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ANALYSIS: India’s movement towards a non-adversarial tax regime

It is well-documented that the Indian Government has been making efforts to promote a non-adversarial tax regime in India, but are taxpayers feeling a knock-on impact already?

The emphasis on promoting as non-adversarial environment is in line with the commitment of the Narendra Modi-led government to have a stable, predictable and certain tax regime in India both for foreign investors and Indian residents.

During the government’s first 18 months in power, there have been several positive moments in terms of tax policy decisions, such as accepting certain tax rulings, which demonstrate the thought process of the new government to do away with controversial and unnecessary tax litigations. This is a positive indication of promoting a stable and non-controversial tax environment in the country. Having said that, there are certain tax aspects which remain unaddressed and which are painful for taxpayers. The authors hope that the government will deal with them for a resolution.

The first move

Finance Minister Arun Jaitley’s first Budget was presented in July 2014, with expectations riding high that the government would seek to bring clarity in tax laws and improve its economic environment.

The first Budget provided both resident and non-resident companies cause for cheer, though there were, of course, certain aspects which were not addressed, perhaps due to time constraints. Some of the important changes brought about in the first Budget were:

·         Establishing additional benches of the Authority for Advance Rulings (AAR) in some major cities other than New Delhi in order to expedite the process of obtaining clarity in tax matters for foreign investors.

·         Bringing clarity to the taxation of income of foreign portfolio investors (FPI) to the effect that gains arising from share sale transactions would be regarded as ‘capital gains income’ and not ‘business income’.

·         Introducing additional provisions into India’s transfer pricing legislation, such as the ‘range’ concept for determination of the arm’s-length price, roll back provisions for advance pricing agreements (APAs), among others.

Change in approach

There is a huge backlog of pending tax litigation at different levels. Urgent action on the part of the government and judiciary will be required to clear this backlog.

Vodafone is part of this backlog. The telecoms company has been embroiled in controversies since it set foot in India, sparking the ‘tax on indirect transfer’ debate. This controversy still prevails, with Vodafone having sent an arbitration notice to the Indian Government.

Another controversy involving Vodafone related to the issuance of shares at a premium by the Indian company to its offshore parent. The Indian tax authorities alleged that the shortfall in premium charged by the Indian company to the foreign parent company should be treated as a ‘loan’ given by the Indian company to the foreign parent and ‘notional interest’ on the same would be chargeable to tax in the hands of the Indian company. However, the Bombay High Court rejected this contention and granted relief to the Indian company, ruling that such transactions should not be covered within the ambit of transfer pricing regulations as they do not give rise to any ‘income’. The government then issued a press release accepting the ruling and stating that this would be applied in other, similar cases pending at various levels. This was a welcome move which went a long way in resurrecting the confidence of foreign investors in the Indian judiciary and legislative systems.

Directives to field officers for a fair and reasonable treatment to taxpayers

The government has also issued clear-cut guidelines to field officers of the Tax Department to standardise their approach, stress the need for a non-adversarial tax regime and also for assistance in administration of tax laws. Some of the important points covered in such instructions relate to the following issues:

·         The selection of cases for scrutiny (tax audit) and review of scrutiny assessment orders;

·         The process relating to grant of tax refunds;

·         The process relating to recovery of tax demands, stay of disputed tax demands and granting of instalments; and

·         The process for review of appeals to the High Court and the Supreme Court.

These issues are all very relevant and important from the perspective of providing a non-adversarial tax regime since the conduct of officers of the tax department is the key aspect which leads to clarity in administration of tax laws.

Compliance window pre-Black Money Act

With a view to granting an opportunity of coming clean by declaring their undisclosed foreign assets, the government provided a one-time compliance window to taxpayers before the enforcement of the Black Money Act, which was introduced in India on July 1 2015. Taxpayers wishing to partake in the amnesty were required to file a declaration, followed by payment of prescribed tax and penalty in order to regularise their foreign assets.

