The proposed Direct Taxes Code has generated a lot of debate in recent weeks with companies protesting against many proposals, arguing it will hurt capital-intensive firms, will deter M&As and so on. PricewaterhouseCoopers Global Tax Head Richard Collier-Keywood, who was in Mumbai, tells Sidhartha how the tax authorities can put certain safeguards in place to ensure a win-win deal for the government and the corporate sector. Excerpts:
The Tax Codes proposal to make tax law override tax treaties has been criticised a lot
The proposition is that the Direct Taxes Code would override a tax treaty, having been legislated at a later point of time. Unless a treaty is notified, either bilaterally or unilaterally, the domestic law will prevail. If,the government thinks, say, the India-UK one is a very robust treaty, which requires no further negotiation, it can notify it.
It can go back and say it wants to notify the Mauritius treaty subject to certain conditions overriding the treaty. This gives domestic tax authorities the ability to override a treaty if the counterparty is not willing to renegotiate. What happens in case of individual countries is not known.
Maybe, in certain cases, the treaty could be re-notified with a clause to ensure that companies which are set up to take advantage of the tax treaty do not derive benefits. Treaties, like the one with Singapore, have a clause that stipulates a minimum investment for a specified number of years, but there is also a subjective criteria that leaves it to the opinion of the tax official to say that a company has not been set up to take advantage of the treaty.
Is this a good thing or a bad thing? It is good. In todays day and time, it is unusual to find any country, even a developing one, actively blessing treaty shopping. There is no problem if the legislature has the ability to override a treaty.
There are certain aspects on which tax consultants are up in arms. In certain treaties, royalty and fees for technical services are taxed at 10 per cent and the Code fixes taxability at 20 per cent. But tax officials have said this is not the reason why they want to override the treaty. They are trying to impose anti- avoidance regulations.
Will the General Anti Avoidance Rules (GAAR) add to the taxmans power? Several countries operate GAAR very successfully. You have to include principles which are clear in terms of how officials should operate GAAR. So, you give the definition of an abusive transaction this includes transactions that take place purely for tax purposes or are against policy and tax legislation. This gives you the basis on which the administrative discretion of tax authorities is exercised.
Two, there must be a mechanism for companies to deal with uncertainty that is created by GAAR. So, if GAAR determinations are made privately, without impact or precedent, and are not published, then it is probably not the best way to do it. Finally, the clearance procedure must be timely since GAARs, by their very nature, are drafted to cover just about everything.
You need to allow people to go to the tax authorities for a dialogue on a timely basis. But if that is going to take 90 days, it is unacceptable because most commercial transactions have to happen within a week.
The advance ruling mechanism, which so far deals with only foreign companies and takes time, will have to deal with local companies and issue orders quickly. Also, instead of a commissioner coming to a conclusion on the applicability of a GAAR, you could have a panel of commissioners, which could decide.
The government says that 450,000 companies file tax returns but only 50,000 pay taxes. But is the new proposal on Minimum Alternate Tax against capital-intensive companies?
It is relatively unusual to have a tax on assets as opposed to a tax on profits. From an economic perspective, it is less distortive to have a tax on profits.
A lot of countries deal with the situation by reducing the exemptions and the rates of tax and there is less reason for companies to avoid taxes. For large infrastructure projects, it will be very burdensome. You need to ensure that unless the asset becomes productive, there should be no tax. Otherwise, it is not income tax but wealth tax.
In a typical infrastructure project, where the gearing can be as high as 3:1 or 4:1, you struggle to get a return of 8 per cent of the assets employed. So, it makes sense to have it on the net value of assets, reduced by any leverage that is there.
If the Direct Tax Code is implemented in its present form, will India move up in global rankings in terms of tax-friendliness?
India was thought of as one of the more difficult places to do business because it was uncertain, fairly aggressive and it was difficult to resolve disputes.
The ambit of advance pricing and safe harbour mechanisms will help improve the attractiveness of India to the international community provided the rules are applied and implemented properly.
The other big debate is on the Goods and Services Tax especially because there is no clarity on how many rates will be there. Does that create uncertainty? It will be a lot easier to administer if there was just one tax if you can find the allocation mechanism between the Centre and the states. In a federal structure, there will be dual tax.
You can have three rates: A preferential rate, a normal and another one for things like tobacco. It does not create distortions, but it gets complicated if different states start choosing to adopt different rates for same product.
Any change is a big change for companies. They have to change the internal systems to deal with the change. One of the messages to the government will be to keep the long-term picture in mind.
Do not keep tinkering and make major changes every year. It is a nightmare for companies to change their systems to deal with rule-changes.