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Reduction in tax compliance burden, the most pressing need for corporates
September, 20th 2008

Companies today consider compliances as a top priority item, says Mr Ajay Kumar, executive director, PricewaterhouseCoopers. Companies feel that going forward there will be an all round increase in the challenges they feel today covering direct tax, international tax and indirect tax, he adds during a recent interaction with Business Line, over the email.

A Fellow member of the Institute of Chartered Accountants of India, with over 16 years of professional experience in providing tax and regulatory service to several multinational clients of PwC, Mr Kumar is also a member of Economic Policy Council of Confederation of Indian Industry. His experience includes conceptualising tax-effective alternatives and plans, evaluation and minimisation of tax exposure in business / corporate restructuring, acquisitions, divestments, tax due diligence for acquisition and investments.

A significant finding in the PricewaterhouseCoopers 2008 Fiscal Framework Survey, released a few days ago, is that simplification of tax laws and reduction in compliance burden is the most pressing need for corporates in India.

It is also important, says Mr Kumar, that we have a wide window for settlement of dispute which unfortunately has been curtailed very heavily in the Budget of 2007.

Excerpts from the interview.

What, according to you, are the top priorities before each of the four pillars in the fiscal structure, viz. the legislature, the administrators, the judiciary and the taxpayers, with regard to the fiscal framework?

The foremost priority for all the pillars is to connect with one other in such a cohesive manner that it helps achieve the fiscal policy objectives of India.

This requires a coordinated approach ensuring seamless interaction among the four pillars in action. The principal objective of the legislature is to involve the subjects, i.e., the companies, in the decision-making process, provide consistency in application of laws/rules, stability in the tax rates/system, and outline for the benefit of the general public the policy rationale for any changes introduced in the framework.

As far as executive is concerned, progress has been made to a certain extent in return-processing. However, issues relating to variance in assessment proceedings, delayed rectification proceedings and high-pitched tax demands require immediate attention.

Assessments can be simplified if the authorities can standardise a list of documents that companies need to preserve and provide during the tax examination process. At present, the assessment officers have the liberty to demand documents from companies at will and the requirements of different assessing officers vary greatly.

In terms of appellate mechanism there is a need to put in a system for faster dispute resolution, by taking certain measures such as increasing the number of benches, laying down threshold for filing appeal, outlining the timeline for completion of appellate proceeding, and setting up tax-specific benches.

Are there any estimates of the tax compliance cost for corporates? Has it been on the rise? How does it compare with other countries of relevance?

As per the latest study by the World Bank/PwC on paying taxes, the effective tax rate in India is approximately 71 per cent. This study includes various indicators which point out the high compliance burden incurred by the company in fulfilling compliance obligations imposed under the various fiscal statues in India including the time to comply indicator. In our experience the multiplicity of tax / return filing etc. and associated audits by the Revenue authorities create tremendous pressure on the resources of the company to meet its obligations.

With the IFRS bringing in a taxonomy for heads of account, in a few years from now, do you see its beneficial impact on the tax space too? Or, do you anticipate that the tax regime will be insulated from any accounting convergence?

So far we have not seen a concerted effort being made for convergence of the tax regime with the accounting developments. Leasing industry is one such example. In my view only in exceptional circumstances should divergent position be allowed.

Can you list the key areas of ambiguity, which contribute to more than two-thirds of tax disputes?

The key areas of ambiguity in relation to direct taxes are international taxation and transfer pricing. Ambiguity is bound to arise when the new-age businesses are being taxed by the application of traditional principles of taxation.

In the recent OECD 2008 Model Convention, where India was granted a status of an observer, India has chosen to exercise the right of deviating from the settled principles of taxation on important issues such as PE determination, characterisation of income as royalty or fee for technical services. India has chosen to make significant deviation from internationally-acceptable guidelines.

In our fiscal framework survey, the corporates have highlighted that they would prefer the Indian Government to follow international principles of taxation as against the new concepts evolved by the Indian tax authorities.

Transfer pricing has been a new area where more strenuous provisions have been incorporated. The implementation of the transfer pricing regulations needs to be in line with international practices.

With respect to indirect taxes, the key area of dispute today is service tax where there is a lot of ambiguity. One view could be since it is a new legislation, there are bound to be ambiguous issues. However, I believe that if a new law is implemented, the legislature has full liberty to frame the law and issue necessary clarifications upfront by involving the corporate sector

Is there a case for reducing the exemptions, since these are seen as adding to the complexity of the tax system?

The Finance Ministry is in favour of phasing out exemptions. However the Finance Minister has himself observed that many exemptions are there due to good reason.

We are not per se against exemptions but administering exemption mechanisms fairly can be particularly complex and leaves avenues for misuse. Wherever exemptions have been notified, like for exemption of profits of SEZ, the administrative machinery responsible for evaluation such claims should be suitably sensitised to promote smooth implementation as would further the legislative intent .

In what areas is discretion used the most by tax officers, even as an alternative may be a better course?

The system today operates in a traditional manner. If in one year there has been an adverse assessment, the company is seen as a deviator and it runs the risk of continuous audit by the tax authorities. The precedent value of the decisions of the Supreme Court has gradually been eroded in the absence of any direct legal redressal mechanism. The dispute resolution mechanism today is a tedious process.

I believe the discretionary power given to a committee of officers can be successfully put in place where big demands can be settled by following the transparent mechanism, particularly when it relates to factual disputes.

Around three-fourths of the survey respondents have never approached the CBDT/CBEC for clarification or administrative issues faced by them. Will a better technology interface help improve the situation? Also, what are the areas in which corporate tax executives can benefit from discussions with the officers?

In todays environment, except for non-residents, there is no forum which can be used by corporates to get the resolution of an ambiguous matter. Other regulatory bodies such as the SEBI, the RBI etc. do have a window where one can approach to get suitable clarifications in a timely manner.

It is critical that all the wings are needed to work cohesively to provide a forum which can be approached by the companies for reasonable degree of confidence of disposal of their case. In the case of non-residents too, it is not always that on similar facts decisions are consistent. Unless these issues are looked into, the corporates will not be confident in approaching a forum for seeking clarification.

Does the current global financial crisis justify a stricter tax regime at national levels?

There is no direct linkage between a fiscal framework of the country and the financial crisis being faced by the world today. However, in such times, the fiscal framework should follow in a fashion that should provide guidance to the corporates about the tax treatment of the issues that the companies face due to the financial crisis.

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