Shome report pragmatic; govt must amend law soon: Experts

The Parthasarathi Shome Committee set up by the government has said retrospective amendments in tax laws targeting overseas mergers and acquisitions of companies with assets in India, should be scrapped.

Speaking to CNBC-TV18, Ketan Dalal, Joint Tax Leader, PwC and Bhavna Doshi, President - Indian Merchants Chamber welcome the recommendations. According to Dalal, the report is pragmatic in nature and should address a large number of concerns of investors at least on the tax front. Also Read: Shome panel has rightly focused on details: Salve Doshi is of the view that it will send a very positive signal that the government should not resort to retrospective amendments merely with a view to enhance or expand its tax base and collect revenue, which could not have been otherwise collected. In unison, both Doshi and Dalal said that the government should quickly amend the law with immediate effect and not wait for the Union Budget. Below is the verbatim transcript of the interview Q: What was your key take away from the recommendations that came out yesterday? Dalal: The reaction is very positive. The Shome Committee clearly said that retrospective amendments should not be normally resorted to. It is only where there is an apparent mistake or a technical error or a highly abusive tax planning scheme. The recommendation states that there should not be a retrospective amendment for indirect transfers, and even if there is a retrospective amendment, it cannot attach on to the buyer of property or buyer of shares or buyer of assets. In any case, even if it attaches on to the seller, interest and penalty should be waived. The larger issue is the focus that there should not be any retrospective amendment at all in such circumstances. Overall, it is a very pragmatic report, and hopefully, should address a large number of concerns of investors at least on the tax front. Q: Do you think it might reverse the negative sentiment, which has cropped up post the Vodafone ruling and the retrospective levies, which had come in earlier? Doshi: Yes, it should because it sends out a very positive signal that you should not resort to retrospective amendments merely with a view to enhance or expand your tax base and collect revenue, which could not have been otherwise collected. I am sure it will send out very positive signals and also it addresses a number of other issues. That is also a very positive sign. Q: There has been a sense yesterday that this could happen even before the Union Budget. But looking at the recommendations, what is a realistic timeline for adoption? Doshi: I would think the government should really opt for amending the law because when the amendments came in in the Budget, there were a lot of apprehensions expressed. There were representations that this should be postponed. At that time, it was not postponed at least as far as GAAR was concerned. But now, at least this should be done. The government should quickly amend the law and it need not wait for the Budget; it should be amended right away, and in some cases, it could be by way of an explanatory circular that this is what we wish to do. _PAGEBREAK_ Q: Do you agree with that or do you think that the harm of the previous Budget will be undone only in the Union Budget coming up in February? Dalal: The Finance Minister had said in one of the meets that after the Shome Committee report is issued, he is not likely to wait till the Budget. As Doshi rightly pointed out, the potential addressing of these issues is in two baskets. Some of it could be done through a circular and I think there was a reference to participatory notes. The Shome Committee itself has said that may be a circular could be issued. Amending the law gives it greater clarity but even on the amendment part, the possibility of introducing a taxation law amendment act, which has been done in the past as well several times, cannot be ruled out. Of course, it has to go through parliament, and before that, it has to be accepted by the FM. Assuming that, I don’t think we should wait till the Budget because the longer one waits, the greater is the uncertainty. Obviously, uncertainty is not good for the investment climate at all. That is something that the government is obviously ceased off and one hopes that it does not need to wait for the Budget because at the end of the day, we are five months away from the Budget still. Q: Would investors heave a sigh of relief from what they have heard so far on P-notes and on capital gains on listed securities from the Shome Committee recommendations? Dalal: As far as P-Notes is concerned, the Shome Committee has gone into fair bit of details. They have referred to the SEBI regulation, the KYC (Know Your Customer) norms and they have said that at the end of the day, the taxable entity is either the FII or the sub account. Any investor at the level above that with any kind of ODI, which is primarily P-Notes or a direct investor in the FII or the sub-account should not be liable to tax and that was a great concern. One also needs to see this report with the earlier report in relation to the FII on the sub account itself. As you might recall, they had clarified that as far as, let’s say, Mauritius is concerned, circular 789 which deems the tax residency certificate to be an evidence of residence should be considered to be valid. If one wants, one should not do it through GAAR provisions but if there is a need to amend it, so be it. But this kind of a backdoor taxation may not be justified. one has to look at all of this in totality and if one looks at it in totality I think those concerns should be addressed. If there is a listed entity transfer outside India and if the listed entity holds shares in India, that should not trigger a tax liability in India. That clarification will be welcomed by the international community.