Fiscal framework in need of change to keep pace with new business realities

NEW DELHI, 17 September, 2008 – Over 75% of tax disputes arise due to differences over interpretation by companies and the tax authorities, according to PricewaterhouseCoopers' 2008 Fiscal Framework Survey in India. A similar percentage of respondents also said that direct tax compliance has become onerous, while 54% say the same for indirect taxes. Though there have been definite movement with the recent announcements on GST and the upcoming Income Tax Code, challenges remain in laws pertaining to transfer pricing and mergers & acquisition (M&A). Companies continue to feel that the present tax structures can be made more conducive to business growth.

As Indian businesses adapt to new business practices and formats, and tap new sources of funds, including foreign financial markets in line with their global peers, the current policy of applying traditional rules and regulations to them exposes companies to potential litigation. The limited liability partnership concept, treatment of derivative losses and gains, cross border acquisitions are some of the new regulatory and economic changes for which corporate sector needs a fresh set of rules/clarifications.

“The fiscal framework vis-à-vis tax policy and administration needs to keep pace with the current realities for doing business,” said Ajay Kumar, executive director, PricewaterhouseCoopers. “A verified and tested framework that has performed under various market conditions and trade environments is something that companies in India are looking for as their businesses become more global in nature day by day.”

Referring to the upcoming new income tax code in the survey, the corporate wish list composed of simplification of tax laws (87%), providing lesser discretionary powers to tax officers (60%) and detailed laws with suitable clarifications (53%). Other areas of action for the new tax code included creation of common fora to get greater clarity on tax law provisions and giving power of settlement to committee of tax officers instead of individuals and stability in tax rates for at least three years.

”Stability is one of the basic tenets of taxation. Retrospective amendments to laws, continuing ambiguity and divergent judicial precedents create avoidable uncertainties leading to impairment of post tax returns on investment made by companies,” said Ajay.

Over 70% respondents voted indirect tax as the most challenging area in the fiscal framework followed by transfer pricing at 65%. Direct tax came in third with 54% followed by cross border taxation and M&A. However, in the next couple of years transfer pricing is expected to be the most challenging area with 75% respondents voting for it, closely followed by indirect tax at 71%.

There seems an anticipation of an all round increase in challenges in areas related to fiscal policy. As per Ajay, “This is an important indicator of how the corporate sector expects our fiscal framework to evolve going forward. An appropriate forum needs to be established immediately where the reasons perceived for the increase in challenges are captured and addressed upfront.”

A majority of respondents felt that in the legislative process due weightage was not accorded to industry feedback as expressed through various memorandums of industry chambers and like. In particular it was noted that the Government has not adequately considered industry representation relating to matters like transfer pricing, M&A and international taxation. Almost 50% saw that their suggestions had little effect on the Government’s decisions during the Union Budget.

Ninety percent of the respondents did not see existing laws as being completely tax neutral and conducive to group restructuring and felt that the existing framework is inadequate to provide guidance to new business initiatives. Seventy five percent replied in affirmative to implementation of globally accepted cross border taxation principles.

On the administration side, 47% respondents found return processing and refund a ‘satisfactory’ process while dealing with tax authorities in comparison to other performance parameters. All other areas, including stay of tax demand (50%), appeals before commissioner of income tax (40%) and rectification proceedings (39%), left the respondents dissatisfied.

"There is a need for a holistic approach to taxation reforms in the country, from policy formulation to administration and dispute resolution," Ajay concluded.