Over the years, tax laws have been rationalised and rates drastically reduced. However, Indian tax laws are still cumbersome, comprising an Act that runs into more than 300 sections and many sub-sections, provisos, explanations, schedules, not to mention the never ending rules and notifications. The World Bank series of Doing Business 2007 lauds India for liberalisation in tax reforms but simultaneously points out its continuing weakness in the form of high tax administrative costs-- these stem from multiple taxes ranging from corporate tax, MAT, FBT etc, added compliance costs and prolonged litigations. There is an urgent need to improve the quality of taxpayer service available to India Inc.
Instead of dwelling on what is wrong with our system, let us analyse on what can be done.
Nipping litigation in the bud:
The root of tax litigation is because the position taken by a taxpayer differs from that of the tax authorities. In India, we do have in place a mechanism of seeking advance rulings, but that is limited to determination of the tax liability of a non-resident. Based on certain qualifying criteria, at least for large transactions, this mechanism could be expanded to cover domestic Indian companies as well. In the arena of transfer pricing, the Indian government could think of introducing Advance Pricing Mechanisms akin to those in Japan, UK, USA etc. These mechanisms would help determine the transfer price between an Indian entity and its foreign group companies in advance. It could introduce safe harbour provisions, such as in UK, Mexico whereby certain specified transactions, based on value, margins etc. could be exempt from transfer pricing audits.
India could even think on the lines of the pre-filing program that was introduced in the United States in 2000, for large and mid-sized business entities. Such taxpayers can request an examination of specific return-related issues (which are factual and governed by well established laws) such as admissibility of a business deduction, which could be subject to disputes later to determine the proper tax treatment prior to filing the return itself. In the course of the program, a binding agreement is reached on the treatment of a particular issue.
There is a scope for better co-operation and collaboration between the government and the industry to address various longstanding issues. These issues include deductibility of software expense, treatment of provision for Non Performing Assets for NBFCs, deductibility of foreign exchange losses on account of year-end revaluation, availability of tax holiday on captive power plants, continuity of tax holiday in case of slump sale of unit, or even emerging issues relating to outsourcing or e-commerce.
The language of tax provisions should be simple and lucid. Further, subsequent to the amendments in the Act, the government should bring in circulars clarifying any ambiguous interpretation. The circular resolving ambiguities relating to FBT provisions for instance, is a step in the right direction. Moreover, where the same provision is subject to varied interpretation by the judiciary at lower levels, the government should clarify the position on such issues by legislative amendments.
In this backdrop, we can draw an analogy to a formal mechanism that exists in the US, wherein corporate taxpayers and associations can submit under a formal programme called the Industry Issue Resolution Program topics for resolution involving a controversy, dispute or unnecessary burden on taxpayers. The IRS then comes out with its guidance on such issues.
Speedy litigation: In India, an appeal process, takes around twelve to fifteen years to conclude. Last year the provisions relating to the Settlement Commission were amended and made more restrictive. The government should think of either constituting an authority with powers similar to that of the Settlement Commission or expand the scope of the reference of any matter to the Commission. Easier alternative dispute resolution processes are available to taxpayers in Australia to settle matters out of court.
Gaurav Taneja & Promod Batra (The authors are senior tax professionals with Ernst & Young)