There are a whole lot of unconventional “expectations” this year on the budget from the investor community and the public at large. The year gone by has witnessed a series of controversies and revelations on black money locked in offshore tax havens. This has impacted the economy in more ways than one as it has also upset investor sentiment and the honest taxpayer community. In this backdrop, the expectation runs high that budget announcements may contain some concrete steps in tax policy towards tracking the black money flow and improving governance.
The recent breakthrough whereby Switzerland and nine other countries agreed to share information pertaining to secret bank accounts being operated by tax evaders is a ray of hope in bringing back Indian wealth locked in offshore tax havens. At the same time, anaemic public income levels due to widescale underreporting could be raised possibly through a strong tracking system across all levels so as to bridge the gap and potentially widen the tax base going forward.
Globally, after the economic slowdown, developed countries including the US, the UK and Australia have announced a raft of amnesty and disclosure schemes designed to bolster tax revenue and widen the tax base. The history of tax legislation in India is replete with such amnesty schemes starting from 1946 to 1997, ostensibly to unearth black money. However, such schemes have not been successful in India due to low collections and their inherent limitation in bringing black money into the tax system.
Hence, this time, any schemes, policies and efforts have to be in tandem with the size of the problem and should not be short lived. The system needs to be advanced and in line with the global trends in tax, including greater cross-border information sharing between tax authorities, greater emphasis on alternative ways of resolving disputes, and the use of more carefully targeted penalty regimes.
Another area where expectations are high is the arena of tax dispute settlement. While there has been a constant effort to improvise tax dispute resolution for non-resident taxpayers by way of advance rulings and through the formation of a dispute resolution panel, a lot more needs to be done for Indian taxpayers to regain their faith in the tax system. In this regard, the Income-Tax Settlement Commission (ITSC) could be another body that can be empowered to settle more cases for domestic taxpayers than what it can do so now. A revamp of ITSC, widening the eligibility criteria, could potentially help free up tax value locked in appeals. Possible steps on this front could be:
• Eligibility criteria for approaching ITSC could be relaxed and broadened.
• Distinction between search and seizure cases and other cases as regards tax liability criteria could be eliminated.
• Distinct tax liability criteria could be laid down for businesses and professionals, with a lower threshold for professionals.
• Appeared and reopened cases could be brought within the purview of ITSC.
• Additional ITSC benches could be created.
The inconsistencies in cross-border tax positions also undermine India’s position in the investor community and need to be addressed. Uncertainty on various tax issues and the lengthy litigation process culminate in India being viewed as a difficult jurisdiction to operate from or indeed to do business with. Disputes about the application and interpretation of tax provisions are unavoidable under any jurisdiction. However, what makes the experience frustrating is where the disputes cannot be resolved expeditiously without recourse to prolonged and expensive litigation.
On cross-border tax disputes, a possible solution could be to identify areas that have been the subject of significant litigation and introduce clear provisions in law. For example, characterization of software payments, charges for satellite connectivity, and tax withholding on payments to non-resident Indians (which are not chargeable to tax) have been contentious issues over the years, and several tax tribunals and advance ruling authorities have decided such issues. The issues are still alive and disputed by the tax authorities and there is no way to achieve finality till the Supreme Court issues a ruling.
Tax incentive schemes are another area of immense uncertainty and prone to litigation. In such cases, a clear provision in law could bring to rest the controversy and prolonged litigation.
While it has become routine to witness a court decision or two that have been passed in favour of the taxpayer being overruled (at times with retrospective effect), the hope remains that the coming finance Bill will be free from such a practice.
Some proposals, such as to tax passive income parked overseas, are contained in the Direct Tax Code, which is to be ushered in only in April 2012. It remains to be seen what steps the government will take in the days to come.
The author is tax partner and national leader at policy advisory group Ernst and Young.
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