By Rohit Jain (partner), Nishant Shah (partner), Kumar Visalaksh (partner)By Rohit Jain (partner), Nishant Shah (partner), Kumar Visalaksh (partner)

So, has the government managed to eradicate tax terrorism?

Yes, the Indian tax structure has all along been very complex and unpredictable owing to a host of factors, such as a multiplicity of taxes, divergent interpretations, the absence of a coherent administrative set-up coupled with unrealistic revenue targets, and a propensity to resort to amendments (including retrospective amendments), by successive governments. In this decade, for foreign investors, the “indirect transfer” of shares case of Vodafone symbolizes all that has been wrong with the Indian tax system. Despite winning at the Supreme Court, the Government in 2012 retrospectively amended the Income Tax Act, 1961 (“IT Act”) to overcome the Supreme Court ruling and to tax indirect transfers involving foreign companies/investors.

In 2014, when the NDA government took over, it promised “ease of doing business” as well as “predictability” in the Indian tax regime. To assuage foreign investors, one of the early key announcements of this Government was that they would not resort to retrospective amendments to create past tax liabilities.1 Accordingly, a high level Committee within the Central Board of Direct Taxes (“CBDT”) was set up in 2014 to scrutinize all “indirect transfer” cases prior to 1 April 2012, and where no action has been initiated by 28 August 2014, the Tax Authority would need to make a reference to and obtain prior approval of the Committee before issuing notice for scrutiny.

Further, in 2015, offering major relief to Foreign Institutional Investors (“FIIs”), the Government also announced exemptions to FIIs from the applicability of the controversial Minimum Alternate Tax (“MAT”) on capital gains arising out of their investments – both for the period prior to April 1, 20152 as well as for the period thereafter. In order to boost FII confidence, in January 2015 the Government by a Cabinet decision decided not to appeal to the Supreme Court in the transfer pricing cases involving taxing the sale of shares of Vodafone and Shell in offshore transactions, which it lost in the Bombay High Court. In fact, by the Finance Act, 2017 the Government amended the relevant provisions of the IT Act3 to specify that provisions relating to indirect transfers will not be applicable to any asset or capital asset being held by a non-resident, directly or indirectly, in FIIs or FPIs.

On the tax treaty front, in the past three years, the Government has re-negotiated tax avoidance treaties with Mauritius, Cyprus and Singapore primarily to bring certainty on various aspects of taxation (such as capital gains) and to curb tax evasion. In its commitment to tackle the threat of black money, besides the sudden demonetization in November 2016, the Government has already signed tax information exchange agreements (“TIEA”) with seven jurisdictions such as Switzerland and the United States, and has also completed negotiating 17 new TIEAs, which will be signed in the days to come4.

Further, the Tax Administrative Reforms Commission (“TARC”)5 headed by Mr Parthasarthi Shome, proposed in its report6 a comprehensive overhaul of the current Indian tax system – both on the legal as well as administrative aspects. Amongst the recommendations are suggestions to ensure clarity and simplicity of tax provisions, as well as separation of investigation and adjudication for a credible dispute resolution mechanism - a must for a stable and predictable tax regime. According to the Government, “these recommendations are at various stages of examination/acceptance/implementation”7. If fully implemented, it will change the Indian tax landscape. It is undeniable that the Government has indeed taken serious efforts towards bringing stability to the Indian tax system, although reforms on the tax administration side are yet to be pursued vigorously. A structural reform on the administrative side would ensure greater stability and predictability.

What is the potential lifecycle of tax litigation in Iindia?

India broadly follows a four-tier tax dispute resolution mechanism. Usually, an initiation of a possible tax dispute starts with issuance of a show cause notice on the tax payer. In case the taxpayer is not satisfied with the assessment, he can approach the Commissioner by way of an appeal, followed by a second appeal to the Tribunal (CESTAT/ITAT) then to a High Court, if substantial questions of law are involved, followed by the final appeal to the Supreme Court. A diagrammatic representation of hierarchy of the forums in tax litigation in India has been set out on the previous page.

