Uncertainties on the tax front can be daunting for investors in India. Abhishek Dutta and Rashmi Chaudhury at HSA Advocates explain what it takes to overcome the challenges
Finland recently explored business opportunities in India, despite a pending tax issue that Nokia has with India, which the Finnish government has taken up with the Indian government. Around the same time the CEO of Vodafone India, Marten Pieters, said that Vodafone is still committed to India – even while acknowledging tax disputes with the Indian government.
Both these cases are no longer purely tax matters and have taken on the overtones of issues that are routinely deliberated at a bilateral level between countries. The disputes permeate across various facets of the Indian business and tax scenario, including the advance pricing agreements that various foreign multinationals are interested in, transfer pricing issues, foreign direct investment, etc. To state that India’s position on taxation is unique is however misleading. Other rising economies are sympathetic to India’s stand although not taking it themselves.
A potential risk to investing in India is retrospective taxation, which was introduced in 2012 and has been widely resented by the international business community. While bilateral investment treaties (BITs) typically exclude taxation issues, efforts are being made to bring the retrospective taxation amendments within the framework of the India-Netherlands BIT. One view is that the coverage of retrospective amendments could be an interpretative issue under article 4(4) of the BIT. Crucial from an investor’s perspective is the law as it currently stands.
Another factor that remains uncertain is the treatment of the route through which investments are made into India. While authorities in Mauritius require that “Global Business Category 1” companies be controlled and managed in Mauritius, tax authorities in India commonly apply the substance test. With India’s general anti-avoidance rules (GAAR) to be applied from 2015-16, the test to be applied would remain a matter of interpretation.
Goods and services tax (GST) continues to elude India. A common and unified system of consumption taxes has been a long-standing demand and achieving it is a daunting task. Certain issues that continue to impede GST’s promenade to fruition in India are: the inclusion of petroleum products and alcohol within the purview of GST; and the subsuming of entry taxes, which are taxes levied on goods while entering a state, within GST.
It has been argued that the introduction of GST without the inclusion of petroleum products and alcohol in GST, as well as the subsuming of entry tax, would only be a partial victory. However, we believe that GST should be introduced with or without these measures, and these contentious issues should be decided at a later date.
The introduction of GST will require a constitutional amendment bill in parliament. The issue remains apolitical as GST is neither a populist measure, nor one that would be widely opposed by the public. Hence, the argument of waiting for the next general election and therefore the next government to introduce this momentous bill appears to be fallacious. This said, GST is and continues to be one of the steps that India will have to take. From an investor’s perspective this is a given that should be factored in.
Tax administration remains an issue in several tax jurisdictions and is not an India-specific issue.
Businesses in India face a higher compliance burden on account of internal corruption. In addition, the burden on the judiciary to clear the backlog of pending cases makes judicial action more expensive for the taxpayer.
The autonomy of the tax administration could lead to an effective solution. A comparison could be made with the UK where the tax administration, Revenue and Customs, is autonomous of the Treasury, which is equivalent to the Finance Ministry in India. This could pave the way for policy partnership in a more effective manner, whereby the Finance Ministry could tap the intellectual capacity within and outside of the government and think-tank bodies.
The Indian government has recently set up a Tax Administration Reforms Committee (TARC) to review the existing methods and mechanisms of dispute resolution and recommend appropriate organizational structure. The TARC is to submit its first report in six months and thereafter periodic reports every three months.
This augurs well for India and one should be hopeful that there will be a better roadmap ahead for investors wanting to explore the vast business opportunities that the Indian economy and human capital offer.