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Fireside chat: Harmonising India’s laws with international standards

Kamlesh Varshney and Hitesh D Gajaria at the India Tax Forum

India’s idea of what the ideal tax system should look like does not necessarily reflect the international standards being set at the OECD, but the finance ministry believes great progress is being made.

Kamlesh Varshney, India’s joint secretary for tax policy legislation at the Ministry of Finance, said 2021 will be a very interesting time to watch how the global consensus emerges and how India’s legislation will change to harmonise with that.

Speaking to Hitesh D Gajaria, partner and head of tax at KPMG India, at ITR’s India Tax Forum, Varshney addressed taxpayer concerns about how tax officers may use the principle purpose test (PPT) in the Multilateral Instrument (MLI) that enters into force on April 1 2020, as well as how it will clash with some bilateral tax treaties and dispute resolution practices.

Hitesh D Gajaria: The Multilateral Instrument is going to be very much part of the law now. There is a concern on whether the principle purpose test will be applied carte blanche to every structure that may be in place, maybe for decades. What is your take on the general anti-abuse rule (GAAR), the PPT, the MLI, and grandfathering?

Kamlesh Varshney: We have provided grandfathering in the Mauritius and Singapore treaties, but let us try to understand what has been grandfathered. We have not grandfathered any abusive structure or any structure that fails substantial tests.

Under the Mauritius and Singapore treaties, earlier it was decided that only a resident country has the right to tax capital gain and that was a conscious decision between two countries. Now, we have sat down with Singapore, and with Mauritius, and decided we need to change this allocation; we need to also allow the source country to tax capital gains.

When that decision was taken, it was decided that we need to grandfather the investments, which have already been made before 2017. So, that was a policy decision, which was taken, and that decision had nothing to do with the principal purpose test. 

The objective of each treaty is that the benefit should be given to only the beneficial resident of that country. 

So, the grandfathering, which has been provided in the Mauritius and Singapore treaties, are only with respect to the allocation of taxing rights. The PPT, which has come in through MLI, is on a different footing altogether.

The PPT says that the principal purpose test must be satisfied. If the principal purpose test is not satisfied, then you will not get the benefit of that treaty. That means, under Section 90, we have a provision that whichever is more beneficial to you, either the tax treaty or domestic law, you can take the benefit of that particular provision. But, in order to be eligible for a treaty benefit, you first need to clear the PPT.

If you fail the PPT, that means you are not eligible for the treaty benefit and then you cannot claim that the GAAR test should be applied instead of the PPT. That is not possible – PPT without grandfathering will stand on its own foot. 

The taxpayer cannot say that because there is a general anti avoidance rule (GAAR) in our domestic law, for which there is a provision, grandfathering, an approval committee and a set procedure that needs to be followed, that that procedure should be followed.

So, my personal view is that this is not the correct interpretation, because our domestic law will not come into play when we are talking about giving a tax treaty benefit. For a tax treaty benefit, you need to clear principal purpose test first, only then can you say that you are eligible for the benefit of the treaty. 

Now, India has not decided on the PPT; all the countries have decided this in the OECD Inclusive Framework. It is a part of the MLI and it is a minimum standard, so every country has to follow this including India. We cannot be an outlier.

India cannot say that we will not follow the PPT or we will follow the PPT in a different version, where we are going to grandfather something. If grandfathering was to be done, it would have been done by all the countries in OECD Inclusive Framework – that has not been done. So, it is not right for India to provide that unilaterally. 

HG: The Mauritius and Singapore treaties and India's domestic law were in one orbit up to a point in time, while the MLI is in a completely different orbit. Now, both orbits are somewhere converging and I do only hope that they don't collide.

In order to prevent the problems at the ground level, will there be any guidance in the form of FAQs out in public or anything? Are you thinking about this, because each officer will start with the PPT for everything and deny everybody any advantage under the treaty? 

KV: Yes. The OECD has already come out with some kind of guidance on the PPT, so that is already on the table. And yes, India could also consider if this [the PPT] is being used excessively in situations that do not warrant invocation of the PPT, then, yes, we need to provide guidance to the officers. 

