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Govt asks industry to list top 5 tax issues
October, 12th 2015

The income tax department has issued letters to industry asking them to provide their top five contentious tax issues. The department will, in turn, send across its informal position on these matters to avoid litigation in future.

This view will be uniformly held - right from the chief of the Central Board of Direct Taxes (CBDT) to the assessing officer. This is the first instance where the government is being proactive in offering its position in accordance with the Income Tax Act to resolve contentious tax issues.

"We have asked industry associations (to flag five taxation issues they would want clarity on)," said Anita Kapur, chairperson, CBDT in an email response to Business Standard's queries. This is in line with the efforts to bring in transparency and predictability in the taxation regime of the country, Kapur added.

This is the first instance where the govt is being proactive in offering its position in accordance with the income tax Act to resolve contentious tax issues

The contentious tax issues range from transfer pricing, safe harbour rules to taxation of subsidies

Industry seeks clarity on what is construed as govt assistance under taxable subsidies

The govt's stand on taxing intangibles - intellectual property, branding and advertising exercises

India-focused funds to come under tax net in case of indirect transfer rules

Revenue Secretary Hasmukh Adhia had met representatives of the Confederation of Indian Industry and Federation of Indian Chambers of Commerce and Industry last month, seeking new and innovative tax policy ideas for reforms in the next Budget.

Industry had said there was a mismatch between the government's intent and the verbal interpretation of the law and asked for filling of such gaps by bringing out suitable clarifications or amendments.

"We want to avoid a recurrence of issues such as the controversy surrounding minimum alternate tax (MAT) for foreign institutional investors (FIIs)," said a source privy to the development. Foreign portfolio investors (FPIs) had been upset with the government's stand on MAT. On this issue, the government had promptly provided clarity on non-applicability of MAT on capital gains of FPIs in Union Budget 2015. However, the amendments applied from April 1, led to 68 tax notices and FPIs moved court for resolution.

The government referred the matter to the A P Shah Committee, which recommended that MAT should not be applicable on the period before April this year. The government accepted the committee's view on exempting FIIs, thus resolving the issue in September. Tax consultants and industry looks at this move as a big positive in the light of saving time and effort that goes into unnecessary tax litigations. This would also avoid a repeat of such a controversy. "This is a proactive approach by the tax department to avoid unnecessary tax litigations. Companies will not be left second-guessing on tax issues as the department will give its position. This also puts the Indian tax department at par with its global counterparts," said Rajesh Gandhi, partner, Deloitte Haskin & Sells.

As a practice, the US Internal Revenue Service identifies such issues and offers opinion to industry on a regular basis.

"At the administrative level, tax authorities would take a considered view that would be followed consistently, right from the assessing officers to commissioners. This would help cut down litigation to a large extent as companies would have one view from the tax department and accordingly take their business decisions," said Vikas Vasal, partner, KPMG.

The list of contentious tax issues is huge and ranges from transfer pricing, safe harbour rules to taxation of subsidies. Another area of concern is around indirect transfer. Indirect transfer rules look to tax transactions where foreign companies buy or sell their Indian assets. The government had clarified in the Budget that for taxation, 50 per cent of substantial assets need to be based in India. This has led to another concern as FPIs are not exempted from it.

This could mean that an investor in a foreign fund with 50 per cent investments in Indian assets could be taxed while redeeming units. Some experts believe treaty benefits would apply in these cases.

The taxation of intangibles such as intellectual property, advertising and branding exercises is another aspect the industry needs clarity on.

There are also several issues relating to classification of income as royalties and fee for technical services. This creates difficulties for non-residents since tax is required to be deducted on payments to non-residents if the income qualifies as royalties.

Industry is also likely to push the issue of speedy administrative action. The Advance Pricing Agreement programme has received 500 applications but owing to the department's lack of capacity, these applications have not reached final conclusion.

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