Diffusing tax terrorism

May 20 2014, 20:45 IST
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SummaryThe new government needs to first find ways to break away from the past

Read the portion on taxation in the BJP’s election manifesto for 2014 Lok Sabha polls—which the party has won convincingly—and it would not be difficult to gather what the BJP-led government under Narendra Modi must do after taking charge in the next few days. It says: “UPA government has unleashed ‘tax terrorism’ and ‘uncertainty’, which not only creates anxiety amongst the business class and negatively impacts the investment climate, but also dents the image of the country. BJP realises the importance of having a Tax Policy Roadmap, so that people are aware of the future and plan accordingly.”

A word of caution here. Remember the past experience. Promising a non-adversarial and conducive tax environment is easy but implementing it is going to be difficult, especially the overhaul of dispute resolution mechanisms, which is also part of the agenda.

But before sprucing up dispute resolution mechanisms, the government needs to take steps to expeditiously resolve the issues that have vitiated the business atmosphere in the last two years. This would require a strong resolve to break away from the past, mirrored in the taxman’s high-handed approach and high-pitched adjustments to the income of the MNCs in transfer-pricing (TP) cases.

The backdrop is that of mistrust and confrontation, with a spate of TP additions remaining unabated at a total of R2,17,300 crore during FY09-14; the R20,000-crore Vodafone tax case pertaining to the 2007 acquisition of Hutchison assets in India has taken the foreign arbitration route after several twists and turns; cellphone-maker Nokia is on the verge of getting into arbitration after it was not allowed to include its Chennai plant in its $7.2 billion deal with Microsoft; and tax disputes with 200 US companies are stuck over an acceptable profit margin for settling them through the mutual agreement procedure (MAP).

The safe harbour margins are high, at 20-30%, so there are few takers, and the advance pricing agreements (APAs) can’t move at the required pace in the absence of adequate workforce.

So, the entire approach to taxation needs an overhaul. Take the TP cases. The latest orders (in FY14) have come for FY10. With the demands for the previous years already in litigation, the income-tax department officials will stick to their arguments and positions in future orders as well if there is no change in the thinking.

Why it is a prerequisite is evident from the FY14 TP orders themselves. Despite Prime Minister Manmohan Singh and finance minister

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