This is also related to dispute resolution that we need to think about in our domestic tax cases. The OECD is discussing dispute resolution, which is kind of a mediation or conciliation panel, not arbitration. I think, once we get through to a large number of cases through the Vivad se Vishwas scheme, we will take care of the disputes that are already pending.

Probably after that, I do believe that government would think about the next step of how to stop disputes from arising and what mechanisms should be put in place. This is just one issue. There could be many, many other issues where disputes can arise that are prevented at the initial stage. 

HG: My only appeal is that the government should not wait until they get more experience of all these cases to be piled up before starting FAQs. The FAQs should be published upfront, guiding officers to make sure that they take a very rational view in these matters. So, coming to dispute resolution, would you like to say a few words on Vivad se Vishwas

KV: I think this is a golden opportunity. We need to properly evaluate our opportunity cost of how much investments taxpayers have to make when disputes arise, such as listening to advocates, putting resources into that particular tax dispute, and then attending proceedings in the various courts, and paying advocate fees for that purpose.

All that cost when we are not sure whether we are going to get decision in our favour or not. In addition, the time and the queue is so long in the high courts and Supreme Court, we know that it will take many years for a particular dispute to be settled. 

So, this is a golden opportunity and a lot of concerns have been addressed through government amendments. For any further concerns, send it to us as we are examining them and will try to cover them under FAQs. 

Taxpayers will need to examine the vivad se vishwas bill properly and do the cost benefit analysis of litigation. If those litigations are settled with the income tax department under the vivad se vishwas scheme, our guess is that most taxpayers would tend to gain.

Therefore, we do expect a very good response if there are any concerns. We hope that once those FAQs are out, then all the concerns will be addressed. 

HG: On tax administration and faceless e-assessments, what do you believe will be the experience of taxpayers? There is currently mixed feelings because people are encouraged by the fact that they don't have to interact with the tax officials, but, especially corporates, are a little apprehensive as to how their positions will be fully explained in a faceless manner. 

KV: Just to clarify, that it is not exactly completely faceless in the sense that you will not be able to explain your position verbally, because, whenever a notice is issued, there will be a video conference. So, you can have a conversation through a video conference, where you can explain a particular point That facility is available because we do appreciate that sometimes, instead of a written note, you also need to explain it verbally to the officer.

The larger aim of this exercise is that we need to remove that human interface between the taxpayer and the tax department because we have seen that when we remove that human interface, through e-filing and the issuance of refunds, a lot of grievances on refunds were addressed and a lot of rent-seeking behaviours in the refund area were also curtailed.

If our experience of e-filings and e-refunds can be transferred to e-assessments and e-appeals, then we hope to curtail rent-seeking behaviours, which would mean more transparency and uniformity, because one officer is going to handle a particular issue, regardless of whether that particular issue arises in Delhi, Mumbai or Kolkata.

Uniform decisions can be taken so that each taxpayer is not subjected to different interpretations of taxation law, so that uniformity will also be there, and we do hope it will also reduce disputes, and probably will release our resources to be employed for better taxpayer services. 

HG: We have the authority for advance rulings (AAR) now, but the name itself has become a misnomer. There is so much pendency that there is hardly anything we can get in advance of a transaction. So any thoughts on what can be done to strengthen that mechanism? 

KV: When the AAR was conceived, we had a Supreme Court Judge, because it was conceived that this is going to be the final decision. 

But then, writs were filed in Supreme Court. Then in a case, the Supreme Court said ‘no, you have to go through High Court’. 

Now, if the AAR orders are passing through high courts, these Supreme Court judges or high court judges are not that willing to join the AAR and, therefore, a lot of vacancies are being created. I think that that is a major concern. If we do get proper staffing, and continuous staffing, in the AAR, we probably can have a very good disposal. But, yes, that is an issue which needs to be considered. 

Kamlesh Varshney also spoke about the impact of the BEPS project on Indian tax revenues and the key areas of Indian tax policy affecting MNEs.

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