Income-tax is one of the key considerations for an entrepreneur when he makes his business decisions. In recent times, though, there has been some negative sentiment surrounding the Indian income-tax regime: the law and its administrators.
From the retrospective amendments, which shocked one and all, to the recent Shell share issue controversy, there has been a considerable discontent and uncertainty in the minds of the investors and the businessmen.
With the new government coming in, a lot was expected, considering the motto of the government was to have a ‘non-adversarial tax regime’. Although, it’s fair to say that the new government has helped calm down the investor sentiments; but certain aspects of the income-tax laws continue to cause undue hardship and difficulties in carrying out business.
Withholding tax
The income-tax laws provide that every person making a foreign payment needs to withhold taxes if the payment is taxable in India.
The rate of tax is to be taken as per the Income-tax Act or a tax treaty, whichever is lower wherein the tax treaties generally provide for a lower tax. However, a penal provision exists in the tax law which provides that tax will be deducted at a higher rate if the foreign recipient does not have a Permanent Account Number (‘PAN’). A PAN is a tax identification number obtained in India and in most cases is not obtained by foreign recipients as they have no presence in India.
Though these provisions were introduced to ensure compliance in India, it has led to additional burden for taxpayers in India where the foreign recipients refuse to obtain any tax registrations in India and consequently Indian tax payers are forced to bear the taxes on its own account and that too at a higher rate of tax in absence of treaty benefits.
Further, when is a payment ‘taxable in India’, tends at time to be a matter of debate, and the payer in order not to take chances on levy of penalty for default in withholding, invariably ends up withholding tax on payments made to the foreign party.
Transfer pricing
The transfer pricing regulations were introduced in India in 2001. However, in the last 15 years, the amount of adjustments in transfer pricing audits has increased on a year-on-year basis. Further, many of these disputes have been on positions which are against international practices and on frivolous issues which have created considerable difficulties for taxpayers and dented investor confidence.
Although the major high-profile controversies were put to rest earlier this year, significant damage to investor confidence and taxpayers did get caused by it.
Ghost of retrospective amendments
The retrospective amendments in the income-tax laws have been the subject matter of discussion for the last 3 years now, especially the amendment for the overseas transfers to overcome the Vodafone ruling. Not only was the amendment to tax overseas transfers made retrospective, it was ambiguous since a few terms were unclear and the scope seemed to be too wide. Although the new government in the recent budget has countered the ambiguity, the clarifications have only been made prospective thereby continuing the ambiguity for the period prior to the clarification. Accordingly, the respite for the investors has been limited and the past transactions made by the foreign investors still continue to be in threat.
Frivolous demands
Many a time, the tax officers raise tax demands on audit which are frivolous and without jurisdiction. Such demands are usually on issues which have been settled in the taxpayer’s cases in earlier years or by the courts in other cases. This is usually done by tax officers to meet their individual collection targets. Further, although the tax laws include a provision for stay of demand, such applications of the taxpayers are rejected and they are forced to deposit at least 50 per cent of the demand. This leads to significant cash flow issue for the taxpayers impacting their working capital as well. This is further accentuated by the fact that the tax department does not face any consequences even if the courts subsequently find their positions untenable.
Other compliance-related burdens
Reporting of foreign payments: As per a recent change in the tax law, a certificate from an accountant would be required for every foreign payment, whether subject to tax deduction or not which led to significant increase in compliance cost.
Introduction of tax standards: The tax department has recently introduced certain Income computation and disclosure standards (‘ICDS’) which need to be adhered to by all taxpayers. Although such standards might help in reducing tax litigation in the long run, they do pose an additional compliance burden to the taxpayers, who now have to deal with Accounting Standards, the new Indian Accounting Standards (IndAS) and the new ICDS as well.
In conclusion, given the above, although the government has its heart in the right place, much needs to be done at the policy level as well as the ground level to reduce hardships in carrying out business by the taxpayers and achieve the motto of ‘non-adversarial tax regime’ and ‘Make in India’.
With inputs from Puneet Putiani, assistant manager, Tax and Regulatory Services, PwC India
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