Rationalising the schemes meant to cut down tax litigation and creating a climate where officers do not have to take defensive decisions would go a long way in giving certainty and confidence to foreign investors, said experts who look forward to a new approach in tax administration under the BJP-led NDA government.
Resolving pending tax disputes relating to the offshore sale of Indian assets such as the Rs 20,000 crore dispute with Vodafone are among the many issues foreign investors would eagerly track when the new government takes charge.
It is not impossible for the NDA, with an absolute majority in Parliament, to drop the retrospective application of the changes made to the Income Tax law in 2012 to tax such deals.
On the other hand, many steps that would have great impact on the business environment and investor interest could be implemented easily, especially those that discourage frivolous tax demands that get struck down at the tribunal stage itself.
One immediate measure that many businesses ask for is a more liberal safe harbour scheme, introduced to give associates of multinational companies in India conditional exemption from transfer pricing audit.
The scheme drew lukewarm response as the minimum operational profit margins taxpayers have to report to avoid audits were seen as too high. That has forced the IT and IT-enabled services to queue up for another scheme called the advance pricing agreement (APA), increasing the workload of the foreign tax (FT) division that is racing against time to conclude all APAs within reasonable time.
Sources said that nearly 40% of APA requests are filed by the IT and ITeS companies. If the safe harbour scheme — a presumptive tax scheme –is made more attractive, IT and ITeS businesses would not seek individual APAs with the tax department that is mainly meant for complex cross-border transactions.
The FT division urgently needs more manpower to decide on nearly 370 APA applications received in two years. Out of these, five have been decided in the first year itself, which experts consider as a world record.
The government also needs to change the way it selects cases for transfer pricing audits. At the moment every cross-border deal above Rs 15 crore between associated companies is compulsorily audited. Businesses say selection of transfer pricing audits need to be risk based.
The tax department's claims of under reporting of income by MNC units—called transfer pricing adjustments—has been growing steadily over the years.
As such adjustments crossed Rs 10,908 in 2009-10, the foreign direct investments (FDI) into India too started faltering, although it may have been impacted by the global economic crisis. The FDI inflow is still off from the $ 41.8billion it scaled in 2008-09.
Avoiding frivolous tax claims is another change businesses expect from the new government.
According to a Deloitte survey of 781 cases decided by the Income Tax Apellate Tribunal, only in 15% cases, the taxman's demand has totally been upheld. In about 47%, tribunal decisions favoured tax payers, while many others were sent back to the authorities for fresh adjudication. This has given rise to a regime of uncertainty causing multinational enterprises, both foreign and Indian, to rethink their growth plan for India, said SP Singh, senior director, Deloitte Haskins & Sells.
“Time has come to make substantial changes in legislation and enforcement of transfer pricing rules, as minor changes will not provide sufficient respite. A systematic reform is needed,” Singh said.
Sources said that in many cases, officials go ahead with making a tax claim just because his predecessor had done so. Tendency to err in favour of the government in view of obligation to meet tax targets leads to a situation where the official is unable to uphold the law without worrying about its implications for the exchequer or for the tax payer.
According to Central Board of Direct Taxes, the total tax arrears or disputed tax demands is as high as Rs 4.82 lakh crore, most of which (97%) is difficult to recover for a host of reasons ranging from sickness of the corporate taxpayer to difficulty in tracing the assessee.
The BJP manifesto makes references to the need to deal with "tax terrorism". “One does expect some quick steps to address concerns on this front, particularly for international investors, who have been particularly badly impacted by a very aggressive approach, and equally aggressive interpretations,” Ketan Dalal, joint tax leader, PwC India. Building consensus with states for introducing the proposed Goods and Service Tax is another priority for the new government.
According to Rahul Garg, direct tax leader, PwC India, the new government may accord priority to addressing legislations that are seen as bottleneck to investment. The Budget for 2014-15 may include a clear road map on tax policy, especially GST, he said.