Propelling India into a USD 5 trillion economic behemoth by 2024-2025 will require significant structural reforms under the Indian tax laws to boost investor confidence and stimulate the diminishing demand of the Indian economy.
The amount of time and resources spent by a business on income tax related litigation has proved to be a substantial burden on the taxpayer. At the commissioner (appeals) level, the tax amount caught up in 3.22 lakh pending cases was Rs 6.38 lakh crore, as of March 31, 2018.
Similarly, a little over 90,000 cases were pending at the ITAT level, with corresponding contentious I-T demands aggregating to Rs 2.01 lakh crore, as of March 31, 2017. It is no secret that the I-T department is the largest tax litigant.
Appeals filed by the I-T department constituted 85 percent of the appeals as of March 31, 2017, with its success rate being less than 30 percent. The rise in such litigations and further appeals by the tax department even if relief has been granted by appellate authorities has been a major cause of concern for India Inc.
Currently the monetary limit for appeals with the ITAT, High Court and Supreme Court are Rs 50 lakhs, Rs 1 crore and Rs 2 crores respectively. A significant increase in the monetary threshold of the tax effect on matters below which an appeal can't be filed by the I-T department is warranted.
Further, a one-time dispute resolution scheme, much like the ‘Sabka Vishwas Legacy Dispute Resolution Scheme’ (introduced for indirect taxes) will benefit the revenue by addressing their tepid tax collections, the judiciary by reducing their burden of pending cases and the tax payer by providing a definitive end to their pending litigations.
The other area of concern and constant dismay for foreign investors is the cumbersome dividend distribution tax. Not only the dividend distribution tax (‘DDT’) rate of 20.56 percent (on a grossed up basis) is one of the highest rates of tax on dividend distribution in the world, but the non-availability of foreign tax credit in the foreign shareholder’s jurisdiction adds to their tax burden and significantly reduced the cash flow after tax available to them upon distribution of profits.
Further, the tax on dividends in treaties is usually subject to a cap of 10 percent. However, since the current mechanism of taxation of dividends levies tax on the companies and exempts in the hands of recipients, the benefit of such cap is not available to the foreign shareholders.
It is recommended to consider replacing the DDT regime on dividend taxation with the erstwhile withholding tax regime. By re-introducing withholding tax on dividends, the foreign shareholders will be able to avail the benefit of caps provided in treaties and also be able to avail foreign tax credit on the amount so withheld.
Alternatively, in case replacing DDT with withholding tax is not possible on account of the fiscal constraints of the government, it is recommended to reduce the DDT rate to 10% from the current effective rate of 20.56 percent (after including education cess, surcharge and grossing up of DDT), considering the significant tax burden it has on distribution to shareholders.
Further, in today’s business environment, business consolidation and business reorganisations are no longer an exception to the rule. The current tax laws are extremely restrictive in allowing carry forward and set off of losses of the amalgamating company to the amalgamated company.
Some of the requirements to allow such carry forward and set off include the requirement for the amalgamating company to be in business for at least three years and for it hold at least 75 percent of the book value of fixed assets held by it two years ago, on the date of amalgamation. These are extremely cumbersome and should be relaxed to encourage consolidation and revival of sick units in India.
A few structural changes to the Indian taxation regime, such as those highlight ted in this article, will go a long way in boosting investor sentiment and reviving the economy.Amit Singhania, is Partner Shardul Amarchand Mangaldas & Co. Nimish Malpani, Associate, Shardul Amarchand Mangaldas & Co. contributed to this article. Views are personal