Sometimes, a boring budget is really the best!
Feb 17 2013
This budget season is especially critical, as the economy has been on the ropes for much of the year. The 2012 budget delivered a sucker punch to an already ailing economy by seeking to introduce GAAR and bringing in retrospective taxation of Vodafone-style “indirect transfers” of shares. General anti avoidance rules (GAAR) are provisions designed to counter-act abusive tax planning by focusing on substance over the form of the transaction. These unexpected changes shook investors’ confidence in stability of the tax environment in India.
There seems to be a realisation in the government that firm steps are necessary to rescue the economy. The finance ministry has taken constructive steps by setting up an expert committee (EC) headed by the respected Parthasarathy Shome to review the Finance Act 2012’s most controversial amendments – GAAR and retrospective taxation of “indirect transfers”.
The FM has already gone on record that GAAR will be deferred till 2016. This is a welcome development. However, the fine print is equally important. GAAR by its nature is a powerful toolset and is susceptible to abuse. Recognising this, the EC has recommended a series of carefully calibrated safeguards. Hopefully, the EC’s recommendations would be implemented in the Finance Act 2013 without diluting these safeguards.
Post the Vodafone case, the Finance Act 2012 introduced provisions to retrospectively tax “indirect transfers” of shares, that is, transfer of shares of a foreign company which directly/indirectly has substantial assets in India. Conceptually, the idea of taxing abusive transactions structured as “indirect transfer” of foreign company shares undoubtedly has merit. Having said this, the manner in which the indirect transfer provisions introduced by the Finance Act 2012 are drafted, leaves much to be desired. The provisions are worded vaguely; it is difficult to objectively determine transactions, which fall within its ambit and those, which do not. Further, giving these provisions retrospective effect would mean that past transactions would now be raked up – an issue, which unnerves investors. The EC has made sensible recommendations to rationalise and streamline these provisions. The government would do well to legislate these recommendations in the Finance Act 2013.
The authority advance rulings (AAR), which can be approached for an advance ruling on the tax consequences of a proposed/concluded transaction, has played a key role in reducing tax uncertainty for foreign investors. An effective advance ruling mechanism can give significant comfort to foreign investors. The AAR system should be strengthened and steps should be taken to reduce the steadily growing backlog of cases before it. Further, to reduce transfer-pricing disputes (especially in the case of smaller taxpayers), the “safe harbour” provisions should be brought out of cold storage and operationalised.
Investors and taxpayers dread “surprise” changes in a budget. Rushed amendments to the tax law during the budget season may prove counter-productive, as the 2012 experience shows. Major changes in the tax law are best introduced only after careful deliberation through a transparent process. This helps build investor confidence and provides an opportunity to iron out kinks, which could otherwise be litigative.
The Finance Act 2013 should focus on rationalisation and simplification of tax provisions. This can potentially yield higher tax revenues for the government, by reducing quantum of tax demands, which are stuck in litigation.
The FM has correctly recognised that stability and clarity is the need of the hour. Let us hope that budget 2013 takes this theme forward in right earnest, by bringing in clarity while avoiding surprises. Sometimes, a “boring” budget is really the best!
(The author is tax partner, Ernst & Young. Views expressed are his own)