This exercise reflects the fact that the government’s intention is not to penalise taxpayers or cause hardship to them. One would also hope that the government would employ a similar policy and refrain from introducing retrospective laws that could lead to unintended tax consequences in the future.

Committee to suggest ways to address tax litigation under domestic tax laws

The Government has recently constituted an expert committee under the chairmanship of a retired judge of the High Court for examining the current provisions of the Indian tax laws and suggesting simplifying modifications. The chairman, a prominent legal mind, is supported by various experts including tax professionals, lawyers, and tax officers. The establishment of this committee is a big positive, and a further manifestation of the government’s agenda to promote a non-adversarial tax regime in India.

The other terms of reference for this committee include making suggestions to bring predictability and certainty in tax laws without substantially impacting the tax base and revenue collection of the nation.

Another important task that has been handed over to this committee is to study and identify the provisions which are impacting the ease of doing business in India. This would be of particular interest to Indian and international business houses that are looking to expand their base in India. The committee is expected to provide its first set of recommendations by January 31 2016.

Hits and misses

A fair amount of effort seems to have been made by the government to address unnecessary tax litigation in India. While there have been some ‘hits’ and some ‘misses’, the thrust of the government is clearly to move towards a non-adversarial and more stable and predictable tax environment. The fact that the government has set up an expert committee to identify and deal with controversial tax provisions and identify other such aspects of tax laws with a view to simplify them (and therefore reduce tax litigation) is a clear step in that direction, while the decision of the government to accept the Vodafone transfer pricing ruling of October 2014 delivered by the Bombay High Court further demonstrates this.

Of course, there is more room for the government to make tax rules and tax administration at the ground level simpler and pain-free. For instance, when a disputed tax assessment is made and, consequently, disputed tax demands are raised, taxpayers find it very difficult to get a fair deal when they make an application to the tax authorities for stay of such disputed demands till their first appeal is adjudicated by the higher forum (that is, the Commissioner of Income-tax (Appeals)). It has often been seen that their fair request for stay of disputed demand is dismissed without giving reasons and without even giving a chance of personal hearing to the taxpayer. The government needs to frame clear policy guidelines for field officers to be more considerate, judicious and reasonable in dealing with taxpayer applications for stay of demand based on the merits of the case.

While an announcement for the setting up of additional AAR benches was made in July 2014, such expansion is still to see the light of the day. While the law requires advance rulings to be pronounced within six months of filing the application, in reality it takes an average of two to three years to get the advance ruling. The whole purpose of setting up the AAR forum is therefore undermined.

The manner in which the one-time window for declaring undisclosed foreign assets was introduced and administered represents another missed opportunity for the government. Uncertainty on many aspects of the Black Money Act was one of the major reasons many people did not opt for the disclosure window. Although the government eventually hopes to uncover foreign assets which are still undisclosed, thanks to the new automatic exchange of information (AEoI) agreement signed by various countries, this was an opportunity to fill the government coffers with cash without the tax department or other administrative wings of the government having to toil for it.

Having taken an holistic view of the tax landscape and various positive tax steps of the Indian Government, taxpayers remain upbeat that more tax policy reforms will be made by this government as it moves forward. The entire world is looking at India as a new potential powerhouse due to its strong economic growth and status as a favourable emerging economy for foreign investments.

The government has decided to constitute high-level supervisory committees within the tax administration to safeguard taxpayers against high-pitched tax assessments. The idea behind this initiative is to see that the practice of high-pitched tax assessments, which results in heavily disputed and contentious tax demands as well as taxpayer harassment, is discouraged as a measure of fair and reasonable treatment toward the taxpayer community. The government has also decided to change the way ‘performance appraisal’ is conducted for field officers. They will now be judged on the quality of their work (tax assessment orders in accordance with law) and not merely on the size of the (disputed) tax demand raised by them.

This article was prepared by Sanjay Sanghvi and Surajkumar Shetty of Khaitan & Co.

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