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Given that tax terrorism was one of the important poll planks for the BJP in the general elections, expectations had been rather high that the Modi government would expedite necessary corrections to India’s existing tax regime and deal with the fetters it has put on FDI.
The Union Budget FY15 had, as expected, only an interim measure as the government had just been voted to power and was coming to grips with the issues. Now, expectations are strong that the coming Budget will deal with the tax issues substantively and, hopefully, address them.
In this background, taking stock of the tax-related developments in the first 100 days of the government is in order, to see if the needle points to the right direction.
There are some very positive developments which were ushered in by the last Budget. With the right implementation, these could provide a significant positivity on the tax front. The two key developments are the Authority for Advance Rulings (AAR) and the Transfer Pricing (TP) changes.
The extension of the AAR benefit to domestic tax payers is a very significant move. One of the key vagaries of Indian tax regime is the uncertainty of the outcome. Enabling the tax-payer to get an advance ruling, and thus be certain about the tax implications of a transaction is a major step changing the tax regime. Now, ensuring implementation of the this is key. Multiple benches need to be constituted and appropriately staffed. More important, there is a need to adhere to the 6-month timeframe within which orders are to be passed. So far, the lone existing bench for AAR has been without a chairman for great length of time and it takes years to get an “advance” ruling!
The TP changes, too, are commendable. The roll forward of the Advance Pricing Agreements for four years and the introduction of range within which arm’s length price has to fall (as compared to the current provisions of arithmetical means) should substantially help abate litigation in this field. The Rules implementing the changes are awaited.
Coming to the misses, two key ones are: not pushing back the introduction of GAAR and not dealing with the retrospective amendment on overseas transfers. There is indeed no argument to say that GAAR should not be introduced. The issue is how to remove the subjectivity (and the attendant litigation) around it and have a constructive dialogue prior to its implementation. There is