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The 2012 Tax Cliff
Finance Minister Mukherjee unveiled the first DTC draft in 2009 followed a bill in 2010. As part of the budget 2010 announcements, the implementation of the new code was deferred to 2012. The 2010 DTC bill is with the Parliamentary standing committee under a 'veil of secrecy' and doubts are being expressed that given an isolated winter session of the parliament, the likely hood of tax payers witnessing the new law in 2012. Widespread representations have been made by the industry & chambers and there is silence on part of the government on implementation.
Is DTC path breaking or case of old wine in a new bottle?
In North blocks view the primary driver for DTC is to replace the extant 1961 law, which has been through at least 50 amendments in annual finance act's making the law unwieldy, complex and prone to interpretation, which has led to mass scale litigation. Another strategic objective is revamping of tax incentives to widen the tax base; a policy that is more or less in place with the phase-out of sectorial & area-based tax holidays, and migration to capital linked allowances. Other substantive changes, applicable to large business with cross border reach include an attempt to address issues in the area of international tax, with the introducing of anti-avoidance rules (GAAR), controlled foreign corporation (CFC) to tax passive income of Indian companies, place of effective management (POEM) to strengthen the source based rules for taxing foreign enterprises and advance pricing agreement (APA) to lend certainty for transfer pricing. While the 2009 draft had proposed material changes on tax administration and its functioning, the 2010 bill is diluted to a large extent.
Do we have an implementation plan?
Overall, the efforts are laudable as most tax payers - salaried or self-employed, business or not for profit - would be affected by a plethora of changes due to tax rate slabs, savings, incentives, business deductions, etc. Like any economic shift in policy, the DTC debate has had difference of views even inter se between the tax administrators with some questioning the rationale for a new code and disturbing established conventions and principles settled by the Courts. However, the task for administration is daunting and not merely restricted to departure from established practices but, the level of preparedness and timing thereof! On the agenda, besides giving shape to subordinate legislation, implementation new processes in a defined timeframe are real challenges. Pilots in various segments would enable address glitches besides rigorous training of revenue officials will go a long way in achieving the desired outcome. The DTC laws will necessitate change in the Revenue departments IT framework and more importantly, tax payers accounting & reporting requirements.
How should I plan my affairs?
So, the question before tax payers is if they are prepared to face the new law in the next few months? If yes, it assumes that Indian businesses aren't smart to look beyond the next few months. We are witnessing a fractured parliamentary debate on any meaningful economic legislation and DTC particularly, which would touch almost 30 million tax payers and several businesses, which contribute a sizeable part to the governments' tax kitty. There are no perfect answers to address the uncertainty! On part of business houses, if they have to prepare for the new law, the top most concern is how it acclimatizes with changes in business deduction provisions. As regards shift in policy for tax incentives, weather DTC is implemented or not, for profit linked incentives, it is end of the road. Large businesses have expressed reservations on path breaking changes on business deductions, GAAR, CFC, POEM, APA which need recalibration, greater clarity and sophisticated tools for administration. The draft provisions don't necessarily resonate a level of confidence given lack of adequate guidance. Though, the FM is on record assuring tax payers that established principles of the court will not be disturbed, clarity would be most useful.
What if the DTC does not come into force in 2012?
Simple answer is that tax payers should be prepared for another Finance bill amending the extant law - will the FM be tempted to enhance tax rates falling to Obama temptation to tax the rich more? Though, North block may be tempted given retarded tax collections evident from second installment of advance tax collections, and likely impact on deficits, I think it would be suicidal to try and imitate the US or EU. India's economic cycle is at a different trajectory. We will continue to grow at 7-8 percent even if the global slowdown prolongs is medium term. India's competitiveness can be boosted only with moderate tax rate as proved in the past topped of course with improved administration and speedy dispute resolution mechanism.
Is DTC a game changer?
I have reservations - the bottom line is that India needs more Indians to pay tax and profitable businesses to pay the right tax. Whereas, it's trendy to tackle the problem of tax avoidance schemes, more important is to deal with several businesses which are not in the tax net. We need better tax payer services and a formidable role for tax ombudsman to deal with tax payer grievances. In summary, we need a Tax Lok pal bill to address leakages and punish errant tax payers. On dispute resolution, even before matters go to trial, we need empowerment to institutions such as dispute resolution panel or the settlement commission to settle dispute rather than perpetuate them. We need arbitration in our treaty policy to settle cross border tax disputes and courts to encourage tax payers to resort to such mechanism as in commercial disputes. Overall, we need a change in mindset of the tax gatherer and the tax payer in today's environment. It's indeed a long wish list.
For North block, the tax policy calendar is dictated by political necessities rather than economic necessities. Hence, will the FM take chances to cajole the private economy for a robust tax policy is something that would be watched in the next few months? Indian entrepreneurs would nevertheless work towards prosperity in difficult economic situation as they see the great 2012 tax cliff approaching - with or without the DTC.
*First published in the Business Law column of the India Business Standard, 10 October 2011.
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