Tax Administration & Policy Developments – next steps

Caucasian businessman using digital tablet in cafeThe first six months of the new Government have been positive for the Indian markets. The Government has announced a series of measures aimed at winning the confidence of investors and securing a business-friendly environment.

In the recent past, various high-pitched assessments made on multi-national companies involving substantial sums had not only led to a series of litigation but also led to a decline in the confidence of global investors in the Indian economy. One classic example is the controversy surrounding the cases of Vodafone and Shell in connection with transfer pricing assessments made for issue of shares at premium to their non-resident parent companies. Recently, the Bombay High Court has settled this controversy in favour of the taxpayer by holding that issue of shares to a holding company at a premium is a “capital account transaction”, which does not give rise to any income and accordingly the transfer pricing provisions do not apply. The judgement has provided great relief to foreign investors. According to media reports, the Attorney General of India has advised the Government not to file an appeal with the Supreme Court against the aforesaid order. If the Government accepts the Attorney General’s advice, the decision of the Bombay High Court will attain finality and will end the controversy surrounding the applicability of transfer pricing provisions to such transactions.

Furthermore, in line with the promise of reducing litigation and bringing in more certainty on taxability of transactions, the Government has recently notified rules for advance ruling for resident taxpayers. This move is certainly welcome. The Government may also initiate steps to increase the number of benches of the advance ruling authority to facilitate speedy disposal of applications. Moreover, the threshold of INR1 billion may be reduced to INR0.5 billion to facilitate more taxpayers to take this benefit.

The advance pricing agreement (APA) mechanism, introduced earlier, has also received very good response from taxpayers. The number of applications increased from 146 in FY12–13 to 235 in FY13–14. While five APAs were concluded in FY13–14, several others are nearing conclusion. The approach of APA authorities has been very encouraging. The issues are discussed with an open mind and with an honest effort to understand the taxpayer’s business. The overall attitude is resolution oriented. The foreign investors are keenly awaiting outcomes of APA applications. Moreover, expeditious disposal will only help to improve confidence.

Another major effort in achieving a non-adversarial tax regime is the internal guidelines issued by the CBDT. The guidelines list several taxpayer-friendly instructions that CBDT wants its officers to adopt. The guidelines include instructions relating to timely assessments, timely attendance of taxpayer’s grievances and monitoring of grievance redressal by senior tax officials.

In his maiden Budget Speech, the Finance Minister, Arun Jaitley had proposed to set up a high level committee to interact with trade and industry on a regular basis and ascertain areas where clarity in tax laws is required. In line with the same, the Government has recently constituted a high level committee headed by the former Chief Economic Adviser, Ministry of Finance, Ashok Lahiri. Based on the recommendations of the committee, the CBDT/CBEC will issue appropriate clarifications by way of circulars/ instructions in a time-bound manner. This is indeed a positive development.

The Government has also expressed a strong resolve towards rolling out of Goods and Service Tax (GST) to replace the existing excise duty, service tax and value added tax regime by April 2016. Business community is awaiting positive outcome on this front.


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