By Ketan Dalal
With the new government in location and the action in the last numerous months, this year’s Budget assures to be a significant occasion. While there are different elements which one might look forward to from the finance minister in the Union Budget plan 2015, this post highlights some of the essential aspects, a few of which the government seems to be anyhow considering, to line up the tax laws to the themes of the government and facilitate its overall program in terms of incentivising international investment, improving’ Make in India’initiative, and offering a strong thrust to the facilities sector. Incentivising Foreign Financial investment
The government’s election manifesto spelt out the need to offer a non-adversarial tax environment, rationalise and streamline the tax program and overhaul the disagreement resolution systems, so as to improve the investment climate.Towards this end, in 2013, the FM had revealed setting up of more Authority for Advance Ruling (AAR) benches and extended AAR route for Indian homeowners. In truth, the Cabinet cleared 2 AAR benches in Mumbai and Delhi on February 25, 2015. Also, alternative dispute resolution mechanisms like conciliation and arbitration should be introduced as recommended by the Shome Committee in its TARC report.
Likewise, APA (Advance Rates Contracts) system put in location to lower transfer pricing litigation is gathering positive momentum. However, more than 400 APA applications are currently in procedure, and this backlog requireshas to be considerably reduced.
So far as foreign investors are con cerned, considerable unpredictability still prevails in numerous areas on the tax front.One of the big unpredictabilities is the date of intro of General Anti-Avoidance Policy (GAAR) and the final shape and kind in which these provisions would be introduced. Based on recent news reports, it does appear that there would be deferral of GAAR program by a year or twoor more, which would be a welcome step.
Another location of unpredictability is the threshold to make up “considerable” for trigger of indirect transfer provisions (aa Vodafone overseas share transfer). Prescribing 50 % threshold as “significant” in line with a current Delhi High Court judgment would be appropriate. Likewise, accepting the recommendations of Dr Shome Committee Report in terms of excusing inter-group transfers, listed international business, etc. from indirect transfer arrangements, would be a step in the ideal direction.
Dividend Distribution Tax (DDT) is expensive at 20 % -it is gratifying that the government appears to be considering scrapping it. In any case, decreasing the rate and making it creditable against tax liability and permitting expens esinterest versus such earnings are terribly needed measures.
The aggressive and er ratic application of law at the ground level also needs to be resolved to enhance international investors’ self-confidence. Show-cause notices released to foreign portfolio investors (FPIs) in the last few months over levy of Minimum Alternate Tax (MAT) on capital gains income is a clear dampener at a time when the need is to restore credibility. Also, clear guidance to tax authorities at the ground level on following Round No. 789 of 2000 for financial investments from Mauritius would develop government’s dedication to produce a non-adversarial tax routine.
Make in India Push
Make in India is one of the key reforms personally near the prime minister that necessitates many policy-level modifications. GST ending up being a factcoming true would be an important step in realising the Make in India dream. Some further clarity on the date and kind would rate.
Intro of Financial investment Allowance provisions last year is certainly a push for making sector, but needs broad basis. Nevertheless, if this is paired with added rewards such as tax vacation arrangements or MAT exemption for entities participating in Make in India effort, it would be a meaningful boost for catalysing financial investments. The growth acceleration which the nation would get is most likely to far offset the revenue loss on account of these rewards. Likewise, rationalisation of MAT levy on SEZ Units and SEZ designers would be welcome.Sector-specific tax incentives may likewise put down a roadmap for growth in future.
In regards to facilities, particularly for developing Smart Cities, the government ought to think about introducing tax holiday program similarjust like Area 80-IA, presently available for other facilities center. Likewise, the tax holiday advantage, which is currently limited only to a “brand-new” center, need to be extended for upgradationmodernisation of existing infrastructure facilities. Similarly, rationalisation of MAT rate levy is expected. In case of REITs InvITs, the whole tax environment needs a re-look to begin financial investments through these vehicles.
Considering the need of developing a separate SPV for each infrastructure project, the concept of Group Tax must be introduced to allow an infra player pay tax on a holistic basis vis-avis on a single project basis.
As widely recognised, lots of tax problems in India emerge not from the law itself, however the administration of law. As the clock begins ticking, let us hope with optimism that mindful wisdom prevails in government to materialize itself in establishing a stable, investor-friendly and non-adversarial tax system. Union Spending plan 2015 might surely set the tone!
(The author is Senior Tax Partner, PwC India)