 78 Advance Pricing Agreements (APAs) have already been signed (these agreements set the price for cross-border related party transactions in advance and let, for instance, MNCs avoid audit/questioning on deals with overseas parents for 5 years). Bilateral APAs (which allows the tax authorities abroad to accept the taxes paid in India as business expenditure) too are gathering momentum and will help in avoiding double taxation. Given all these and the department’s readiness to be sensitive to business realities and address genuine concerns of the taxpayers, arbitration, I think, ought to be the last option. It (arbitration) may not be required. Having said that, if a taxpayer wants to arbitrate, how can we prevent her?

In the Vodafone case, has the company reacted to your offer (to scrap interest and penalty)?

We have given an offer of dispute resolution scheme to them. Any case can come to us and we will try our best to resolve the issues. One cannot talk in public about specific cases.

Have the high-profile transfer pricing disputes like the ones with IBM and Microsoft come to the MAP table?

I can’t comment on specific cases, but we’re generally happy with the (MAP) progress.

The MAP provisions in India’s tax treaties with the UK and US allow suspension of collection of taxes till the procedure is completed. Do you plan to extend this facility to treaties with other countries as well?

The relevant treaties with four countries, including the US, UK and Sweden, allow the person concerned to defer the entire tax payment (until MAP is completed). We also do this (allowing deferral) for other countries but only on a case-to-case basis.

The industry had complained of aggressive TP (transfer price) audits, but you have also turned more realistic — if not lenient —in the few years. Is it not a good idea to have a (high) monetary threshold for picking up cases for transfer price scrutiny?

We’re assimilating business realities into the making of tax laws with a view to giving a sense of comfort to the stakeholders. For instance, the range concept (for arm’s length price determination) in the area of transfer pricing. (If the international transaction price is with the 35th and 65th percentile of the prepared data set, arranged in ascending order, the transaction shall be deemed to be at the arm’s length price). We have also put out the safe harbour rules and a committee going through these will hopefully bring more certainty to transfer pricing.

Our pro-active approach was evident in the removal of minimum alternate tax (MAT) on foreign companies without a permanent establishment in India, as recommended by the AP Shah panel. The issue was escalating into a dispute. We understand the industry has concerns over GAAR (which is to kick in from FY18). There’s are specific provisions for anti-abuse on which the industry wants more clarity. We have set up a committee and asked it to identify GAAR provisions that they think would infringe upon the day-to-day functioning of businesses so that we can (review) them. We want to make tax laws which are clear, easy to implement and give certainty to the taxpayers.

As regards a monetary threshold for TP scrutiny, you may appreciate that we pick up cases (including non-TP ones) for scrutiny through an algorithm which runs in the (IT) system. We also rely on third-party information. Though there is no question of a monetary limit, the effort is not to put small taxpayers (into the scrutiny basket). We pick up only 1% of cases for scrutiny, of which TP cases are a certain segment.

The last Budget put off activating the place of effective management (POEM) regime to April, 2017. The industry is still concerned about the discretionary element in tax residency tests.

We are discussing the POEM rules with the industry. We’re more than willing to address their genuine concerns.

Don’t you think the ongoing revisions of bilateral tax treaties would make many BEPS (base erosion and profit sharing) concepts meant to crack down on treaty shopping etc. redundant? The principal purpose test (as in UK-India treaty) and limitation of benefit (LOB) clause in some 40 Indian bilateral treaties including the one with the US would address issues of treaty abuse.

BEPS strategy, compliant with the OECD, consists of 15 action points and these pertain to several tax practices and domestic taxation, in addition to double taxation avoidance agreements. India was at the forefront of the BEPS initiative. We are not abandoning BEPS; but it’s a fact that the tax laws are being (autonomously) aligned to these noble concepts. Treaties are also meant for better tax compliance. We are formulating stronger anti-abuse provisions and bringing more transparency in exchange of information. The idea is that when there’s is global network (of tax policies), the taxpayer will have fewer options to take unfair advantage of differences across jurisdictions. And this is a global thinking. Treaties are negotiated bilaterally depending on the concerns of the respective countries.

Are you also bringing out the controlled foreign corporation (CFC) rules designed to prevent (untenable) shifting of income across national boundaries and long-term tax deferrals?

This is again one of the issues which has come up. To a certain extent, the POEM rules are part of the same idea. You cannot have shell companies abroad, which are siphoning off funds and escape paying taxes in the home jurisdiction. On the concepts of CFC and thin capitalisation, the work is going on (in the department). We have to think through them and see how they can be implemented.

Gross direct tax collections grew about 30% in June quarter but net (post-refund) collections rose more steeply (49%). Have you slowed down on refunds after the acceleration in the last couple of years?

With our central processing centre in Bangalore, refunds are automated. In the first 60 days of the current fiscal, the refunds processed were 91.2% (of requests) compared with 90.4% in the same period last year. And the number of refunds issued increased by 42% in the 60-days period year-on-year. The reason behind (higher net collection growth) could be that when the backlog got cleared earlier, most bigger refunds were released. Now, the refunds may be of relatively smaller amounts but numbers have only risen. We have removed a lot of backlog.

You set up large taxpayer units (LTUs) but the industry’s response has been rather lukewarm.

It is voluntary (for anyone to join LTU). This is a facility to pay all taxes – direct and indirect – in one place. an be done in the same place. It did not take off as much as we thought. One reason, I think, is that laws (for excise and income tax) are different. Yet, we have 45 large firms registered with Mumbai LTU, 31 with Delhi, 57 with Kolkata , 46 with Chennai 46 and 7 with the Bengaluru unit.

Have you any estimate of the incremental growth in direct tax revenue from the pay hike for government staff?

We had not factored this in the Budget. Usually, taxes would be 15-20% of the payout.

Only 1% of the tax filings are now scrutinised. Do you plan to raise this limit?

When computerised systems are in place, the tax administration has greater responsibility and facility to see that no evasion takes place. We have to ensure that frauds are not committed, whether in declaring of income, filing of returns or claiming of refunds. This is possible only with due diligence. One option of course is (taking up more cases for) scrutiny. We are striving towards an efficient system where the process of scrutiny is finished in six months (after filing of returns) and the case is disposed of in another six months.