BackBudget 2016-17: Tax tweaks to improve ease of doing business
Jaitley introduces a number of steps across direct and indirect taxes to reduce disputes, clarify laws and free up money locked in litigation
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New Delhi: The Union budget on Monday sought to reform the country’s taxation system and thereby improve the ease of doing business.
Finance minister Arun Jaitley introduced several steps across direct and indirect taxes to reduce disputes, clarify existing laws and free up money locked in litigation. He offered a way out to end tax disputes arising from retrospective taxation of capital gains, presented the road map for phasing out corporate tax exemptions, announced a slew of measures to reduce tax disputes (especially in areas such as transfer pricing and indirect taxes), and deferred implementation of POEM (place of effective management) rules by another year.
Significantly, the government offered a one-time settlement of pending tax disputes relating to retrospective amendments to tax laws. Companies embroiled in tax disputes will be able to pay tax arrears and get a waiver of interest and penalty provided they withdraw all appeals against the government in all judicial forums, including international arbitration under bilateral investment protection agreements.
This means companies like Vodafone Group Plc. and Cairn Energy Plc. will have the option of pursuing their disputes or go for a settlement.
Vodafone did not seem very enthused with the announcement. “We will of course study the detail of what the finance minister has proposed today, while continuing to seek resolution of this matter through international arbitration. Vodafone has always maintained that there was no tax to pay at the time it completed its acquisition of Hutchison’s business in 2007," the company said.
Jaitley also said the high-level committee announced in the July 2014 budget to look into such cases will now be headed by the revenue secretary and have the Central Board of Direct Taxes chairperson and an outside expert as members. He reiterated the government’s commitment to provide a stable and friendly tax regime to investors.
The matter recently surfaced after the tax department warned Vodafone of a seizure of its assets if tax was not paid. The tax department and Vodafone have been locked in a dispute since 2007 over the telecom company’s $11 billion acquisition of Hutchison Essar Ltd, now known as Vodafone India Ltd. The tax demand, which was initially around ₹ 8,000 crore, has now more than doubled to ₹ 20,000 crore after adding interest and penalty.
Though the Supreme Court ruled in favour of Vodafone in the tax case, the government in 2012 brought in a retrospective amendment to tax laws, bringing such transactions under the tax net. This prompted Vodafone to launch international arbitration proceedings.
The Cairn tax demand is on account of the alleged capital gains arising from the 2007 deal in the hands of Cairn UK Holdings, the erstwhile parent of Cairn India Ltd. Cairn India, too, has been served a tax notice, a dispute over which is pending in the Delhi high court. The ₹ 20,494 crore tax demand comprises ₹ 10,247 crore of principal tax and an identical amount as interest. Cairn Energy has also initiated arbitration under the India-UK bilateral investment protection agreement.
Jaitley also began the process of phasing out corporate tax exemptions but restricted the marginal reduction in corporate tax rates to small companies for now.
He said benefits of phasing out corporate tax exemptions will be available to the government only gradually, thereby justifying not lowering the tax rates for big companies this year.
Jaitley lowered the corporate tax rate for companies with a turnover of ₹ 5 crore or less to 29% plus surcharge and cess from 30% plus surcharge and cess. He also announced a corporate tax rate of 25% for all new manufacturing companies incorporated from 1 April, provided they do not claim any exemptions.
The exemptions to be phased out over the next few years include accelerated depreciation, benefits available to special economic zones, research expenditure and investment-linked deductions.
To reduce the ₹ 5.5 trillion locked in tax disputes, the finance minister also announced a new dispute resolution scheme for direct and indirect taxes wherein a taxpayer can settle the case pending before commissioner (appeals) by paying tax and interest while getting a waiver on the penalty (in disputes involving amounts up to ₹ 10 lakh) and 25% of penalty (in disputes involving a penalty more than ₹ 10 lakh).
The budget announced introduction of 11 new tax tribunal benches for indirect taxes and steps to reduce transfer pricing litigation. It also moved to implement the recommendations of the R.V. Easwar committee to simplify income-tax laws including rationalization of tax deducted at source provisions.
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