This complex and multilayered hierarchy of tax forums in itself adds to the longevity of a tax dispute, as the Indian judicial system is already reeling with “docket explosion”. Further, the problem is compounded by multiple and varied interpretations adopted by various forums (Commissioners, Tribunals, High Courts) on identical issues, which takes time for resolution by the Supreme Court. In the current hierarchical structure, the lifecycle of a tax dispute (from investigation up to the Supreme Court) is usually in the range of 6 – 10 years.

Has the situation with respect to pendency of tax disputes at different courts improved at all?

It is well known that in India, the Government is the biggest litigator. However, it may be interesting to know that within this, the highest litigation is on the revenue side8. According to a report9, the total number of tax cases pending at different fora is over 4 lakhs (400,000) involving 6.5 Lakhs crores (more than $100bn). See the table for a summary of the data.

The statistics are also reflective of the tendency of the revenue authorities to resort to indiscriminate appeals, irrespective of the merits of the case, which is appropriately reflected in the relatively low success rates on appeals filed by the Revenue Department (estimated to be between 15 per cent10). This is primarily driven by ignorance of law and procedures, and the unrealistic target pressures of revenue collection.

The NDA Government at the policy level has taken various initiatives towards reducing the backlog. One of the key initiatives has been to increase the strength of tax benches across the country. For instance, in the last two years, the Government has notified 11 new benches to deal exclusively with indirect tax matters. Further, various dispute resolution schemes such as the Income Declaration Scheme, 2016 and the Direct Tax Dispute Resolution Scheme, 2016 have also been announced as steps to contain litigation. Two new benches of the Authority for Advance Rulings (“AAR”) have been set up in Delhi and Mumbai respectively. In a record of sorts, India has signed 88 Advanced Pricing Agreements (APA) in the financial year 2016-17, which is probably amongst the highest number signed by any jurisdiction in the world.

In fact, TARC in its report has identified unrealistic revenue target as one of the primary reasons for frivolous litigation and has suggested that the CBDT and the Central Board of Excise and Customs (“CBEC”) should move towards ‘dispute prevention’ rather than ‘dispute resolution’.

The NDA Government has been conscious of the heavy pendency of tax litigation at various forums and has taken early steps towards litigation management and dispute resolution by fixing threshold limits for filing appeals by revenue authorities, as well as making pre-show-cause notice discussion mandatory in few instances.

The CBEC/CBDT have also undertaken review of litigation at higher forums (Tribunals, High Courts and Supreme Court) and have issued instructions for withdrawals of cases. For instance, in the last year, as per the new threshold monetary limits, the CBEC filed for withdrawal in 980 and 2,174 cases in High Courts and CESTAT respectively11.

With a view to improve the litigation management system relating to direct tax cases in various courts, the CBDT has also launched a portal in March 2015 called the “https://en.wikipedia.org/wiki/National_Judicial_Reference_System National Judicial Reference System;;” (NJRS). It is a computerized repository of all judgments and pending appeals related to Direct Tax cases at Income Tax Appellate Tribunals (ITATs), High Courts and the Supreme Court. It has intelligent search facilities and work flows to enable the officers at the department engaged in litigation work to closely monitor appeals as well as carry out research and analysis on various issues. It also helps the department in streamlining the huge backlog of litigation in Courts and Tribunals.

While a host of measures have been taken by the Government towards mitigating tax disputes and reducing the pendency of cases, more needs to be done to clear the backlog. A complete revamp of: (a) the tax administrative set up in line with the recommendation in the TARC report, and (b) the current tax provisions with simple and clear tax provisions in line with the global standards, would greatly help in curbing future litigation. On both these counts, the Government needs to work hard.

How will GST, which has been brewing for years, affect foreign investors and Indian companies?

The idea of “one nation one tax” under the Goods and Services Tax (“GST”), which was first mooted in 2000 by the NDA Government of the then-Prime Minister Mr. Atal Bihari Vajpayee, now seems to be becoming a reality during the term of this NDA Government. With the Government clear on rolling out GST on July 1, one can say that the wait is finally over, but there have been concerns on how it will affect foreign investors and Indian businesses.

