Non-tax sops better for wooing investors: Revenue Secretary Sanjay Malhotra

The government is at an advanced stage of formulating a new piece of legislation to offer investors ready approvals for all requirements and replace the special economic zones (SEZ) Act and non-tax measures remain the preferred route for promoting new investments in the country, revenue secretary Sanjay Malhotra said in an interview.

Finance minister Nirmala Sitharaman announced the Development of Enterprise and Service Hubs (DESH) Bill in February 2022. The proposed law will replace the existing one governing SEZs.

India has also given relief on ‘angel tax’ to foreign portfolio investors (FPIs) from well-regulated countries, and the same from certain jurisdictions have been excluded due to concerns of round-tripping, Malhotra said, without naming the countries.

India has excluded investments from Mauritius, Singapore, and the Netherlands while granting exemptions from a new anti-abuse provision in the income tax law dealing with foreign investments into unlisted shares. The revenue secretary also said it is in the interest of gaming companies to follow goods and services tax (GST) law as the government sees it and pay 28% tax on the full value of bets. Field officers of the tax department are also expected to go by this understanding. The government’s effort is to bring Central Goods and Services Tax Act amendments in the monsoon session of Parliament. Edited excerpts:

The GST Council has decided online gamers should be taxed at 28% on the face value of bets, but we have the Karnataka high court order favouring the industry. What should gaming platforms follow till GST law is amended? When is an amendment to GST law expected?

See, our view has always been that it is a 28% tax rate. They are paying 18% of gross gaming revenue (GGR). Some companies have gone to court and have secured a favourable order. So far, as the companies that have gone and won, it is up to them; we will, of course, fight it out in the Supreme Court, and there is a possibility that we may win. It is in their interest if they fall in line with the law, as we understand. It will be our attempt to bring in amendments to the GST law in the monsoon session.

What about those who were not party to the litigation?

We would expect that they follow the law as interpreted by us. There is a social dimension to it, as has been pointed out by some of the ministers (in the GST Council). The ministers also felt taxation of online gaming is very low compared to that in the food industry, where the tax rate is either 5%, going up to 18%. The Council has taken its view after great deliberation and in the socio-economic interest of the country.

What is your expectation as far as the field officers of the tax department are concerned about tax compliance?

The same as that of taxpayers.

We have been phasing out tax exemptions and, on the other hand, have begun to offer direct incentives for manufacturing activities. Will production-linked incentives (PLIs) remain the main instrument for attracting investments rather than tax concessions?

As far as possible, direct methods, rather than taxation, are preferred as modes of promoting any activity or any industry. Non-tax measures are always preferred.

In the discussions around the DESH Bill, some tax concessions had come up. What is the progress on this Bill?

That is under consideration. We are at an advanced stage of discussions with the ministry of commerce. Recently, there was a meeting chaired by the finance minister in this regard, and we are trying to bring out a good solution. The major attraction in the DESH Bill, however, is relating to providing an enabling environment where one can have a kind of plug-and-play facility where all clearances, whether they are environmental or others, are already taken care of so that there is ease of doing or ease of starting a business. That is one of the main attractions or selling points of the DESH Bill. Tax matters are also under discussion.

Negotiations between startup founders and investors for raising investments will be based on what the company may be worth, say, four or five years down the line, not on the present valuation. Therefore, the valuation at which investments are raised will most likely be more than their current fair market value. It is likely that startups, even genuine ones, may be hit by the angel tax, although the share premium of unlisted shares is an area of concern as far as tax evasion is concerned. Your comments?

Two things. Our effort is to allow genuine investments and, at the same time, ensure there is no money laundering, round tripping of funds, etc. A number of measures have been taken to protect the interests of genuine investors. The methods given for fair valuation take into account the prospects of growth of a company. For startups, as you are aware, when they are recipients, the recognized startups are already exempt from positions of angel tax. Similarly, for investments from certain entities, especially foreign entities, there is a carve-out. For example, government-owned companies, banks, insurance companies, and some other regulated entities in some jurisdictions. Additional five methods of valuation have also been provided to foreign entities. Overall, a good balance has been struck.

But this carve-out excludes investments from countries like Singapore, Mauritius and the Netherlands. Are we excluding jurisdictions which were prone to abuse in the past?

All well-regulated countries have been exempted. Investments from countries from where there is a high possibility of round-tripping have been excluded.

GST revenue receipts have been buoyant. Where do you expect monthly average receipts? What will the direction of reforms in GST be?

For this year, we expect an average gross GST collection of about ₹1.65 trillion monthly, in line with the projections and targets. We have to continue to make it easy for businesses to comply with tax laws while at the same time making it more difficult or impossible for tax evaders. A number of measures have been taken in this regard in the GST Council to tighten the registration process with the idea of preventing the creation of fake entities and fake invoices. We are planning to use biometric authentication for registration. We are already using data analytics and artificial intelligence to identify suspected bogus forms. Technology will play a major role in all our endeavours, including in providing greater convenience to our taxpayers. On the customs side, further reducing the dwell time of consignments in the ports for both exports and imports will be a priority. Reducing the compliance burden is also a priority.

What is the roadmap for setting up GST appellate tribunals?

Central GST law amendments have been done, and states are now making amendments to state laws. The Centre will set up the tribunals on the recommendations of the selection committee. One selection committee for the state technical member will be headed by the high court judge of that particular state, and for the other three members, there will be a committee headed by the chief justice of the Supreme Court or his nominee, and it will also have members from states.

OECD said on 12 July that 138 countries have agreed to extend by one year till the end of 2024 the implementation of the global deal on taxation covering digital economy firms if sufficient progress is made by the end of this year. What is India’s position on these negotiations?

We are negotiating for the best deal. It is a multilateral negotiation. Every country tries to negotiate and get a good deal for their own country, depending on their circumstances. The broad contours have already been decided by the declaration of October 2021. It is now the details that are being worked out. So, our effort is to get the best deal possible for the country.

The government had in June announced some relief on tax collected at source (TCS) on overseas remittances, including bringing back the ₹7 lakh threshold for TCS levy. Is a Bill to amend the Income Tax Act expected in the monsoon session of Parliament?

We will bring those amendments at the right time.