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CBDT circular needlessly queers the pitch
June, 19th 2007
Indias dubious reputation as a notoriously difficult place to do business just got a leg up from the Central Board of Direct Taxes (CBDT)! Its circular making a distinction between shares held as stock-in-trade and investment creates fresh uncertainly for taxpayers, especially FIIs. Tax circulars should aim to provide greater clarity and as far as possible, leave little or no room for discretion.

Unfortunately, the recent CBDT circular does neither. Worse, it opens a can of worms by raising issues that should have been settled long ago. Admittedly, there could be instances of business income masquerading as capital gains and the CBDT, like tax authorities the world over, is eager to plug loopholes that allow such evasion.

But by leaving it to the judgement of individual assessing officers to determine whether income should be classified as business income or as capital gains and taxed accordingly (capital gains attract a much lower rate of taxation), the circular only makes matters worse, leaving the system open to abuse and, of course, has given rise to the prospect of endless litigation.

A rule-based system ensures both transparency and probity. Our tax administration, unfortunately, leaves much to be desired on both counts. The World Banks Doing Business reports repeatedly feature India somewhere near the tail end of the league tables in terms of ease of doing business. Its an honour we could do without given how desperately we need to attract investment into the country.

Sadly, we seem to be adept at shooting ourselves in the foot. So, from time to time we rake up issues that should be regarded as settled in law once and for all. The issues are usually arcane the interpretation of the double taxation avoidance agreement with Mauritius that allows preferential treatment to FIIs registered in Mauritius; the definition of what constitutes a permanent establishment for the purposes of taxation of an overseas entity; and as in the present instance, the distinction between business income and capital gains. But they have serious implications, especially for overseas investors, and we could do without queering the pitch any further for them.
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