Mahesh Singhi: Tax reforms key to ease of business

by / Thursday, 01 September 2016 / Published in News & Updates

Complex tax regime and archaic redressal systems play spoilsport for India

Multi-layered tax legislations and arc­haic redressal sy­stems continue to be major hi­ndrances for foreign inve­stors wanting to do business in India. Contentious issues like lack of clarity on direct and indirect taxes, retrospective taxation and access to tax treaties have been chiefly responsible for ambiguities in the present tax regime and become a stumbling roadblock to the development of a prudent and transparent tax structure.The Panama Papers sc­am should be treated more as an exposure of the loopholes in the system than the exposure of some individuals involved. The information by the International Consortium of International Journalists (ICIJ) based on data from Panama law firm Mossack Fonseca detailed several offshore holdings of companies, individuals and corporate entities across global tax havens.

Revelation of the names of a sizeable number of Indian individuals and corporate entities in the documents prompted the Indian government to set up a multiagency group (MaG) comprising several economic regulatory agencies to probe the veracity of the claims. The task set out before the group is gargantuan considering the fact that it might have to segregate details of both legal and illegal holdings. It is encouraging that the government has initiated wider information sharing measures with foreign governments, especially tax havens like Switzerland and Mauritius to assist in investigations of stashed holdings. The government may impose tighter asset disclosure norms in the future for offshore Indian holdings and impose severe tax pe­nalties over defaults on such assets. Stricter monetary restriction and periodical inspections by regulatory authorities are expected to tighten the screws on illegally stashed assets abroad.

Over the years, global businesses have lowered the outflow of corporate tax figures by basing operations in countries having lower tax rates. The Organization of Economic Cooperation and Development (OECD) has estimated the global economy suffers tax losses of around $100 billion to $240 billion annually, am­ounting to 4 per cent to 10 per cent of global income-tax revenue. In order to curb tax losses and bring transparency and accountability in global business practices, India, part of the G20 group of nations, is cooperating closely with the OECD on the base erosion and profit sharing (BEPS) initiative.

It aims to introduce mutually agreed tax administration standards across countries with a thrust on matching tax rates with the location where the business is based. It is estimated that as and when the BEPS measure is enforced, 155 Indian companies would need to comply with the initiative on their country-by-country business transaction disclosures. Companies, whose global turnover exceeds Rs 6,000 crore, will have to report to their respective tax authorities on profit and tax details along with revenues earned. Adherence to the new system will require companies to change their accounting systems and compliance mechanisms.

The scheme has been conceptualised as a broad-based measure to help EMs like India to keep checks on rising cases of tax defaults of companies operating in low tax jurisdictions.

General anti-avoidance rules (GAAR) is an Indian anti-tax avoidance regu­lation that has assumed

controversial connotations owing to provisions empowering it to impose retrospective taxes on overseas transactions involving local assets. This, in turn, could make it the subject of unwanted future litigations. In order to ensure that this critical taxation measure is not misused and is implemented in a transparent and judicious manner, the government needs to issue clear guidelines and safeguards at the same time.

The implementation of GAAR is seen as ushering in a reasonable and rational taxation structure in the country based on commercial considerations and prevailing business environment. Documentation will assume paramount importance in the GAAR regime with businesses required to keep their books clear with precise details like business goals, assets and liabilities.

The regime will also have to place due emphasis on clear-cut tax governance pr­ocesses encompassing the complete tax cycle of a company for preventing undue exposure to its provisions.

With amendments to the double taxation avoidance agreement (DTAA) with Mauritius, India will levy capital gains tax on sale and transfer of shares of an Indian company under the ownership of a tax resident in Mauritius. Investments made till March 31, 2017 have been exempted from capital gains tax of 50 per cent of the total tax rate — 7.5 per cent for listed equities and 20 per cent for unlisted — that will be imposed on shares purchased between April 1, 2017 and March 31, 2019. However, investments made from April 1, 2019 will be subject to full domestic tax rates of 15 per cent and 40 per cent, respectively.

This may not cause a huge funds outgo in the near future, as investments made till the end of the next financial year have been exempted. The benefit of tax discount at 50 per cent of the full rate will apply only to companies that do not qualify as shell entities of their parent corporations. It is widely speculated that as a tax saving measure, investors may invest before April 1, 2017.

Other investors are likely to undertake due diligence on their invested funds, taking into account the tax factor garnered from the returns. For foreign portfolio investors (FPIs) impacted by the India-Mauritius tax treaty amendment, the Netherlands is likely to emerge as a preferred alternative. Foreign institutional investors (FIIs) in Europe will find it feasible to route investments through the Netherlands. As per the finer provisions of the India-Netherlands tax tre­aty, a Netherlands-based company holding less than 10 per cent equity stake in an Indian company will be exempt from capital gains tax on share sales to residents or non-residents. Ev­en if the Dutch entity holds more than 10 per cent of the equity stake in an Indian company, no tax will be imposed on share sales to non-residents. Capital gains accrued for investments routed through Singapore will enjoy the same benefits that are accorded to tax residents in Mauritius.

We have come a long way, taking up many initiatives in the right direction. But there is still a long way to go if we need to reach our targets of making sure that all our money is kept and used in our country.