Budget 2016 – Making the Tax Regime More Predictable

A predictable taxation regime is something most foreign investors and domestic experts have been calling for a very long time. When the idea of GAAR was first mooted in 2012, the markets were spooked. It was not because of the compliance angle that FIIs got jittery but due to the uncertainty and unpredictability surrounding the tax regime. Then in 2015, there was this huge uncertainty over prospective and retrospective implementation of MAT for FIIs. It created a huge amount of confusion before it was finally set to rest. Even in case of items like dividend taxation and taxation of capital gains, there has been no clear policy and that has been the major concern. Fortunately, budget 2016 has taken some important steps towards making the taxation regime more predictable.

Institutionalising the process of tax assessment:

One of the major complaints of foreign investors was that there was too much discretion at the hands of the assessing officer and the powers that these officers enjoyed were almost absolute. This degree of discretion to an individual was something most institutions were uncomfortable with. In the case of retrospective MAT on FIIs, the government should have had a stated policy, but instead individual officers went ahead and started issuing notices to FIIs.

For the first time, this budget has attempted to institutionalise the entire assessment process and more number of critical decisions will be incumbent on a committee rather than on a few individuals. This will reduce the amount of discretion and also ensure that institutional investors and global corporations have the requisite comfort level. Budget 2016 has clearly stated that wherever the assessing officer applies the retrospective amendment, it will have to be overseen by a high-level committee chaired by the Revenue Secretary. This will go a long way in assuaging the concerns of global investors.

Black money window for taxpayers:

The government also went ahead and introduced a form of the voluntary disclosure of income scheme (VDIS) in budget 2016. This will only be applicable for black money stashed away in India and not for black money stashed away abroad. Domestic black money can now be legalized officially by paying a penal tax of 15% over and above the peak rate of 30%. Effectively, the person pays 30% applicable tax plus 7.5% surcharge plus 7.5% penalty. At 45% it gives an attractive window for domestic taxpayers with black money to make a clean breast of their black money holdings. The budget 2016 has kept the domestic black money tax at 45%, lower than the global black money tax at 60%. The fact that the domestic penal rate has been kept lower than the global penal rate shows that the government takes a more lenient view on domestic black view than on black money stashed away abroad.

An official mechanism for resolution of disputes:

 The government has virtually created a comprehensive framework for the resolution of disputes in a simpler and smother manner. Some of the highlights of the dispute resolutions mechanism are as under:

  • Under the Dispute resolution scheme, there will be no penalty for disputed tax up to Rs.10 lakhs.
  • All cases with disputed tax above Rs.10 lakhs will be subject to just 25% of the minimum imposable penalty.
  • Any pending appeal against a penalty can also be settled by paying 25% of the penalty.
  • Mandatory for the assessing officer for granting stay on demand once the assessed pays 15% of the disputed sum.

The government realizes that billions of dollars of tax revenues is currently stuck in long winding cases. It does make sense to monetize some of these stuck cases by offering a palatable exit route. This can go a long way in reducing the legal pressure on the IT department as well as release the amount of money locked up in disputes.

The Indian Income Tax Act has been quite complex and if one adds up the plethora of cases and judgements pertaining to the Act, it actually becomes a very vast body of knowledge. The unfortunate part is that it also gives tax payers enough room to delay payment of taxes by using the legal route. This budget has rightly addressed this issue by providing a voluntary dispute resolution mechanism.

The VDIS has always been subject to a debate on ethics, but the government needs to look at alternate ways to enhance revenues. Of course, the government needs to ensure that the VDIS remains a once-in-a-decade kind of an activity. Otherwise, it loses its sanctity.

But most important is that the budget has provided a tax certainty to global investors. There was no negative reaction to the government commitment to implementation of GAAR from April 2017. That goes to show that what foreign investors want is tax predictability and not exemption from compliance. This budget 2016 has made the right first step in that direction.

Religare Online offers latest news and highlights regarding Union Budget 2016.

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