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December 2016

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The Economic Times

By
Sudhir Kapadia
National Tax Leader, EY India

As life draws a close to yet another calendar year, my mind wanders back to school when our teachers were fond of giving exercises by way of writing essays on current topics by assuming.." If I were the Leader of our country...”. This gave us a certain thrill in imagining various solutions rather than just complaining about problems. It of course helped that these were just thoughts without any accompanying responsibility or authority to "walk the talk"! Thus, it is in this eternal spirit of essay writing, I have put together my thoughts of New Year Resolutions on Tax Policy if I were the FM:

First and foremost I would commend the Revenue Secretary and the Central board of Direct taxes (CBDT) for a series of mostly welcome clarifications and giving certainty on various knotty issues including the ones where "Angels feared to tread". Examples are clarifications on contracts not constituting an Association of Persons (AOP), characterisation of investments in securities as capital gains vs business income, automatic stay of demand upon payment of prescribed amount of tax demand and quite a few others.

The crowning achievement would certainly be the bold and much delayed step of prospectively amending the Mauritius Treaty and phasing out of capital gains exemption whilst grandfathering past investments to ring fence the capital gains exemption applicable to them.

Now for the Resolutions for 2017:

1. I would forthwith bring necessary amendments in the indirect transfer provision in the tax law to clarify that purely institutional investments (Sovereign Wealth Funds, Pension Funds, Education Endowments) would not be taxed under any circumstances if they enjoy similar exemption in their home jurisdictions. Further, indirect control needs to be atleast 26% instead of the low threshold of 5% currently prescribed to fall under taxation under the indirect transfer rules. The recent CBDT circular merely reiterating the current legal position has not done any good in providing the clarifications which were sought and the only solution is an appropriate legislative amendment.

 

2. I would forthwith get the much delayed clarifications on Place of Effective Management (POEM) issued as these have been pending for nearly a year now and simultaneously defer the applicability of POEM from 1 April, 2017 onwards to enable effective compliance of the law.

3. The Ministry of Finance (MoF) had invited case examples to provide clarifications on applicability of General Anti Avoidance Rules (GAAR) effective 1 April, 2017. Several responses were given in this regard but clarifications are still awaited. I would ensure that these are issued forthwith and certainly before January end to enable proper planning by those impacted and enable better compliance.

4. The Authority for Advance Ruling (AAR) is not functioning effectively in the absence of appointment of a retired Supreme Court judge to head the AAR. This is depriving an opportunity to non-resident investors of seeking certainty in advance of making investments in India. I would get this expedited forthwith and simultaneously look to bring about some "out of the box" changes in the law governing AAR to make it more effective. (For example, appointing retired High Court judges if it’s proving difficult to appoint retired Supreme Court judges).

5. Now that the phased removal of tax exemptions has been laid out, I would specify the roadmap of reduced corporate tax rates from now till 2019 along with a phased reduction of the Minimum Alternate Tax (MAT) and its ultimate removal in 2019.
6. Now that capital tax gains exemptions in respect of future investments through the tax treaty "back door" has been effectively nailed, I would use the opportunity to revamp the entire scheme of capital gains taxation to make it simpler and neutral between domestic and foreign investors in Indian securities.  For example, there is clearly a need to continue incentivising long term investments but without the need to distinguish between listed or unlisted securities.

7. By all accounts, there will be some positive impact on tax collections due to the phenomenal quantum of bank deposits garnered as part of the demonetisation exercise (hopefully it will not be offset by corresponding reduction in GDP growth). If this be the case, I would consider this to be the right time to implement the recommendations on personal tax rates of the then Standing Committee on Finance on the now shelved Direct Tax Code (DTC). The Standing Committee had made a strong case for enhancement of the tax exemption limit and reduced marginal tax rates at the middle without compromising on the marginal tax rate on the higher slabs of income.

8. In keeping with the tax policy objectives of demonetisation, I would review and streamline various provisions relating to unaccounted income and expenses.
For example, I would implement the Shome committee recommendation to require furnishing of information by banks on high value withdrawals to income tax authorities in addition to high value deposits.

9. I would take utmost care in ensuring that the bewildering array of clarifications in the wake of demonetisation are understood and applied by tax officers in their proper context. It would be a travesty of justice if genuine tax payers are unduly harassed on the basis of clinically applied technical interpretations of these clarifications.

10. Finally, I would specify targets for expansion of tax base like Tax/ GDP ratio in the Budget along with the fiscal and revenue deficit targets to help taxpayers contextualise various measures undertaken for tackling the bane of unaccounted income and wealth.

Phew! Thank God that this was just an essay much like my school days as clearly the job of FM is even more unenviable at this critical juncture than ever before in his tenure when he goes about outlining tax policy proposals for 2017 in his Budget on 1 February 2017.

May the Force be with the FM and may he not only continue his fantastic track record so far but take tax policy to a different level altogether in 2017!