If studies and surveys are to be believed, roll-out of GST will attract foreign investments and improve investors’ sentiments, who had been discouraged by multiple taxes with differential rates in different states, cascading of taxes, compliances under various Acts and differential regulatory requirements. Implementation of GST will bring an end to all these problems. The Government has been betting high on the introduction of GST as one of the major contributors to the policy initiative of improving the “ease of doing business in India”. Seamless flow of credit, an integrated national market, reduced logistics costs and reduced product costs will not only benefit domestic but also international segments of Indian businesses. Economists project a rise of 1%-2% in GDP post the GST rollout.

On the other hand, critics have been pointing out flaws in the new tax regime, like increased compliances, rise in compliance costs and hardships to SMEs. There is also speculation of inflation in the early days of implementation of GST, based on the experiences of countries that started a GST. Despite criticism, the fact remains that GST is definitely an improvement over the current system.

What still needs to be Ironed out in the GST small print?

With the Government all prepared to roll out GST on July 1, 2017, one should weigh on the possibility of passing an imperfect GST. Even though the achievements of the GST council in such a short time are commendable, there are some flaws that need to be highlighted.

In the GST Council meet in Srinagar held on 18-20th May, 2017, the GST Council formulated the classification and rate schedules of the goods and services. All goods and services have been classified in 4 slabs of 5%, 12%, 18% and 24%. Little time is left for the industry to analyze the impact of the rate change and streamline its operations if July 1st remains the roll out date.

Another area of concern has been how input tax credit would be availed of goods held in stock on rollout day. Though the act contains provisions for the same, industry is confused as the provisions are subject to multiple interpretations. As a consequence, there is a fear that retailers and dealers of FMCG, medicines, etc. would start cutting stocks so that a minimum stock is maintained on rollout date. This may create shortages in the coming months. Another challenge qua GST lies with respect to obtaining multiple registrations in the states, particularly by the service industry, which has been governed by Central Laws until now and usually held only one registration. An additional burden on businesses would be in relation to uploading each and every invoice to the GSTN system: just imagine the number of invoices raised by a big supermarket in one day selling FMCG products.

Further, the current concept of ‘open market value’ under the Valuation Rules, apportionment of services provided at multiple locations, etc. may lead to potential litigation.

What part of GST has not seen enough attention yet?

Passing of four GST bills namely: the CGST bill, the IGST bill, the UTGST bill and the Goods and Services Tax (compensation to states) bill by parliament on April 6, 2017 marked a decade-long achievement in meeting the July 1, 2017 deadline to roll out the biggest tax reform in India post independence.

However, in the melee to meet the “deadline” some features of GST have been overlooked. These are:

(a) Multiple tax structure- When the Government announced adoption of multiple tax rate regime it was not taken well by the industry. It hampered the essence of one tax rate for all products, which was widely propagated when GST was first conceived.

(b) Anti-profiteering measure- The CGST bill allows the government to set up an anti-profiteering authority. The authority will be responsible for ensuring that reduction of tax rates on implementation of GST results in reduction of prices. The industry is of the view that this will allow the Government to monitor and control prices. This is against the idea that prices should be market determined and no Government authority should have any business in deciding the price of goods or services. The idea of setting up such committee has not been taken well by industry.

(c) Retention of concepts like Cess and E-way bills- The Government proposed an introduction of cess on demerit items, which would be used for compensating states for any revenue loss. Similarly, later the Government has published E-way bill Rules, which are nothing but a makeover of way-bills used at state check posts used by transporters. Retaining such concepts, even when the rate of tax imposed on inter-state or intra-state sale of goods is the same, takes us away from the essence of the GST in its true sense.

Where do you foresee some of the biggest GST complications to arise?

While the industry is lauding the benefits of the new tax regime, it may be noted that for all its benefits, GST is something of a double-edged sword. With numerous advantages, GST also brings several complications and disadvantages to the table, particularly for businesses, such as:

(a) GST will eradicate the concept of centralised registration. GST requires businesses to register in all states they are operating in. This will increase the burden of compliance on the businesses. Particularly it would prove a challenge for the service industry, which, for the first time, would deal with State Authorities.

