One of the advantages of December year end musings of life in general is the fact that one can cherry pick some salutary omens in the environment, wrap around a comfortably warm blanket and announce to amuch wearied hassled and over worked populace the golden mantra: All is well!. When it comes to musings on Indias Tax policy the temptation is no different.
After all, we witnessed a bold intent to completely overhaul an over engineered and grammatically battered (and, therefore, incongruous in many parts) Direct Tax law and to subsume a plethora of parallel but often overlapping bouquet of Indirect Tax laws into one integrated Goods & Services Tax Law. If nothing else, these two initiatives demonstrated that at last the winds of change from the Atlantic were making their presence felt in Lutyens Delhi offering hope that sincere efforts are being considered to make the alarming hot tax climate in India cooler. So how green and soothing will the tax environment be in 2010 and beyond? Here is my prognosis:-
Direct Tax Code (DTC): With the Govt already having identified seven key areas of rethink, there is a question mark on the implementation of the DTC itself. The moot point is whether some of the suggested changes creep their way as business as usual amendments to the current law through the Finance Bill 2009. Some examples of these are as follows:
1) Indirect Transfer of shares : China has recently announced its intent to tax indirect transfer of shareholdings in Chinese companies under specified circumstances a move said to be inspired by Indias much celebrated and eagerly watched Vodafone case.
Many multinationals hold the view that they would rather have clear cut guidelines setting out the conditions under which India would seek to tax indirect share transfer rather than live with perpetual uncertainty of Indian Revenues subjective application of the principle of taxing indirect share transfers.
2) GAAR : Here again multinationals and India Inc alike would ideally like the application of time tested common law principles of economic substance over form and onus being on Revenue to prove malafide on past of the tax payer before applying anti- avoidance law.
If Revenue is concerned about specific fact patterns or tax shelters it would be far better to have specific anti avoidance rules like in many other countries rather than a general omnibus provision with uncertain outcomes.
3) Indian tax residency definition : Current attempt to rope in foreign companies partially controlled and managed from India for subjecting their global profits to Indian tax would lead to horrendous consequences for India Inc with overseas subsidiaries.
This is doubly compounded by the fact that no underlying corporate tax credit for taxes paid overseas is not provided for. The common law principle of central management & control is a far better test to apply and will ensure that genuine subsidiaries and group companies outside India are not ensnared for tax in India.
4) Capital Gains taxation : A vital area of simplification in the DTC is the proposal for uniform rate of taxation for business income and capital gains. The current system of levying Securities Transaction Tax (STT) and exemption of long term capital gains on listed securities from taxation has the merits of simplicity, certainty and avoidance of any leakages in tax collection.
Even if there is a policy imperative to abolish STT and bring back capital gains tax, it is essential to retain the distinction between short term and long term capital gains. Whilst world over short term capital gains are treated on par with normal trading income, in the interest of promoting long term capital investments, it is advisable to atleast have a concessional rate of tax on long term capital gains if not complete exemption.
Towards this, a rate of 15% tax on long term gains can be considered on par with dividend distribution tax (DDT) in the interest of horizontal equity.
5) Uniform Maximum Marginal Tax Rate : Whilst the much touted sharply reduced Corporate tax rate of 25% in the DTC hinges precariously upon the revenue compensating measures such as the Gross Assets Tax, Finance Budget 2010 could well consider a uniform tax rate of 30% for both individuals ( at the highest slab) and corporates. This would mean a much delayed and over awaited removal of all kinds of surcharges notorious for sticking around much beyond their originally planned tenure.
6) Goods & Services Tax (GST) : GST is by far the most path breaking and revolutionary piece of tax legislation in independent India. As a concept, GST was eagerly awaited by an over burdened Industry grappling with multiple layers of asymmetrical indirect taxes ranging from Excise duties, sales taxes, service tax to a variety of local taxes such as octroi, entertainment and luxury taxes.
In it purest form a single uniform GST rate with no exempted items would seamlessly integrate al the different taxes currently prevailing and ensure zero leakage of input tax credits against output tax payable by a provider of goods or services.
If implemented with political will and administrative ( and technological) efficiency we could well see an improvement of 2% in GDP of the economy. This ofcourse highlights both the criticality of GST as well as the pitfalls (and lost opportunity) if its implementation is unduly delayed and still worst, done half heartedly.
As with the Climate Summit in Copenhagan, it seems safer to predict a reduction in the hot tax climate in India in the long term while we callibrate our tax temperature in the short term. For the present whether with the physical or tax environment in India we can choose to ignore the obvious challenges and the inevitable sweat and grind amidst us all around and offer a uniquely Indian prognosis for our situation: All is well!