The government has reached out one step beyond industry expectations and the clarification on the transfer residency certificate (TRC) was a welcome step, Dinesh Kanabar, deputy CEO and chairman, tax, KPMG told CNBC-TV18.
Regarding the lag between the announcement and implementation of an non-adversarial tax regime, Kanabar says, "The government must implement the recommendations of the the Shome and the Rangachary Committees to boost investor mood."
Kanabar adds that the government reduction of the tax on interest payments to foreigners on government and corporate debt to 5 percent from up to 20 percent for a two-year period is evidence of the government’s ability to allay fears and boost business sentiment.
Below is the edited transcript of the interview on CNBC-TV18
Q: The tax residency certificate (TRC) was the big red herring in the Budget. Do you believe that the government has now allayed all apprehensions with the clarifications announced and the removal of Sub-Section 5 altogether from the Finance Bill?
A: The government has gone beyond the expectation of the industry when the Budget was introduced. The clarifications have removed the mandate of seeking more documents if the TRC did not contain sufficient evidence. But what is more important is the removal of the presentation of the TRC in a prescribed format which previously placed a lot of undue pressure on investors as not all countries were willing to issue tax residence certificates in a format acceptable in India. So on the whole it is a welcome step.
Q: How significant are the changes and the clarifications regarding the withholding tax because the street believes the reaction in the rupee was linked to the kind of clarification on the withholding tax front?
A: The withholding rate was reduced by the finance minister from 20 percent to 5 percent and the removal of the requirement of the permanent account number (PAN) are significant. The rupee's reaction versus the dollar is really more procedural and indicates the considerable boost to business on the government's efforts to allay the investors' fears regarding taxation.
Q: Though the government has announced its objective of establishing a stable, non-adversarial tax regime, the reality on the ground is very different. There is an increase in the number of transfer pricing notices being issued, the latest being to Maruti and royalty payments under scrutiny. Do you believe, in general, that the hostility in the tax climate, has improved?
A: There are two aspects to my answer to that question. I do wish that the lag between the announcement of the policy of a non-adversarial tax regime and its implementation narrowed. The government constituted two committees – the Shome and the Rangachary Committees- and it is now important that the recommendations of these two committees are implemented.
The finance minister has gone on record to state that he will sooner than later implement the recommendations. In my opinion, the moment they are implemented there will be a wave of positive investor sentiment on the tax front.