(b) When GST was first conceived it was supposed to be a single uniform rate, but what we have now is a four tier tax structure - 5%, 12%, 18% and 28% and a cess of 15% for some demerit goods. With the increase in rates of tax there is a possibility of increase in the prices of some goods or services. This will affect revenue of businesses.

(c) In the present scenario, businesses are using software or ERPs which have the utility of filing Excise, Service Tax and VAT returns. The rollout of GST would require them to change their ERPs too.

Change is never easy. The complications in GST need to be overlooked for the greater good. Once GST is implemented, all complications will become a story of the past. Industry will benefit from the new tax regime and so will the customers.

NOTES

1 Business Standard

2 Undertaken on the recommendation of the Justice AP Shah Committee formed to look into the applicability of MAT on Capital gains arising to FIIs from investments into India for the past as well as future period.

3 Section 9 of the IT Act was amended to provide for the same.

4 DTAA

5 TARC was established vide the Government of India Notification dated 21 August 2013 by the then UPA government

6 DOR Accepted Recommendations

7 PIB Release

8 Hindu Businessline

9 Business Today

10 Ibid

11 Office memorandum F. No.296/07/2016-CX.9 dated 25.04.2016

About the authors

Rohit Jain, partner

T: +91 22 6636 7000

E:

Rohit Jain is a Partner in the Tax practice of ELP focusing on indirect taxes, direct tax and transfer pricing. He is a law graduate from the University of Mumbai and a fellow member of the Institute of Chartered Accountants of India (ICAI). His areas of expertise include customs, excise, service

tax, central sales tax, state VAT laws and foreign trade policy.

Rohit has been with the firm since its inception and has over a decade of experience in handling matters related to tax, in both advisory and litigation matters. He has advised various Fortune 500 Companies and Indian Conglomerates in sectors like financial services, manufacturing, telecommunication, oil and gas, petroleum and infrastructure projects in order to ensure smooth transitions from sales tax to the VAT regime. He has also been involved in making representations to the Ministry of Finance and the Ministry of Commerce in relation to various tax policy matters on behalf of numerous industry associations.

Rohit has been recognised for his expertise in Tax by Chambers Asia-Pacific 2014 to 2017, has been recommended by the Tax Director’s Handbook 2012 and has also featured in World Transfer

Pricing 2015. Prior to ELP, Rohit was part of the Tax team at RSM & Co.

Nishant Shah, partner

T: +91 22 6636 7000

E: Tax

Nishant Shah is a Partner in the Tax practice of ELP, focusing on indirect taxes. He is a qualified lawyer and a Chartered Accountant. His areas of expertise include excise, customs, service tax, central sales tax, state levies as well as regulations under the Foreign Trade Policy.

Nishant has worked extensively with the State Governments of Rajasthan and Punjab during the introduction of the Value Added Tax (VAT) regime in India. He has worked extensively with various Industry Associations and assisted them in successfully representing before the Central Government or State Governments for grant of reliefs from concerns faced by these associations. He has tremendous experience and expertise on matters relating to Special Economic Zones.

As part of a new initiative, Nishant has been working on developing expertise in relation to the anti-money laundering, anti-corruption and allied laws recently introduced in India, including its implications for various industries.

Nishant has been recommended for his expertise in Tax by The Legal500 Asia-Pacific 2016.

Prior to ELP, Nishant was part of the tax teams at KPMG and Deloitte.

Kumar Visalaksh, partner

T: +91 11 4354 8400

E: Tax

Kumar Visalaksh is a Partner in the Tax practice at ELP and is based in Delhi. Kumar has over 10 years experience in rendering tax advisory, transactional and litigation services. He regularly advises clients on Customs, Excise, Service Tax, Value Added Tax/Central Service Tax, Foreign Trade Policy and Export Control related matters.

He has been extensively associated with both advisory and litigation services for various Fortune 500 companies on Indirect Tax issues. Kumar writes regularly on issues related to taxation for leading newspapers/magazines such as The Economic Times, Financial Express, Economic and Political Weekly, Indirect Taxation Review etc. He is also a regular speaker at various tax conferences. Kumar is a graduate (BA. LLB) from the National Academy of Legal Studies and Research (NALSAR), University of Law, Hyderabad.

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