This is a blog created specially for the readers of the book Indian Economy Key Concepts. This is mostly to provide Indian Economy related news that is published in various newspapers under one umbrella. My own write ups will be posted very rarely.
Law to tax indirect transfers is not bad in itself at all
Mukesh Butani, managing partner at BMR Legal has just published a book on the knotty issue of tax disputes in India — a top concern for global investors. Here, he discusses how well tax disputes have been managed, what to watch for in an era of new domestic tax paradigms such as the impending Goods and Service Tax regime, and a global crackdown on cross-border tax arbitrage.
What’s your prognosis of the tax disputes landscape often blamed for India’s uncertain investment climate?
Tax disputes typically remind people of courts. But they arise at the lowest level where the taxpayer says ‘x’ and an officer says something different, eg, ‘y’. What you do to avoid going to the trial stage? Why does it have to be settled only by the Supreme Court? The normal process of how courts administratively lookat disputes has to change. One reason is that disputes in the post-liberalisation era are of very different from those that occurred in earlier in India’s post-Independence history. If you do a fast-forward of how disputes will occur in the future, it’s going to be even more different. For example, with the imminent GST law you need to actually rewrite the entire jurisprudence to interpret the law judicially. Cross-border tax disputes will occur because of new regimes such as Base Erosion and Profit Shifting norms, for which there are no precedents. So you have to look at disputes very differently even in the courts. We will have to look at alternative dispute resolution, tax arbitration, mutual agreement procedures. For example, how should transfer pricing disputes on questions of valuation, not law, be settled? India got negative press because of Nokia, Vodafone, Microsoft, IBM, Flipkart and Amazon, because traditional forums for resolving disputes and jurisprudence are not going to help you settle these kind of disputes. Foreign investors feel there’s no clarity, certainty or consistency.
Is it a legacy issue owing to the inability to push tax reform?
We have been responsive to legislative changes and directional tax policy changes, in the last 25 years. After granting a spate of tax holidays to spur industrial growth in the nineties, we realised they should have a full-stop somewhere. But on aspects like dispute resolution and administrative practices, we haven’t moved, else we wouldn’t have seen record disputes.
Do you sense reluctance on administrative reforms?
I think the intent is there. But it’s a gigantic ecosystem. It’s like trying to bring the economy back to growth mode. We keep having this philosophical debate about when India will touch 9-10% growth… is it practical with the internal challenges? We have just got (our hands) around inflation thanks to crude oil prices, but we still have a problem of NPAs, corporate debt and recapitalisation of banks. The government is talking of a national litigation policy and getting rid of obsolete laws. There is a move to set up dedicated tax benches. If you look back at the history of tax administration, you will not find any one government that has issued 23 notifications to address issues of ease of doing business. At the highest political level, you have the PM who says India has changed, is being reformed with a red carpet, not red tape — that is empowerment at a macro level. The message takes time to percolate down which is not easy, because you are dealing with-red tape there.
Former Finance Minister P. Chidambaram recently said he would have scrapped the retrospective tax that has spooked foreign investors by now…
The common man became aware of retrospective tax changes only due to Vodafone. That assumed significance because here was a company that won the case and the law was changed. The manner in which it was done came up for questioning. On a standalone basis, retrospective amendment is not bad in law and some are in favour of taxpayers. I have shown a trend to demonstrate a direct correlation between past actions and FDI, and how retrospective amendments rose in 2012. There are some very expensive lessons we have learnt. Suffice for me to mention that if a law can be amended retrospectively, it can also be repealed retrospectively. But there are implications of that repeal. Take the infamous fringe benefits tax that was criticised a lot. Pranab Mukherjee, as finance minister, repealed it in two years. But he didn’t do it retrospectively as it would have meant people who were taxed had to be given refunds. But this law is different.
Is this still a headache for investors?
To be fair, in an era of BEPS and General Anti-Avoidance Rules, this law had to come. The question was: should it have been applied retrospectively? I don’t think that law to tax indirect transfers is bad per se . The debate is only on the retrospective aspect.
Many people are getting notified about the end of LPG subsidy citing income over Rs.10 lakh a year, though the Centre has said it is not using I-T records for this.
Taxpayer confidentiality is a big debate in the world. If LPG users are getting notices about ceasing subsidies as they are earning more than Rs.10 lakh, it means one department is using data collected by another. If one government agency makes use of my income tax data, it raises a question of taxpayer rights — a very big issue globally. In the western world, this will never be allowed. Part of the fundamental rights is the right to confidentiality of information, the right to a fair trial and right to be heard. Then there are moral rights like getting good infrastructure. That debate has not come up in India.