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Tax authorities miffed at Shome Panel's reports
October, 25th 2012

The tax authorities are likely to oppose most of the conclusions of two panels, both headed by tax expert Parthasarathi Shome, on the ground that government would suffer a loss of revenues. The likely stand of the tax department highlights the difficulties which the finance minister P Chidambaram and Prime Minister Manmohan Singh in bringing about internal consensus as they seek to implement reform measure to woo back investors who have been spooked by policy paralysis coupled with aggressive tax enforcement.

An internal report of the Central Board of Direct Taxes (CBDT) on the general anti-avoidance rules (GAAR) has opposed Shome Panel's proposal to defer its implementation by three years, ET Now had reported on Friday.
Another panel set up by the board to examine the Shome committee's recommendations on the controversial retrospective amendment to the income tax law could also oppose some of its recommendations, especially the suggestion that it be applied prospectively.

"Are we prepared to refund hundreds of crores that have been collected as tax on indirect transfers...There are many cases at various stages of litigation....Suddenly it seems that the department has no case at all," said a department official.

The panel will give its views only when the Shome committee gives its final recommendations. According to a back of the envelope estimate by the department, the government could lose about one lakh crore in tax if the Shome Committee's recommendations on the retrospective tax are accepted.

The finance ministry had told the Rajya Sabha earlier this year the government could raise Rs 35,000- Rs 40,0000 crore from this change in the law in the current year itself

The belligerent reaction from the tax officials appears to indicate that the tax authorities do not accept what has become conventional wisdom among many tax experts and most economists-that aggressive tax enforcement is at least a contributing factor to the economic slowdown.

Economic growth was 5.5% for the quarter ended 30 June 2012, close to none-year low. The investment rate, which reached a peak of 38% of GDP in 2007-08 has dropped to below 35% for the fiscal ended 31 March 2012.

The government had amended the Income Tax act retrospectively in the union budget to tax so-called indirect transfers, essentially deals executed overseas in which substantial Indian assets change hands.

The provision was referred to the Shome Committee after massive outcry from foreign and domestic investor as the law that effectively over turned the Supreme Court ruling in favour of Vodafone in the case relating to its acquisition of Indian telecom company Hutchison Essar in a deal executed in the Cayman Islands.

In its interim report the Shome Committee has said the provision should be applied prospectively. In case it is applied retrospectively, the committee said, it is to be applied only in cases where there is capital gain and even in such cases no penalty or interest should be levied on taxpayers that have a tax liability because of the change in the law. The panel is expected to submit is final report shortly.

In the case of GAAR, the Shome committee has said its implementation be deferred to assessment year 2017-18.

But the committee set up by CBDT to review the GARR recommendations has criticised the suggestion and called for its review by Parliament's standing committee of finance.

Some tax experts are in favour of the tax authorities' world view. M Govinda Rao, who heads the National Institute of Public Finance and Policy, has also come down heavily on the Shome committee report on GAAR.

"You can't abolish tax to curb tax evasion... To me it's like throwing the baby and retaining the bath water...GAAR is an instrument for tackle tax compliance...Fear of getting caught is more important than getting caught for compliance," Rao said.

GAAR was deferred by a year by the then finance minister Pranab Mukherjee following hectic lobbying by industry but retro amendment was retained. Prime Minister Manmohan Singh, who took charge of the finance ministry after Mukherjee resigned to contest presidential election, set up panel headed by Shome to review GAAR rules. Later the committee was also asked to review the retro tax.

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