The climate for corporate taxpayers and tax practitioners alike in India at the moment is uncertainty.
This environment was triggered in part by last January's decision in the Vodafone case when the Supreme Court held that "the said Offshore Transaction evidences participative investment and not a sham or tax avoidant preordained transaction...Indian Tax Authority had no territorial tax jurisdiction to tax the said Offshore Transaction".
The judgment had brought cheer and an "upbeat mood, thought jury system was impartial and a great decision, but only to find that the Union Budget 2012 took away the decision," with retrospective effect, said Milind Kothari of MZSK & Associates.
"Clients are becoming more cautious and attentive before entering into any transaction, because the knowledge of the tax authorities is greater than before. The tax authorities are using that knowledge to gather more revenue," says Rajesh Kapadia of GM Kapadia & Co. "The current trend is that they do not take things at face value and are more inquisitive, going into precise details to either be satisfied about a contention placed before them or countering an argument presented to them".
The emphasis for taxpayers is on concrete planning to prevent litigation. "There is not a lot of action in people who try to do something extraordinary, not too many options left on the table at the moment," said Kothari.
The present attitude is "not good for the economy and country. We are losing more competitiveness compared to China for example", said Kothari. The tax status is "driving off foreign direct investment (FDI) at this moment. We need to do something extraordinary to give confidence back and clarity for investors", he added.
The government has displayed signs that they acknowledge taxpayers' concerns and this is reflected in recent announcements that seek to ease these anxieties.
The Union Budget 2012 included the introduction of advanced pricing agreements (APA) under its transfer pricing regulations, commencing in July 2012. "The advance pricing agreements (APA) have been necessitated by the spiralling number of transfer pricing disputes between the taxpayers and the Indian tax administration," said Pallavi Dinodia of SR Dinodia. The primary focus of APAs is to provide certainty and reduce transfer pricing litigation.
"With the manifold increase in transfer pricing adjustments made by the India tax department from approximately $4 billion (R230 billion) in 2010 to about $8.9 billion in 2011, there was a huge concern on the uncertainty in doing international business," said Jeenendra Bhandari of MGB & Co.
"Under the guidelines, a tax payer can opt for both unilateral as well as bilateral APA. The APA ruling will be binding on both taxpayer and tax authorities and will be valid for five years," said Uday Ved of KPMG.
"The only drawback being that these rules cover only existing, continuing and proposed transactions but do not provide a facility of roll back for resolving existing disputes that are before appellate authorities," said Dinodia. "In my view, this is an experiment which needs to succeed. If India wants to be a preferential "Place to do business", it must change its image from a highly aggressive tax administration to a friendly tax administration which enables a compliant taxpayer to go about and do his business peacefully with least litigation and discord with the Government," she said.
Initial feelings are positive though there is hesitation about how well this may actually apply in practice. "The government would want to show some initial success to give foreigners confidence, "said Uday Ved of KPMG.
"The question is in several signed tax treaties. A number do not have provisions which talks about resolution of transfer pricing matters. So those treaties with countries missing articles may not be able to apply for bilateral APA," said Rahul Mitra of PwC.
In this environment, the general anti-avoidance rule (GAAR) and goods and services tax (GST) are looming on the horizon.
The GAAR was introduced in the Union Budget 2012 and will apply to transactions that are deemed impermissible avoidance arrangements, granting tax authorities the power to re-characterise such transactions to deny tax benefits.
"The introduction of the GAAR provisions raises a number of apprehensions for taxpayers investing into India," said Ravishankar Raghavan of Majmudar & Partners. "Subsequent to the release of the first GAAR guidelines in June 2012, the Indian Prime Minister has approved the formation of an expert committee (that is, the Shome Committee) for a pervasive dialogue with stakeholders and for better transparency.,"
The Shome Committee issued its second report on September 1 2012. "The GAAR report is meritorious, and should be positive on markets and foreign institutional investors," said Daksha Baxi of BDO Consulting. Besides efforts to restore trust and confidence, "the step is in accordance with the international best practices. The committee recognised that GAAR is a deterrent tool and not revenue raising instrument," said Vispi Patel of Vispi T Patel & Associates.
The report "has provided its recommendations on various aspects including that the GAAR provisions should not be invoked to examine the genuineness of foreign capital into India. This, coupled with the fact that, the Approving Panel of five members is proposed to be headed by a retired judge of a High Court, is an attempt to reinforce the taxpayers' confidence in the entire GAAR implementation," said Bhandari.
"Shome committee's recommendation that implementation of the GAAR be deferred by three years and an announcement to this effect should be made upfront now is a reasonable proposition. This will give adequate time both to the taxpayers and also to the revenue authorities for preparation," said Patel.
Besides the deferment, important suggestions include: "Great relief that taxpayer's right to mitigate tax is upheld, investments are grandfathered, SAAR structures exempt and Mauritius treaty safe for some time," said Baxi. Though helps to clarify, "Grandfathering of investments made before GAAR is certainly a step in the right direction but insufficient since prior 'arrangements' would not be grandfathered," said Sudhir Nayak of Sudit K Parekh.
"The revised draft guidelines reflect a far greater balance and sensitivity in the roll out of GAAR in India. The draft guidelines bring sensibility in the principles, especially in respect of cross border flow of investment, and also provide improved checks and balances with an approving panel that can be expected to be mature and unbiased," added Gokul Chaundri from BMR Advisors – Taxand.
Another positive step is the introduction of goods and services tax (GST). Though the new law has been through numerous discussions over the years, its planned implementation date has once again been pushed back. It is possible that it could be delayed beyond 2014.
GST reforms will alleviate the hardships of multiple layers of taxation that exist now, and blend the availability of credit for taxes paid both under manufacturing and services. "GST ought to be introduced this year, failing which it may not be enacted till 2014 due to political compulsions on account of the forthcoming general elections," said Rajesh Kapadia. "Due to Constitutional provisions requiring consent of States the coalition Government may find it difficult to push this through without broad consensus of all parties".
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