Tax laws in many countries tend to be complex, but with India beginning to occupy an increasingly important place on the world stage, the benchmark for comparison has to be changed, saysMr Ketan Dalal, Executive Director, PricewaterhouseCoopers (PwC), Mumbai.
India will increasingly be compared, not against other developing countries, as in the past, but with the dominant and mature economies, he adds, during an exclusive interaction with Business Line, over the phone and e-mail, shortly after the release of PwCs 2007 Tax Risks in India survey.
With the growth of the economy and a continuing flow of foreign investments including substantial investments by MNCs (multinational corporations) into India, as well as large investments (both greenfield and otherwise) by Indian corporates, the stakes are far higher, reasons Mr Dalal. Increasing public scrutiny has made it that much more difficult to deal with uncertainty. In that context, long-drawn-out litigation is something that corporates are obviously keen to avoid.
Excerpts from the interview:
Is there an urgent need for India to mature in the area of tax administration and laws? What are the immediate changes you would recommend?
There is a need for India to mature in relation to administration of tax laws. Two important dimensions are: the need for laws that are clear and also for a mechanism to provide taxpayers with upfront clarity, say through circulars. (One example is a body called the Emerging Issues Task Force, which was supposed to provide clarity on emerging issues related to taxation for non-residents ; for a variety of reasons, that has not been very active). Another dimension is shortening the timeframe within which certainty can be achieved (for example, shortening the time taken to complete assessments unfortunately extended to three years and nine months in the last Budget). Widening the scope for advance ruling (e.g. extending advance ruling to domestic transactions, rather than only for cross-border transactions) could be another move aimed at providing upfront clarity.
Insofar as indirect taxes are concerned, several changes have been made and perhaps the introduction of GST in 2010 or earlier may lead to greater clarity.
The latest survey covered over 80 large Indian and multinational companies for an extensive period. What about the problems for the smaller players? Though they might be less image-conscious and more removed from transfer pricing and M&A deals, is the income-tax scenario comforting for them?
The survey did cover a cross-section of companies. There were several companies with a turnover of Rs 100-500 crore as well. In that sense, the issues of relatively smaller companies are reflected in the survey. However, if one is talking about companies smaller than that (or, for that matter, non-corporate assessees), the answers may vary depending upon a variety of factors, including whether one is a business entity, a salaried individual, etc.
For smaller businesses, a couple of dimensions merit attention, such as compliance requirements becoming more onerous and causing strain on taxpayers to comply (for example, extensive withholding tax requirements).
This issue is further heightened by a talent crunch in terms of experienced tax personnel. Also, the issue of litigation and uncertainty causes equal concern (sometimes even more) for larger companies, given their relatively limited ability for longdrawn-out litigation.
Given the significant action on the M&A front, would you think there are some measures that the government could take to reduce contentious tax issues on M&A?
There are two dimensions: one is that some provisions may need a relook in the contemporary context, and the second is a part of the larger basket of clarity and dispute resolution. An example of the first would be amendments, such as simplifying the definition of mergers and demergers, bringing capital gains exemption for shares tendered in an open offer on par with shares sold in the stock exchange in normal situations, etc.
Given the multiplicity of the types of transactions, the possibility of tax disputes in M&A transactions will remain, but perhaps could be mitigated as a part of structural changes, such as those discussed above.
Should there be a fast-track mechanism for the litigations involving taxes, since they seem destined to stretch on over 10 years, serving no interests of both parties involved?
That would be a good move if it can be implemented meaningfully. The issue, of course, would be in categorising them and perhaps also dealing with those that are more generic, so that a few cases could have a (positive) cascading effect on other similar cases. It might also be useful for both the Government and the taxpayer to refrain from litigation on smaller amounts, since often, the cost and the time spent on litigation cannot be justified given the quantum involved.
Is there a need to simplify the language of tax laws so that it is not misunderstood and thereby easily interpreted?
The (impending) Direct Tax Code is intended to simplify the tax laws insofar as income-tax is concerned. Hopefully, one should see more simplified laws in the near future.
However, the challenge is in administering the law, and that is both an issue of the law being simple, as well as the approach of both taxpayers and the Government. As for the tax authorities, they perhaps need to recognise that most business decisions are not taken with a tax shelter in mind and therefore need not be looked at from that perspective.
Bio: Ketan Dalal is a Fellow Member of the Institute of Chartered Accountants of India. He cleared his Chartered Accountancy in 1981. He has extensive experience on cross-border tax issues and investment structuring including mergers and acquisitions. He was a member of the Working group on non-resident taxation formed by Ministry of Finance. He has also served on various committees of professional and business organisations. He is also a member of SEBIs High-Powered Advisory Committee on consent/compounding matters. He is also the Co-Chairman of the Direct Tax committee of Bombay Chamber of Commerce. A speaker and author on tax and regulatory issues, he has contributed to leading international publications such as the CCH Journal of Asia Pacific Taxation and the IBFD Bulletin for International Fiscal Documentation. He has several publications to his credit, including a Study on Foreign Collaborations and Study on Transfer Pricing, both published by the Institute of Chartered Accountants of India. International Tax Review, a leading global magazine on international tax has listed him among Indias leading tax advisors, 2006.