The Budget 2011 had brought some appreciable moves in indirect taxes, such as introduction of self assessment in Customs and Point of Taxation Rules in Service tax, strengthening hopes for quick movement towards Goods and Service Tax regime. Such positive moves were accompanied by some unwanted and regressive ones like creating administrative hurdles for SEZ units to claim refunds.
There also exists a third category namely, the hidden ones which will have drastic consequences - such as prosecution i.e. jail due to failure to issue invoice once service is provided or nonpayment of service tax for a period of more than six months. These draconian provisions have started ringing bells in the board rooms of quiet a few companies who could manage to read the fine print of these provisions.
In todays business environment many organizations are under pressure to reduce costs, streamline processes, automate activities and implement higher levels of control. However, it is essential that the core financial systems not only meet the operational and business requirements within an organization, but also mitigate tax risks inherent in the existing system.
Tax risk assessment is a crucial component of Corporate Governance principles. Its well known that, efficient Corporate Governance helps to reduce the risk of a corporate by ensuring transparency, accountability, and enforceability in the marketplace. But sometimes, even the most respected corporate find place in the media for wrong reasons, such as non compliance of tax regulations, short or nonpayment of tax, availment of wrong credit, even though such omission occurred on account of interpretation of law or without any mala fide intension. This could bring more than just embarrassment for the Board of Directors.
Strong Corporate Governance has a close nexus with efficient indirect tax management. With both Central and State governments seeking increased tax revenues and tax authorities stepping up efforts to improve cooperation between departments, a good tax governance can help to overcome the obstacles to productivity growth. Tax risks can be classified into following broader buckets of:
Managing tax risks and governance remains an integral component of tax agenda. Yet the challenge remains on how to do more with less:
Responding to the demand for better tax risk management
Handling greater scrutiny by tax authorities while dealing with resource constraints
Adapting to new developments in tax laws, changes and increase in demand from tax authorities for greater transparency and cooperation;
These challenges are increasing the burden on tax and finance departments. Given these challenges, its not surprising that the management often spends a disproportionate amount of time on compliance activities, rather than focusing on higher value activities such as strategic planning and risk management.
As a result, many companies are looking for more consistent, more efficient and more cost effective ways to mitigate their tax risks. Two feasible options to mitigate tax risks could be efficient compliance and litigation management
An effective compliance management is one of the most important milestones for better corporate governance. Traditionally, Indirect tax management system is a black box for most of the companies operating in India. Transparency in Indirect tax management has always been a challenge.
However, with the Indian Indirect tax system ready for a paradigm shift, with the introduction of Goods and Services Tax (GST), the time is just right to bring about the wanted transparency and efficiency in Indirect tax administration, by establishing a unified command for Indirect tax management across the country.
Companies may find it helpful to give advance consideration to litigation management. Effective litigation management requires up to date data on details of litigation such as grounds of argument, amount involved and status of the litigation, available preferably online. Efficient management of the litigation can reduce the burden of interest and penalty costs to the company and can help to strategize the way forward on good and bad claim. Independent assessment of tax provisioning is one more area which has direct impact on the profit and loss account.
Specialized assistance in litigation and effective drafting with sound knowledge of indirect tax ensures effective communication of tax positions to the authorities. Timely replies to the notices issued by the tax authorities and strategically handling the litigation with on going follow up with the authorities ensures the company to effectively manage its tax risk, avoiding future surprises.
To sum, I am not seeking to offer solutions and conclusions of universal application, but rather highlighting that tax governance is a subject with wide implications. Management is encouraged to consider critically how they can fulfill their responsibilities in the area of tax governance, in a way that they can enhance the value of their company for the benefit of all stakeholders.