On September 25 2014, Prime Minister Narendra Modi kicked off the 'Make in India' campaign in the presence of a large number of business leaders, promising a transparent and secure environment to do business in the country. The campaign is a part of his strategy to boost manufacturing in India, and thereby create more jobs and increase the country's growth trajectory.
Clearly tax policy will play an important role if we want to attract big-ticket investments through this campaign. After the not-so-happy experience of several large taxpayers with the tax administration in the past few years and highlighting of the issue in several fora time and again, the new government responded by announcing a number of positive measures (for example, the use of a range to calculate arm's-length pricing under transfer pricing (TP) provisions instead of arithmetic mean) in its first Budget. However, more steps need to be taken quickly to boost the confidence of investors by showcasing a stable tax regime.
- We need to simplify laws and remove unnecessary regulations to bring down the cost of compliance. For example, introduction of rational safe harbour norms under TP regulations for the manufacturing sector with dispensation for maintaining documentation can bring significant relief to the taxpayers. Similarly we can scrap the domestic TP regulations to facilitate ease of doing business.
- As originally envisaged in the Direct Taxes Code Bill 2009, India needs to gradually reduce the corporate tax rate to 25% from the present level of 30% (excluding surcharge). This will make the manufacturing sector competitive vis-a-vis other countries in Asia.
- The concept of special economic zones (SEZs) was introduced in 2005 to promote export of products made in India through various concessions under direct as well as indirect tax laws. Though a tax holiday for units in the SEZ is still available, the subsequent introduction of minimum alternate tax (MAT) on book profits and dividend distribution tax (DDT) on income distributed as dividends led to a virtual paralysis of the scheme. We can revive manufacturing in SEZs by eliminating MAT/DDT altogether or by imposing a token levy.
- Often the taxpayers in India have to deal with conflicting views of tribunals or courts on a variety of topics. This leads to endless litigations (with consequent impact on costs) which can easily be avoided if the Central Board of Direct Taxes (CBDT) or the Central Board of Excise & Customs (CBEC) intervenes and issues circulars or clarifications to bring finality on interpretations.
- In August 2013, the previous government set up a Tax Administration Reform Commission (TARC) under the chairmanship of Parthasarathi Shome to study Indian tax administration operations and identify key areas of improvement. The committee presented its first report to the new finance minister earlier this year. The recommendations of the TARC include enhancing "customer focus", lowering compliance costs and strengthening dispute resolution processes. Implementation of TARC's recommendations in a time-bound manner will go a long way in not only reforming the tax administration but making taxpayers' lives much easier.
- The government must defer the general anti-avoidance rules (GAAR), due to kick in from April 1 2015, by at least three years. Ideally GAAR should be introduced only after the tax administration reforms are complete.
- One of the most significant reforms for which the entire business and investor community has been keenly waiting since 2010 is the implementation of goods and services tax (GST). As GST will subsume most of the indirect taxes at the central (excise duty, service tax) and state (VAT, stamp duty) level, it will also improve the ease of doing business considerably by bringing down the incidence of multiple taxes. The government has set a target of 2016 to launch GST, and this time we must make it happen.
Given the positive vibes generated by the 'Make in India' campaign so far, we must seize the moment and use our tax policies to encourage investments into the manufacturing sector. Hopefully the finance minister will address some of the above issues while presenting his second Budget on February 28 2015.
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