Law Street in The Economic Times (January 2009)

Dear Readers,
Do you feel you are being squeezed dry by the tax authorities? Well you are not alone. Read on for Zenobia Aunty's views by clicking here.

As always, the column is also cut and pasted below.

Law Street/Lubna Kably

New Year woes

• Economic slow down necessitates downward revision of tax targets
• Knee jerk reactions are uncalled for
• Alternative dispute mechanisms are required

We are now firmly entrenched in a brand new year. But our new financial year, is a few months away - April 1, 2009. Quite apt I must admit, because it isn’t really our New Year but one for the tax authorities. We poor souls begin work anew and spend the initial months just working for the government, after all a fair share does slip away as taxes. Not that Zenobia Aunty or her niece is complaining. Taxes, albeit taxes imposed and collected fairly, are needed to keep the wheels of democracy churning smoothly.

The past financial year 2008-09, will not give the tax authorities much to smile about. In fact, even the RBI, in one of its monthly bulletins, affirms a decline in the growth of tax revenue owing to the general economic slowdown. India Inc is required to pay its annual tax liabilities as advance taxes. The last such installment was due by December 15, 2008 and the showings were dismal. Newspapers have cited that: Advance tax collections from India Inc declined by over 22 per cent to Rs 42,600 crore in the third quarter of this fiscal. In the same period last fiscal the advance tax collection stood at Rs 54,900 crore.

Well, targets have to be met and news-reports have it that a full fledged presentation has been made at a recent meeting of top tax officials in Mumbai asking them to roll up their sleeves and launch surveys. Zenobia Aunty has time and again advocated that revenue targets must not be the criteria for appraisal of a tax officer. Unfortunately the system is such that targets have to be met, even if it means an endless bout of litigation followed by refunds to the tax payer as the demands were raised on weak grounds, in some cases just to meet the target. In the long run this practice is costly not just to the tax payer but also to the revenue authorities. The very same newspaper report mentions that: Nowhere does this presentation talk of the economic slow down which has had its impact on India Inc resulting in a short fall in tax collections.

The Comptroller and Auditor General of India, from time to time, comes out with reports which cite the amount of taxes remaining uncollected, the tax collected and the amount refunded during a particular period. However what perhaps needs to be done is a study on tax demands where the amount has had to be refunded later on, as the ground for raising these demands were weak. Believe, me you, or rather believe Zenobia Aunty, this study will put things in the right perspective.

We, in India have a long winded mechanism for settlement of tax disputes and this only adds to tax payer woes. Let us just take the example of one country, USA. Its tax laws are no less complex than ours. Yet, USA has mechanisms such as private letter rulings and advance pricing agreements which provide tax certainty at the outset.

The most common type of advance ruling in the USA is the private letter ruling. It involves a private request by a taxpayer, in advance of a transaction, for determination of the tax treatment of such proposed transaction. Once obtained, the ruling is binding on the government in the absence of a showing of substantial factual error, misrepresentation, or fraud. Our advance ruling mechanism is not available to all and sundry, further it is quasi judicial in its approach. Private rulings are more taxpayer friendly, authorities are empowered to discuss issues on hand and act as advisors rather than tax collectors. Something on these lines is vital for India Inc.

Transfer pricing is one of the most complicated subjects in international tax law, and the tax payer and tax authorities can easily disagree about it. The US Internal Revenue Service implemented the Advance Pricing Agreements (APAs) program in 1991, to avoid the prolonged, lengthy, expensive, and uncertain litigation. Prior to the APA program, transfer pricing was generally not a subject for private letter rulings because of its highly factual nature. Under an APA, as with any private letter ruling, disputes are avoided by an advance agreement.

Coming back, to home ground. Fortunately the Bombay High Court, recently, in Clifford Chance’s decision, has upheld the doctrine of territorial nexus for levy of Indian taxes. Hopefully cognisance will be taken of this concept in Vodafone’s case, where transfer of shares between two non residents of another non resident entity were held taxable in India, merely because shareholding in India was indirect held by the company whose shares were transferred. Knee jerk reactions if any, are not going to help in the long run, rather a mechanism of tax certainty will help attain the objectives of tax collection and avoid inconvenience to the taxpayer.