Naveen Aggarwal
The government’s bold decision to reduce the corporate tax rate by way of an ordinance in 2019 was seen as a welcome move by the industry. The reduction positions India more competitively with other global economies, apart from the reduced tax rate for new manufacturers that seems to have reinforced the government’s ambition to become a global manufacturing hub.
While the industry acknowledges that these are steps in the right direction, one would agree that the tax cuts, by themselves, may not be sufficient to stimulate private sector capex and jumpstart the economy over the short to medium term. The government needs to address other areas by adding more levers with meaningful firepower to help improve the investment attractiveness quotient. The Budget 2020 provides the perfect platform to add more rigour to corporate tax and push towards greater maturity in other areas.
Aim to bring down the cost of doing business
The government should contemplate a shift from the current dividend distribution tax (DDT) to the classic withholding tax model with respect to shareholder profit distribution. This approach would shift the tax burden on dividends from corporates to shareholders. Once this shift comes into effect, tax on dividends will be governed by a tax treaty and become creditable in the shareholder jurisdiction.
Push towards a more stable and predictable tax regime
No growth in today’s time can be sustained without the hope and promise of a clear, stable and predictable operating environment. A critical growth engine adding to the certainty is dispute resolution and litigation management. According to the FY20 receipt budget released by the Ministry of Finance, as of March 31, 2018, a total of 462,824 direct tax cases were pending before various appellate forums, involving a tax demand of Rs 6.23 lakh-crore. The recent step by the Central Board of Direct Taxes (CBDT) prescribing monetary thresholds for filing appeals by the tax department before the appellate tribunal and higher forums is seen as a welcome move. However, a lot more needs to be done on this front. Some of the thought provokers for the government are:
Could there be an amnesty scheme for direct tax?
Based on the success of ‘Sabka Vikas (Legacy Dispute Resolution) Scheme’ for service tax and excise matters, feasibility of a similar amnesty scheme should be evaluated for long-pending direct tax cases. While a litigation resolution scheme for direct taxes was introduced in 2016, it had limited takers within the taxpayer community as it entailed full payment of the disputed tax and conceding only a portion of interest and penalty amount.
Taking a cue from the indirect tax scheme, the proposed framework for any such direct tax-related amnesty scheme should help create a win-win situation for both the government and taxpayers where the former may consider partial collection of disputed taxes and granting relaxation on interest, penalty and prosecution.
Can an Alternative Dispute Resolution (ADR) mechanism be introduced?
Given India’s position against introducing mandatory arbitration, the government could look at other alternative dispute resolution mechanisms such as mediation or conciliation. These mechanisms have found reasonable success in other developed economies, including the United States and the EU (European Union). Apart from being faster and more cost-effective than the conventional approach, the ADR mechanism seems to have driven more commitment to arrive at a resolution.
Can we bring legislative amendments to expedite disposal of cases?
Focussed efforts are required to clear the backlog of cases before the Authority for Advance Rulings (AAR) and conclude Advance Pricing Agreements (APAs) — the two prevalent routes of multinationals for certainty on tax issues. While these channels were introduced to reduce the multi-layer litigation framework and inject a sense of certainty, their effectiveness seems to have got diluted on account of slowdown in administrative machinery and the disposal rate. An important step would thus be to regularise the functioning of AAR and introduce statutory timelines for disposal of matters through legislative amendments.
Providing certainty to avoid litigation
Clarity on some of the newly-introduced provisions such as Significant Economic Presence (SEP), applicability of the General Anti Avoidance Rules (GAAR) as against the Principal Purpose Test, thin-capitalisation and the like through a clarificatory circular or amendments can go a long way in preventing protracted litigation.
In summary, a strong dispute resolution mechanism coupled with a holistic and competitive tax rate will help form a potent force for attracting investments across growth sectors. Given the stagflation headwinds the economy is experiencing, the finance minister has her task well cut out. There is a need to fix the structural weaknesses and create a sustainable growth-oriented tax ecosystem to help drive the government’s global manufacturing and $5 trillion ambition.
Naveen Aggarwal is Partner (Tax), KPMG in India. Views are personal.
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